Role of Board of Directors and Cost-Volume-Profit Analysis in Financial Decisions

Part A: Role of Board of Directors in Financial Statements and Fraud Prevention

Accounting is the collection, summarization and communication of a firm’s financial information for the management, stakeholders, individuals and others to help them make sound financial decisions. However, following a series of recent financial scandals, the true and fair view of financial information disclosed to the public has been questioned. Regulators and governments have responded by issuing new regulations and legislation.

Discuss the above statement by analysing the role of the board of directors in the preparation of financial statements and the prevention of fraud. In your answer, you should also examine the actions taken by the regulatory authorities and the government in the UK in response to these scandals. Please use appropriate references( word limit 1,000 words +/- 10%)

Cost–volume–profit analysis makes Subway’s $5 foot-long sandwiches a success: but innovation challenges loom.

Since 2008, the 44 000-location Subway restaurant chain has done big business with the success of its $5 foot-long sandwich deal. Heavily advertised, the promotion lowered the price of many sandwiches, which attracted customers in droves and helped Subway to significantly boost profits. Since introducing $5 foot-long sandwiches, Subway has sold billions of the sandwiches worldwide.

How did Subway lower prices and boost profits, you may ask? Through higher volume and incremental sales of other items. When the price of foot-long sandwiches was lowered to $5, the contribution margin per sandwich dropped but customers flocked to Subway and sales increased rapidly, increasing total contribution margin. At least two-thirds of Subway customers purchase potato chips or a soft drink with their sandwich. Subway’s contribution margin on these items is very high, frequently as high as 70%.

As the number of customers increased, the total contribution margin from these other items also increased. Fixed costs increased but the increases in contribution margin resulted in big increases in operating income. But Subway faces challenges going forward. Its rapid sales growth has slowed as customer preferences have changed, and competitors from McDonalds to Firehouse Subs, Jimmy John’s and Jersey Mike’s have begun offering healthier menu options. If Subway is to continue to grow, it needs to get closer to its customers and continue to innovate its product offerings and its marketing.

Explain how Cost Volume Profit Analysis can help Subway improve its profitability. Use appropriate references to support your arguments (word limit 750 words +/- 10%)

24 Hour Fitness is one of the largest fitness-club chains in the United States, with nearly 4 million members, more than 450 clubs in 16 states and $1.5 billion in annual revenues. The company uses Longview, an internet-based software platform, to manage its planning and budgeting process.

Using detailed operational statistics including number of members, number of workouts, and hours worked by each category of staff, accounting and finance managers sign on to the platform and develop budgets for each club. Advertising costs are allocated to each club based on the size, age and traffic of each club.

Using Longview at 24 Hour Fitness has resulted in more accurate budgets and forecasts being developed in less time. Managers can also conduct ‘what-if’ budget scenario analysis. The platform also allows each club manager to track very detailed revenue and expense data covering individual aspects of club activity, including juice bars, personal training sessions, product sales, and when credit card member-ship payments are due and to take corrective action. It also enables staff to better support senior management decision making by responding more quickly to information requests.

Mike Patano, Senior Director of Financial Planning & Analysis, summarised, ‘Day to day, it’s about being able to thoroughly understand our business, benchmark the performance of our clubs, and understand our business drivers much better and quicker.’

Design an appropriate budgeting system for a fitness club. What elements it needs to include and why? Would you suggest a budgeting innovation (i.e Zero based budgeting) as appropriate for this business and why? Please support your arguments with relevant references (max word count 750 words +/-10%).