Introduction
The purpose of this report is to evaluate the viability of the new conference by Business Conferences Plc. This has been accomplished by the use of CVP, Break-even, and Financial Analysis. I hope that after reading this report, you can make a more informed decision on whether or not to approve of this project. In case of any further questions regarding this matter, please do not hesitate to contact me.
Viability of the Conference
The viability of this conference depends on the number of delegates who attend and the attendance fees they pay. The budget below represents the expected costs and revenues assuming the best-case scenario prevails. In this situation, the estimated costs would not change, the maximum number of delegates would attend and the maximum fee would be charged. This is an idealistic budget.
Assuming that this budget holds, the following table shows the Break-even Analysis that would prevail.
Interpretation
Business Conferences Plc expects to incur fixed costs of £ 18287. This amount is independent of the number of delegates that will attend the conference. Aside from this, £ 193 will be incurred for each delegate that attends the conference. Considering these costs and revenues, the company’s costs will equal their revenues if 36 delegates attend. Any number below 36 delegates will result in a loss. Any number above 36 delegates will constitute a profit for the company. The break-even sales are £25248. The contribution per delegate is £507. The margin of safety indicates how far above or below the break-even point the company is operating. The current level of activity is taken to be the maximum of 200 delegates. The margin of safety is thus £114752. This means that the company is operating way above the break-even point.
The tables above represent an ideal situation that may not materialize. The costs above may change due to inflation. Changes in foreign exchange prices may also raise or lower costs. There is a possibility that less than 200 delegates will attend the conference. These changes are factored into the table below. It shows different scenarios that may prevail. This is more realistic than the previously presented tables.
Business Conferences Plc cannot afford to charge a conference fee of £300. Such a fee would result in losses, regardless of the number of delegates who attend. The company can lower their fees to £400 or £500 provided they can attract more than 50 delegates. Lowering the fees raises the break-even point. Thus, charging lower fees and having less than 50 delegates would also result in a loss.
Recommendation
Business Conferences Plc should proceed with the project if there is certainty regarding the conference attendance and fees. The project holds a lot of profit potential. However, the company should avoid charging very low conference fees as this will result in a loss. The conference fees can be lowered slightly to attract customers as this is a new product.
Relevant and Irrelevant Costs
There are two categories of costs involved in making this decision. Relevant costs should be taken into consideration while irrelevant costs should be ignored. Irrelevant costs will be incurred whether or not the project proceeds. In this case, the non-refundable fee of £200 that has been paid to secure accommodation is an irrelevant cost. It has already been incurred and is thus a sunk cost. All the other costs can be avoided by deciding not to undertake the project. These costs should be carefully scrutinized and any unnecessary or avoidable expenses cut down.
Company Goals
The company may have long or short-term goals. In the short term, they may wish to maximize the early profits in this sector before competitors enter the market. This is a new product and the company may be employing price skimming. This would explain the high conference fees of £700 per delegate. The company could seek to lower costs by negotiating lower fees with the speakers and the venue owners. This would also aid in the reduction of costs and thus raise the expected profits.
Long-term goals could include the creation of a brand name in this sector and gaining a huge market share. This could be achieved by increasing the amount budgeted for advertising. Customer feedback should be sought during the conference. This will enable the company to determine whether customer needs are being satisfied. Market surveys would also aid in measuring the growth of Business Conference Plc’s market share. The company should not ignore the potential of competitors to erode their brand name.
Assumptions
Two foreign exchange rates have been used in the preparation of this report. One Australian Dollar has been equated to £0.624 while one Euro has been equated to £0.8693. These were used in computing the travel expenses for the speakers. The fixed costs, variable costs, and unit selling prices have also been held constant in performing the break-even analysis.