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Increased Cost Savings and Revenue

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Increased Cost Savings and Revenue

                                                                                M1A1 - 1029450                                                                                                                                                                                                

COAST4LIFE Inc.

                                M E M O R A N D U M

To:          Board of Directors                                 From: Pat Brown , Controller

Subject: Increased cost savings and revenue  Date: September 26 2013

Introduction:

Coast4Life Inc has successfully grown its business from a $9.4 million company in 2002 to $55.7 million company in 2012. Unfortunately due to a terrorist attack in September 2012 on another cruise line the industry as a whole expects bookings to drop by 50 % to 55% globally over the next six months and 30% to 35% annualized over the next year.

Recovery to 2012 levels is projected to occur by 2014. (See Appendix A)

The Board of Directors has mandated that Cruise4Life continue to remain profitable during the downturn in business.

The purpose of this report is to analyse and identify risks and suggest alternative solutions.

Identification of issues

An expected drop in bookings for 50% to 55% over the next six months and 30% to 35% over the next year. This would result in a decline in revenue of approximately $19 million.

They have proposed the following four options to meet the mandate of the Board of Directors :-

          1. Divest the Fraser Dry dock

          2. Target a more profitable market segment

          3. Register its cruise ships in Liberia and hire unskilled, cheap labour

          4.Implement a web based booking system

Analysis of Alternatives

Alternative 1 - Divest Fraser Dry Dock

Pros:

  1. The Current book value of the drydock is $2.6 million and if they accept the offer to sell at a price of $4.3 million will definitely produce an instant source of cash flow.
  2. Should they choose to sell the dry dock the cruise line would realise a cost savings of$1.374 million dollars in 2012. (Sale Price $4.3 million less operating costs $ 5.674 million).

      3. The sale will also eliminate layoffs and generate future cash flow

      4. Outsourcing the maintenance will reduce costs - $2.0 million versus $2.16 million

        per ship.

      5. This will allow them to focus on their core business of promoting cruises.

Cons:

  1. The manager is of the opinion that selling the dry dock could harm the cruise line

 as its passengers may be concerned about safety. Since the repairs and maintenance has to be out sourced and Coast4Life would have little or no control of the quality of work performed.

     2. Maintenance fees of $2.0 million not guaranteed

     3. There could be potential loss of revenue from external maintenance contracts

     4. Termination of employees would hurt the company's reputation within the

         community and the local government agencies.

Alternative 2 -  Target a more profitable market segment

Pros:

      1. Increase repeat traveller rate from 20% to 40%        (See Appendix B)

      2. Target a more diverse age group by offering unique services and features

      3. More value for their money

Cons:

      1. Target segment for repeat travellers may be very small due to aging population

      2. There is a cost associated with diversifying its target market - advertising,

          incentives

  1. A younger age group may not have access to the financial resources that more

mature travellers would limited on board sales and extras on cruises.

Alternative 3 - Register its cruise ships in Liberia and hire unskilled,  

                         cheap labour

Pros:

     1. Cost of labour would be reduced by as much as 20% to 30%

     2. Availability of a large labour force to draw from.

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