M3
If Letzgo costs increase this would have an impact on the business’s
performance. There can be many reasons for why the costs would increase,
such as seasonal demand. For example, people like to go on holidays during
the Christmas holidays and during summer, so during these times the demand
and sales for Letzgo would increase. If the sales increase, this means that their
costs would also increase as they may need more staff for the increase number
of customers they are getting. Increase in costs would affect the business’s
performance. Increase in costs would impact Letzgo’s budget as it would lower
the amount of sales revenue they make, it will lower their actual budget of
sales revenue.
If the sales revenue is lower than the forecasted one, then there would be an
adverse variance, as the variance will go lower. The variance should always
stay higher than the forecasted or the exact amount, lower means the business
is making lesser than the amount they have planned. However, if the costs
increase is due to the sales increasing, then the revenue levels may stay the
same or change slightly.
The business can reduce this adverse variance by increasing their prices, this
allow would all letzgo to make a higher amount from every sale the make,
helping to increase their overall sales revenue and variance from adverse to
favourable. One reason the holidays would require an increase in price is if the
increase in costs for letzgo is due to the increase in costs for the resources to
provide customers with the holidays, If the business’s expenses are higher to
offer the services, then they will need to increase the prices of them so that
the sales that they make from the service covers the costs for offering them.
Another reason the business can increase their prices, is when the demand
levels go up for their services. If the business is making more sales, by
increasing the prices, they will make even more, helping to increasing their
profit and affect the business’s overall performance in a positive way. Increase
in price will have a positive effect on the variance, as they will go up, meaning
the business will make more money than they have forecasted.
For example, for letzgo holidays, when their selling price increased from £800
to £838.4 due to the retail price index increase by 4.8%, the amount of
revenue they made also increased. The first year they made, 2,880,000, and
then after the price increase they made 3,018,240. However, the variance had
stayed the same in this case, because the amount of sales they made stayed
the same. So in order to reduce any adverse variance, the business can
