Homework: Financial Decision Making
Gogo Airlines low-cost carrier
Gogo Airline is a full-service long-distance airline based in the country of Greenburg. Over the past decade, GoGo Airline has earned a reputation for providing intercontinental passengers with high levels of service and hospitality. The airline is very popular in Greenburg due to the ongoing marketing efforts by the CEO.
In 2015 air travel in the region received a massive boost due to an increase in the number of new budget airlines operating additional routes and rising national income levels which encouraged more people to fly, and to do so more often. At present, budget airlines hold 40% of the market share of air travel in Greenburg. The growing popularity of budget airlines has put pressure on full¬service carriers such as GoGo Airlines, which cannot compete with the former on prices.
The Challenge
The rise of budget airlines has posed a dilemma for GoGo Airlines. On the one hand, there is a danger that GoGo may lose its price¬sensitive passengers. On the other hand, GoGo airline's parent company believe there might be huge opportunities from an increased preference for air travel.
GoGo Airlines CEO has noted new budget carriers are mainly concentrating their efforts on short to medium¬haul routes. He is of the opinion this should not pose immediate problems for GoGo Air as it operates long-haul routes, but may be problematic if the budget airlines expand into the long-haul route market.
GoGo Airlines CEO has commented competing on price was not an option as much of its reputation depends on providing excellent services. Compromising on that to cut costs would be a disastrous precedent for a premium brand. Alternatively, if the group did nothing, it risked further encroachment by low-cost competition.
The Strategy
The group decided to develop a low¬cost airline, MegaSaver Airways, for the medium¬ to the long¬haul category. This separate airline would have a drastically different business model, target audience and service.
Essay Question:
GoGo Airline's parent company is planning to take a cautious approach in launching MegaSaver. In response to the concerns raised by several shareholders, the parent company is exploring the possibilities of dividing its airline business into two distinct departments and monitoring the working capital of the new airline to prevent any liquidity crises.
The parent company has requested that you prepare a report which can enable it to make an informed decision. You are required to include the following information in the report:
A. Critical evaluation of the advantages and disadvantages of divisionalisation to the parent company
B. Explanation of various techniques the parent company can use to measure the performance of the proposed divisions and divisional managers
C. Explanation of the importance of non-financial measures in measuring performance
D. Costs associated with various elements of working capital and
E. Methods of controlling various elements of working capital
Among your research also use following:
• Find & Examine the use of profitability index to choose projects
• Examine the use of sensitivity analysis
• Net Present Value (NPV) is a popular method of capital investment appraisal
• Examine the main components of working capital
• Evaluate how working capital can be managed to maximise returns on assets
• Evaluate the advantages and disadvantages of adopting a divisional structure.
• Examine various methods of measuring the performance of divisions and divisional managers
• Explore the importance of non-financial measures in decision-making
Format your homework according to the give formatting requirements:
• The answer must be using Times New Roman font (size 12), double spaced, typed, with one-inch margins on all sides.
• The response also includes a cover page containing the student's name, the title of the homework, the course title, and the date. The cover page is not included in the required page length.
• Also include a reference page. The references and Citations should follow APA format. The reference page is not included in the required page length.
Reference
• Title: Management Accounting for Decision Makers - Author(s): Atrill, P. and McLaney, E Date of Publication: 2018 - Edition: 9th - Publisher: Pearson
o Chapter 8 of Management Accounting for Decision Makers will assist you in recapping investment appraisal.
o Chapter 9 provides specific information on dealing with risk, particularly in relation to investment appraisal.
o Chapter 11 Financial issues in managing performance in divisionalised organisations.
o Chapter 12Focus on Working Capital Management
• Title : Drury, C. (2018) Management and Cost Accounting (10th Ed). Hampshire: Cengage Learning -
o Chapter 13: Capital investment decisions: appraisal methods.