Discuss decrease in profitability and high interest expense in the case below:

Established in $1980,$ Violet Accommodations Limited $($VAL$)$ is a professional housing

company that provide high level of accommodations for its clients.

VAL is located in Toronto and operates $340$ houses and apartments across Ontario. VAL is

known for continually developing new processes and testing new accommodations services

to better serve their customers. VAL is a private corporation owned by Li Chun and her family

and has a September $30$ year$-$end. The company prepares its financial statements in

accordance with accounting standards for private enterprises $($ASPE$).$

During fiscal year $2023,$ Li made the decision to hire a CEO, Fang Jing, to oversee VAL. After

more than $40$ years, Li felt fatigued by the daily operational demands and sought to shift her

focus towards strategic planning, long$-$term growth, and navigating the challenges posed by

ongoing market and economic conditions. Additionally, she had plans to retire in $2-3$ years

and intended to transfer all responsibilities accordingly.

New CEO, Fang, approached you as a financial advisor to assist her with some challenges

that she confronted as her first year of experience. Today is February $10,2024,$ and you have

a meeting with Fang, Li and the controller of the company. The following notes outline the

most important discussion between you;

Li: Thank you for accepting to assist our new CEO as a financial consultant. The company

has confronted game$-$changing market and economic issues over the years since the

pandemic hit in $2020$ resulting in increased costs, changes to seasonal fluctuations,

reduced revenues, and less predictable outcomes. In order to responding to the changing

market and economic conditions, we decided to establish a strategic planning committee

and develop new processes and innovative strategic to better serve our customers and

navigate through the challenges brought about by the pandemic.

You: That is my pleasure. Please let me know what your priorities are, and we can start with

them.

Fang: Our financial statements show a constant decrease in profitability from $2020$ until

now. $($Appendix $1)$ I believe that we need to revise both our pricing strategy and cost

structure. The numbers indicate that while the cost per room night has increased

significantly over the last three years, our current prices cannot achieve the desired return

rate.

You: Did you implement any cost$-$saving initiatives during last $3$ years such as renegotiating

contracts with your owner$-$vendors or optimizing resource allocation, and evaluate their

impact on the company's bottom line?

Controller: The housing market in Canada is highly competitive and regulated. Our current

contract allocates $65\%$ to us and $35\%$ to the owner$/$vendors of company. We've attempted

to negotiate with the owner$/$vendors to adjust the split to $40\%$ for us and $60\%$ for them.

Li: I had been in contact with several of our owners to renegotiate our deals. However, they

have shown no willingness to accept this proposal, as our competitors are already offering

them a $70\%$ and $30\%$ deal.

You: I see. Any other initiative for managing the operating cost?

Controller: We implemented several cost$-$saving plans to manage our operating expenses.

For instance, we reduced the overtime hours for housekeepers. With the increase in

minimum wages over the past three years, the $150\%$ overtime rate has placed a significant

financial burden on the company. During the pandemic, we faced staffing shortages,

resulting in increased overtime hours for housekeepers. However, with the employment

market returning to normalcy, we have hired additional housekeepers, allowing us to reduce

overtime hours.

Fang: Still, payroll remains a critical component of our operating expenses. While our sales

team performs exceptionally and collaboratively to maximize sales revenues, I believe it's

necessary to reassess our monthly sales bonus system. Currently, a significant portion of

their payroll is fixed, with a smaller portion being variable based on a percentage of closed

deals. This structure adds pressure to the company during low seasons, as we're obligated

to pay them a fixed amount regardless of sales performance.

Controller: I concur that we should revise our bonus system for the sales staff. Do you have

any idea how we can adjust our sales bonus system to encourage the sales staff for closing

more deals and also put less pressure on the company during the low season?

You: Sure. I will prepare a sample sales bonus system along with an explanation of its

benefits.

Li: We should reconsider our collection policy and review our customer base. Currently, we

have three types of customers:

$60\%$ are insurance companies that rent our units for their clients. Payment from these

companies is typically made by cheque, a process which takes around three months.

$20\%$ are c