East Coast Tours (ECT) is a company based in St. Johns, NL, that offers economical cruises along the east coast of Canada. ECT currently owns two cruise ships. The cruises specialize in sight-seeing tours such as viewing icebergs and whale-watching, and activities at interesting ports of call. Currently, the most popular ports of call are Halifax, NS, Charlottetown, PE, and Saint John, NB. Some passengers prefer to explore the ports of call independently. Others prefer guided tours arranged by ECT. The guided tours focus on local cultural activities and have received great feedback from customers. Elizabeth Howard, the CEO of ECT is concerned about the companys future profit potential. The cruise industry is still recovering from the global pandemic of 2020. After experiencing consistent annual growth year after year, the pandemic wiped out profitability in 2020, and bookings dropped by 90%. The industry has still not recovered from the pandemic, and it is not expected to start improving until mid-2022. For the past 10 years, ECT enjoyed a niche market because its ships are smaller than those of the major cruise lines, and are able to dock at smaller ports in Atlantic Canada. ECTs 2019 customer data indicates that most of its customers are less than 45 years old, and generally choose the basic cruise package at $1,000 per passenger per week. Elizabeth is a bit concerned about this, as ECTs customer mix differs compared to the rest of the industry (Exhibit A). This is significant as industry data indicates that 45-to65-year-old passengers spend 25-30% more on travel than any other age group. This age group has the most disposable income, and therefore are more likely to book lucrative additional services such as exclusive tours, luxury dining options and spa services. This age group is also very familiar using the Internet to compare prices and book online. To remain competitive, and to accelerate recovery once cruise travel starts to become popular again, Elizabeth is considering several different strategies. She has summarized the information in the exhibits attached. 1) The first is a new advertising and promotion campaign to target the 45-to-65- year-old passengers, with an updated online booking system to help attract this demographic, and bring ECTs passenger mix more in line with the industry (Exhibit B). ECT has historically engaged various travel agencies to manage their bookings, but many of those agencies have been forced into closure due to the pandemic. Elizabeth feels it is time to move to a fully online booking system, with outsourced customer support. One of ECTs accounting staff have prepared an analysis to determine the additional contribution margin that could be gained by the campaign (Exhibit C in Excel). 2) Given that the cruise industry is not operational at the present time, Elizabeth believes it is an opportune time to consider upgrading both cruise ships with 5 additional amenities. Any ship upgrade is costly, and would be funded by an increase in cruise prices. Data on this alternative is outlined in Exhibit D. In addition, Elizabeth is looking into the opportunity to install a new waste filtration system that will reduce grey and black water waste by 80%. Elizabeth considers this an important strategic move, as it will allow ECT to qualify as an environmentally friendly cruise line. Given the tremendous movement toward environmental consciousness in all aspects of industry in the past three years, Elizabeth anticipates it is only a matter of time before national legislation is tabled to address this issue. She would like to be proactive in this aspect, and believes that she can build additional brand capital in the industry by adopting environmentally responsible practices. Preliminary data is given in Exhibit E. From 2015-2019, all staff and managers received a bonus based on achieving and exceeding various financial targets that were set for them during the annual budgeting process. In 2016, the bonuses were very low, as results had been just below budget. Some staff have complained that they feel the bonus structure is unfair, as the work they do does not necessarily impact financial results. In particular, the staff hired to provide maintenance and cleaning on the cruise ships feel that their hard work to ensure a pleasurable experience for customers is not rewarded for their efforts. Elizabeth has been considering a different method to measure performance, and is interested in a balanced scorecard. She understands that there are four perspectives, but is unsure what measures should be used. She would like you to provide at least one potential measure for each perspective, and a proposed target for each. Elizabeth has engaged a management consulting firm to assist her in the analysis of these alternatives. The supervisor at the firm has asked you, a university accounting co-op student, to provide her with an analysis of the two proposed alternatives and the waste filtration system. ECT uses a 5% discount rate for all major projects, and at this point, you are asked to ignore income taxes. ECT evaluates projects over a five-year period. You will be preparing the report for your supervisor at the consulting firm, who will review it before sending it forward to Elizabeth. Required: You are to complete a short report addressed to the Supervisor. In your report, you will provide: a) A qualitative assessment of the current situation at ECT. b) A qualitative and quantitative assessment of: i. Advertising campaign and online booking upgrades; ii. Ship upgrades; and iii. Waste filtration system. c) Recommendations on the best course of action for ECT. 6 d) Recommendations on preliminary measures and targets for a Balanced Scorecard. EXHIBIT A: Data on Customers and Industry Standards; 2019 2019 Customer Data Less than 45 years old 45 to 65 years old More than 65 years old Total Number of passengers (ECT) 8,775 5,485 7,678 21,938 ECTs passenger mix 40% 25% 35% 100% Total revenue (in 000s) $9,881 $11,857 $9,214 $30,952 Industry standard passenger mix 29% 38% 33% 100% EXHIBIT B: Advertising Campaign and Online Booking System The advertising campaign is forecasted to cost $550,000 annually. Fixed costs will not change with a change in passenger mix. The average variable cost per dollar of revenue will not change with a change in the passenger mix. The current average contribution margin percentage of sales is 65%, or $917 per passenger. The website will be upgraded at a cost of $850,000. ECT has a preliminary contract proposal with a local call-centre to assist customers in their bookings, should it be required. Overall, the savings from the reduced travel agent commissions (net of additional web hosting fees and the call-centre costs) is anticipated to be $187,000 annually. The additional contribution margin that is expected to result from the implementation of this alternative is outlined in Exhibit C. EXHIBIT C: PLEASE SEE EXCEL EXHIBIT D: Upgrade of New Ships Planned upgrades can be completed in the current year before the 2022 cruise season begins. The upgrades are anticipated to cost $7.3 M, and will be funded by a 20% increase in prices. The average cost to upkeep the amenities will decrease the average contribution margin percentage of sales to 58%. It is uncertain how the upgrades may impact the customer mix. For this first analysis, it is safe to assume the current customer base as the customer mix, and that the customers will accept the fee increase based on increased perception of value. 7 EXHIBIT E: Waste Filtration System A new waste filtration system was introduced to the industry in 2020. The cost to install the new system for both ships will be $350,000 in total if the system is installed during the upgrade, otherwise, the cost to install the system without ship upgrades will be $550,000 for both ships. Currently, the waste produced by the ships meets with government regulations. The new system will significantly decrease harmful toxic waste. ECTs technicians will need to be trained on the new systems, at a one-time cost of $65,000.