Explain retained profit as internal finance kept after owners receive distributions, linking cost, flexibility, control, expansion and the business’s past success.
Source for use with Section C Extract E Asian Biscuit and Confectionery Ltd (ABC) ABC was established in 2012. It produces the Goodlife brand of biscuits, crackers and sweets at its large factory in Nepal. The factory has fully-automated production facilities and six baking zones, each 76 metres long. It is the largest biscuit factory in Nepal. Unmatched by other businesses in Nepal, ABC prides itself on baking products to the highest quality and the best taste. Goodlife is able to compete with international brands by selling at competitive prices. ABC aims to attract Nepalese customers away from buying imported biscuits to buying the Goodlife brand. The brand is marketed using the slogan, ‘for a good life, have a good bite’ . The idea being that it makes the customer think of it as a good and healthy lifestyle brand. To maximise its potential to achieve this aim, ABC believes it needs to invest in new production equipment and advertising. It currently promotes many of its biscuits, such as Goodlife Coconut Cookies and Goodlife Nice Biscuits, via YouTube videos, featuring its slogan. It periodically runs ‘lucky draws’ for wholesale customers making bulk purchases of Goodlife biscuits.
Evaluate whether sale of assets or retained profit would be more suitable for Asian Biscuit and Confectionery Ltd (ABC) to help finance the purchase of new production equipment.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.
Knowledge, Application, Analysis, Evaluation - indicative content
Sale of assets
- Sale of assets is a type of internal finance, involves selling resources that belong to the business
- Assets may include things used repeatedly by a business (non-current assets), such as buildings, baking equipment and ovens, as well as
inventory of raw materials (current assets), such as baking ingredients and packaging
- ABC has been established for more than 10 years, meaning it may be able to sell unwanted assets in order to raise finance
- ABC owns the largest biscuit factory in Nepal, with fully-automated production facilities, meaning it may have spare capacity available to sell, especially as it plans to buy new production equipment
- By selling unwanted assets, ABC may be able to raise enough finance to support its plans to invest in new production equipment
- However, ABC may need all of its non-current assets in order to meet
demand should its aim to attract Nepalese customers away from buying
imported biscuits, be achieved
- It may not be possible to sell some current assets because ingredients are likely to be perishable, meaning obsolete inventory cannot be sold
- This would limit the finance that ABC could raise from the sale of assets and therefore it may not be enough to invest in new production
equipment
Retained profit
- ABC could raise finance by using retained profit, which is an alternative type of internal finance
- Retained profit is profit after tax has been deducted that can be used for
investment in the business
- ABC may have accumulated a considerable amount of retained profit in the 10+ years it has been in business
- Therefore, ABC may be able to purchase new production equipment with readily available finance, even more quickly than by selling assets
- As the Goodlife brand is successful enough to be able to compete with
international brands and is favoured over other Nepalese brands, ABC
may have enough retained profit to fund the purchase of new production
- However, there may be an opportunity cost involved as retained profit
may be needed to fund advertising campaigns in order to help to meet the aims of the business
- It may be that a combination of sale of assets and retained profits are needed
- Additional sources of finance may be used to support selling assets and/or using retained profit, such as leasing assets ABC has previously
sold
| Level | Mark | Descriptor |
|---|---|---|
| 0 | No rewardable material. | |
| Level 1 | 1-4 | Isolated elements of knowledge and understanding. Weak or no relevant application of business examples. An argument may be attempted, but will be generic and fail to connect causes and/or consequences. |
| Level 2 | 5-8 | Elements of knowledge and understanding, which are applied to the business example. Arguments and chains of reasoning are presented but connections between causes and/or consequences are incomplete. Attempts to address the question. A comparison or judgement may be attempted but it will not successfully show an awareness of the key features of business behaviour or business situation. |
| Level 3 | 9-14 | Accurate and thorough knowledge and understanding, supported throughout by relevant and effective use of the business behaviour/context. Uses developed chains of reasoning, so that causes and/or consequences are complete, showing an understanding of the question. Arguments are well developed. Quantitative and/or qualitative information is introduced in an attempt to support judgements, a partial awareness of the validity and/or significance of competing arguments and may lead to a conclusion. |
| Level 4 | 15-20 | Accurate and thorough knowledge and understanding, supported throughout by relevant and effective use of the business behaviour/context. Uses well-developed and logical, coherent chains of reasoning, showing a range of cause and/or effect(s). Arguments are fully developed. Quantitative and/or qualitative information is/are used well to support judgements. A full awareness of the validity and significance of competing arguments/factors, leading to balanced comparisons, judgements and an effective conclusion that proposes a solution and/or recommendations. |