Evaluate final accounts and financial statements to interpret profitability, financial position and decisions in IB Business Management HL cases.
He knew that he could increase the scale of his business operations with the UWP Mission without any additional marketing. This would also allow for significant economies of scale, but the logistics would be more complex. He would have to drive and collect produce using dangerous remote unpaved roads outside the protection of the UWP Mission. These remote communities might perceive Kos as collaborating with the UWP troops. He would also have to dedicate all his time to his business and would no longer be able to work in the officers' dining hall. Although that job did not pay particularly well, it was in a safe environment and provided a regular source of income.
To collect larger quantities of produce in remote areas, Kos would need to purchase a large lorry (truck). He discussed potential sources of finance with his bank. The bank manager indicated as a condition for the granting of a loan that the bank would require the lorry as collateral. Secondly, the poor quality of the roads meant that the lorry would lose value quickly.
Kos prepared a business plan and compiled information comparing his current income to his forecast income if he increased his scale of operation (Appendix 5). The income comparison showed that the expansion of his business would be very profitable - as long as the UWP Mission remained in Loyka. However, even after a number of conversations with Colonel Donovan, Kos was still unsure how long the UWP Mission would remain in Loyka.
Consequently Kos drew up three possible options for his produce distribution business:
- Option 1: No change. Keep the same scale of operation and stay working at the UWP Mission.
- Option 2: Increase the scale of operation of his business. Sell more produce to the UWP Mission and to the university or hospital. Kos would need to leave his job at the officers' dining hall and lose his regular source of income.
- Option 3: Maximize the scale of operation. Supply produce not only to the UWP Mission and to the university or hospital, but also to retailers in Beral. In Beral there is no city-wide wholesaler for the produce that Kos distributes. Becoming a wholesaler would require setting up and managing supply chains, employing staff, increasing working capital and adopting a new business structure.
As part of his evaluation of Option 3, Kos Palouk consulted Sami Taibi, who owned and operated a medium-sized grocery store. Sami said that Beral had no reliable produce suppliers and there was a business opportunity if someone could make reliability their unique selling point (USP). However, the deterioration of the situation outside of the U W P-protected area was making reliable purchase and distribution of produce difficult (Item 1).
To ensure reliability, Kos would require a loan of \$ 42000 to:
- Purchase two lorries (2 at \$ 15000=\$ 30000 ). Because of the poor quality of the roads, the lorries would require frequent maintenance. One lorry could still deliver produce while the other was being maintained.
- Increase working capital (\$12000) for higher stock levels.
Unfortunately, the bank will loan Kos a maximum of \$ 30000, as they do not wish to loan funds for working capital as well as for the purchase of the lorries (Item 2).
Kos had an idea. He proposed to Sami that they merge his grocery store with Kos' wholesale produce business. The combined operation would be organized as a private limited company and Kos proposed a 50-50 share ownership. It would also have the following advantages:
- It would have two revenue streams: wholesale (from Kos' operations) and retail (from Sami's grocery store).
- The grocery store would acquire produce at wholesale prices.
- The combined operation would always guarantee supply to the grocery store before other customers.
However Sami was reluctant to give up 50 % ownership of his grocery store for an unproven operation. Sami made a different proposal: Kos would merge his wholesale operation into Sami's grocery store in exchange for 25 % of the shares of the new private limited company. The merger would also result in a new contract and management structure (Items 3 and 4).
Calculate:
the annual depreciation expense of one $ 15000 lorry with a useful life of 7 years and a residual value of $ 1000 using the straight line method.
the depreciation expense in the second year of one lorry using the reducing balance method, with a depreciation rate of 32 % (show all your working).
Easy E Booking (EEB)
Easy E Booking ( EEB ) is a small, well-known, reputable and financially stable online hotel reservation service. EEB employees are highly motivated and take great pride in their work. EEB has received recognition for their high quality customer service. Due to an increase in global demand, greater competition and changes in technology, the finance director, Maia, has decided to upgrade EEB's computers and/or software.
Maia has two options: manufacturer abroad.
[C International Baccalaureate Organization, 2013]
The estimated return/total revenue in $ per year is shown below:
The average rate of return (ARR) of Option A is 46.25 %.
Maia is considering using a straight line method of depreciation.
EEB employees favour Option A, even though some of their competitors using "Book-Fast" have reported problems with the software, including security issues. However, Maia has chosen Option B, which will provide more up-to-date, sophisticated and secure reservation system software. It will also give EEB a competitive advantage and an ability to handle a large global volume of hotel reservations.
Describe one strength and one weakness of EEB using a straight line method of depreciation.