IB Business Management HL 3.5 Profitability and Liquidity Ratio Analysis Question Bank

Explain one strategy that Enjuice could use to increase its gross profit margin.
- Enjuice could increase its gross profit margin by reducing direct costs/cost of goods sold. It could use cheaper raw materials or instead, find cheaper materials for producing the cans or find cheaper suppliers of cans.
- Enjuice can reduce labour costs by reducing the wages / salaries of its labour on the production line, or by increasing automation in the canning process.
- Enjuice could decrease the price of its juices. Sales revenue might increase as the market for juices is very competitive and customers are likely to be very responsive / very price elastic.
- JIT - perhaps Enjuice can use JIT stock management for aluminum / fruit, or any other metals for the canning process to cut cost of holding stock.
- Technically, if the suggestion of the marketing manager is followed, increasing advertising will reduce net profit before interest and tax, but can increase total revenue with positive impact on gross profit.
N.B. Do not accept increase in price given the information in the stimulus.

Do not credit any suggestion to reduce expenses.

Award [1] for a relevant generic explanation and [1] for application.
[2] cannot be awarded if the response lacks either explanation and/or application.
For an identification or a description of a strategy with or without application [1].
For explanation of a strategy with no application [1].
For description of a strategy with application [1].
For explanation of a strategy and application [2].

Liquidity is the ability to pay short-term debts. Papel's liquidity position is delicate. Working capital is zero and Papel's acid test is 0.75 , which means that Papel has less than $1 of liquid assets with which to repay every $1 of its short-term debts.

Papel could improve its liquidity position by keeping a tight credit control with debtors. Many are not paying on time, which means that Papel does not keep a check of customers' accounts.

Papel could use a debt factoring service to recoup some of the debt as a way to boost its liquidity.

Papel should monitor debtors and chase them to pay on time and to respect the credit periods established and agreed.

Creditors are increasing even though 80 % of accounts are settled in cash. To improve the liquidity position, Papel could try to negotiate improved credit terms with its suppliers.

Reward candidates who highlight 'surplus' or 'unused' assets to sell but not a generic response of 'sell assets'. Award maximum [1] as no application is possible.

Accept any other relevant strategy.
Award [1] for a relevant generic strategy identified or described and [1] for any additional explanation in context to DD.
[2] cannot be awarded for the strategy if the response lacks either explanation and/or application.
For example: For an identification or a description of the strategy either debtors or creditors with or without application [1].

For explanation of the strategy with no application [1].
For explanation of the strategy and application [2].