Practise IB Business Management HL 3.7.5 by analysing how investment affects short-term cash flow and long-term profit potential in case evidence.
Tijeras (TJ)
Tijeras (TJ), a private limited company, manufactures surgical scissors. It has four shareholders and operates one factory in Peru. TJ sells in Central American and South American markets. Its sales have grown for the last 10 years, which has led to both economies of scale and diseconomies of scale.
The chief operating officer (COO) analysed the situation. He discovered that:
- current work areas are overcrowded
- workers are specializing more than in previous years
- maintenance costs are increasing
- the firm now buys raw materials in bulk.
The market for surgical equipment, including scissors, in the United States (US) is large and highly competitive. Recently, some hospitals in the US purchased TJ's scissors.
Table 3: Selected financial information for TJ on 31 May 2021 and 2022 and for the years ending 31 May 2021 and 2022
The COO determined that TJ needed more manufacturing capacity and put forward two options:
- Option 1: Keep the current factory in Peru and build a second one in Mexico, closer to the North American market. TJ's bank has agreed to provide a long-term loan to finance the new factory.
- Option 2: Build a new factory that is large enough for all of T 's manufacturing-capacity needs and sell the old factory for . This new factory cannot be financed solely with external borrowing.
Table 4: Forecasted costs of Option 1 and Option 2
With reference to T J, explain the relationship between investment, profit and cash flow.