IB Business Management HL 3.9.2 Constructing budgets Question Bank

As details about "RDB 2020" spread, several stakeholder groups began to express their concern. One stakeholder group was the workers, who were upset because of the planned closure of their workplaces. Another stakeholder group was the governments of Denmark, Germany and Sweden who wanted RDB to continue manufacturing in northern Europe. The three governments agreed to offer two incentives for RDB to remain.

1. All three governments promised to pay 25 % of the budgeted cost of making the RDB factories "green", if RDB chose to be a real "green" company. The budget for the renovations would have to be approved by the three governments before the work on the factories could begin. With this money from the government, RDB would not have to sell shares. Details of the governments' assistance and some of the implications were explained to Valdemar Holstein in a memo from Sofia de Carvahlo, RDB's Chief Financial Officer (Item 1).

2. In addition, the Danish government promised to feature the story of "Green Bearings, an RDB Company" (Valdemar's rebranding suggestion) as the lead article in the Danish Global Business Directory for 2015. This directory is well respected and is published annually by the Danish government. The directory is mostly purchased by public libraries and embassies. Gloria Woolrich, a marketing consultant, informed Valdemar that this would not be sufficient for RDB to successfully rebrand (Item 3).

Valdemar produced a simple decision tree framework to visualize the three strategic options:

Option A: "RDB 2020"
(Anna Holstein's original proposal).
Option B: Valdemar Holstein's counterproposal with
government incentives:
- stay in Europe
- cell production
- "green" factories
- government grants
- form strategic alliances with ball bearing companies in
Brazil, China and India.
- Option C: Valdemar Holstein's counterproposal:
- stay in Europe
- "green" in name only
- "groduction strategic alliances with ball bearing companies in
- Brazil, China and India.

Item 1: Memo from RDB's Chief Financial Officer to Valdemar Holstein From: Sofia de Carvahlo, Chief Financial Officer, $RDB$ To: Valdemar Holstein, Chief Executive Officer, $RDB$ Subject: Implications of the governments' $25 \%$ grant for "green" conversions Below are key financial data related to the upgrade of the three European factories instead of "RDB 2020". Budgeted cost of converting the factories: $€ 300000000$. Financed by grants from the governments of Denmark, Germany and Sweden, which total $€ 75000000$ and in long-term loans, which total $€ 225000000$ : The $€ 75000000$ from the three governments will be recorded as retained profit on the balance sheet. The impact on $RDB$ will be significant. Financial data is given in Items 2.1 and 2.2. Of particular note is the impact that the conversion will have on gearing. Even though the governments will provide $€ 75000000$ for the conversion, $RDB$ will still have to borrow significant funds.

Item 3: Memo from Gloria Woolrich to Valdemar Holstein From: Gloria Woolrich, Marketing Consultant, Maia Marketing Associates To: Valdemar Holstein, Chief Executive Officer, $RDB$ Subject: Proposed article in the 2015 edition and issues related to rebranding The proposed article in the 2015 edition of the Danish Global Business Directory will be about 10000 words and will narrate the history and "green" practices of "Green Bearings, an RDB Company". A focus will be on why Green Bearings is a company of which Denmark is proud. As you know, the publication format is printed (2000 copies). Generally the authors of these articles do not say much about the nature of a company's product or its competitive position, as that would make it appear as though the publication and the Danish government were promoting particular businesses over other Danish businesses. Danish Global Business Directory wants to be neutral. I do not think that the article will be adequate for $RDB$ to successfully rebrand as "Green Bearings, an RDB Company"...

With reference to the renovations to the RDB megafactories in Europe, describe a budget.