IB Business Management HL 3.9 Budgets Questions

Columbo Coffee (CC)
Columbo Coffee ( C C ) is a family business that produces four espresso coffee machines. C C 's objective is to provide the highest quality machines, but it is currently unprofitable.

A marketing audit of the four espresso machines had the following results:
- The Ventura was CC's best selling espresso coffee machine. It has the strongest brand loyalty of all four machines, but has been suffering from overseas competition. Many customers of The Ventura want a new, improved version. However, because of its weak financial position, the company has not been able to develop it.
- The Crema is CC's exclusive luxury espresso coffee machine. Considerable publicity for CC was gained when it featured in a recent popular television series. Sales of The Crema are forecasted to grow further despite its high price.
- The Rocket has been very successful. However, technical problems have resulted in many customers returning their machines. Reduced brand loyalty and quality control are significant concerns.
- The Fortuna is the company's newest model. It was developed to replace The Ventura but consumer resistance has forced C C to keep The Ventura in production. The Chief Executive Officer (CEO) of C C sees The Fortuna as a potential market leader, but to achieve brand awareness this would require most of C C 's limited marketing budget.

The CEO of C C is considering reorganizing the four espresso coffee machines into separate cost centres.

However, before any decision is made the CEO receives an offer from its main competitor to work together. As part of a strategic alliance, the competitor will provide funds to allow C C to finance extension strategies or enter new international markets. The only condition is that The Ventura is discontinued. The family is divided. Some family members are worried about the impact of the business losing its most recognizable brand. Others think the competitor's offer will allow CC's other three machines to achieve their full market potential.

Analyse the implications for the CEO of converting C C into four cost centres.

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.

Creative Toys (CT)


Creative Toys (CT) manufactures toys and markets them business-to-customers (B2C) online only. The business operates in a leased industrial site and relies on word-of-mouth promotion only. To make customers believe that CTs toys are better than its competitors, CT sets prices slightly higher than the competition. Production and sales are mostly between 1 October and 24 December. Most of the employees work on temporary contracts during this busy period. For the remainder of the year, CT operates well below capacity utilization.
Table 1 contains selected data for CT, for 2014:

In 2014, the management of CT considered a change of the marketing mix to include above the line promotion, lower prices, and an additional sales method called "toy parties". Toy parties would be hosted by newly recruited CT sales representatives and attended by parents and their children. At the parties parents could see the toys and children could play with them. Sales would be made at the parties by the new sales representatives, who would be paid on a commission-only basis.

Toy parties could be held throughout the year and make CTs total sales less seasonal. Based on market research, management has estimated that the parents' demand for toys is price elastic and is planning to set lower prices for all toys sold online and at toy parties. The management has prepared forecasted financial data for CT, for 2015, based upon the proposed change to the marketing mix, shown in Table 2 below.

The Finance Manager will carry out a variance analysis in order to determine whether the proposed change to the marketing mix has been successful.

Define the term variance analysis.