Practise IB Business Management SL/HL 3.2.1 by applying internal sources of finance concepts to exam-style questions.
DA has a long-standing social commitment: employees live in Ville d'Ablet with subsidized rent and access to a hospital, school and leisure facilities. The proposed employment package would replace annual salary with low basic wages and profit-related bonuses, charge market rent and fees for facilities, and offer compensation payments to employees who leave. This could reduce employment costs but may damage morale, trust and DA's social values. DA has recently made losses, while its two strategic options have different risks. Option A would move DA from high-end niche markets to the mass market using the DuLow brand and outsourced mass production by SE. Option B would invest €500 million in cellular manufacturing and modular click-and-fix products. The option must be assessed against the cash inflows, finance, product life cycle, brand loyalty, innovation, production costs, environmental concerns and possible future demand.
DA's board must make two major decisions.
Decision 1: DA needs to reduce employment costs. A new system of pay and benefits is under consideration. This includes:
- changing from an annual salary to low basic wages with profit-related bonuses
- reducing social benefits for employees, such as paying market rents for the housing in Ville d'Ablet and having to pay for the use of the leisure facilities
- offering generous compensation payments to employees who are prepared to leave the business.
Decision 2: The three options from DA directors must be considered.
Immediately prior to the board meeting, Mia withdrew her proposal (Option C).
There is now additional information available on the remaining options.
Louise plans to target the mass market and proposes using the brand name DuLow for the redesigned products. She is planning for DA to outsource production to Star Electrics (SE). SE uses mass production together with some customization of products. SE keeps costs low by importing cheap raw materials and paying low wages.
Ben, the human resource management director, is concerned about the impact this change would have on DA's employees.
Salah's plan requires new production lines, one for each product. Salah proposes using cellular manufacturing. The investment cost is estimated to be € 500 million. Salah estimates the following net cash inflows (excluding the initial investment cost).
Table 1: Forecast financial information for Option B (figures in € millions)
Louise thinks the option is expensive. Dodi, the finance director, thinks that the investment is too large and he believes that some shareholders are also concerned about the size of future dividends. Salah believes that shareholders will be pleased about the revenues that this investment will generate. Mia is worried that the products would be expensive to produce and that demand might fall in five to seven years.
Define the term retained profit.