IB Business Management HL 3.5 Profitability and liquidity ratio analysis Question Bank

1. Call it Magic (CIM)
Call it Magic (CIM) is an online jewellery store that sells silver earrings. It has completed its first year of trading, during which it sold 1000 pairs of earrings. CIM's selling prices are low compared to those of other jewellery stores. The average unit cost per pair of earrings is $5, and overhead costs are already at a minimum level.

1. Visionary Toys (VT)
Visionary Toys (VT) produces highly innovative toys for children. VT began operation in January 2017 and its unique selling point/proposition (USP) is producing toy parts with a 3D printer. VT uses the reducing balance method of depreciation. 3D technology changes rapidly and the financial directors are also considering ways of reducing VTs tax liabilities in 2018. The financial director presented financial information for V T at the end of 2017.

1. The Pie Store (TPS)
The Pie Store (TPS) bakes pies and sells them in its three retail stores. When developing its brand, TPS used the mathematical symbol pi ( $\pi$ ). In 2020, each store made a profit.

At the end of 2020, the balance sheet for TPS (the three stores combined) showed $ 200000 in assets and $ 120000 in liabilities. $ 50000 of the liabilities was long-term debt.

1. Deep Sea Catch (DSC)
Deep Sea Catch (DSC) operates as a sole trader on an island popular with tourists. DSC specializes in supplying fresh fish to local hotels on a daily basis.
The local government has given D S C a permit to catch a maximum of 70 kilograms of fish per day. However, there has been an increase in illegal fishing (without permits), in addition to overfishing by DSC's other competitors (with permits), which has reduced fish stocks in the area. Given the increasing competition among fish suppliers on the island, hotels will only pay a fixed price of $ 10 per kilogram of fish.
DSC's cost of operation and the quantity of fish caught varies depending on factors such as weather conditions, the availability of fish, and the number of competitors.
Local hotels demand that:
- the fish they buy meet strict national health and safety standards, to ensure the quality of the fish for tourists
- fish are caught ethically without endangering other sea creatures, such as sea turtles or dolphins.
An environmental pressure group is also pressuring the government for:
- more strict regulations on the fishing industries, targeting suppliers without permits
- a reduction in the quantity of fish that each supplier can sell
- new legislation for a compulsory installation of new and sophisticated technological equipment for ethical fishing.
DSC is well known for fishing responsibly and within government legislation. However, the owner is worried about the possible high costs of some of the new legislation.
Unsold fish is stored and kept in a refrigerator for up to two days. After two days, the stored fish is sold to a processing factory for $ 4 per kilogram. For example, fish caught on Monday, but still not supplied to the hotels by Tuesday evening, will be sold on Wednesday to the processing factory.
DSC uses the system of last-in-first-out (LIFO) for the stock valuation. The table below shows a typical week's supply of fish at DSC:

2. Enjuice
Enjuice produces canned juices. The market for canned juices is very competitive. Each can is sold at $ 8. Enjuice's profit margins are falling. The marketing manager has conducted primary market research and suggested increasing advertising to increase sales. In 2018 Enjuice sold 360000 cans.

Papel

Papel manufactures and sells paper bags. It pays cash for 80 % of its raw materials but, to remain competitive, it must sell on credit to all customers. Many debtors are not paying on time and creditors (suppliers) are increasing. The board of directors is concerned about Papel's liquidity position.

The finance manager has provided information from Papel's accounts.

2. BP and the Gulf of Mexico
In May 2010, the oil company BP suffered a major disaster while drilling for oil off the coast of Louisiana, United States (US) in the Gulf of Mexico. The drilling platform exploded and was destroyed, killing 11 workers. Millions of tonnes of oil spilled out into the sea. This was the worst industrial accident B P had ever faced. Subsequently the price of B P shares fell by 30 %.
It took B P three months to stop the leak in the oil well. The oil spill had a major negative impact on fish, birds and the whole ecosystem. Regional fishermen, seafood restaurants and the tourist industry were the first to suffer from the impact of the pollution and demanded compensation.
This was a public relations (PR) crisis for B P. The US media attacked the company on a daily basis. Environmental pressure groups called for a ban on deep water oil drilling and even the US president got involved, announcing on television that B P would be "made to pay heavily". The perception was that B P 's crisis management was slow, uncaring and inefficient. For example, Tony Hayward, the Chief Executive Officer (CEO) of B P was reported to have said that the oil spill "was tiny" and on another occasion he complained of stress and said he "would like his life back". However, to solve the problem in deep water was a very technical exercise, which had never been attempted before. As a result of this PR crisis, B P decided not to give dividends to its shareholders in 2010.
B P has identified the following as causes of the decline in financial performance:
- the loss of the oil drilling platform
- the cost of stopping the leak 250 metres below the sea
- the cost of the clean-up operations
- the fall in share price
- the loss of brand image and goodwill
- compensation paid to regional businesses
- compensation paid to the families of the workers killed.
Selected items from BP's balance sheet as at 31 December 2009 (US$ millions) (before the disaster).

MM's growth has been helped by its unique selling point/proposition (USP) of rapid response to customer needs and by its high-quality customer service. New employees undergo detailed training to become skilled in:
- finding out what a customer's objectives are
- helping the customer work towards a marketing plan
- working closely with the customer as M M develops a marketing strategy for them
- maintaining links with the customer to provide an effective after-sales service.

The business takes a multicultural approach to its customers, employees and other stakeholders. MM's approach to diversity is one of the features that stakeholders say they like about the business. The company also ensures that it accommodates many cultural differences.

According to a business service that provides measures of social behaviour for every country, in British businesses:
- employees are accustomed to working in a competitive, individualistic society
- employees often take individual responsibility for their own actions and decisions
- competition is high between both employees and customers
- customers are accustomed to changing contracts when service is bad or competitors offer a better deal.

In comparison, Indian businesses:
- are based on power structures with a greater focus on teamwork than individuality
- are more likely to be hierarchical
- have greater loyalty from their customers
- have greater formality with their customers
- place importance on building business relationships
- are subject to greater variety in culture between businesses and regions.

Maintaining high levels of customer service is expensive. MM has increasing costs (line 107). Rachel is concerned about MM's finances and is examining the latest accounts for the company for 2019 and 2020 (Table 1) to identify problems.