2021 AL BS - Paper Classes - A2 - Paper class -3

Pop Cool (PC) 10 min read

PC is a public limited company. Its head office is in Europe and it operates with centralised decision
making. The company owns the Pop Cool brand name, logo and the distinctive bottle shape that is
still used in some markets. PC operates its own bottling and canning factories in some countries.
However, it also has joint venture agreements with packaging businesses in other countries.
Much of the fruit and sugar used in producing the soft drinks is imported from African and Asian 5
countries. 75% of PC’s sales and 90% of its profits are earned in the USA and Europe. The directors
of PC are keen to develop other markets and other products so that the company becomes less
dependent on a few key markets and products.

Economic changes
The economies of the USA and Europe have experienced very slow economic growth since 2008 10
– and some have even been hit by recession. Interest rates are very low as the monetary policy
of these countries is aiming to boost demand. However, this has contributed to exchange rate
depreciations of the US Dollar and the European Euro. Consumer spending has fallen due to
declining real incomes. There are ageing populations in most of the countries where PC sells its
products. A loss of competitiveness in many industrial sectors has resulted in rising unemployment. 15

Statement of financial position valuations

Since 2008 PC’s share price has fallen. This has been the trend for many public limited companies.
PC’s Finance Director has been considering three changes that will affect PC’s accounts. He
could make all three changes or just one or two of them.

• When calculating depreciation of new production equipment bought last year for $25m, use 20
an estimated life of 8 years not 5 years. The equipment would still have an estimated residual
value of $3m.
• Sell $10m of property assets and lease them back at an annual leasing cost of $1.5m.
• Revalue the company’s intangible assets by 50%.

He used an extract of PC’s most recent accounts to calculate what the impact of these changes 25
might be on profit and gearing (see Appendix 1).

Entering new markets – Africa and Asia

Paul, PC’s Chief Executive Officer (CEO), has been discussing with the Marketing Director, Suzy,
alternative marketing strategies the company could use to enter the rapidly expanding markets of
Asia and Africa. They have different views. 30

Paul stated that: ‘I think we should take over an existing soft drinks manufacturer in, for example,
India or China. We would then have all of the production facilities and distribution channels
through large supermarkets that we will need. The existing brand names could then be replaced
with the Pop Cool brand which we would advertise very heavily for a short period. Consumers will
be attracted to this because it is so popular elsewhere in the world.’ Suzy replied: ‘There could be 35
local opposition to this globalised approach – although the marketing economies of scale will be
substantial. I think we should develop a range of soft drinks to suit local tastes with brand names
that reflect local language and culture. We could distribute these new drinks through small retail
stores and street markets. This way we will slowly but steadily build up consumer awareness and
loyalty.’ 40

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Workforce planning in country X

Country X is one of PC’s biggest markets. The company fully owns all of the production facilities
in this country and it has a large sales and marketing team too. PC employs 468 people in country
X and labour costs are the company’s biggest expense in this country. The Human Resources
department is under pressure from PC’s Head Office to reduce labour costs in country X by 15%. 45
The Human Resources manager in country X, Bill, thinks that cutting labour costs might be risky. He
told other senior managers: ‘We must maintain consistent and adequate production levels so that
consumers can always buy the quantity they want. Production workers are sometimes reluctant to
learn new skills and they are resistant to job flexibility. Should we cut back on sales and marketing
staff? Perhaps we should employ more production workers on flexible contracts. Another option is 50
to introduce even more automation at our main packaging plant.’ The other managers agreed with
him that meeting this new company objective of reducing labour costs was going to need careful
workforce planning.

Special order in country X

PC’s marketing team in country X has just received an enquiry from the country’s largest 55
supermarket group – Superfood. The supermarket is asking PC to produce one large batch of
soft drinks as a trial product to be sold under Superfood’s own brand name. The drinks would be
similar to an existing Pop Cool product. PC’s Marketing manager in country X is not prepared to
take this decision without the approval of Head Office. He consulted with the Operations manager
in country X. They compiled data to present to PC’s senior management team in country X before 60
asking Head Office for a final decision (see Appendix 2).

Future options for PC’s growth

PC’s Board of Directors has been criticised by the newspapers and by major shareholders for
the company’s slow rate of growth in sales and profits since 2008. Apart from expansion into
markets in Asia and Africa, the directors are investigating two other strategic options for growth and 65
increasing long term profitability.

Option A: Develop new flavours and distinctive names for a wider range of PC products. These
could include: Pop Cool Energy aimed at the sports people market segment and Pop Cool Vital
aimed at young people wanting to buy healthy drinks. The Marketing Director believes that much
clearer market segmentation is the best strategy for achieving market penetration and higher 70
profits. He said at a recent Board meeting: ‘This is a low risk strategy that could be implemented
within two years’.

Option B: Extend the Pop Cool brand name and image by organising a joint venture with a clothing
designer. The plan would be to launch a range of modern clothes aimed at young consumers.
With careful and extensive promotion, the CEO thinks that these consumers would quickly link the 75
clothing range with Pop Cool’s positive image. He believes that the best way to expand profitably
in the longer term is for PC to diversify into markets and products that could lead to higher profit
margins than those achieved with soft drinks.

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Appendix 1: Extract from Pop Cool’s latest published accounts

(before any changes proposed by Finance Director)

Statement of financial position extract as at

$m
31 October 2013
Non-current assets:
Land 78
Buildings 112
Production equipment 78
Vehicles 10
Intangible assets 80
Total non-current assets 358
Net current assets 86
Non-current liabilities 156
Shareholders’ equity 288
Income statement extract for year ending
31 October 2013
Revenue 750
Profit after depreciation and interest 87

Appendix 2: Superfood’s special order – data produced by Marketing manager

and Operations manager

PC’s annual production capacity in country X 50m cans

PC’s actual production level (2012) in country X 45m cans
Superfood order 4m cans
Unit material cost per can of drink $0.10
Unit direct labour cost per can of drink $0.15
Cost of new design of can for Superfood and product testing $0.5m
Transport costs for Superfood order $0.1m
PC factory overhead cost per can of drink (2012) $0.25
Price per can offered by Superfood to PC $0.50

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Section A

Answer all questions in this section.

12m 1 Analyse the likely impact on PC’s profitability of the economic changes referred to in lines 9–15.
[10]

2 (a) Refer to lines 16–26 and Appendix 1. Calculate:

5m (i) change in the annual depreciation of the new production equipment [4]

5m (ii) gearing ratio after the revaluation of PC’s intangible assets by the Finance Director
(assume he makes no other changes). [4]

17m
15m (b) Assess the usefulness of ratio analysis of PC’s published accounts to its stakeholders. [12]
\]

30m3 Recommend to PC’s Board of Directors which one of the two strategies should be adopted for
entering new markets in Asia and Africa (lines 27–40). [16]

4 (a) Refer to the data in Appendix 2. Calculate the impact on PC’s profits of accepting the special
9m
8m order from the Superfood supermarket group. [6]

(b) Using your result from 4(a) and other information, advise PC on whether to accept this special
17m
15m order. [12]

30m 5 Evaluate the factors that the Human Resources manager should consider before completing the
workforce plan for PC’s operations in country X. [16]

Section B

Answer one question from this section. 45 m

6 PC has the objective of increasing long term profits. Evaluate the strategic factors that the directors
should consider when making the choice between option A and option B. [20]

7 Several strategic changes are likely to occur within PC. Evaluate how senior managers could
implement these changes most effectively. [20]

© UCLES 2014 9609/03/SP/16 [Turn over