MM – Section B Answers

(a) labour turnover refers to the number of employees that leave a firm over a given time
period, usually over one year. MM are considering shifting all of its operations to
Bangalore, but due to new standards of living that young graduates are embracing, it
is forecasted that Bangalore’s working population has a higher labour turnover rate.

All Figures in $000

Sales Revenue 575
Cost of Goods Sold 380
Gross Profit 195
Less Expenses 125
Net Profit Before Interest and Tax 70
Less Interest 0
Net Profit Before Tax 70
Less Tax 21
Net Profit After Interest and Tax 49

Dividends 12.25
Retained Profits 36.75

(b) (ii) gross profit margin = (gross profit / sales revenue) x 100

gross profit margin = (195/575) x 100 = 33.91% (2 d.p.)

(iii) if MM were to acquire (take over) SF, they would be able to insource the production of
radio and film promotions, in addition to giving them “better knowledge of the local market”.
Insourcing the production of radio and film promotions following the acquisition of SF would
allow MM to obtain complete control over this internal business function as earlier they were
relying on outsourced firms to provide the same service, which could potentially result in
higher efficiency for MM, although unlikely.

(iv)

Year Net Cash Flow Cumulative Cash Flow

1 60,000 60,000
2 60,000 120,000
3 60,000 180,000

initial investment cost (IIC) = 105,000

initial observation – PBP is in between Years 1 and 2 as CCF > IIC in Year 2.
(60,000 / 12) = 5,000
105,000 – 60,000 = 45,000; (45,000 / 5,000) = 9
PBP = 1 year and 9 months = 21 months
(v)

Year Net Cash Flow Discount Factor Net Present Value

0 (105,000) 1.00 (105,000)
1 60,000 0.9259 55,554
2 60,000 0.8573 51,438
3 60,000 0.7938 47,628

49,620

(vi) job production refers to the production process where orders are considered to be
delivered or produced on a “one-off” basis – it is the most labour intensive form of production
whereby orders are highly customized based on the requirements of the customer. With
respect to MM, they have adopted job production as their production method in order to
customize and meet service requirements demanded by their customers.