Page 8 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

EXERCISE 3

Email

To: Randal Edwards, Director of Finance
From: Senior Manager
Subject: Proposal to close factories in Cronland

The purpose of this email is to consider the benefits and risks of closing two of the three factories
in Cronland and, if such a strategy were to be adopted, to identify how the decision on which
factories should be shut can be made.

Proposal to close 2 factories

Benefits

The principal benefit is that having 10 factories instead of 12 should save costs for Novak and
therefore increase the profitability of the company. Cronland is a well-developed economy, and
so the cost of manufacturing here is likely to be much higher than in other parts of the world.
Significant cost savings should result each year in staffing and premises.

Secondly, the disposal of two factories may well lead to an injection of cash into the company in
the year of sale. Our premises are all state of the art and with the latest manufacturing
technologies and may therefore be of considerable value on the open market. Disposal proceeds
could be used to fund further research or to pay a special dividend to shareholders.

Thirdly, identifying cost savings in the business is probably the quickest means of arresting a fall in
profits. In our industry it takes a long time to bring new products to market, and so trying to grow
sales through new product development is unlikely to reap benefits in the short term. Our
shareholders will no doubt be looking for immediate improvements in the bottom line, and
announcing factory closures and a more efficient manufacturing process is likely to be the best
way to achieve this.

A further positive to this proposal is that it is already being done by many of our competitors. The
newspaper article actually criticises Novak for not having acted in this way earlier. If the rest of
the industry has already relocated some of its manufacturing to cheaper parts of the world, and
this has been seen as a success, this should give comfort to the Board that it is an appropriate
strategy for Novak.

In addition, the relocation of some of our manufacturing will mean that the company is showing
greater commitments to its foreign markets. Whichever countries to which we decide to relocate
production currently happening in Cronland will now see us as being more dependent on that
country; this gives longer term job security to those employed by Novak in that location and a
reassuring sign that Novak commits to helping with economic growth in that area. This may make
the relevant foreign governments look on Novak more sympathetically when it comes to
important decisions such as approval for new drugs.

KAPLAN PUBLISHING 69