QUESTION TWO Jenifer's Doll, a UK manufacturing company produces dolls mainly for young children living in Europe. It has recorded a significant amount of profit over the last years for product diversification (various models are available for children from different economic, social, religious, and ethnic background). Recently, it is facing serious delays to deliver the customised dolls because of post-Brexit bureaucracy. This delay gravely impacts its sales as customers frequently cancelled orders and have asked for refunds to be made. To overcome this barrier, Jenifer Kumar, the Chairperson of the company considers acquiring a local toy factory in France that is up for sale. The top-management of Jenifer's Doll partially agrees with her but share their concern that a British citizen may face enormous paper work and financial constraints to start a business in France. Jenifer, however, wants to explore the opportunity, thus, forms a team to conduct a feasibility study. The Chief Financial Officer (CFO) prepared a proforma 'profit and loss statement' and 'balance sheet' for the next five years after conducting the market research. The first three years expected revenues and their probabilities are presented below: Year Revenue (, 000) Probability 2022 2,500 30% 2,300 40% 1,800 10% 1,600 20% 2023 3,000 20% 2,800 45% 2,200 25% 1,500 10% 2024 2,400 35% 3,000 25% 3,500 22% 1,400 18% The respective costs of the company's new adventure for 2022 are as follows: Description Amount (, 000) Direct materials cost 725 Direct labour cost 380 Variable manufacturing overhead expense 210 Variable selling and administrative expense 150 Fixed overhead cost 400 Fixed selling and administrative expense 250 . . The CFO also expects the changes in allocated costs in the coming years as follows: The cost of direct materials will increase by 8% per year. The cost of labour will also increase by 5% per year. The variable manufacturing cost will keep increasing at the rate of 7% per year. The variable selling and administrative expense will increase by 5% per year. The company needs to buy new machinery which will cost 300,000 in 2023 and 200,000 in 2024. Fixed selling and administrative expenses are expected to increase by 7% per year. The corporate tax is currently 15%, however, it will be 20% from 2023 to onwards. . . Required: (a) Calculate the expected value of sales for 2022, 2023 & 2024. (12 Marks) (b) Prepare a profit and loss statement for the next three years. (15 Marks) (c) Assume that there is a 60% probability that the company would secure the net income reported in 2022, 30% probability that net income would be 20,000 (i.e., moderately successful), and 10% probability that net loss would be 50,000 (i.e., failure). Based on the given information, draw a 'Decision Tree with some analysis. (9 Marks) (d) Write a risk report to the Chairperson of Jenifer's Doll based your observation on post-Brexit trade environment and reading on risk management literature. (14 Marks) [TOTAL: 50 MARKS]
