Grimco is a very large privately owned company in a less developed country. Grimco is of...
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Grimco is a very large privately owned company in a less developed country. Grimco is of a size that would be listed on the alternative stockmarket in many smaller countries. It is primarily owned by family members although there are a substantial minority of other shareholders (mainly local investors). The main business of Grimco is to manufacture clothing for various large retail companies around the world. Grimco owns many factories in the surrounding area and is the main employer in many of the local villages. Conditions for the workers are considered 'good' for the area but would not be acceptable in many of the countries to which the goods are exported. Typically, the working day is around 10 hours and compulsory overtime, in peak demand periods, can be up to 6 hours. One day a week is usually given as a rest day (although this can be cancelled at very short notice if necessary). The workforce is mainly female and the minimum working age is fourteen. Wages for a normal working week are of a level that allows a basic level of subsistence (enough to cover clothing and food with a little extra for a single person). All of the supplies for the clothing come from other local businesses and many other people are indirectly employed as a result of the Grimco manufacturing. Net profit margins are very low and require very tight control on costs to enable reasonable profits (defined as 5% return over total costs) to be made for the shareholders and owners. Most of this profit is distributed to the owners on a biannual basis with just enough cash left in the business for day-to-day operations. However, it is becoming more and more difficult to reach a 5% return and increased competition from more modern factories means that margins are likely to drop to between 1-2% in the next year. Grimco's owners are considering 3 options - 1. To close down the business and sell off the assets and land. The money could then be invested and would deliver a return of around 3% per annum. 2. To invest in the new machinery needed which would increase the margin to around 5% again before the cost of the new machinery is taken into account. As a rough estimate, and allowing for a ten year machinery life, the net profit margin after the cost of new machinery is taken into account, would be around 3.5%. 3. To cut costs (mainly wages) so that the 5% return is maintained. Grimco is a very large privately owned company in a less developed country. Grimco is of a size that would be listed on the alternative stockmarket in many smaller countries. It is primarily owned by family members although there are a substantial minority of other shareholders (mainly local investors). The main business of Grimco is to manufacture clothing for various large retail companies around the world. Grimco owns many factories in the surrounding area and is the main employer in many of the local villages. Conditions for the workers are considered 'good' for the area but would not be acceptable in many of the countries to which the goods are exported. Typically, the working day is around 10 hours and compulsory overtime, in peak demand periods, can be up to 6 hours. One day a week is usually given as a rest day (although this can be cancelled at very short notice if necessary). The workforce is mainly female and the minimum working age is fourteen. Wages for a normal working week are of a level that allows a basic level of subsistence (enough to cover clothing and food with a little extra for a single person). All of the supplies for the clothing come from other local businesses and many other people are indirectly employed as a result of the Grimco manufacturing. Net profit margins are very low and require very tight control on costs to enable reasonable profits (defined as 5% return over total costs) to be made for the shareholders and owners. Most of this profit is distributed to the owners on a biannual basis with just enough cash left in the business for day-to-day operations. However, it is becoming more and more difficult to reach a 5% return and increased competition from more modern factories means that margins are likely to drop to between 1-2% in the next year. Grimco's owners are considering 3 options - 1. To close down the business and sell off the assets and land. The money could then be invested and would deliver a return of around 3% per annum. 2. To invest in the new machinery needed which would increase the margin to around 5% again before the cost of the new machinery is taken into account. As a rough estimate, and allowing for a ten year machinery life, the net profit margin after the cost of new machinery is taken into account, would be around 3.5%. 3. To cut costs (mainly wages) so that the 5% return is maintained.
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Option 1 Close down the business and sell off the assets and land This option would bring in a retur... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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