Luxury Cars (LC) LC is a manufacturer of luxury cars based in the US. Its customers expect LC to use premium materials in its cars. Customers are willing to pay higher prices than those charged by LC's competitors. The company's reputation for 'affordable luxury' is critical to its promotional strategy. LC's main customer markets are in the US and Europe. These two geographical areas were originally operated as individual profit centres. LC employed experienced design engineers and market research teams in each area. This ensured LC met the distinct customer needs in each area. Timeline of LC 2009-2013 LC struggles to recover from the global financial crisis which reduced consumers' disposable incomes. 2014 New Chief Executive, Juan Pedro, appointed [Appendix 1]. 2015 Organisational structure changes from geographical to functional areas. Inventory management and budgets controlled centrally by US head office. 2016 LC develops an enterprise resource plan in response to budgetary constraints [Appendix 2]. 2017-2018 LC closes its least profitable, labour-intensive factories. 2019 LC reduces its product range. 2020 LC invests in one new capital-intensive factory financed by a bank loan. 2021 Employee contracts are changed to improve workforce flexibility [Appendix 3]. 2022 Labour productivity decreases and labour turnover increases. 2023 Board of Directors reviews LC's financial performance [Appendix 4]. A new Human Resource (HR) strategy A recent SWOT analysis indicated to the Board of Directors that LC has lost the support of its employees when it introduces strategic changes which directly affect them. There has been a loss of experienced workers with design and IT skills. This has led to a reduction in overall output across all factories. Productivity is 30% lower than projected. LC has received feedback from its employees [Appendix 5]. Appendix 1: press release announcing LC's new CEO in 2014 LC has appointed Juan Pedro, a former Finance Director, as its new Chief Executive. Juan is eager to use his experience to introduce strategic changes which will cut costs. Juan promises 'higher dividends will be paid to shareholders within the next ten years.' Appendix 2: extracts from LC's enterprise resource plan in 2016 • Centralised finance department to allocate all costs and calculate profit margins. • Monthly financial reports to be sent to head office to monitor performance and decision-making. • Inventory holding costs to be minimised. Appendix 3: new production employee contracts in 2021 • Change from salary to time-based contracts. • All bonuses removed. • Guaranteed working week reduced from 40 to 20 hours. • All hours worked, including overtime, paid at standard hourly rate. • LC's contribution to employee pensions reduced. Appendix 4: ratio results based on LC's financial statements 2014 to 2023 | | 2014 | 2017 | 2020 | 2023 | |-------------------------|------|------|------|------| | Gross profit margin | 40% | 50% | 60% | 40% | | Operating profit margin | 5% | 4% | 8% | 6% | | Rate of inventory turnover (times) | 12 | 15 | 24 | 24 | | Gearing | 40% | 40% | 65% | 63% | | Current ratio | 1.2:1| 1:1 | 1:1 | 1:1 | | Acid test ratio | 0.4:1| 0.7:1| 0.8:1| 0.8:1| | Dividend yield | 2% | 1% | 1% | 5% | Appendix 5: feedback from employees in 2024 'The new contracts state 20 hours but I'm expected to work 45 hours most weeks with no increase in hourly rate.' 'Why should the impact of strategic change always fall on workers?' 'I've got to do two jobs now because LC's contract only guarantees 20 hours.' 'We are never involved in any decision making.' 'I've never worked in a worse job!' 'I feel like just another machine in the automated factory.' Evaluate LC's business performance between 2014 and 2023.

Mark scheme

Marking points from the official mark scheme (May/June 2024). The mark or mark type is shown in brackets.

1. [AO1: 3 marks] Definition or understanding of business performance
2. [AO1: 3 marks] Definition of any concepts used in the case to show performance including: Global financial crises
3. [AO1: 3 marks] Appointment of a new CEO
4. [AO1: 3 marks] Any definition of appendix 4 ratios
5. [AO1: 3 marks] Bonuses, contracts, pensions
6. [AO1: 3 marks] Centralised - decentralised
7. [AO1: 3 marks] Labour productivity
8. [AO1: 3 marks] Capital - intensive factory
9. [AO1: 3 marks] Organisational structures
10. [AO1: 3 marks] Inventory management
11. [AO1: 3 marks] The use of financial statements to enable strategic decision making using financial strategies to develop strategies, the contents of an annual report and their usefulness to business and other stakeholders
12. [AO1: 3 marks] Understanding of appendix 4 concepts such as gross profit margin, current ratio, dividend yield, inventory turnover, acid test
13. [AO1: 3 marks] The use of accounting data and ratio analysis in strategic decision making including: Assessment of business performance over time and against competitors
14. [AO1: 3 marks] The impact of accounting data including ratio results on business strategy
15. [AO1: 3 marks] The impact of debt or equity decisions on ratio results
16. [AO1: 3 marks] The impact of changes in dividend strategy on ratio results
17. [AO1: 3 marks] The impact of business growth on ratio results
18. [AO1: 3 marks] The impact of other business strategies on ratio results
19. [AO1: 3 marks] The limitations of using published accounts and ratio analysis.
20. [AO2: 2 marks] Inventory management and budgets controlled centrally by US head office
21. [AO2: 2 marks] LC develops an enterprise resource plan in response to budgetary constraints
22. [AO2: 2 marks] LC closes its least profitable, labour-intensive factories
23. [AO2: 2 marks] LC reduces its product range
24. [AO2: 2 marks] LC invests in one new capital-intensive factory financed by a bank loan
25. [AO2: 2 marks] Labour productivity decreases and labour turnover increases
26. [AO2: 2 marks] Evidence from Appendix 4: Financial statements
27. [AO2: 2 marks] Rise and fall of GPM between 2014-2023
28. [AO2: 2 marks] Fall and rise then fall of OPM between 2014-2023
29. [AO2: 2 marks] Rate of inventory turnover doubles from 12–24 but has remained flat in the last 2 years
30. [AO2: 2 marks] Dividend yield increases by 2.5 × between 2014–2023
31. [AO2: 2 marks] Gearing increases between 2014–2023 [except for slight fall in 2023]
32. [AO2: 2 marks] Current ratio remains constant at 1:1
33. [AO2: 2 marks] Acid test doubles between 2014–2023 (after 2017)
34. [AO2: 2 marks] Appendix 5 evidence shows strategic changes affecting employees has caused significant negative feedback from them.
35. [AO3: 8 marks] Arguments that LC's financial and accounting strategy were successful include:
36. [AO3: 8 marks] Liquidity ratios: between 2014 and 2023 have stabilised: which indicate better utilisation of working capital, indicating less raw materials/work in progress, a result of the 2015 ERP programme focusing on JIT which reduces working capital employed
37. [AO3: 8 marks] Profitability ratios: between 2020 and 2023 have fallen by (GPM) 33% and (OPM) 25%: indicate that LC may have focused on increasing inventory turnover (×2 RoIT) and gaining market share sacrificing short-term profit for long-term profitability which may have a positive impact on the market price.
38. [AO3: 8 marks] Gearing ratio increased to over 50% between 2014–2023 showing a reliance on long-term borrowing – increase in costs through interest payments reducing profit and dividends to be paid to shareholders
39. [AO3: 8 marks] Reduction in product range – linked to strategic objective of cost cutting and achieving 10-year plan to pay higher dividends, satisfying shareholders
40. [AO3: 8 marks] Arguments that LC's financial and accounting strategy were not successful include:
41. [AO3: 8 marks] Meeting long-term financial objectives – focus taken off short-term financial issues – from OPM and GPM
42. [AO3: 8 marks] A focus on finance and accounting has impacted on other areas such as productivity, product range and employee performance which has led to inefficiencies and employee dissatisfaction.
43. [AO4: 7 marks] A judgement on the business performance between 2014–2023.
44. [AO4: 7 marks] A focus on finance and accounting may lead to other intangible assets and competencies being ignored which may be more important than cost reduction.
45. [AO4: 7 marks] Each geographical area will have their own requirements. These may be lost with centralised leadership brought on by a focus on finance and accounting.
46. [AO4: 7 marks] The range of products may be more important than a narrow focus, especially with a USP of affordable luxury.
47. [AO4: 7 marks] Weighing up the arguments about the success of financial and accounting strategies between 2014–2023.
48. [AO4: 7 marks] Overall judgement required about the success of financial and accounting strategies between 2014–2023.