Revision Notes for Exam on Case Study: Lathom’s Dairy
Exchange Rates
Understand and be able to explain the effects of changing exchange rates on Lathom’s
Dairy.
Exchange rate is the amount of 1 currency that another currency can buy.
Weak pound Business Sound – Good for exports.
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remember that if the pound sterling is weaker than the currency of a country it
is selling to this is good for business
good for exports
this means that sales could rise
Lathom’s Dairy sell to USA, Australia, European Union
If the pound is strong against one of the currencies noted above then those
businesses will have to pay out more for the goods in sterling – opposite of
above statement
How will exchange rates affect their export sales?
The foreign exchange market is quite volatile. There are a great many factors that can
change the rates between any two currencies and sometimes these changes can be
extreme and happen very quickly.
So you either have to mark up your prices to compensate for the change in the
currency rates, or you maintain your prices and absorb the loss.
If you raise prices, you may suffer from loss of business if your customers think the
item is too expensive.
If Lathom’s customers in the USA and Canada can buy similar cheese for less in other
countries they will. If the pound is strong the cheese will be more expensive for their
American customers.
If the Americans and Canadians cannot get this type of cheese anywhere else they will
bear the cost of importing it from the UK and will have to pass those costs on to their
customers.
If the pound goes up against the Dollar?
Lathom’s may lose business to the USA and Canadian customers.
If the pound goes down against the Dollar? (weak pound
business sound)
Lathom’s will do well and gain more export business from USA and Canada.
Is cheese made by job / batch or flow process?
This is made in batches. There are 4 types of cheese and fig 4 tells us they swap
production between all 4 types. Therefore must be batch.
Pros of batch production: less capital to invest at the start of a business because you
only need one production line to produce 4 types of cheese. They can change types
of cheese that they make to cope with fluctuations in demand. This makes them very
flexible.
Cons of batch production: downtime while they change cheese that they are making.
Evaluate the statement “some tough decisions had to be made to cut costs
including making redundancies.”
What does the term redundancy mean? Employees losing their jobs, the business can
no longer afford to pay them.
Should Lathom’ Dairy make more production workers redundant?
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Redundancies lead to staff still in LD having to work hard for the same money
They could try to cut costs in other areas rather than make staff redundant
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LD could re finance, try to get a better rate on their loan or spread their
payments
Look at the selling price of their cheese- is it too expensive if they lower the
price could they sell more
Cut marketing costs
Get bigger discounts from suppliers
Get an overdraft to cover period of less sales.
Sources of Finance
Selling
shares
Sell
assets
Bank loan
Where the
money
comes
from?
Trade
Credit
Profit
from the
year
before
Mortgage
The next question is based on the data above.
TEMPLATE FOR GAINING MAX MARKS
Qu.
Evaluate the case for Eric using mass produced or traditional hand
made production of the cheese.
This could be a 6 or an 8 mark question.
Evaluate the case looking at pros and cons of each method:
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Will be able to produce 5000 cheeses mass produced compared to only 3000
traditional cheeses. This is because mass will be faster.
All the cheese they make at present are hand made, how will mass production
affect this?
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The gross profit of mass for a 900g is only £10.00 compared to £15.00 for
traditional hand made cheese.
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The quality of the mass produced may not be as good as the hand made
method.
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Cannot advertise/promote it as a hand made product, this is why the selling
price is less for mass produced.
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The cost of sales that is the cost of making the product is 15.00 for hand made
versus only £8.00 for mass produced this is a saving of £7.00 per product.
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Going on the market research figures and the costs etc..The gross profit for
hand made will be £45,000 and gross profit for mass produced will be £50,000.
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If he is going to mass produce he has to spend £150,000 on factory and
machinery.
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Could the new equipment also help with production of their other cheeses
currently being made?
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Is it worth all the extra spending for only an extra £5000 gross profit?
Which method is best giving one or two reasons?
I think that …It would be best if they used the traditional hand made method
Because….. as they can advertise it in USA and Canada as quality, hand made famous
moorshire cheese this might help them sell more. Also the gross profit is only an extra
£5000 and this does not seem feasible considering the extra equipment/factory will
cost £150,000. if they were to use mass produced they would need to make and sell
more to cover the costs of the extra equipment etc… and the selling price would need
to be increased from £18.00. Also they need to look at their production schedule and
see when they can fit in production of this new cheese as it was already at full
capacity. Do they need to scrap one of their products to make room for new product?
This extract introduces how Lathom’s Dairy are environmentally friendly.
They have tried to improve the environment by:
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Buying milk from local farms, reducing effects on environment from too much
transport, reducing pollution of the atmosphere
All the milk they use is organically produced.
They intend to install a wind turbine to generate electricity
Installing a wind turbine:
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Have to pay for the turbine
They could get a grant for it
If they did not obtain the grant this could impact negatively on their cash flow
situation if they had to increase their costs
Because they have a production site they will be using electricity and this will
be expensive so by having their own electricity supply they will be saving
money.
Production is sustainable because the resources used are renewable
Installing a wind turbine will also be good for the image of LD as they are
showing how environmentally friendly they are, many consumers are
interested in businesses that they buy from being environmentally minded,
they could promote this on their business website, or on promotional material
for their business
Possible Exam Questions – Mock Exam Paper
1. What sustainable work practices are Eric and Alice promoting in their
business. (4)
2. Line 20 states that “The closure of three competitors producing world famous
moorshire cheeses was not all good news for the industry”. How would this
be a disadvantage for the cheese making industry and who would suffer from
these closures. (8)
3. Line 15 discusses the recession, A) explain the effects of the recession on sales
of cheese? (2) B) explain the effects of the recession on the local people
living in Moorshire? (2)
4. What is the value of export sales in 2007 and in 2010? Include the change in
value? (2)
5. “Eric also recognises that changes in the exchange rate will affect their
business.” Evaluate this statement in relation to Lathom’s Dairy, their main
export markets were Canada, USA, Australia and European Union. (6)
6. Identify two stakeholders that will be affected by Lathom’s Dairy. (4)
7. From extract 7 what is the gross profit figure for traditional hand made cheese
and for the mass produced cheese? (4)
8. Calculate the total estimated sales and cost of sales for traditional cheese and
mass produced cheese. (6)
9. How do you think Eric should finance a) the factory extension (4) Give
reasons, b) the cheese making machinery (4) Give reasons.
10. What other costs will Eric have to consider.( 4)
11. Evaluate the case for Eric using mass production or traditional hand made
production of the cheese. (6)
12. Market research suggests that USA will be interested in buying their new
product, how will a strong US dollar exchange rate to Stg affect their sales. (4)