HSC Business Studies 2023

Question 1 (5 marks): Harbourline Kayak Hire Pty Ltd reports the following. Current assets: cash $\text{\textdollar}18\,000$, accounts receivable $\text{\textdollar}24\,000$, inventory $\text{\textdollar}38\,000$. Current liabilities: accounts payable $\text{\textdollar}30\,000$, overdraft $\text{\textdollar}12\,000$, short-term loan $\text{\textdollar}8000$. Non-current liabilities: bank loan $\text{\textdollar}90\,000$. Owner's equity: $\text{\textdollar}160\,000$. Sales were $\text{\textdollar}400\,000$, cost of goods sold $\text{\textdollar}240\,000$ and expenses $\text{\textdollar}116\,000$. (a) Calculate the current ratio, the debt to equity ratio and the net profit ratio. (b) The owner proposes either using $\text{\textdollar}10\,000$ of cash to pay suppliers, or borrowing $\text{\textdollar}20\,000$ on a short-term loan and holding it as cash. Which proposal improves the current ratio? Show working.

Step 1: Liquidity (current ratio)

Step 2: Gearing (debt to equity)

Total liabilities are current plus non-current: $50\,000 + 90\,000 = \text{\textdollar}140\,000$.

Step 3: Profitability (net profit ratio)

Step 4: Test each proposal

Paying suppliers reduces current assets and current liabilities by the same amount:

Borrowing short term adds the same amount to both:

Because the ratio starts above 1, subtracting equal amounts from both sides raises it and adding equal amounts lowers it. Short-term borrowing looks like "more cash" but it worsens liquidity as measured by the current ratio.

Final answer: current ratio $1.6:1$, debt to equity $0.875$ (87.5%), net profit ratio $11\%$. Paying suppliers improves the current ratio to $1.75:1$; the short-term loan lowers it to about $1.43:1$.

Question 2 (5 marks): Ember and Oak Bakery has an opening cash balance of $\text{\textdollar}6000$ on 1 January. Projected cash inflows (cash sales) are $\text{\textdollar}22\,000$ in January, $\text{\textdollar}18\,000$ in February and $\text{\textdollar}25\,000$ in March. Each month it pays wages of $\text{\textdollar}9000$ and rent of $\text{\textdollar}3000$. Ingredient payments are $\text{\textdollar}8000$, $\text{\textdollar}7500$ and $\text{\textdollar}9500$ respectively. In March it plans to pay $\text{\textdollar}15\,000$ cash for a new oven. (a) Distinguish a cash flow statement from an income statement. (b) Calculate the closing cash balance for each month. (c) Recommend ONE strategy to manage the problem your projection reveals.

Step 1: Cash flow versus income statement

A cash flow statement tracks actual cash moving into and out of the business over a period (operating, investing and financing activities), so it shows whether the business can meet its payments as they fall due: a liquidity tool. An income statement records revenue earned and expenses incurred in the period, whether or not cash has changed hands, to calculate profit. A business can be profitable and still run out of cash.

Step 2: Month by month

For March: $9000 + 9500 + 3000 + 15\,000 = \text{\textdollar}36\,500$, so $6500 + 25\,000 - 36\,500 = -\text{\textdollar}5000$.

Step 3: Diagnose and recommend

Before the oven, operating cash flow is close to balanced ($+\text{\textdollar}2000$ in January, $-\text{\textdollar}1500$ in February, $+\text{\textdollar}3500$ in March), so the March shortfall is caused by paying cash for a long-term asset out of working capital. The strongest fix matches the finance to the asset: lease the oven (or buy it with a term loan). A lease replaces a $\text{\textdollar}15\,000$ lump sum with small monthly payments, so March closes positive, and the bakery keeps its cash buffer for seasonal dips such as February. Alternatives with weaker fit include negotiating a short-term overdraft (costly interest, and it funds a long-term asset with short-term debt) or delaying the purchase (may reduce output if the old oven fails).

Final answer: closing balances are $\text{\textdollar}8000$ (January), $\text{\textdollar}6500$ (February) and $-\text{\textdollar}5000$ (March). Recommend leasing the oven (or a term loan) so the long-term asset is not paid from working capital and March stays in positive cash.

Question 3 (4 marks): Saltwater Café is refitting its kitchen. The activities are: A design approval (4 days, no predecessor); B order and deliver equipment (6 days, after A); C demolition (3 days, after A); D plumbing and electrical (5 days, after C); E install equipment (4 days, after B and D); F painting (2 days, after D); G final inspection (1 day, after E and F). (a) Identify the critical path and its length. (b) Delivery of equipment (B) is delayed by 3 days. By how many days does the project length change?

Step 1: List every path from start to finish

The critical path is the longest path, because no activity on it can slip without delaying completion.

Step 2: Float on B

B sits on a 15-day path, so it has $17 - 15 = 2$ days of float (slack).

Step 3: Apply the delay

B now takes $6 + 3 = 9$ days:

The delay exceeds B's float by $3 - 2 = 1$ day, so the project lengthens from 17 to 18 days and the critical path shifts to A-B-E-G. A manager could respond by expediting delivery or by adding resources to shorten installation (E), which is now on the critical path.

Final answer: (a) critical path A-C-D-E-G, 17 days. (b) The project lengthens by 1 day (to 18 days) because B had only 2 days of float; A-B-E-G becomes the new critical path.

Question 4 (5 marks): Saltbush Skincare, a small Adelaide business, is launching a native-botanical sunscreen into a market dominated by established brands. Each unit has a variable cost of $\text{\textdollar}9$ and launch-year fixed costs are $\text{\textdollar}60\,000$. Its research suggests that at a penetration price of $\text{\textdollar}15$ it would sell about $12\,000$ units, while at a premium price of $\text{\textdollar}24$ it would sell about $5000$ units. Justify ONE pricing strategy for this launch, using calculations to support your answer.

Step 1: Contribution per unit and break-even

Step 2: Projected profit at the researched volumes

Step 3: Justify with the business situation

• Margin of safety: premium pricing breaks even at 4000 units against forecast sales of 5000, a safety margin of 1000 units (20% of forecast sales). Penetration needs 10,000 of a forecast 12,000 units, so a small forecast error wipes out its profit.
• Positioning: "native botanical" is a point of difference that supports prestige positioning; a low price could signal lower quality and invite a price war with larger rivals that enjoy economies of scale Saltbush cannot match.
• Capacity and cash: a small business producing fewer units ties up less cash in inventory.
• Counterpoint: penetration builds market share faster, so Saltbush could review price once the brand is known, but it has the higher risk here.

Final answer: Saltbush should use premium (prestige) pricing at $\text{\textdollar}24$: it breaks even at 4000 units (versus 10,000), earns a higher projected profit ($\text{\textdollar}15\,000$ versus $\text{\textdollar}12\,000$), carries less forecast risk and fits the product's botanical point of difference.

Question 5 (20 marks, business report plan): Brightwater Aquaculture Pty Ltd is a Tasmanian oyster and mussel producer with 60 staff. It plans a $\text{\textdollar}900\,000$ processing plant to supply Asian markets. Its balance sheet shows total liabilities of $\text{\textdollar}1.2$ million and owner's equity of $\text{\textdollar}1.5$ million, with 2 million shares on issue. Staff are anxious about automated shucking lines, and the business must hire food-safety technicians who are in short supply locally. The board asks for a business report that (1) explains the human resource challenges of the expansion, (2) compares a debenture issue at 7% interest with a 1-for-4 rights issue at $\text{\textdollar}1.80$ per share, and (3) recommends ONE source of finance.

Step 1: Report skeleton (headings a marker can tick)

1. Executive summary: one paragraph stating the recommendation up front.
2. Introduction: purpose, scope, the $\text{\textdollar}900\,000$ plant and export goal.
3. Human resource challenges: workforce transition, skills and supply, global factors.
4. Financing options: comparison: debenture versus rights issue, with ratios.
5. Recommendation and implementation.
6. Conclusion.

Step 2: Human resource challenges (section 3 content)

• Resistance to change: fear of redundancy from automation; respond with consultation, redeployment to quality control and packing, and retraining (a training and development strategy).
• Skills and supply: technicians are scarce in regional Tasmania, so consider sponsored skilled visas or partnering with a TAFE for traineeships; offer monetary and non-monetary rewards to retain them.
• Global factors: export customers impose food-safety standards, so certification training is a cost; global labour costs and competition for skilled workers raise wage pressure.
• Legal and workplace relations: any change to rosters or duties must comply with the Fair Work framework and the relevant award or enterprise agreement.

Step 3: Quantify the financing choice (section 4 content)

Current gearing:

Debenture issue of $\text{\textdollar}900\,000$ at 7%:

Rights issue, 1 new share for every 4 held:

Comparison points: debt keeps ownership and control, and interest is tax deductible, but it must be repaid regardless of export success and pushes gearing to 1.4; equity has no fixed repayment and lowers gearing to 0.5, but spreads future profit over more shares and dilutes control for holders who do not take up their rights, and dividends are not guaranteed to be cheaper than interest.

Step 4: Recommendation (section 5 content)

Export sales from a new plant are uncertain in the first years (biosecurity risk, exchange rates, new buyers). A fixed $\text{\textdollar}63\,000$ interest commitment on top of existing debt raises financial risk just when cash flow is least predictable. Recommend the rights issue, timed with an information memorandum to shareholders, and reassess debt once export revenue is established.

Final answer: Recommend financing the plant with a 1-for-4 rights issue raising $\text{\textdollar}900\,000$, which lowers gearing from $0.8$ to $0.5$ and avoids $\text{\textdollar}63\,000$ a year in fixed interest, while managing staff resistance and skill shortages through consultation, retraining and targeted skilled recruitment.