AB is a private limited company owned and managed by A and his brother B. It was started by the brothers 10 years ago in country M. A manages the administration of the business while B focuses on employees and marketing. AB provides helicopter flights for business people who need to travel to meetings quickly. The price charged to these customers is high and demand is price inelastic as there are few competitors in this niche market.
However, there is a growing trend for business people to use video conferencing instead of meeting face to face. The brothers plan to expand AB and they could done either by attracting additional business customers or by targeting the tourist market. Country M has many tourists who visit the areas of natural beauty around Country M. The demand for helicopter flights from tourists to these areas is price elastic because there are competitors in this niche market.
A and B realise that working capital will become more important as the business expands to help avoid cash flow problems. In order to expand, AB will need another helicopter and another pilot. The total cost to train a pilot at college is RM20 000. If A employs a ready trained pilot the annual salary will be RM50,000. A is qualified to train pilots himself.
The brothers are considering the following two options for AB’s additional helicopter:
Option A: Purchase a small helicopter at a price of RM2.4m. The helicopter will carry up to 5 passengers and costs RM2 per km in fuel. A loan is available to purchase this helicopter, which can be repaid over 10 years with a low rate of interest.
Option B: Lease a medium sized helicopter. Lease arrangements are available over a period of 5 years at a total cost of RM5.5m. The helicopter will carry up to 9 passengers and costs RM3 per km in fuel.
Traveller Website Advisor comments for VeryGoodFlights, (VGF) – a competitor to AB
We had a fantastic trip!! VGF made sure we had the best experience possible. The price was only RM150 per passenger for the flight which lasted 30 minutes. We would recommend taking a helicopter flight as part of your holiday – you will find it a fantastic experience. You can recognise VGF’s helicopters by the distinctive red colour and logo on the side. A happy tourist.
Forecast price and cost information for expanding AB
Price – one hour business flight (per passenger)
Price – one hour tourist flight (per passenger)
Average number of business flights per month
Average number of tourist flights per month
Average fuel costs per one hour flight at RM2 per km
Other costs per one hour flight (includes costs such as pilot, maintenance, loan repayment or lease payment and airfield fees)
Increasing concerns about the environmental impact of helicopter flights
Recent government reports show that helicopter flights are causing increasing damage to the environment. The government wants to reduce the number of flights taken by tourists and is introducing a new tax on all flights of RM1 per km per tourist. This is forecast to increase the price of the average tourist flight by 5%. Business passengers will not be charged this tax because the government wants to make sure business costs do not increase. It does not want to damage the competitiveness of businesses in country M.
1. Identify and explain two ways A and B could use the Internet to help them manage AB.
· Option 1
· Option 2
· Explanation for each
2. Identify and explain two reasons why working capital is important to AB.
· Reason 1
· Reason 2
· Explanation for each