ByteBrew is a fast-growing Australian subscription business that delivers premium coffee pods to customers monthly. The business has recently expanded from one warehouse to two, and it is considering a new automated packing line.
Selected information for the most recent month:
| Item | Amount |
|---|---|
| Sales revenue | \$520,000 |
| Cost of goods sold | \$312,000 |
| Operating expenses (excluding depreciation and interest) | \$150,000 |
| Depreciation (existing equipment) | \$18,000 |
| Interest expense | \$9,000 |
| Cash at bank (end of month) | \$22,000 |
| Accounts receivable (end of month) | \$95,000 |
| Inventory (end of month) | \$140,000 |
| Accounts payable (end of month) | \$160,000 |
| Short-term loan due within 12 months | \$80,000 |
| Long-term loan (repayable over 5 years) | \$420,000 |
The automated packing line would cost \$360,000. It is expected to:
- reduce operating expenses by \$12,000 per month (from lower labour and fewer packing errors)
- increase depreciation by \$6,000 per month
- require an additional \$30,000 of inventory to be held on average
The supplier offers two funding options:
- Option 1: Pay cash upfront (using existing cash and an increase in the short-term loan).
- Option 2: Lease the equipment for \$14,000 per month for 3 years (no upfront payment).
ByteBrew’s directors are debating whether to prioritise rapid growth in subscriptions over “playing it safe” financially.
Explain how the automated packing line could improve profitability while simultaneously weakening liquidity in the short term. Use the expected changes provided and show your reasoning.
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objectives of financial management - profitability, growth, efficiency, liquidity, solvency - short-term and long-term
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