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AG Barr takes over Funkin, the cocktail mixer business - Edexcel - A-Level Business - Question 2 - 2017 - Paper 2
Question 2
AG Barr takes over Funkin, the cocktail mixer business. A takeover is where one business buys a majority shareholding in another business and obtains full management... show full transcript
Worked Solution & Example Answer:AG Barr takes over Funkin, the cocktail mixer business - Edexcel - A-Level Business - Question 2 - 2017 - Paper 2
Step 1
Potential financial risks of AG Barr taking over Funkin:
Answer
- Initial Cost: The initial cost of £16.5m may be irrecoverable if the takeover fails.
- Opportunity Cost: The £21m could be better used to develop new soft drink products instead of acquiring Funkin.
- Market Entry Risk: Entering the new cocktail mixer market carries significant uncertainty.
Step 2
Potential financial rewards of AG Barr taking over Funkin:
Answer
- Diversification: AG Barr would diversify its product range, reducing reliance on the soft drinks segment.
- Growth Potential: The cocktail mixer market is growing, providing opportunities for increased sales and profits.
- Economies of Scale: By utilizing existing distribution and production facilities, AG Barr could lower costs.
Step 3
Judgement on the takeover:
Answer
The potential financial rewards may outweigh the risks, as the acquisition provides access to a growing market and diversification. However, the inherent risks due to lack of expertise in this new area should not be underestimated, which could lead to a financial loss of at least £21m.