Question

Firm A (Nassau Heavy Equipment Operator) Firm A is in the business of heavy equipment. This firm provides heavy equipment services for all of the major contracts on the island of New Providence. This firm is the first choice of the government for all of its infrastructural works, i.e. construction of roads, docks, bridges and airports. This firm provides all of the heavy equipment services to these projects. In addition to being a major supplier of services to the Government of The Bahamas, this firm is also the provider of heavy equipment services, notably crane and excavation services to the private sector, in particular, the hotels. Any new hotel construction, the hotels uses this company as its preferred provider for heavy equipment operation services. The following is a summary of key data of this hypothetical firm, Firm A (Nassau Heavy Equipment Operator) based on its financials as at December, 2019: January to December 2019 (5) No. of employees in 2019 Revenues: 54.221.419 ($500000) (5375,616) Fixed Cost: Fixed Maintenance contracts for repairs of equipment: Annual Payments on a fixed interest rate loan Annual payments for a fixed leased (expires 2025) for use of building to use equipment: Annual payments for fixed leased for office space expires 2022) (SS00,000) (SS00,00) $275.000 550.000 Variable Cost: Salaries for 2019 Utilities Flectricity, Water and Communications Services Operating Profit for 2019 $2,022.803 Factors to note, inter alia for Nassau Heavy Equipment Operator i. You are told for the first quarter, 2020, i.c. period January 1 to March 31, 2020, the revenues as a result of the coronavirus (COVID-19), is $450,000. ii. The projected fixed cost for 2020, is the same as what the company would have had in 2019. Further, the fixed cost is to be allocated on a quarterly basis, in other words, you must apportion, 25% of the annual fixed cost to derive the quarterly allocation. ili. For the first quarter of 2020, you have committed to keeping staff count, but there is no commitment beyond the first quarter. iv. Salaries and utilities are variable costs, i.e. discretionary. v. The variable costs inclusive of utilities are the same in 2020 as that of 2019.

Answer 1

2019		Nassau heavy equipment		Plant heaven
Number of employees		10		120
Revenues		42,23,419		27,87,654
FC		18,75,616		4,25,616
Maintainence contract		5,00,000		1,00,000
Interest		3,75,616		1,75,616
Lease godown (upto 2025)		5,00,000		1,00,000
Lease office (upto 2022)		5,00,000		50,000
VC		3,25,000		13,68,954
Salaries		2,75,000		13,18,954
Utilities		50,000		50,000
Operating Profit		20,22,803		9,93,084
Q1 2020
Revenue		4,50,000		5,10,000
FC		4,68,904		1,06,404
VC		81,250		3,42,239
Operating Profit		(1,00,154)		61,358
Degree of total leverage (DTL) (2019)	1.93		1.43

1. Which of the firms is in better position to respond to the threat of COVID-19?
Plant Heaven
As the proportion of FC for Plant Heaven is lesser than Nassau heavy equipment, it is in better position to the threat of COVID-19.
85% of the Total costs for Nassau is Fixed, which increases its risk
Only 24% of the Total costs for Plant Heaven are fixed which makes it better in short term
	Nassau	Plant Heaven
Total Costs	5,50,154	4,48,643
FC	4,68,904	1,06,404
VC	81,250	3,42,239
FC%	85%	24%
VC%	15%	76%

2. Apart from the response to COVID-19 which firm is likely to perform better in expanding economy?

Degree of Total Leverage (DTL) is the sensitivity of EPS or Net Profit with respect to Sales

DTL for Nassau is 1.93 which is higher than Plant heaven which is 1.43

So, if economy is expanding 1% growth in sales will increase EPS of Nassau by 1.93%

So, if economy is expanding 1% growth in sales will increase EPS of Plant heaven by 1.43%

This makes Nassau heavy equipment to perform better in case the economy is expanding

3. If turnaround is not expected to take place, untill second quarter what should be done?

For Nassau heavy equipment FC are also not recovered. So shutting down for temporary period makes sense rather than operating.

For Plant Heaven FC are recovered, also operating profit seems to be positive. So, keep operating at a lower number of employees.

4. Steps to be taken to make business more resilient in the future

Longer term revenue contracts with the customers will make it beneficial for these firms.

This may keep their revenues constant in difficult times like COVID-19.

5. Greater support should be given to which of the firms?

If I were a policymaker, I would have given support to healthcare and necessity products.

No support is required for these 2 firms are they are not most important in these testing times.

Still if we were to compare which firm should get support, then it should be Nassau heavy equipment.

The main reason is that, they are into a capital intensive business, which is mainly into infrastructure development

If support is not given to Nassau, it may go bankrupt in sometime and may not be able to repay its debt

6. Recommendation to the govt of bahamas?

Recommendation would be to provide healthcare facillity first

Increase government spending

Decrease taxes

Allow delayed payments of taxes

Provide necessary products (food) to the needy

Defeat COVID-19 first, then recover all the amount later once economy is stable again