Vanguard Living Ltd is a private limited company that manufactures luxury, handcrafted solid-wood furniture (such as mahogany dining sets and oak bedroom suites) in Country Z. The business employs 45 skilled carpenters and sells its products to high-income homeowners through exclusive retail showrooms.
During Year 1, Country Z experienced an economic boom with high consumer confidence and low borrowing costs. In Year 2, however, the economy entered a recession: Gross Domestic Product (GDP) contracted by 1.2%, inflation escalated to 8%, and the central bank increased the base interest rate from 3.0% to 7.5% to combat inflationary pressures. Vanguard Living carries a $1,000,000 variable-rate commercial bank loan used to finance factory machinery.
State two main stages of the business cycle that occur between an economic boom and a subsequent economic recovery.
Identify two government economic objectives that may conflict when the government attempts to control high inflation.
Using the data provided, calculate the increase in Vanguard Living's annual loan interest expense in Year 2 compared to Year 1. Show your working.
Explain two ways the increase in interest rates and the economic recession in Country Z could affect Vanguard Living's sales and profitability.
Vanguard Living's managing director is considering two strategic options to respond to the economic downturn:
Option 1: Diversify production into lower-priced, flat-pack self-assembly furniture made from composite engineered wood.
Option 2: Maintain handcrafted solid-wood production, reduce selling prices by 20%, and offer 24-month interest-free credit terms financed from cash reserves.
Evaluate both options and recommend which strategy Vanguard Living should implement to ensure long-term business survival. Justify your choice.