Using Appendix 3 and other information, consider the extracts from the income statements for the two companies in country P. Which company should TSE take over? Justify your answer using suitable calculations. Company A: . . . . . . . Company B: . . . . . . . Recommendation: . . . . . . .

Relevant points might include:
Simple statements:
- Company B has twice as much revenue at \$200m
- Company A has less revenue than Company B
- Company A has less than half the cost of sales, a difference of \(\$ 50 \mathrm{~m}\)
- Company B has higher cost of sales at \(\$ 90 \mathrm{~m}\)
- The expenses are less than twice as much for Company B at \$60m
- Lower revenue means that Company A is probably smaller than Company B

Possible calculations:
- The gross profit of Company A is \(\$ 60 \mathrm{~m}\)
- The gross profit margin of Company A is \(60 \%\)
- The gross profit of Company \(B\) is \(\$ 110 \mathrm{~m}\)
- The gross profit margin of Company \(B\) is \(55 \%\)
- The profit of Company A is \(\$ 20 \mathrm{~m}\)
- The profit margin of Company A is \(20 \%\)
- The profit of Company B is \(\$ 50 \mathrm{~m}\)
- The profit margin of Company B is \(25 \%\)

Justification might include:
- TSE should take over Company A because it has a \(5 \%\) higher gross profit margin than Company B. This suggests that it is more efficient in its management of variable costs. It is a smaller competitor as its revenue is lower at \$100m and therefore it could require a lower amount of capital to take over the company. It should not take over Company B as TSE may need to borrow a much higher amount of capital as the company appears to be larger.
- TSE should take over Company B because it has much higher revenue suggesting it is a larger competitor than Company A and will better help TSE to achieve the aim of increasing its market share and it has a \(5 \%\) higher profit margin than Company A.