Business management
Higher level
Paper 2
Practice set #3
1 hour 45 minutes
Instructions to candidates
● Do not open this examination paper until instructed to do so.
● A clean copy of the business management formulae sheet is required for this
● examination paper.
● Section A: answer all questions.
● Section B: answer one question.
● Answers must be written within the answer boxes provided.
● A calculator is required for this examination paper.
● The maximum mark for this examination paper is [50 marks].
Section A
Answer all questions in this section.
1. EcoWrap (EW)
EcoWrap (EW) manufactures and sells reusable bags that keep food fresh in bulk to retailers. EW has a onemonth credit period from its suppliers and sells on credit to its customers. Many debtors are not paying on
time, and creditors are increasing. The finance manager is concerned about EW’s liquidity position. Table 1
shows information from EW’s accounts.
Table 1: Selected Information from EW’s Accounts at 31 December 2023
Item
$000
Accumulated retained profit 28
Cash
6
Cost of goods sold
4
Creditors
40
Debtors
24
Expenses
4
Long-term liabilities (debt) 40
Net fixed assets
120
Sales revenue
10
Share capital
52
Stock
10
(a) Define the term debtors.
[2]
(b) Using information from Table 1:
(i)
Construct a fully labelled statement of financial position for EW for the end of
December 2023.
[4]
(ii)
Calculate the current ratio for EW for the end of December 2023.
(c) Explain one possible strategy, other than the elimination of credit sales, for EW to improve its
liquidity position.
[2]
[2]
2. Ridgeview Farms (RF)
Ridgeview Farms (RF) operates in the primary sector, specializing in large-scale cattle farming. The
company is experiencing robust growth and had significant capital expenditure planned for 2024.
Table 1: Selected Forecast Financial Information for the Year Ending 31 December 2024
Description
Amount ($000)
Cost of Goods Sold
12,000
Expenses
4,200
Interest
800
Net Profit After Interest and Tax
2,800
Net Profit Before Interest and Tax
3,600
Sales Revenue
15,000
Non-current Liabilities
8,000
Capital Employed
20,000
Fixed Assets
7,000
Estimated Residual Value of Fixed Assets 500
Useful Life of Fixed Assets
5 years
(a) Define the term capital expenditure.
[2]
(b) Using Table 1, and other information in the case study where appropriate, calculate for RF:
(i)
Return on Capital Employed (ROCE).
(ii)
Depreciation in 2024, using the straight-line method.
(iii) Using Table 1, calculate the gearing ratio for RF.
[2]
[2]
[2]
(c) Explain the difference between profit and cash flow.
[2]
3. Small-Scale Hobbies (SSH)
Small-Scale Hobbies (SSH) publishes a magazine called "Scale Airplane Modeller," which is sold through
independent retail outlets in the US. In 2023, SSH had a margin of safety of 20,000 units. The company
stipulates a 1-month lead time. SSH is considering new production methods to enhance efficiency and
reduce both fixed and variable costs.
Table 1: Selected Financial Data for SSH for 2023 (before new production methods)
Description
Amount ($)
Annual fixed costs
100,000
Variable costs per magazine produced 2
Magazine price
4.50
Total purchases
12,000,000
Creditors
1,000,000
(a) Define the term lead time.
[2]
(b) Using the financial data in Table 1, calculate for SSH:
(i)
(ii)
(iii)
the break-even level of output (show all your working)
the creditor days ratio (number of days) (show all your working)
the target profit output to achieve a profit of $30,000 (show all your working)
[2]
[2]
[2]
(c) Assuming there are no other changes, explain how the introduction of new production methods might
affect the margin of safety for SSH.
[2]
Section B
Answer one question from this section.
4. Velocity Bikes (VB)
Velocity Bikes (VB) is a well-established manufacturer of high-performance bicycles. Despite its strong
reputation in the industry, the company has faced significant challenges in recent years. Due to a combination
of economic factors and increasing competition, VB has struggled with declining profitability and financial
instability. In particular, VB's domestic market share has decreased, and the company has recently encountered
issues related to insolvency.
(a) Define the term insolvency.
[2]
VB has also faced difficulties with its online sales operations. As the company seeks to adapt to changing
market conditions, it has introduced several new production methods to improve efficiency and reduce costs.
For example, VB now orders materials only when they are needed for production, rather than maintaining
large inventories. VB has also implemented small, cross-functional teams that are tasked with regularly
reviewing and optimizing their specific production processes.
(b) Explain one method of lean production that VB has introduced.
[2]
Table 1: Online Sales Performance and Customer Feedback (2021-2023)
VB
Online Industry
Average % of Sales % of Customer
Year
Sales Growth Online Sales Growth from Website Complaints
2021 8%
10%
25%
3%
2022 10%
12%
30%
4%
2023 15%
18%
40%
5%
(c) (i) Comment on the data in Table 1.
[2]
(c) (ii) Explain one advantage and one disadvantage for VB of selling its products online.
[4]
VB is considering external growth strategies to address its financial challenges and improve its market
position. The directors are evaluating two potential merger options:
● Option 1: A merger with SpeedRider, a multinational bicycle manufacturer. This merger could provide
VB with enhanced product development capabilities and greater competitiveness in international
markets. SpeedRider’s extensive experience and resources might help VB innovate and expand its
product range more effectively.
● Option 2: A merger with BikeWorld, a major bicycle retailer with a strong presence both domestically
and internationally. This merger could enable VB to improve its distribution network and increase its
market reach. BikeWorld’s established retail channels could help VB boost sales and grow its brand
recognition in new and existing markets.
Table 2: Key Data on Potential Merger Partners
Criteria
SpeedRider (Manufacturer) BikeWorld (Retailer)
Annual Revenue
$200 million
$150 million
International Market Presence 30 countries
20 countries
Number of Employees
2,000
1,200
Reputation in Industry
High
Moderate
Potential Synergy with VB
Product Development
Market Expansion
(d) Using the data in Table 1, Table 2, and other information in the case study, evaluate the two merger options
for VB.
[10]
5. HealthMax Corp (HMC)
HealthMax Corp (HMC) is a global pharmaceutical company that was formerly a public sector organization,
offering medications to hospitals at significantly reduced prices. Facing financial difficulties and operational
inefficiencies, HMC was sold to a multinational corporation in early 2023. The new owners have sought to
address these issues through a major restructuring.
(a) Define the term public sector.
[2]
To improve efficiency and adaptability, HMC has restructured its operations into a shamrock organization.
This approach involves outsourcing production to a specialist manufacturer while retaining and expanding the
Research and Development (R&D) department. The core employees now include the R&D scientists, who are
supported by peripheral staff as needed, while production is managed externally.
(b) Explain one benefit and one limitation for HMC resulting from the implementation of the shamrock
organization structure.
[4]
As part of the restructuring, HMC has placed a strong emphasis on internal recruitment to fill key positions
within the R&D department. This strategy aims to promote career development.
Table 1: R&D Performance Measures (2021-2023)
Number of New Average Time to
Scientist Turnover Rate (%)
Drugs Developed Market (months)
2021 5
24
15%
2022 6
22
12%
2023 8
18
10%
Year
(c) (i) Comment on the data in Table 1.
[2]
(c) (ii) Explain one benefit of internal recruitment for HMC.
[2]
Despite the restructuring efforts, there has been notable conflict within HMC. Managers have proposed a
number of additional changes that needs to be implemented in order to improve productivity, improve financial
efficiency and enhance organisational performance. Manufacturing staff have resisted proposed changes such
as moving to shift work and the introduction of formative appraisals. Sales staff have expressed strong
concerns about proposed performance-related pay and commission structures. Employees in both departments
have complained about lack of progression opportunities and a decrease in working conditions. Financial
pressures on HMC have led to these proposals being made and HMC management are considering how to
approach this conflict with employees in the manufacturing and sales departments.
Table 2: Employee Satisfaction and Performance Measures (2021-2023)
Number of employees Employees belonging Capacity
in each department to trade union (%) utilisation (%)
R&D
2021 70
50
80
2022 75
60
85
2023 80
80
88
Manufacturing 2021 140
70
72
2022 155
80
74
2023 180
85
72
Sales
2021 45
55
80
2022 50
60
82
2023 60
80
82
Department
Year
(d) Discuss two approaches to conflict that HMC could use to achieve its objective of implementing its
proposals.
[10]