m11/3/busmt/sp2/eng/tz0/xx section a - weebly€¦ · m11/3/busmt/sp2/eng/tz0/xx 2211-5014 ......

M11/3/BUSMT/SP2/ENG/TZ0/XX

2211-5014

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SECTION A

Answer one question from this section.

1. Informatic

Informatic manufactures computers and is based in Sri Lanka. Informatic uses a method of batch production and manufactures batches of computers according to customer specifications such as computer speed and screen size. Production workers are paid by the hour but receive a lower than average wage for Sri Lanka. To compensate they are offered long-term job security and other non-financial rewards.

Informatic exports 4000 computers a year to Pakistan using local independent distributors who have knowledge of the local market as well as experience in delivering and installing computers. 90 % of Informatics sales are organized through such distribution channels. Because using local independent distributors increases the final price of the computer to the customer, senior managers have decided to offer customers in Pakistan the opportunity to purchase computers directly from Informatic. Customers have to telephone orders to Informatic in Sri Lanka from Pakistan because e-commerce sales are not available.

The following are Informatics expense and sales price figures: fixed costs of $100 000 per year variable costs of 80 % of the sales price sales price of $1000 per computer.

(a) (i) Define the term batch production. [2 marks]

(ii) Identify two fixed costs for Informatic. [2 marks]

(b) For Informatic:

(i) calculate the break-even quantity in units (show all your working). [2 marks]

(ii) calculate the margin of safety in units (show all your working). [2 marks]

(iii) calculate the net profit if 4000 computers are sold (show all your working). [2 marks]

(iv) prepare a fully labelled break-even chart. [5 marks]

(c) Examine the effectiveness of the new distribution channel for Informatic. [5 marks]

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SECTION A

1. (a) (i) Define the term batch production. [2 marks]

In batch production, items are produced in consignments and undergo a stage of the production process together. The whole consignment is then moved on to the next stage of production and another task is performed.

Candidates are not expected to word their definition exactly as above.

Award [1 mark] for a basic definition that conveys partial knowledge and understanding. Award [2 marks] for a full, clear definition that conveys knowledge and understanding similar to the answer above. For only a relevant: example or application to the stimulus award [1 mark].

(ii) Identify two fixed costs for Informatic. [2 marks]

For Informatic fixed costs could include: rent of the premises insurance of machinery salary for managers accept any other relevant fixed cost for Informatic. If a candidate refers to cost of workers or workers salaries, the candidate must make clear that the employees referred to are (a) salaried (not earning wages) and (b) permanent (short of some financial or other disaster). In other words, if the candidate says workers salaries / cost of workers, the presumption is that these costs are variable (not fixed) unless the candidate fully and clearly explains that they are fixed. Also, distribution costs, unless otherwise appropriately explained, are variable, not fixed. Award [1 mark] for each correct and relevant fixed cost identified up to a maximum of [2 marks].


(b) For Informatic: (i) calculate the break-even quantity in units (show all your working). [2 marks]

Fixed Costs = $100 000 To calculate contribution we need variable costs per unit. They are equivalent to 80 % of sales price = $800. Contribution per unit = sales price variable cost per unit = $1000 $800 = $200

Break-even point fixed costs $100 000 500 unitscontribution per unit $200

= = =

[1 mark] If a candidate who has shown working provides a correct procedure (thus, demonstrates an understanding of the underlying concepts) but has made an error in calculation. [2 marks] Candidate provides the correct answer with working.

(ii) calculate the margin of safety in units (show all your working). [2 marks]

Margin of safety = current level of output break-even level = 4000 500 = 3500 units

Apply Own Figure Rule (OFR). [1 mark] If a candidate who has shown working provides a correct procedure (thus, demonstrates an understanding of the underlying concepts) but has made an error in calculation. [2 marks] Candidate provides the correct answer with working.


(iii) calculate the net profit if 4000 computers are sold (show all your working). [2 marks]

Method 1 Revenue 4000 computers at $1000 per computer 4 000 000 Variable costs 4000 computers at $800 per computer 3 200 000 Fixed costs 100 000 Profit 700 000 Net profit = $700 000 Method 2 Net profit = margin of safety contribution = 3500 units $200 = $700 000 Apply Own Figure Rule (OFR). [1 mark] If a candidate who has shown working provides a correct procedure (thus, demonstrates an understanding of the underlying concepts) but has made an error in calculation. [2 marks] Candidate provides the correct answer with working.


(iv) prepare a fully labelled break-even chart. [5 marks]

Award marks as follows: [1 mark] for each appropriately labelled axis maximum of [2 marks]. [1 mark] for an accurately drawn and labelled total revenue curve.

[1 mark] for an accurately drawn and labelled total costs curve. [1 mark] for the identification of the break-even level of output. Award [0 marks] if a candidate produces a table, and award no more than [3 marks] if the chart is not neat, not drawn with a straight-edge, or is not to scale. Ideally, the candidate will draw an arrow pointing to the break-even point and label the arrow. However, accept as an appropriately labelled break-even point a vertical line from the x-axis to the break-even point provided that the line is labelled break-even point.

0 500 4000

Cost/revenue

Margin of safety

Break-even point

Profit

Total revenue

Total costs

Fixed costs Number of computers sold

4 million

500 000

100 000


(c) Examine the effectiveness of the new distribution channel for Informatic. [5 marks]

Currently Informatic is using local independent distributors to distribute 90 % of its annual sales. We must assume that the new channel is intended to reduce selling prices (by eliminating distributors fees) by selling directly to customers. Benefits include but are not limited to: cost savings, with an increase in profit margins per computer sold if variable costs are reduced, contribution will increase, reducing the

break-even level of computer sales and increasing profits (if the number of units sold remains the same)

additional profits generated could be used to pay for the training of staff taking the telephone orders

if selling prices are reduced, additional volumes of computer sales will be generated, perhaps further reducing the break-even level of output.

However: a lack of experience in selling through this channel and also not being able to

take advantage of the local knowledge of the Pakistani distributors given that orders will be taken by telephone, additional staff training will be

required to process those orders the new system may not be able to cope with increased orders the new telephone system may not be entirely reliable.

Accept any other relevant examination.

If the response is a one-sided generally relevant approach with no examination, award a maximum of [3 marks]. If there is no mention of the cost savings, award a maximum of [3 marks].

Marks should be allocated according to the markbands on page 3.


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SECTION A


1. Asado Heaven (AH)

Asado Heaven (AH) is a traditional barbeque restaurant run by a sole trader called Roberto Vergerio and is located in Montevideos city centre next to the football stadium. The restaurant serves grilled meats and a variety of salads and fried potatoes. The meats are cooked in a traditional fashion on a wood-fired grill that gives it a special flavour. The traditional food is very popular with local residents and tourists alike.

AH competes with four other traditional barbeque restaurants (A, B, C, D) within the same street. Roberto has constructed a position map to determine his position among the four main competitors in terms of price and quality. He is planning to use some below the line promotion to attract new customers.

High

High QualityLow

Low

Price

Competitor D

Competitor B

Competitor A

Competitor CAsado Heaven

(This question continues on the following page)


2212-5014

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(Question 1 continued)

Currently, the restaurant serves on average 100 meals per day; it opens every day of the month (assume 30 days) and each meal is sold at an average price of US$10. The business employs a barbeque chef at a monthly salary of US$500 and two waiters with a monthly salary of US$350 each.

Fixed costs (paid monthly) US$Insurance 200Rent 500Robertos salary 400Other employee salaries XOther 150

Variable costs per meal served US$Meat 4Vegetables 1Wood for the grill 1Other 2

(a) Describe two below the line promotion methods that Roberto could use. [4 marks]

(b) Calculate for AH for each month (show all your working):

(i) other employee salaries (figure X) and hence the break-even level of output. [2 marks]

(ii) the margin of safety. [2 marks]

(iii) the profit or loss at the current level of meals served. [2 marks]

(c) Construct a fully labelled break-even chart for AH. [5 marks]

(d) Using the position map, analyse how AH can differentiate itself from its main competitors. [5 marks]


SECTION A

1. (a) Describe two below the line promotion methods that Roberto could use. [4 marks]

Below the line promotional methods that AH could use include:

Direct mail could be used to inform customers about delivery services, contact details, menu, prices and promotions.

Leaflets and 2 for 1 offers could be handed out in the neighborhood of the restaurant. AH could offer 2 for 1s either promoted on the leaflets, or at

point-of-sale, or through other means.

Loyalty programs for frequent customers could be introduced to allow special discounts or free meals after a number of visits. These could also encourage

brand loyalty and provide AH with a database that could be used for further

promotions.

Birthday clubs, special date promotions and refer-a-friend tactics could be set up to increase the number of customers.

Selling internal merchandising such as special barbeque utensils and aprons with the restaurants logo/name to enhance brand awareness.

Accept any other relevant below the line promotion method described.

Award [1 mark] for each correct and relevant below the line promotion method

identified up to a maximum of [2 marks]. Award an additional [1 mark] for a

relevant description of each method identified up to a maximum of [2 marks].

(b) Calculate for AH for each month (show all your working):

(i) other employee salaries (figure X) and hence the break-even level

of output. [2 marks]

Other employee salaries (X) 500 (350 2)

Fixed costs 200 500 400 500 350 2 150 US$2450

Contribution per meal sales price variable cost per meal

10 8 US$2

fixed costs 2450

Break-even level of output 1225contribution per meal 2

Award [1 mark] for the correct workings and [1 mark] for the correct

answer.



Margin of safety current level of output break-even level

Margin of safety 30 100 1225 1775 meals

Apply Own Figure Rule (OFR).


answer.

(iii) the profit or loss at the current level of meals served. [2 marks]

Method 1

Revenue 3000 meals at US$10 per meal 30 000 Variable costs 3000 meals at US$8 per meal 24 000 Fixed costs 2450

Profit 3550

Profit = US$3550

Method 2

Profit margin of safety contribution

1775 meals 2

US$3550

Apply Own Figure Rule (OFR).


answer.


(c) Construct a fully labelled break-even chart for AH. [5 marks]

Award marks as follows:

[1 mark] for each appropriately labelled axis up to a maximum of [2 marks].

[1 mark] for an appropriately drawn and labelled total revenue curve.

[1 mark] for an appropriately drawn and labelled total cost curve.

[1 mark] for the identification of the break-even level of output.

Award [0 marks] if a candidate produces a table, and award no more than

[3 marks] if the chart is not neat, not drawn with a straight-edge, or is not to scale.

Ideally, the candidate will draw an arrow pointing to the break-even point and

label the arrow. However, accept as an appropriately labelled break-even point

a vertical line from the x-axis to the break-even point provided that the line is

labelled break-even point.

0 1225 3000

Cost/revenue in US$

Margin of safety

Break-even

point

Profit

Total revenue

Total costs

Fixed costs

Number of meals

30 000

12 250

2450


(d) Using the position map, analyse how AH can differentiate itself from its main

competitors.

[5 marks]

Roberto has constructed a position map to determine where his restaurant stands

vis--vis the other competing restaurants in the street. According to the position

map, AH is competing with restaurants A, B and C in the high quality high priced

segment, meanwhile restaurant D is all alone in the economy segment offering an

inferior service.

The map suggests that AH has a distinct position in the market. On the one hand,

restaurant B is perceived as offering services with the same quality than AH but at

a higher price. Restaurant C on the other hand, is perceived as offering services at

the same price than AH but with a lower quality. Restaurant A in turn, is

perceived as providing better quality services but substantially more expensive.

Roberto could design his future promotions so as to emphasize AHs distinct

position in the market. His restaurant is perceived as offering good quality service

for good value for money. Future promotions could aim at showing that his

restaurant is cheaper than competitor B for the same service quality, and better

quality service than competitor C for the same price.

Another option for AH is to try to change its market position to a less crowded

position to differentiate more effectively from restaurants B and C. It could aim

at the premium segment such as restaurant A, or inversely, at the economy

segment like restaurant D. However, these alternatives would imply competing

with restaurants A or C which are already positioned in their market segments.

It could also entail several risks such as losing customers or drastic changes to the

restaurants image.

Roberto should then take advantage of AHs current position to deepen its

differentiation over its competitors. Future promotions should emphasize AHs

distinct position on quality service and price.

Accept any other substantiated analysis.

Marks should be allocated according to markbands on page 3.

N12/3/BUSMT/SP2/ENG/TZ0/XX

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SECTION A


1. Wavin Surfboards (WS)

Wavin Surfboards (WS ) manufactures surfboards. The business was founded in 1978 by Brent Bass who operated it as a sole trader. In 1991, after years of sales growth and employing many employees, Brent changed WS into a private limited company. The growth in scale of operation was a challenge for Brent, who had a laissez-faire leadership style. He loved surfing and as a young person he started producing and selling surfboards at his home. He had not received any business training. As the business grew Brent struggled to develop the business and management skills necessary to operate the business.

Due to the high quality and popularity of the surfboards, sales continued to increase. Brents accountant believes that the company will need a new larger building in two years. The span of control within the company is currently wide, and increasing the number of units (surfboards) produced would require employing more managers. For Brent, this would mean spending more time supervising managers and less time producing andpromoting surfboards. Brent would also have to decide whether to recruit the new managers internally or externally.

Brents accountant prepared a comparison of the current and proposed new scale of operation.

Current building Proposed new buildingActual units

produced per year

Maximum capacity units

producedper year

Initial forecasted

units producedper year

Maximum capacity units

producedper year

Sales in units 2400 3000 3300 6000Variable costs per unit ($) 800 800 750 750Fixed costs per year ($) 590 000 590 000 1 050 000 1 050 000Managers salaries per year ($) 450 000 450 000 600 000 900 000

The current sales price per surfboard will remain at $1400 no matter the scale of operation.

(This question continues on the following page)

[Source: http://www.grainsurfboards.com/,20 July 2012]


8812-5014

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(Question 1 continued)

(a) (i) Identify one advantage and one disadvantage of internal recruitment. [2 marks]

(ii) Describe one method of external recruitment. [2 marks]

(b) Prepare a fully labelled break-even chart for WS at its current actual sales of 2400 units in the current building. [5 marks]

(c) (i) Calculate the contribution of one surfboard in the proposed new building. [1 mark]

(ii) Calculate the initial forecast profit for WS for its first year of operation in the proposed new building (show all your working). [3 marks]

(iii) Explain why Brents accountant forecasted lower variable costs per unit in the proposed new building. [2 marks]

(d) Using appropriate calculations for the actual units produced (2400) in the current building and initial forecasted units produced (3300) in the proposed new building, analyse the impact of the proposed new expanded scale of operation on profits and profitability. [5 marks]

5 N12/3/BUSMT/SP2/ENG/TZ0/XX/M

SECTION A 1. (a) (i) Identify one advantage and one disadvantage of internal recruitment. [2 marks] Advantages of internal recruitment include:

it is generally cheaper and faster than external recruitment it strengthens employees loyalty to the company (as they know that

they have opportunities for career development within the company) existing employees are already familiar with the practices and culture

of the company (no need for long induction processes) other employees and managers know the promoted person better than

a newcomer recruited from the outside. Disadvantages of internal recruitment include:

the number of applicants will be limited external candidates may be better qualified it might create tension amongst workers (as their new manager might

be a previous colleague who is now above them in the chain of command)

hiring someone internally will create a vacancy (the position that the recruited person vacates) so further recruitment will be needed.

Accept any other relevant advantage or disadvantage.

Award [1 mark] for a correct and relevant advantage identified and [1 mark] for a correct and relevant disadvantage identified, up to a maximum of [2 marks].

(ii) Describe one method of external recruitment. [2 marks]

Methods of external recruitment include:

employment agencies government-run employment agencies/job centres placement companies (headhunters) recruitment from/coordination with local schools and universities advertisements in newspapers, trade magazines, and other media

outlets. Accept any other relevant method of external recruitment and description.

Award [1 mark] for a correct and relevant external method of recruitment identified and [1 mark] for a description of the method of recruitment, up to a maximum of [2 marks].


(b) Prepare a fully labelled break-even chart for WS at its current actual sales

of 2400 units in the current building. [5 marks]

Total fixed costs: $590 000 + 450 000 = $1 040 000

Break-even point: 1 040 0001400 800

1733 units

Margin of safety: 2400 1733 = 667 Apply Own Figure Rule (OFR). Award marks as follows: [1 mark] for each appropriately labelled axis (the vertical axis must include reference to both costs and revenue) award a maximum of [2 marks]. [1 mark] for an accurately drawn and labelled total revenue curve. [1 mark] for an accurately drawn and labelled total cost curve. [1 mark] for the identification of the break-even level of output. Award [0 marks] if a candidate produces a table, and award no more than [3 marks] if the chart is not neat, not drawn with a straight-edge, or is not to scale. Ideally, the candidate will draw an arrow pointing to the break-even point and label the arrow. However, accept as an accurately labelled break-even point a vertical line from the x-axis to the break-even point provided that the line is labelled break-even point.

0 1733 2400

Cost/revenue in $000s

Margin of safety

Break-even point

Profit Total revenue

Total costs

Fixed costs

Number of surfboards

3360

2426.2 1040


(c) (i) Calculate the contribution of one surfboard in the proposed new building. [1 mark]

sales price per unit variable cost per unit = contribution Proposed new building: $1400 $750 = $650 Award [1 mark] for the correct answer (working not required).

(ii) Calculate the initial forecast profit for WS for its first year of operation in the proposed new building (show all your working). [3 marks]

Profit can be calculated as follows: Sales (no. of units sales price per unit) $4 620 000 variable costs (no. of units variable costs per unit) $2 475 000 fixed costs (from table) $1 050 000 managers salaries (from table) $600 000 $495 000

Alternative method:

Fixed cost 1 650 000 Contribution 650

Break-even = 2538.4615 units

Margin of safety = Output Break-even

= 3300 2538.4615 = 761.5385 units

Profit = Margin of safetyContribution

= 761.5385650 = $495 000.025

Award [1 mark] if the candidate clearly demonstrates an understanding of how to calculate the profit (candidate shows revenue expenses = profit). Award [2 marks] if the candidate demonstrates that the method is (no. of units sales price per unit) (no. of units variable costs per unit) (fixed costs + managers salaries) = profit, but with an error in the calculation. Award [3 marks] if the candidate demonstrates the method (show working) and correctly calculates the answer. If the candidate produces the correct answer but does not show workings, award [2 marks]. If the candidate uses the alternative method and rounds the number of units to 762, accept the profit as $495 300 .


(iii) Explain why Brents accountant forecasted lower variable costs per

unit in the proposed new building. [2 marks]

Award [1 mark] if the candidate identifies economies of scale, or provides a sufficient description of the concept (even if the candidate does not explicitly state economies of scale). Just saying (something to the effect of) getting bigger would not be sufficient to earn a mark. Award an additional [1 mark] for applying the concept to WS.

(d) Using appropriate calculations for the actual units produced (2400) in the

current building and initial forecasted units produced (3300) in the proposed new building, analyse the impact of the proposed expanded scale of operation on profits and profitability. [5 marks]

Using the same approach as for (c)(ii), candidates may calculate the current profit for the existing building with actual production levels. The current profit is ($1400 2400) ($800 2400) $590 000 $450 000 = $400 000. This shows that, when doing a simple comparison with the new building, profit would increase significantly (from $400 000 to $495 000, so + 23.75 %), a calculation that the accountant probably did in order to justify the expansion. In terms of profitability ratio, the profit margins for WS are:

current building: 400 000 1003 360 000

= 11.9 %

proposed new building: 495 000 1004 620 000

= 10.7 %

From these calculations the profitability would slightly decrease. The slight decrease is mainly due to the sharp increase in fixed costs. The proposed expanded scale of operation has clear impacts on both profit and profitability, though Brent Bass would also need to take other factors into account before deciding on the expansion, especially as financial gain (measured through profit and profitability) does not seem to be his main motivation.

Accept any other relevant analysis.

If the response does not include quantitative data, award a maximum of [3 marks].

If only profit or profitability are considered, award a maximum of [4 marks]: to achieve the top markband candidates need to refer to both.



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2. Aravind Eye Care

Aravind Eye Care is the worlds largest provider of eye surgery. Founded in 1976 in India by Dr Govindappa Venkataswamy, the non-profit organization can perform 250 000 operations per year. At Aravind Eye Care, only 40 % of the patients pay for the operation, which costs them US$60. The other 60 % of the patients, who would otherwise not be able to afford the operation, do not pay.

Aravind Eye Care has transformed the process of eye surgery in developing economies. Expensive medical equipment has been purchased but is used 24 hours a day in order to lower the average cost for each operation. In Aravind Eye Care hospitals, surgeons perform only the eye operation itself whereas in other hospitals, doctors also provide care before and after the operation. At the Aravind Eye Care hospitals, each doctor can perform 4000 eye operations per year, whereas other eye surgeons in India average 400.

With these economies of scale, in 2007 Aravind Eye Care performed 100 000 operations for fee-paying patients. For these patients: the price charged per operation was US$60 the variable cost per operation was US$20 fixed costs including overheads were US$3 000 000.

In recognition of their extraordinary efforts to improve health in developing countries, Aravind Eye Care received the Bill & Melinda Gates Foundation award in 2007.

[Source: adapted from Globality: Competing With Everyone From Everywhere For Everything,New York and Boston: Business Plus, 2008, and http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991824, 17 June 2008]

(a) Define the following terms:

(i) non-profit organization [2 marks]

(ii) overheads. [2 marks]

(b) Calculate for fee-paying patients in 2007 at Aravind Eye Care (Show all your working):

(i) the contribution to fixed costs of each fee-paying patient [2 marks]

(ii) the break-even quantity [2 marks]

(iii) the margin of safety. [2 marks]

(c) Prepare a fully labelled break-even chart for Aravind Eye Care in 2007. [5 marks]

(d) With reference to appropriate content theory, examine two factors that could influence the motivation of doctors at Aravind Eye Care. [5 marks]


2. (a) Define the following terms:

(i) non-profit organization. [2 marks]

A non-profit organization is an organization that does not distribute its surplus funds to owners or shareholders, but instead uses them to pursue its goals. Many non-profit organizations are charities; others include trade unions and public arts organizations. Although many government agencies meet this definition, in most instances they are not considered non-profits. Candidates are not expected to word their definition exactly as above. Award [1 mark] for a basic definition that conveys partial knowledge and understanding. Award [2 marks] for a full, clear definition that conveys knowledge and understanding similar to the answer above. For only a relevant: example or application to the stimulus award [1 mark].

(ii) overheads [2 marks]

Overheads are indirect expenses that are not chargeable to a particular part of work or production. Typically overheads are items such as accounting fees, advertising, depreciation, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone bills, travel and utilities costs. Candidates are not expected to word their definition exactly as above. Award [1 mark] for a basic definition that conveys partial knowledge and understanding. Award [2 marks] for a full, clear definition that conveys knowledge and understanding similar to the answer above. For only a relevant: example or application to the stimulus award [1 mark].

(b) Calculate for fee-paying patients in 2007 at Aravind Eye Care (Show all your working):

(i) the contribution to fixed costs of each fee-paying patient [2 marks]

Contribution = selling price variable costContribution = US$60 US$20Contribution = US$40

""

Award [1 mark] for the correct workings and [1 mark] for the correct calculation.


(ii) the break-even quantity [2 marks] The break-even quantity occurs when total costs equal total revenue. Total costs = Total revenue, where Total costs = Fixed costs + variable costs Variable costs = quantity sold # US$20 AND Total revenue = price x quantity sold FC + Q US$20 = Q 603 000 000 + 20Q = 60Q 3 000 000 = 40Q 75 000 = Q

# #


(iii) the margin of safety. [2 marks]

Fee-paying quantity per year break-even quantity = margin of safety 100 000 75 000 = 25 000

Margin of safety = 25 000



(c) Prepare a fully labelled break-even chart for Aravind Eye Care in 2007. [5 marks]

Award marks as follows: [1 mark] for each correctly labelled axis maximum of [2 marks]. For the y-axis, candidates must label it cost/revenue, or something equivalent thereto, to receive [1 mark]. Just labelling the axis with a US$ sign is insufficient for a mark. [1 mark] for an accurately drawn and labelled total revenue curve. [1 mark] for an accurately drawn and labelled total costs curve. [1 mark] for either identification of the break-even level of output or the value of the break-even level of output. Award [0 marks] if a candidate produces a table, and award no more than [3 marks] if the chart is not neat, not drawn with a straight-edge, or is not to scale.

Break-even chart Aravind Eye Care

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0

Cost/revenue Millions of US$

10 20 30 40 50 60 70 80 90 100

Output/Thousands of fee-paying eye surgeries per year

Break-even point

Total revenue Profit Total costs Variable costs Fixed costs

Margin of safety


(d) With reference to appropriate content theory, examine two factors that could influence the motivation of doctors at Aravind Eye Care. [5 marks]

Candidates should refer to and apply appropriately any of the standard content theories addressed in a standard-level course (Taylor, Maslow, McGregor and Herzberg) and might consider the factors below (and any other appropriate factors). For example, according to Maslows hierarchy of needs, after social needs have been met individuals want recognition, such as the award from the Bill & Melinda Gates Foundation, which honoured all employees but especially the doctors at Aravind Eye Care. After the need for recognition, according to Maslow, people have the opportunity to self-actualize (to feel complete and valid), which for medical doctors might well be achieved by providing medical care to the poor. Factors potentially influencing doctors motivation positively may include: ! the focus on surgery alone specialization could enhance doctors skills as

surgeons ! providing an important medical service to many of Indias poor ! freedom from other responsibilities, some of which may be bureaucratic or

unfulfilling ! recognition (such as the award from the Bill & Melinda Gates Foundation) ! gaining concrete experience/immersion in a cost-effective way to provide

health services to the poor a learning opportunity.

Factors potentially influencing doctors motivation negatively may include: ! by only doing surgery, doctors work could become routine or they could fear

lack of development of other skills ! lesser opportunity to develop relationships with patients ! lesser autonomy than doctors in traditional eye clinics ! 24 hour-a-day operations require doctors to work non-traditional hours for

surgeons ! because Aravind Eye Care is a non-profit organization, doctors compensation

might be lower than working in a for-profit clinic or hospital.

Accept any other relevant examination.

To achieve the top markband the candidate must provide a thorough examination of factors that might affect the motivation of doctors. The response reflects detailed knowledge and understanding of motivational theory, to which the candidate refers to explicitly, appropriately, and meaningfully.



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2. Niekerk Manufacturing

Niekerk Manufacturing, a private limited company located on the outskirts of Montevideo, Uruguay, manufactures small aluminium pipes for companies in a range of industries. The pipes are designed following customers specifications. The good reputation of Niekerk Manufacturing has led to increased sales in the last several years and the firm is now operating at 100 % capacity. Jan Niekerk, the owner of the company, even has to decline orders when too many come in at once. He fears that this is giving his competitors opportunities to increase their sales and is considering expanding his factory.

In 2005, the sales revenue was $4 500 000.

Current factory ($) Expanded factory ($)

Fixed cost per year 350 000 570 000Variable cost per pipe 4.5 4.25Sales price per pipe 5 5

To fund the proposed expansion and increase economies of scale, Niekerk Manufacturing will need to raise a significant amount of finance. The capacity of the expanded factory with any additional

equipment will be 1 600 000 pipes per year. Jan Niekerk does not anticipate operating at full capacity in the expanded facility for some time, but he believes it is better to expand now rather than build a small second factory then a third in a few years.

(a) Define the following terms:

(i) private limited company [2 marks]

(ii) economies of scale. [2 marks]

(b) Construct a fully labelled break-even chart for Niekerk Manufacturing at the current capacity prior to the expansion. [6 marks]

(c) Assuming Niekerk Manufacturing sells 1 200 000 pipes in the first year in the expanded factory, calculate:

(i) the net profit [2 marks]


(d) Analyse two appropriate sources of finance to fund the expansion of the factory and any additional equipment. [6 marks]


2. (a) Define the following terms: (i) private limited company [2 marks]

A private limited company is usually a small business, though that is not always the case. Shares of such companies can only be transferred privately, and all shareholders must agree on the sale/transfer. The shares may not be advertised for sale. Typically, private limited companies are family companies or are owned by close friends, with shareholders also serving as directors. Award [1 mark] for a basic definition getting chiefly at the common characteristics (small family business), but without any legalrequirements/limitations. Award [2 marks] for a full, clear definition that includes legal criteria and general characteristics.

(ii) economies of scale. [2 marks]

Economies of scale refer to the unit cost reductions that companies experience as they grow. There can be both internal and external economies of scale. Internal economies of scale refer to the unit cost reductions that a single company experiences as it grows, while external economies of scale refer to the unit cost reductions available to all companies within an industry as the industry grows. Award [1 mark] for a basic definition that conveys partial knowledge and understanding. Award [2 marks] for a full, clear definition that includes the idea of declining average unit cost.


(b) Construct a fully label led break-even chart for Niekerk Manufacturing at

the current capacity prior to the expansion . [6 marks]

Break-even chart for Niekerk Manufacturing

Award marks as follows: [1 mark] for each appropriately labelled axis maximum of [2 marks]. [1 mark] for an accurately drawn total revenue curve. [1 mark] for an accurately drawn total cost curve. [1 mark] for the identification of the break-even level of output (whatever the value) and [1 mark] for showing the correct value of the break-even level of output. If the break-even chart is accurately drawn but not neatly, using a ruler or straight-edge, or out of proportion, award a maximum of [3 marks]. If the candidate produces a table rather than a chart, award [0 marks].

Total revenue

Total costs

Profit

Break-even point

Fixed costs

Thousands of pipe 100 200 300 400 500 600 700 800 900 1000

5

4

3.5

3

2

1

0

Cost/revenue in $000 000s

200 000 pipes Margin of safety

Quantity


(c) Assuming Niekerk Manufacturing sells 1 200 000 pipes in the first year in

the expanded factory, calculate: (i) the net profit [2 marks]

Revenue 1 200 000 pipes at $5 per pipe 6 000 000 Variable costs 1 200 000 pipes at $4.25 per pipe 5 100 000 Fixed costs 570 000 Profit 330 000 Profit with the expansion and assuming sales of 1 200 000 pipes in the first year is $330 000. [1 mark] If a candidate who has shown workings provides a correct procedure (thus, demonstrates an understanding of the underlying concepts) but has made an error in calculation. [2 marks] Candidate provides the correct answer. Workings not required.


Break-even point: fixed costs 570 000contribution ($5 4.25)

760 000 units

1 200 000 units per year (projected sales) minus 760 000 = margin of safety = 440 000 units. [1 mark] If a candidate who has shown workings provides a correct procedure (thus, demonstrates an understanding of the underlying concepts) but has made an error in calculation. [2 marks] Candidate provides the correct answer. Workings not required.


(d) Analyse two appropriate sources of finance to fund the expansion of the factory and any additional equipment. [6 marks]

Niekerk Manufacturing will need additional funds to finance both the expansion of the facility and to acquire additional industrial equipment to support the added sales volume. These funds could be generated internally and externally. Internal sources of finance: At the existing location, Niekerk Manufacturing has an annual profit of $100 000 per annum, some of which could be retained and used to support either the expansion of the building or the new equipment. From the stimulus material, it is not evident what dividend payout requirements the firm has, if any. An additional requirement for funds will be for increased working capital. The company anticipates its sales volume to increase substantially. Inventory and trade receivables will also increase substantially, which will be offset only partially by an increase in trade payables. Since this increased working capital is not a seasonal requirement, short-term loans of less than one year would be an inappropriate source of finance. However, since the increased working capital requirements do not represent any fixed assets, most lenders will be disinclined to lend money for this purpose. Thus, even if the firm has no dividend payout requirements, the firm would be ill-advised to allocate too much of current earnings to the building expansion and new equipment. Earnings should be reserved for increased working capital requirements. External sources of finance: more appropriate for the building and equipment would likely be external sources of finance, of which there are several options: issuance/sale of ordinary shares of stock loan capital, such as a bank loan, for the equipment (and possibly the

expansion of the building), or an insurance company for the building and a bank loan for the equipment

leasing, for the additional equipment. The issuance/sale of stock would dilute NiekerkManufacturings ownership in the company and, in fact, Jan might have difficulty finding investors interested in a minority position in a private limited company. More realistic and attractive, from Niekerk Manufacturings point of view, is borrowing funds from a bank or an insurance company or some combination thereof (finance the equipment with a bank loan and finance the building with an insurance company or some other long-term lender). Given the anticipated profitability of the company, this is presumably the most attractive option. The high levels of anticipated profits should allow for a rapid reduction in debt. However, if those profits do not materialize, Niekerk Manufacturing could find itself with more debt than it wants or, potentially, can service.


Leasing is often an option with industrial equipment. However, without additional information, it is difficult to make any specific judgments of feasibility. The advantages of leasing are that (1) there usually is little or no downpayment and (2) lease payments are paid with pre-tax dollars. The disadvantage of leasing is that, at the end of the lease, the lessor owns the equipment. If well made and well maintained, industrial equipment often will outlast the anticipated useful life, which typically determines the length of the lease or loan. Thus, lesseesoftenhave togiveuppaidforequipmentwithsome remaining useful life. Had the equipment been purchased outright instead, the company would still possess it. If the reponse is a one-sided relevant approach with no analysis, award a maximum of [4 marks]. If only one source of finance is analysed, the analysis is partial, award a maximum of [4 marks]. For [6 marks] the candidate recognizes that the internal source of funds of profits is probably an inappropriate source of funds and thus discusses the other options, appropriately matching the financing need to an appropriate source of funds. Candidates demonstrate an understanding that the financing need must be matched with an appropriate source of funds. Marks should be allocated according to the markbands on page 3.

M1.pdfSection BSection A(c) questionsQ5 (c)Q4 (c)Q3 (c)Q2 Q1 Level descriptors(c) (c) Marks 05012345Section B(d) questionsLevel descriptorsQ5 (d)Q4Q3 (d) (d)Marks 07 012 34 56 7

M4.pdfThe markbands on pages 34 should be used where indicated in the markscheme.Section B part (d) questions

m11/3/busmt/sp2/eng/tz0/xx section a - weebly€¦ · m11/3/busmt/sp2/eng/tz0/xx 2211-5014 ......

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