Practice Paper 2 (Cambridge International A-Level Business)

[case-study] Motorcycle Components (MC)

MC is a large public limited company that produces a range of components used by motorcycle manufacturers. MC’s mission statement is ‘to be the world leader in delivering quality motorcycle components to our customers’.

The motorcycle component industry is very competitive and MC’s customers expect high quality and a short lead time. MC operates a Just in Time (JIT) inventory control system. MC’s good relationships with its suppliers ensure that JIT operates efficiently. The production workers at MC are highly skilled and the business benefits from a low labour turnover.

Liquidity management is very important in the motorcycle component industry. The industry average for the acid test ratio is 1. A summary of some key data for MC has been prepared by the Finance Director, as shown in Table 2.1.

Table 2.1: Summary financial data as at 30 April 2022 ($ million)

Trade receivables	26
Cash	19
Inventory	1
Trade payables	30
Other current liabilities	20

The Operations Director, Jay, is proposing new capital expenditure of $4 million. Jay thinks that automation of the production process will have significant financial benefits for MC. He wishes to gain approval from the Board of Directors to implement a process innovation project. Jay believes that, with good communication and the involvement of employees, he can effectively manage the project.

Explain the term ‘mission statement’.

[case-study] Iron Oak (IO)

Iron Oak (IO) manufactures gym equipment for commercial fitness centres in country P. It makes treadmills, rowing machines and weight racks, and employs 310 people.

IO supplies around 700 fitness centres, many of which have bought from it for over a decade and trust its equipment to withstand heavy daily use.

Several of these customers have asked IO whether it plans to produce equipment that records each user's performance and sends it to a phone app. Two overseas manufacturers already sell such machines in country P.

IO employs no software engineers.

Table 1.1: IO selected data

Employees	310
Revenue in 2025 ($m)	44
Fitness centres supplied	700
Estimated development cost ($m)	6.5
Estimated development time (years)	2

Analyse two risks to IO of a product development strategy.

[case-study] Priya’s Bookshop (PB)

Priya lives in town R which is situated in beautiful countryside with nice walks nearby. Many tourists visit town R.

The town’s council would like town R to become branded as a ‘booktown’, a town with many bookshops selling new and used books. The council announced a new financial scheme offering grants to attract entrepreneurs willing to open a bookshop.

Priya applied for a grant to start up Priya’s Bookshop (PB). Part of her grant application included a cash flow forecast, shown in Table 1.1.

Table 1.1: Cash flow forecast, first three months of trading ($000)

	Month 1	Month 2	Month 3
Cash in:
Owner’s capital	15	0	0
Grant	20	0	0
Revenue	4	6	11
Cash out:
Initial set up costs	20	0	0
Utilities (power, water etc)	0	0	2
Employee costs	1	1	3
Purchases	6	3	4
Marketing	10	5	4
Opening balance	0	2	-1
Closing balance	2	-1	X

Priya’s grant application was successful and she opened PB well aware of the need for both cash and profit.

Priya now wants to raise awareness of PB in town R. Priya did some market research and decided to use market segmentation. This will help her to decide on the promotional methods she could use for her bookshop. See Table 1.2.

Table 1.2: Age and gender of residents in town R

Age group (years)	Percentage of residents in age group	Percentage of age group who are female
0–15	19%	50%
16–64	63%	55%
65+	18%	60%

Explain two entrepreneurial qualities that Priya has shown.

Extract:

Urban Bee Hive (UBH) Co-working After Amit Menda graduated from university, he started work for a business in the US. The business specialised in designing workplace environments that aim to improve productivity. Whilst working in the US, Amit observed the growth of co-working. Co-working provides office space and support services for businesses. It offers a flexible solution for businesses which need an alternative to traditional long-term leasing or ownership of office space. In 2018, using his knowledge and experience, Amit founded UBH, a private limited company. It is based in country W, where co-working is still a relatively new idea. UBH focuses on providing office space to entrepreneurs and small businesses as and when they demand it. UBH calls its co-working centres ‘beehives’. There are three shareholders in UBH, all of whom are directors. Amit owns 50% of the shares while the other two shareholders own 25% each. A difficult economic climate Until 2020, UBH’s expansion was rapid. This internal growth was mainly financed by bank loans. However, in 2020 UBH came close to failing. There was a recession in country W when economic output fell by 10%. Many of UBH’s small business customers became insolvent during the recession. UBH was left with significant unused capacity and almost no working capital. The government responded quickly to the recession and made the following changes to its economic policies: • increased investment in infrastructure including road and rail transport • reduced income tax • reduced central bank interest rates • delayed payment of business and property taxes. Amit believes that without these changes to economic policies UBH would have failed. Marketing strategy UBH’s marketing strategy has targeted entrepreneurs starting new businesses and small, established businesses. Each UBH co-working centre (beehive) provides customers with shared kitchen facilities and snack vending machines. Customers are offered flexible contracts from 1 day to 1 year. They can either lease a hot desk (any desk available that day), a dedicated desk (the same desk for the duration of the contract) or a private office. Customers can also rent meeting rooms of various sizes by the hour. All customers benefit from unlimited internet access and printing facilities.

The Marketing Director has produced a situational analysis for the Board of Directors to consider. Selected details are given below. • In 2020, capacity utilisation fell to a low of 50%. • During 2021, following the recession, UBH opened 3 new beehives. UBH now has 10 beehives in country W. • In 2021, two international corporations entered the market in direct competition with UBH. • Customer feedback shows a high level of satisfaction with UBH’s facilities. • Customer feedback rates price, flexible contracts and distance from key transport hubs as the three most important factors in choosing a co-working centre. • Price elasticity of demand for leasing desks is estimated to be –0.5. • Most new business start-ups are unaware of the benefits of co-working. • Social media advertising has been the most cost-effective method of attracting customers. • Some larger businesses, including multinationals, make use of co-working centres in country W. However, they demand premium facilities and more space per desk than UBH currently provide. • Forecast market growth for co-working in country W in 2023 is 10%. Table 1: Price per month for leasing desks at UBH and market leader UBH ($) Market leader ($) Hot desk 150 140 Dedicated desk 300 280 Private office 2500 2300 Amit is concerned that capacity utilisation across UBH’s 10 beehives averages 80% compared to the target of 100%. He has asked the marketing department to propose changes to the marketing strategy to increase sales and reach target capacity. Managing co-working centres and Human Resource Management (HRM) Amit has delegated authority to centre managers to make decisions about local advertising, day-to-day operational issues and hiring of employees such as cleaners, IT technicians and security. Each UBH beehive also has a customer relationship manager. UBH encourages its beehives to hold special events to promote their facilities and increase customer interaction. Recent events include educational talks and business advice sessions. UBH employees have flexible employment contracts. Employees can spend 5% of their time working on individual projects of interest. All new recruits receive extensive training. UBH’s vision includes ‘Our people are our greatest strength and we are committed to providing opportunities for each individual to fulfil their potential. Our team is energetic with an entrepreneurial spirit, ready to face challenges.’Beehive 811 UBH is scheduled to open its new centre, Beehive 811, very soon. The Operations Director prepared a network analysis at the start of this project and predicted it would finish within Amit’s deadline of 45 days. Table 2 and Fig. 1 provide details of the network analysis and diagram. Table 2: Network analysis Activity Activity detail Preceding activities Duration (days) A Agree and sign lease with landlord None 5 B Draft building plans None 3 C Order and delivery of building materials A & B 5 D Building work and inspection C 20 E Order and delivery of office equipment A & B 10 F Installation of office equipment D & E 8 G Employee recruitment A 24 H Employee training G 10 J Initial marketing of centre A & B 30 K Fire inspection and certificate F 5 2 5 5 1 0 0 3 5 5 4 10 10 5 A B 3 C 5 D 20 J 30 F 8 K 5 E 10 G 24 H 10 5 6 30 30 7 38 38 8 43 43 Fig. 1: Network diagram The project started 10 days ago. The delivery of office equipment is delayed by 12 days. Amit is concerned that any delay in opening will lead to a loss of income if prospective customers decide to go elsewhere.

Going public? After making a loss in 2020, UBH returned to profit in 2021. UBH has ambitious expansion plans for the next 18 months. As well as opening Beehive 811, UBH is aiming to open 3 more centres in 2022 and 10 more in 2023. Office buildings are expensive in country W so UBH uses a combination of long-term leases and joint investments with landlords to reduce cash outflows. UBH will need to invest $16m to finance this expansion. Amit is in favour of changing UBH to a public limited company (plc). UBH could offer its shares for sale to the public by early 2023. The other two shareholders warned Amit that the cost of a stock exchange flotation is likely to be very high. The Finance Director predicts that interest rates in country W will increase from 2% to 4% by 2023. Table 3 provides data from UBH’s latest financial statements. Table 3: Extracts from UBH’s financial statements 2021 ($m) 2020 ($m) Income statement Revenue 14.4 6 Profit/loss for the year 1.5 (3) Dividends paid 0.5 0.2 Statement of financial position (at end of year) Non-current liabilities 12 9 Share capital 2 2 Retained earnings 3.5 2.5 Trade receivables 1.1 0.7 Cash and cash equivalents 0.7 0.1 Current liabilities 3 4.5

Read the extract before answering

Evaluate the likely impact on UBH of the changes the government made to its economic policies in response to the recession.

[case-study] Harbour (HB)

Harbour (HB) is a supermarket chain with 34 stores along the coast of country Q. It employs 1,400 people and is known for stocking fish and fresh produce from suppliers in the towns where its stores are located.

HB buys from around 200 small local suppliers. Many of these suppliers sell most of what they produce to HB.

A national supermarket group has offered to buy HB. The national group operates 600 stores across country Q, buys centrally from a small number of large suppliers, and sells at lower prices than HB.

HB's directors have recommended that shareholders accept the offer. Local newspapers have reported concern among shoppers and suppliers about what the sale would mean.

Explain one way the proposed takeover could affect HB's suppliers.

[case-study] Farm Produce (FP)

FP is a primary sector co-operative made up of six farms in country G. Each farm grows a range of fruit and vegetables. FP employs 26 workers across the farms and distribution centre. Each farm transports its fruit and vegetables to the distribution centre where they are packaged and sent to customers’ homes. Table 1.1 contains data about the farming industry in country G.

Table 1.1: Data about the farming industry in country G

- Farms producing fruit and vegetables are given an annual government grant. - Most farms are labour intensive. - The government promotes the importance of eating fresh fruit and vegetables. - Most farms are small family businesses. - Minimum wage for farm workers will increase by 10% next year.

FP’s customers pay for a box of seasonal fruit and vegetables that is delivered each week. Data about the different box sizes sold by FP is shown in Table 1.2.

Table 1.2: FP’s cost and price data

Box size	Variable cost per box ($)**	**Allocated monthly fixed costs ($)	Price per box ($)	Sales in April 2022
Small	8	2000	10	400
Medium	10	2000	20	300
Large	15	2000	35	150

FP is concerned about the profitability of the small box size. It believes it should stop selling this product.

Analyse how two stakeholders of FP might be affected by a decision to stop selling the small box size.

Define the term ‘gross profit margin’.

Explain why a favourable variance is not always good news for a business.

Explain one reason why a business manager needs to understand the difference between capital expenditure and revenue expenditure.

[case-study] Super Heroes (SH) SH is a leisure (theme) park aimed at 10–18 year olds. It is owned by two companies, X and Y, which started SH as a joint venture. Company X owns many leisure centres and swimming pools. Company Y owns many brands based on superheroes.

SH employs 200 full-time workers and an extra 50 seasonal workers during the busiest times of the year. The park has 10 large rides which take up 2km2 of land. There are also many smaller rides, restaurants, toilets and shops. The price of an entrance ticket is $11 per customer. Table 1.1 shows the costs for SH in 2019.

Table 1.1: SH costs for 2019

Total fixed costs (per year)	$12m
Variable costs (per customer)	$3
Total costs	$42m

One of the larger rides at SH is the Iron Blaster. The number of customers who use this ride has decreased each year for the last three years. This has led the management of SH to consider its options for internal growth.

Option 1 – A new virtual reality (VR) ride This option would involve developing the Iron Blaster into a VR ride. Most of the structure of the Iron Blaster could be used but customers would be given a VR headset to wear during the ride. The cost of developing the VR ride would be $2m. The Iron Blaster ride would be closed for a three month period during the off-peak season for the development to be carried out. No employees would be made redundant or dismissed.

Option 2 – A new hotel SH does not currently have a hotel. It could demolish the Iron Blaster to provide the space to build one. Many of the competitors of SH have a hotel near or within their leisure parks. Hotel customers would pay a high price for a room but have free access to the leisure park’s facilities. Market research suggests that the average hotel customer would spend twice as long in the leisure park than a non-hotel customer. The cost of developing the hotel would be $15m and take a year to build. All of the employees currently working on the Iron Blaster ride would face redundancy or dismissal.

Calculate the total revenue from entrance tickets for SH in 2019.

Explain one difficulty a business may face when valuing its inventory.

[case-study] Ravi's Sportswear (RS)

Ravi founded RS in country J eight years ago. The business designs and sells sportswear and running shoes. RS employs 25 full-time staff and sells its products through its own website and a small number of selected sports retailers across country J.

Ravi has recently launched a new range of women's sportswear, targeting the growing women's fitness market in country J. He has invested heavily in digital promotion and influencer partnerships to promote the new range, which has led to high marketing expenditure in the first quarter of 2024.

RS currently uses on-the-job training to develop all new employees. Ravi is considering whether to switch to off-the-job training, which would be more expensive in the short term but would develop employees' skills more systematically.

Table 1.1: RS cash flow forecast (January–March 2024)

	January ($000)	February ($000)	March ($000)
Cash inflows	45	28	52
Cash outflows
Cost of goods sold	22	18	25
Wages	12	12	12
Marketing	15	5	5
Total outflows	49	35	42
Net cash flow	−4	−7
Opening balance	12	8
Closing balance	8

Calculate:

i. the net cash flow for March

ii. the closing balance for February

iii. the closing balance for March.

Extract:

KOPARA BEVERAGES (KB)

Background

Kopara Beverages (KB) is a private limited company based in country P. It manufactures and sells premium fruit juices and plant-based drinks, including cold-pressed juices, coconut water blends, and protein smoothies. Founded 15 years ago by entrepreneur Lily Sato, KB now employs 400 workers in one large production facility in country P.

KB sells its products domestically and has recently begun exporting to country Q, where demand for healthy, natural drinks is growing rapidly. KB's mission is 'to bring nutritious, sustainably produced beverages to customers across the world'.

Organisational Structure

Two years ago, KB moved from a centralised management structure to a decentralised one, giving production and marketing managers greater autonomy over day-to-day decisions. Lily believes the change has increased innovation and improved employee morale.

However, KB's Finance Director has raised concerns about inconsistent financial decisions being made across departments and a lack of coordinated budgeting.

Investment Projects

To meet growing demand from country Q, KB is evaluating two investment projects. Table 1 shows data for Project A. Table 2 shows projected annual net cash flows and discount factors for Project B.

Table 1: Project A — New Production Line

Table 2: Project B — Automated Bottling System

Financial Performance

KB's Finance Director has produced financial data for 2022 and 2023 to allow comparison of the business's performance. Table 3 shows selected financial data.

Table 3: KB selected financial data

Competitive Pressures

The domestic market for beverages in country P has become increasingly competitive. Several large multinational companies (MNCs) have entered the market with similar healthy drink products, often at significantly lower prices than KB. KB's share of the domestic market has fallen from 18% to 14% over the past two years.

KB's Marketing Director is recommending that KB invests in product innovation — developing new flavours, new formats, and stronger branding — to differentiate its products from MNC rivals and justify its premium price.

The Finance Director disagrees, believing that KB must reduce prices to remain competitive and maintain market share.

KB's export revenue from country Q has grown by 35% in the past year. Country Q has a growing middle-class population with rising health awareness and disposable income. Lily is considering whether KB should seek additional long-term finance to accelerate its expansion into country Q.

Read the insert before answering questions 3a, 3b and 3c

Calculate the average rate of return (ARR) for Project A.

Explain one advantage to a partnership of admitting a new partner as a source of finance.

Extract:

WoodPlayer (WP) Rona Lupa is a skilled woodworker who set up her own business, WP, to manufacture wooden toys. She started WP in 2015 in country A. The toys are sold to retailers. Quality control and assurance WP has grown rapidly and is now a private limited company employing 35 people in one factory. WP employs skilled workers and offers them training opportunities. Production workers are paid a basic wage plus a piece rate. Workers are expected to check their own work and a brief final inspection is made before products are despatched. Rona is proud of the company’s quality assurance. Leadership and communication Rona is one of two directors. She owns 90% of WP’s total share capital of $1 million. The other director has a limited role in decision-making. Rona thinks of all the ideas for new products. There are managers for each functional area of the business – Operations, Marketing and Finance. Each manager meets individually with Rona and gives her a written report once a week. Rona holds one meeting with all employees at the start of each week to communicate plans and give updates on new developments. Forecast revenue Sales of WP’s products are highly seasonal. Table 1.1 shows data produced by the Marketing Manager. He thinks every functional area of the business will find sales forecasts useful in planning for the future. Table 1.1 WP sales data ($m) Revenue (* forecast data) Trend (* forecast data) Seasonal variation Average seasonal variation 2019 Q3 1.0 Q4 1.1 2020 Q1 1.8 1.288 0.512 0.550 Q2 1.2 1.313 –0.113 –0.084 Q3 1.1 1.350 –0.250 –0.250 Q4 1.2 1.400 –0.200 –0.217 2021 Q1 2.0 1.438 0.562 0.550 Q2 1.4 1.450 –0.050 –0.084 Q3 1.2 1.463 –0.263 –0.250 Q4 1.2 1.488 –0.288 –0.217 2022 Q1 2.1 1.525 0.575 0.550 Q2 1.5 1.588 X –0.084 Q3 1.4 1.638 –0.238 –0.250 Q4 1.5 1.663 –0.163 –0.217 2023 Q1 2.2 1.688* 0.512 –0.550 Q2 1.6* 1.710* –0.110 –0.084 Q3 Y 1.755* –0.250 –0.250

New range of play equipment for outdoor use? Rona is considering a new product range of outdoor play equipment. Some market research has already been carried out which indicates a significant probability of success. Additional machinery will need to be purchased to manufacture the new range. Existing employees will need training on the new machines. WP could finance the new product range with borrowing and existing cash. The return on capital employed (ROCE) for year ending 31 May 2023 is 10%. Based on producing the new product range from January 2024, the Finance Manager provided Rona with forecast financial information for the year ending 31 May 2024: • total issued share capital will remain at $1m • current ratio will fall from 0.8:1 to 0.7:1 • gearing ratio will rise from 30% to 40% • reserves will be $2m • non-current liabilities will rise from $1.5m to $2m. Table 1.2 shows extracts from WP’s financial statements for year ending 31 May 2023 and forecast data for year ending 31 May 2024. Table 1.2 Extract from WP’s financial statements ($m) Forecast for year ending 31 May 2024 Year ending 31 May 2023 Revenue 7.0 6.5 Cost of sales 3.5 3.3 Gross profit 3.5 3.2 Expenses 3.3 2.7 Profit from operations 0.2 0.5 Profit for the year 0.1 0.25 Dividends 0.05 0.15 External influences on WP WP is a relatively small producer in its market sector. It has a unique selling point (USP) which is a combination of good design and excellent quality at an affordable price. This means it is unlikely that any competitor will be able to threaten WP’s market share in the near future. Country A is facing several economic challenges: inflation, skills shortages and high government borrowing. The government intends to implement the following economic policy measures in the next six months: • restrict pay rises for public sector workers • increase income tax rates • increase tax for businesses which do not provide employee training • increase interest rates.

Read the following extract before answering

Analyse two limitations to WP of its methods of internal communication.

Read the extract before answering.

Calculate the difference in labour turnover between the Design Division and the Manufacturing Division for January to May 2022

[case-study] Eastvale (EV)

Eastvale (EV) operates a warehouse in country S, packing and dispatching online orders. It employs 480 staff, of whom 310 are on temporary contracts.

Staff are set an individual target of 140 items packed per hour. A screen above each packing station shows how each worker is performing against that target.

Table 1.1: EV selected data

Employees	480
Staff on temporary contracts	310
Target items packed per hour	140
Average items packed per hour	112
Orders returned because of packing errors (%)	6
Staff leaving within their first three months (%)	41

Temporary staff receive one morning of training before starting work.

Explain one cause of poor employee performance at EV.

Define the term ‘emotional intelligence’.