Practice Paper 2 (Cambridge International AS Business)

[case-study] Super Candy (SC)

SC is a large public limited company that sells low-sugar candy (sweets) with natural flavourings. The candy is made using flow production in SC’s four large factories in country T.

SC uses psychographic market segmentation when planning its marketing mix.

SC has completed some secondary market research using published accounts. The data is about one of SC’s main competitors, Organic Kandy (OK) and compares the results with data about SC (see Table 2.1). OK is in the same market as SC.

Table 2.1: Secondary market research about OK and SC for 2020

	OK	SC
Revenue	$60m	X
Market share by revenue	40%	34%
Different varieties of candy	12	18
Main channels of distribution	Wholesalers Large supermarkets Health food shops	Wholesalers Small retailers E-commerce
Target market(s)	Mass market	People with interests in: - Nature - Sports - Travel - Health

There have been a number of media reports in country T about the increasing importance of corporate social responsibility (CSR). A large food manufacturing business in country T recently lost many customers due to reports about its use of plastic packaging.

The directors of SC are particularly concerned about this trend because of SC’s use of plastic in its packaging. The marketing department has been told to conduct some primary market research on this issue. The directors are planning to discuss making CSR a new business objective for SC.

Evaluate the benefits to SC of having corporate social responsibility (CSR) as a business objective.

[case-study] Charlie’s Chocolates (CC)

CC is a large public limited company that manufactures a wide range of chocolate bars. Production takes place in low wage countries so that costs can be kept low. CC has suffered recently from poor publicity due to the high levels of sugar used in the production of its chocolate. A national newspaper has recently published an article about how CC exploits employees in low wage countries. The Marketing Director, Alan, is aware of recent trends showing that consumers are becoming more ethical in their buying decisions. He thinks this might explain why sales decreased by 10% last year.

He has asked to meet with the Managing Director, Ikram, to discuss a major change towards more ethical production methods. This could mean re-locating production back to the home country. This will increase costs and involve the recruitment of additional employees. In response to recent Government guidelines to improve health, Alan wants to decrease the amount of sugar used in the chocolate bars.

Alan is also thinking about the financial accounts for this year that he received this morning from Ikram (see Table 1 and Table 2).

Table 1 – Extract from Income Statement

	$000s
Revenue	7000
Cost of sales	4150
Gross profit	2850
Profit for the year	1350
Retained earnings	565

Table 2 – Extract from Statement of Financial Position

	$000s
Non-current assets	3000
Current assets	900
Current liabilities	400
Working capital	500
Net assets	3500

With sales declining from last year, Alan has to think carefully about the next steps for marketing. He knows that the product range is of good quality – the problem is the poor image of the company. For example, he is aware that a local consumer group is trying to organise a demonstration outside one of CC’s factories in the next few weeks.

Defi ne the term ‘public limited company’ (line 1).

[case-study] Delicious Cocoa (DC)

DC is a co-operative owned by cocoa farmers in country X. It has 500 workers. In 2022, DC produced 2000 tonnes of raw cocoa beans. Productivity is expected to increase by 5% in 2023. Although DC is profitable, it has no retained earnings.

DC focuses on the triple bottom line as its main objective. The members of the co-operative (farmers) are motivated within the current operation.

Zara, the Managing Director, has recently completed a workforce plan. She has identified that young people do not want to work on DC’s farms. Their concerns are:

• lack of investment in training
• most of the work is manual
• lack of control over earnings.

Ranjit, the Operations Director, has identified an opportunity to create added value by investing in a capital intensive factory.

The factory will process raw cocoa beans produced by DC’s farms into cocoa butter. Cocoa butter is a premium product and attracts higher profit margins than raw cocoa beans. The processing factory will require a significant capital investment (see Table 2.1).

Table 2.1 Data for the cocoa processing factory

	$
Initial investment: Land Machinery Training	100 000 150 000 15 000
Average variable costs per tonne	5 000
Average selling price per tonne	10 000

Explain the term added value.

[case-study] Braid Runner (BR)

Lewis is a hairdresser. He rents a small shop which he uses as a hairdressers called Braid Runner (BR). Lewis is a sole trader and he set up BR 25 years ago.

BR is the smallest of all the hairdressers in city Y. Lewis works on his own. He has repeat customers who have been using BR for many years. However, there are many large franchises in city Y which offer a much cheaper haircut than BR.

Lewis is considering increasing the price of a haircut and he has outlined the costs and revenue of the business in Table 2.1.

Table 2.1: Costs and revenue of BR

Variable costs per customer	$3.50
Fixed costs per week	$675
Price	$8

Lewis would like to employ another hairdresser so that he can work fewer hours in BR. The new employee would have to be able to work in BR on their own. They would be responsible for taking bookings, dealing with customers and some financial transactions. Lewis has drawn up a person specification (see Fig. 2.1) that will be placed on a job website.

Characteristic	Essential	Desirable
Qualifications	- Hairdressing qualification	- A-Levels or high school standards in Mathematics and Business
Physical	- Must be between 18 and 30 years old	- Female
Experience	- None required	- Experience of dealing with customers/consumers - Experience of working alone
Personal qualities	- Able to work in a team - Good communication	- Friendly

Fig. 2.1: Person specification created by Lewis

Analyse one advantage and one disadvantage for Lewis of operating as a small business.

[case-study] Tin Mines (TM)

TM is a private limited company in the primary sector. Tin is found underground and is extracted by mining. TM operates seven mines in country C. There are several job roles at each mine including skilled engineers, managers and miners.

TM has recently discovered a new source of tin in a remote area of country C. TM has permission to develop a tin mine but will have to construct transport links. It will need new buildings such as offices, warehouses and employee housing. The Human Resources Director is developing a workforce plan to recruit miners and managers for the new mine.

TM’s Financial Director has produced a cash flow forecast for the new mine for the next five years. This is shown in Table 2.1.

Table 2.1: Cash flow forecast for the new mine ($m)

Year	2022	2023	2024	2025	2026
Opening balance	X	-80	-95	-85	5
Sales	0	0	25	105	Y
Development costs	60	15	0	0	0
Operating costs	0	0	15	15	15
Closing balance	-80	-95	-85	5	240

The remote area of country C where the new tin mine will be located has a high level of unemployment and average incomes are low. TM intends to recruit employees from the local area and buy resources from local suppliers, if they are available. The market for tin is likely to be affected by increased demand for electric vehicles. The batteries in electric vehicles contain tin. The government of country C believes that the tin mine will be of great benefit to both the local community and national economy. However, tin mining can result in pollution of local water supplies.

Evaluate possible conflicts between the aims of two of TM’s stakeholders.

[case-study] Samira's Whiteboards (SW)

Samira left school at the age of 18 in country H. She had a small amount of savings and an idea to create a flexible, removable and reusable whiteboard. Samira created a prototype and received small orders from local retailers.

A local manufacturer batch produces stock when required. There is a two-week lead time for a minimum order of 500 units. Samira started to sell her whiteboards on her website and at trade shows. She has been trading for seven months. She has good cashflow but little working capital as production costs are high.

Samira has heard that OS, a large business that sells office equipment, is planning to sell their own version of Samira's whiteboard. She is keen to increase production quickly to take advantage of being first to market. However, Samira's manufacturer cannot supply enough product to meet the growth in potential demand for whiteboards.

Fig. 1.1 shows an inventory control chart for the first seven months of trade.

Fig. 1.1 SW Inventory control chart 2023

Fig. 1.1 is an inventory control chart showing SW's stock level (in units) over the first seven months of trade, January to July. The reorder level is 300 units and the minimum stock level is 100 units. Stock falls steadily as whiteboards are sold, then rises by 500 units (the minimum order quantity) each time a delivery is received. The stock level at each turning point of the chart is:

Point on the chart	Stock level (units)
Opening stock (January)	800
First low point, before delivery	100
After first delivery	600
Second low point, before delivery	200
After second delivery	700
Third low point, before delivery	0
After third delivery	500
Closing stock (July)	400

Lara, a venture capitalist with experience of manufacturing, has approached Samira about making an investment. She would invest $100 000 to build a local mass production facility for SW. The facility would have a maximum output of 50 000 units per month. Lara wants to own 40% of the business.

Explain the term working capital.

[case-study] Van Man (VM)

Obi is a sole trader who operates a van service. He used to be employed by a similar business but realised that he likes to be in control. Obi used all of his savings to start his business so that he did not have to go into debt.

He owns three vans which can carry furniture, packages and other large items. He has eight full-time employees who drive the vans and move items. Customers can hire a van with two employees to move these items from one place to another. The cost per day of providing a van with two employees is $170. The prices of the service are shown in Table 1.1.

Table 1.1: Price of hiring one van (including two employees)

Price for the first day’s hire	Price for each additional day
$250	10% discount on the price for the first day’s hire

Demand for Obi’s service is growing fast. To supply this demand he needs a new van and he is investigating sources of finance. He has a choice of two vans. The details of the vans are in Table 1.2.

Table 1.2: Van details

	Van A	Van B
Capital cost	$30000	$40000
Estimated maintenance costs per year	$600	$450
Insurance cost per year	$500	$550
Expected life	7 years	9 years
Van owner reviews	- Easy to drive but not very fast - Boring but fuel efficient - Engine is very noisy, but reliable	- Fast and great fun to drive - Looks great and the range of colours is fantastic - It broke down a few times, but the manufacturer repaired it quickly

Recommend whether Obi should purchase Van A or Van B. Justify your recommendation.

[case-study] Tin Mines (TM)

TM is a private limited company in the primary sector. Tin is found underground and is extracted by mining. TM operates seven mines in country C. There are several job roles at each mine including skilled engineers, managers and miners.

TM has recently discovered a new source of tin in a remote area of country C. TM has permission to develop a tin mine but will have to construct transport links. It will need new buildings such as offices, warehouses and employee housing. The Human Resources Director is developing a workforce plan to recruit miners and managers for the new mine.

TM’s Financial Director has produced a cash flow forecast for the new mine for the next five years. This is shown in Table 2.1.

Table 2.1: Cash flow forecast for the new mine ($m)

Year	2022	2023	2024	2025	2026
Opening balance	X	–80	–95	–85	5
Sales	0	0	25	105	Y
Development costs	60	15	0	0	0
Operating costs	0	0	15	15	15
Closing balance	–80	–95	–85	5	240

The remote area of country C where the new tin mine will be located has a high level of unemployment and average incomes are low. TM intends to recruit employees from the local area and buy resources from local suppliers, if they are available. The market for tin is likely to be affected by increased demand for electric vehicles. The batteries in electric vehicles contain tin. The government of country C believes that the tin mine will be of great benefit to both the local community and national economy. However, tin mining can result in pollution of local water supplies.

Using the information in Table 2.1, calculate the value of the:

(i) opening balance (X) for 2022.

(ii) sales (Y) for 2026.

Explain one use of the cash flow forecast for TM.

Analyse two factors which may influence a business's choice of sources of finance.

‘Human Resource Management is the most important department in any large manufacturing business.’

Discuss the extent to which you agree with this view.