Question
Ace Industries (AI)
Ace Industries (AI) manufactures plastic containers, mostly for the soft and fruit juice industries. The operations management department uses flow production for its standard-sized products and batch production for its customized products.
AI’s sales are growing rapidly. It currently has a 6 % share of the plastic container market. However, it has recently struggled to meet customized orders on time. Some customers have complained about product quality. Currently, AI is organized by region, which allows the company to have strong relationships with customers, who feel that AI knows them and cares about their interests. The human resource department is proposing restructuring the organization by function. Not everyone at AI agrees with this change. Many think that the problems of late delivery and poor quality could be solved through greater delegation.
Lloyd Rinnegrat, Chief Financial Officer, has suggested that AI’s management think more deeply about their rapid growth. Except Lloyd, most people at AI believe that rapidly growing sales are good – that by increasing its market share AI will, in the long run, benefit by being a large organization. However, Lloyd argues that being a small organization has many merits, as shown by the changes in AI’s recent gross profit margins and net profit margins.
Table 1: Selected financial data for AI
The marketing department has predicted that the soft and fruit juice industries are moving away from major mass-produced drinks and toward niche products, such as exotic fruit drinks and speciality beverages for very particular markets.
a. Outline two features of batch production.[2]
b. Draw a possible organizational chart for a manufacturing firm like $A l$ if it is organized by function.[2]
c.i. Calculate the total size of the plastic container market in 2019 (show all your working).[2]
c.ii.Calculate the difference in Al’s net profit before interest and tax between 2018 and 2019 (show all your working).[2]
d. Explain how delegation might help $A l$ improve its delivery times.[2]
e. With reference to $A l$, discuss Lloyd’s view that being a small organization has merits.[10]
▶️Answer/Explanation
Ans:
a.Features of batch production include:
Limited quantity produced according to specific specifications.
Non-continuous: batches are produced at intervals.
Batches more from stage to stage of production together (in other words, stage 1, one process occurs. Then, the batch moves to the next stage, where another process is done, etc).
Accept any other relevant feature.
Award [1] for each feature identified up to [2].
b.
The organizational chart does not have to appear exactly as above. Award [1] if the candidate demonstrates some understanding of an organizational chart. Award [2] if the candidate draws an organizational chart that is organized by function and has at least three functional areas labelled (operations, marketing, accounting and finance, HR, etc).
c.i. $\$ 421000000=0.06 \times($ total market size $)$
$$
\frac{421000000}{0.06}=\$ 7016666666.67
$$
Accept $\$ 7016666667$
Award [2] for correct answer and workings. Award [1] for correct process but with a mathematical error.
c.ii.PLEASE NOTE: Market size is not included in the syllabus for 2024 exams onward. Related parts of this multi-part question may be used.
$$
\begin{aligned}
& 0.08 \times 376000000=30080000 \\
& 0.07 \times 421000000=\frac{29470000}{610000}
\end{aligned}
$$
The difference between Al’s profit in 2018 and 2019 was $-\$ 610000$.
Award [2] for correct answer and working. Award [1] for correct process but with a mathematical error.
d. PLEASE NOTE: Delegation is not included in the syllabus for 2024 exams onward. Related parts of this multi-part question may be used.
Delegation occurs when authority and responsibility are passed down the chain of command and subordinates are empowered to make decisions. When properly done, delegation leads to more effective decision making by subordinates, as they now feel the weight and bear the responsibility for their decisions. In the case of $A I$, if employees who deal with the customers’ orders and manage the operations line had greater authority, they could better align customized sales, which requires some reconfiguration of tooling for each batch, with capacity and availability.
Award [1] for some understanding of delegation and award an additional [1] for an explanation of how delegation could improve delivery time.
e. Refer to Paper 2 markbands for May 2016 forward, available under the “Your tests” tab > supplemental materials.
Advantages of being a small business include:
- can implement change quickly (flexibility)
- can maintain relationships with customers and employees
- can maintain consistency of brand identity
- management can focus, including having tight control over operations
- there are fewer risks associated with overtrading.
Disadvantages of being a small business include:
- less recognition/awareness in the market place
- fewer opportunities for economies of scale
- less ability to compete on price
- lesser access external sources of finance.
$A l$ is transitioning into a large organization, but its growth affects the business. $A I$, for example, is not delivering orders on time, customers are complaining about product quality, and the company is not making the same margins it previously was. Unless $A l$ can specifically pinpoint benefits from higher market share, which presumably explains the rapidly rising sales, the company may want to consider whether its sales growth is worth the problems.
Marks should be allocated according to the paper 2 markbands for May 2016 forward.
Question
Wong Corporation (WC)
Wong Corporation (WC) manufactures clothes dryers. WC pays tax at a rate of 20 %. WC has a hierarchical organization structure. Table 3 shows selected forecasted financial information for the company for 2022, and Table 4 shows its annual cash flow forecast for 2022.
Table 3: Selected forecasted financial information for WC for 2022 (all figures in $000s)
Table 4: Annual cash flow forecast for WC for 2022 (all figures in $000s)
a. State two features of a hierarchical organizational structure. [3]
b. Calculating $\mathbf{X}$ and $\mathbf{Y}$ in Table 3, prepare a profit and loss account for WC for 2022 (show all your working). $[4]$
c. Using Table 4, calculate WC’s net cash flow for 2022 (show all your working). [2]
d. Explain the difference between WC’s profit and its cash flow. [2]
▶️Answer/Explanation
Ans:
a. Features of a hierarchical organization include:
- Pyramidal with many layers (workers>supervisors>managers>senior managers>executives>CEO) or long chain of command or tall structure.
- Usually a narrow span of control.
- Decisions flow from top down and information passes from the bottom up.
- Authority/decision-making is centralized.
- Delegated authority, if any, is narrowly defined.
- Individuals in a hierarchical organization tend to have specialized skills.
- Decision-making typically takes time or is not a quick process.
If a candidate raises the issue of decision-making, award [1] if they say that decision-making typically takes time.
However, if the candidate appropriately contextualizes their response, they can earn [1] for saying decision-making can be faster. For example, if a candidate wrote something to the effect of “In hierarchical organizations where delegation occurs, decision-making can be fast.”
Accept any other relevant feature.
Award [1] for each feature identified up to a maximum of [2].
b.
Gross profit (X) = $16 000 000
Tax (Y) = $800 000
If, in their workings, the candidate has dropped the 000s, accept X = $16 000 and Y = $800.
WC Profit and loss account for the year 2022
Figures in $000
Award [1] for correctly calculating gross profit (X), [1] for correctly calculating (Y), [1] for the correct layout of a profit and loss account, and [1] for a correct heading. Maximum award: [4].
N.B. In the heading candidates must say the name of the company (WC), the year, and profit and loss account (they may say income statement). If the candidates does not say “in 000s”, accept.
c.
If, in their workings, the candidate has dropped the 000s, accept Z = $2 600.
An alternate method for calculating net cash flow is to use the following formula:
Closing balance = net cashflow + opening balance
$10 000 000 = NCF + $7 400 000
$10 000 000 − $7 400 000 = $2 600 000.
Award [1] for correct method and [1] for correct answer. Maximum award: [2].
d.
A candidate can earn [1] by defining profit (revenue minus expenses) and then explain that cash flow is the movement of funds such as external financing (an inflow) or debt service (an outflow) or some other specific examples of inflows or outflows.
For a second mark [2], candidates must apply their response to the stimulus. Application must be more than nominal (just naming WC but otherwise providing a generic answer). Based up the stimulus, two opportunities exist for genuine application:
- The candidate refers to the $3 200 000 profit and the $2 600 000 cashflow.
- The candidate refers to the product (dryers) when exemplifying how a timing difference can occur between sales and payment received (trade credit).
An alternate way a candidate can earn [2] is by explaining that profit is typically calculated on an accrual basis (when revenue or expense actually accrues to the business) but does not reflect the actual movement of funds. On an accrual basis, WC had a net profit of $3 200 000. Cash flow reflects the actual movement of funds – when a business receives payment or makes a payment. In 2022, WC had receipts in excess of payments in the net amount of $2 600 000. This difference between profit and cashflow reflects a timing difference between the accrual of a revenue or an expense and the actual receipt or payment of funds.
Award [1] for partial understanding and explanation and [2] for a complete understanding and explanation. A candidate does not have to use the word accrual, but they must convey some understanding of a timing difference between the profit and loss account and the cash flow. If the candidate does not apply their response to the stimulus, the maximum award is [1].