IB DP Business Management Unit 3: Finance and accounts -: 3.1 Introduction to finance HL Paper 2

Ans:

a.

CSR is the decision/attempt by a business to take responsibility for their action/activities by considering the interests of and the impact on a wide range of stakeholders in society. The business accepts the moral and legal obligations to society, not just to investors, that result from its operation.

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

Award [1] for a basic definition that conveys partial knowledge and understanding similar to the above answer. The first mark would typically come from awareness that there is some morale guidance.

Award [2] for a full, clear definition that conveys knowledge and understanding similar to the answer above. Individual stakeholders do not need to be named to gain full marks.

Do not credit an example.

b.

One advantage for CM of using a cost-plus pricing strategy is the fact that it will be CM that covers all the costs and ensures a certain percentage of profit to be made. It is evident given the figures above that CM makes a profit. CM’s ability to make a profit ensures long-term survival. CM’s meals are perceived as good value for money, hence the strategy is effective.

Given the increase in competition, CM can be flexible and reduce the margin set above the costs. Flexibility in pricing is an important factor when there is an economic downturn, as well as increased competition.

A possible disadvantage is that CM’s costs are likely to be higher than competitors who supply non-organic meals. Together with the customers’ unwillingness to pay a premium price during an economic downturn, CM might see a further fall in demand as seen in the fall in total revenue in 2018.

Accept any other relevant advantage / disadvantage.

Award [1] for each role identified and an additional [1] for development with application to CM. Award a maximum of [2] per advantage/disadvantage. [2] cannot be awarded per role if the response lacks either explanation and / or application.

For example:
For an identification or a description of an advantage/ disadvantage with or without application [1].
For explanation of relevant advantage/ disadvantage with no application [1].
For explanation of a relevant advantage/ disadvantage and application [2].

c.

A possible advantage for CM of changing the stock method from JIC to JIT:
As CM buys agriculture produce/ stock, these products need to be well stored and possibly refrigerated. Moving to JIT will significantly reduce costs of storage and spoilage. The gross profit margin, which has fallen by 2 %, is likely to increase rather than decrease. The very high current ratio of 2.4 will fall, as CM will not stock financially unproductive assets.

A possible disadvantage for CM of changing production /stock method methods from JIC to JIT:
Given the nature of the industry, the farmers are likely to prefer CM buying large quantities seasonally. Ordering lower quantities when needed might create problems/costs for the farmers, who might not prioritize CM any longer. CM will also lose its reputation for CSR based on long-term commitment to farmers to buy large quantities.

Moreover, given the unpredictable nature of farming, not having buffer stock could result in CM being out of stock with the consequences of losing clients/reputation and therefore revenue and profit. CM is likely to lose its reputation for flexibility with the retailers in terms of quantity and delivery if not enough agriculture produce is available.

Accept any other relevant/applicable advantage / disadvantage.

Award [1] for each advantage / disadvantage identified and an additional [1] for development with application to CM. Award a maximum of [2] per advantage / disadvantage.

[2] cannot be awarded per role if the response lacks either explanation and / or application.

For example:
For an identification or a description of an advantage/ disadvantage with or without application [1].
For explanation of a relevant advantage/ disadvantage with no application [1].
For explanation of a relevant advantage/ disadvantage and application [2].

d.

Refer to Paper 2 markbands for 2016 forward, available under the “Your tests” tab > supplemental materials.

It is expected that candidates make constant reference to/use of the figures and other relevant information in the stimulus combined with theoretical understanding of the advantages and disadvantages of the possible strategies.

Some of the possible strategies:

Reduce cash outflow. CM is facing cash flow crisis as seen by its deteriorating acid test ratio of 0.6. Without stock, which contributed to a high current assets ratio, CM cannot meet its long-term liabilities. It is evident that there is a big difference between debtors and creditors days. CM paid the farmers within five days in 2018, which is very quick and got significantly quicker – twice as fast – but received money from the retailers after 70 days in 2018, a significant increase from 50 days. CM is too generous to retailers with the credit term. Despite the fact that the relationship with retailers and the suppliers is CM’s competitive advantage, it is financially dangerous given the decreasing and very low acid test.

Seek alternative suppliers with cheaper agriculture produce might be seen as an extreme solution, as CM’s relationship with the farmers and the quality of the organic ingredients are key to its competitive advantage. It might take a long time to find different suppliers. Perhaps agreeing a longer credit term would be a better solution. Currently, CM pays after five days. One can assume that the farmers are likely to prefer a request for a longer pay period than a more drastic one.

Cut expenses. Gross profit margin is considerably higher than net profit margin for a manufacturing company and is getting worse over time. CM should look at some unnecessary expenses like marketing or administration. However, cutting salaries or staff might impact on the employees’ motivation and cutting marketing might create some difficulties in competing with the new competitors. However, going out of business due to lack of cash can be judged as a more significant threat.
Do not accept better stock control due to JIT.

Tighter credit control. Cash payments only for the retailer will clearly reduce/eliminate debtor days. The acid test ratio is worrying and CM must take immediate actions to solve this short-term liquidity problem. However, the relationship with the retailers might deteriorate and they might start buying non-organic frozen food from the emerging competitors. It appears that CM’s bargaining power with the retailer is weak and this option is unlikely to be successful. One, however, may argue that increasing the creditor days is unlikely to be met with much objection from its suppliers given the very low starting figures and long-established trust. CM might also be able to ask its debtors – the retailers – to pay sooner, even after two months, a demand which is likely to be seen as reasonable.

Changing pricing policy. CM can possibly reduce the price of its products. While CM may be more competitive and this strategy may work well given the economic downturn and the increased competition, CM may suffer losses or a reduction in profit. However, customers may perceive the frozen organic meals as even better value for money and increase demand. Moreover, perhaps CM can withstand a reduction in profit in the short term and we can see that CM is profitable. The liquidity issue ought to be sorted. CM should prioritize its cash flow problem first, then deal with a low acid test to generate cash to survive.

Enhance marketing to generate more sales in cash. CM might be able to reduce its increasing level of stock and reduce stock turnover in days, which has clearly deteriorated considerably from 20 to 40 days. However, any type of promotion may incur more expenses, especially in cash. The data indicates that the net profit margin is considerably lower than the gross profit margin, which indicates that CM does not control its expenses well.

Improved product portfolio. Perhaps CM should also consider non-organic meals or other types of products to enhance its portfolio and create more revenue streams. However, cannibalism can be created – CM may also have to compete more directly with the increasing number of providers of non-organic frozen meals. Market research has to be done so perhaps this option is not the most appropriate one in the short term.

Seeking alternative short term sources of finance. Accept relevant applicable suggestions like the use of overdraft and short-term loans, to deal with CM’s short-term liquidity crisis. However, these options are more of first aid rather than solution to some ongoing problems and are likely to be more theoretical given the lack of information in the stimulus.

It is not expected that the candidates cover all of the above.

Accept any other relevant arguments for and against any relevant suggested strategy.

Accept any other relevant examination.

A conclusion with judgment is expected.

A balanced response covers at least one argument for and one argument against each of two different strategies.

Marks should be allocated according to the paper 2 markbands for May 2016 forward with further guidance below.

For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].

Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.

Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.

It is expected that the candidate goes beyond just providing some relevant arguments for or against any suggested strategy and finish off with some conclusions and judgment.

Award a maximum of [4] marks if the answer, regardless of balance and judgment makes no reference to either the figures or headings in Table 1.

Candidates, in order to reach to the top markband, should show clear evidence of substantiation/well supported.

For the top markband, candidates must make use of the financial information given in their discussion.