Question
Refer to the Accord case study (SL/HL paper 1 Nov 2019).
Aran and Kayla decided to launch Detox using batch production. It has now been on the market for six months. Detox is showing strong growth, although sales for the first six months were less than a quarter of Kayla’s target of 160000 bottles for the first year. The price of Detox is $\$ 2.50$ per bottle. The cost of goods sold is $\$ 160000$ and the operating costs before interest and tax are $\$ 20000$ per year.
Enrich sales have not grown much and Aran is very disappointed. Customers, mainly athletes, do not use the product frequently and it is difficult to find new customers. However, research into customer perceptions indicates a very strong brand, resulting largely from Accord’s corporate social responsibility (CSR) and strong customer loyalty.
Aran does not like the way the business is organized by product and wants to change it so that it is organized by function instead.
Following the success of Detox, Kayla wants to produce a range of snack bars based on Enrich flavours and recipes. Accord would use the Enrich brand name for the snack bars. The market for healthy snack bars is very competitive and dominated by a few large companies who spend large amounts of money on advertising. The market is growing rapidly – some market researchers estimate by $34 \%$ per annum. There are many examples of small businesses entering the market successfully on a small scale. Kayla estimates the proposal would involve an investment of $\$ 100000$, with forecast net returns of $\$ 80000$ for four years. Aran thinks that the money could be better spent on marketing Enrich drinks.
a. Define the term batch production.[2]
b.i. Based on a target of 160000 for the first year of production at Detox, calculate the gross profit generated by Detox.[2]
b.ii.Based on a target of 160000 for the first year of production at Detox, calculate the net profit margin of Detox.
c. With reference to Accord, explain one advantage and one disadvantage of an organizational structure based on product.
d. Discuss Kayla’s plan to produce a range of snack bars.[10]
▶️Answer/Explanation
Ans:
a. Producing a defined number of identical products – each item in the batch passes through one stage of production before passing on to the next stage. An example, which is not necessary, is the commercial manufacture of biscuits.
Award [2] for a complete definition.
Award [1] for some understanding.
b.i. Gross profit $=$ revenue – cost of goods sold
$
=\$ 160000 \times \$ 2.50-\$ 160000=\$ 240000
$
Award [2] if correct answer and working shown.
Award [1] if correct answer but no working, or a reasonable attempt with errors.
b.ii.Net profit before tax, interest $=$ Gross profit – operating costs before tax and interest
$
=\$ 240000-\$ 20000=\$ 220000
$
so
$
\begin{aligned}
& \text { NPM }=\frac{\text { Net Profit before tax and interest }}{\text { sales revenue }} \times 100 \% \\
& \frac{220}{400} \times 100=55 \%
\end{aligned}
$
Award [2] if correct answer and working shown.
Award [1] if correct answer but no working, or a reasonable attempt with errors.
c. Advantages:
- Simple.
- Can have different strategies for each product.
- Markets different, so works well.
Disadvantages:
Disadvantages:
- May duplicate functions.
- Small business, so does not want too many departments.
Any other reasonable explanation
Award [1] for each advantage/disadvantage up to a total of [2].
Award [1] for putting each advantage/disadvantage into context up to a total of [2].
d. Refer to Paper 1 markbands for May 2016 forward, available under the “Your tests” tab > supplemental materials.
Arguments for:
- There are problems with Enrich, so maybe diversify.
- Good profits.
- Massive growth (34\%).
- Returns seem good (candidates may do payback, ARR).
- Small businesses have successfully entered the market.
Arguments against:
- Aran does not like idea.
- Very competitive.
- Dominated by large companies.
- May not match large advertising spending.
- Would be better to spend money advertising Enrich?
Recommendation not needed, but rewardable if supported by analysis.
Accept reasonable alternative answers.
Marks should be allocated according to the paper 1 markbands for May 2016 forward section B.
Award a maximum of [4] for a purely theoretical answer, or with no effective use of case (eg, only repeating case material without development).
Award a maximum of [6] if culture change is considered but there is limited use of data, or if there is good analysis of data with limited consideration of culture change.
Award a maximum of [8] if culture changes are considered and there is good use of data but there are no significant judgements.