Question
Refer to the Ducal Aspirateurs case study (DA) (SL/HL paper 1 Nov 2020).
There are several important items to be discussed at $D A$ ‘s board meeting, three of which are outlined below.
Item 1: Budgets. DA produces its budgets based on the functional areas of the business. For example, the Marketing, Production, Innovation and Corporate Social Responsibility (CSR) Departments are all separate cost centres. Pierre is proposing that budgets should be more detailed so that, for example, each of D A’s products has its own cost centre and each separate innovation project is also a cost centre.
Item 2: Recommendations from the management consultants. The management consultants propose bringing D A more up to date with employment practices by replacing the many benefits that employees get with a low basic pay and a profit-related bonus, and charging market rents for the housing in Ville d’Ablet. There will also be penalties on employees for failing to meet targets. The CSR department are opposed to this idea because they believe it will change the culture of the business, which has built up over many years.
Item 3: The manufacture of rechargeable batteries used in cordless products. DA currently makes its own rechargeable batteries. In 2019, it made 10000 batteries. The variable cost is € 15per battery and the fixed costs are € 30000 . X L, a public limited company, is a major manufacturer of batteries. D A has contacted X L to manufacture the rechargeable batteries, which they will buy from X L at € 17 each.
a. Define the term public limited company.
b. Explain one advantage and one disadvantage for $D A$ of changing from function-based cost centres to the cost centres proposed by Pierre.
c.i. Calculate the difference between the cost for $D A$ to make the rechargeable batteries and the cost to buy them from $X L$.
c.ii.Suggest one other factor that $D A$ should consider before deciding whether to make the rechargeable batteries or buy them from $X L$.
d. Discuss the likely impact on DA’s organizational culture of the changes recommended by the management consultants.
▶️Answer/Explanation
Ans:
a. A limited company (incorporated), often a large business, with the legal right to sell shares to the general public (publicly traded). Its share price is quoted on the national stock exchange. It has limited liability (not necessary in answer but helpful)
References to ‘owned by the government’ or ‘local authorities can be rewarded as state involvement in plcs is common in some countries
Award [1] for a partial definition and [2] for a full, clear definition. This answer does not need to be in context and the definition does not have to use the words above. A full, clear definition needs more than just a reference to limited liability.
b. A cost centre is a section of a business to which both costs and revenues can be allocated.
Currently cost centres are based on functional areas such as Marketing, HRM. Proposal is to base them on product (washing machines, vacuum cleaners, toasters etc, ) and, where appropriate, project (eg click and fix).
Advantages of change include:
- Easier to monitor and control production of products
- Easier to see which products to drop, or modify
- Easier to set targets – difficult for large functional areas
- This is because functions are not directly related to products.
Disadvantages of change include:
- Costs of implementing change
- Disruption
- Lack of continuity
- Possible unwanted competition between products or projects.
Please note context may be a challenge. Candidates need to mention functional areas, products, projects that appear in the case.
References to budgets need to be linked to cost centres.
Award [1] for each relevant advantage identified and [1] for a description of how that advantage relates to AFA. Award [1] for each relevant disadvantage identified and [1] for a description of how that disadvantage relates to DA.
Where a candidate ONLY refers to existing cost centres max award [1], for understanding cost centres.
Where a candidate does not refer to new cost centres but does mention impacts of changing: max award [2].
c.i. Cost to make $=10000 \times € 15+€ 30000=€ 180000$
Cost to buy $=10000 \times € 17=€ 170000$
Difference/Saving $=€ 10000$ in favour of buying
Reward alternative methods of getting to the same answer e.g. by starting with unit costs and cost differences. Although working is preferable the question does not require it.
The answer $\epsilon 10000$ also achieves [3]
Award [3] for a correct answer which must include $€$.
Award [2] for a correct answer with wrong units or reasonable attempt with units. E.g. not making a final subtraction.
Award [1] for an attempt.
If the answer does not appear in (i) but does appear in (ii) then (i) can be rewarded retrospectively – you will have to go back to mark entry for (i).
c.ii.Factors could include:
- Quality control issues (in-house easier to control)
- Reliability of suppliers
- Suitable workforce at DA
- DA’s experience with manufacturing
- Policy on core activities
- Impact on employees
- Impact on $D A$
Award [1] for any relevant factor – does not have to be in context. Do not reward relative costs.
d.
Refer to Paper 1 markbands for May 2016 forward, available under the “Your tests” tab > supplemental materials.
Changes include:
Changing from an annual salary to low basic wage with bonuses
Reducing social benefits
Penalties for failing to meet targets
Some elements of changing to task culture from person culture (candidates do not need to name these culture types)
Culture currently based on:
Family business
Strong social values
Benefits to employees and their families such as housing, hospitals etc
Looked after employees in hard times
Recently included employee focused HRM strategies and management including consultation, redeployment
CSR
Focus is changed to managing costs. The switch is from ‘soft’ to ‘hard’ HRM, part of the culture.
The current ‘soft’ approach is more consistent with a family business than ‘hard’ HRM.
‘Balance’ could be achieved by comparing old and new methods; positive and negative impacts on stakeholders and/or DA.
Marks should be allocated according to the paper 1 markbands for May 2016 forward section B.
Theoretical answer or context limited to naming the business or simplistic development max [4].
Discussion of only either the existing situation or the new situation or only focuses on motivation, or on impacts other than on culture [5].
Discussion of culture with no clear balance [6].
Cultural change considered, good use of evidence, particularly from section B, but no effective conclusion award a maximum of [8].
For [10] the answer needs to be clearly relevant to DA, with good use of context, a clear sense of how culture will change and a clear conclusion.
Question Higher level Paper 2
jill’s Jeans (JJ)
Jill created Jill’s Jeans, which operates as a sole trader. JJ makes custom-design jeans. Jill designs all the jeans and sells them online and at local markets.
Because of increasing demand in 2020, JJ has benefitted from economies of scale.
Table 1: Budgeted and actual figures for the year ending 31 October 2020
a. State two features of a sole trader.[2]
b.i. Using information in Table 1, for JJ, prepare a profit and loss account for the budgeted figures and the actual figures
(show all your working).[3]
b.ii. Using information in Table 1, for JJ, prepare a variance analysis (show all your working)[3]
c.Explain one possible economy of scale from which JJ has benefitted.[2]
▶️Answer/Explanation
Ans:
a.Features include:
Easy to set up – no legal formalities
Owner has complete control – not answerable to anyone else
Owner keeps all profits
Able to choose times and patterns of working
Able to establish close personal relationships with staff (if any are employed) and customers
The business can be based on the interests or skills of the owner – rather than working as an employee for a larger firm
Unlimited liability – all of owner’s assets are potentially at risk
Often faces intense competition from bigger firms, e.g. food retailing
Owner is unable to specialise in areas of the business that are most interesting – is responsible for all aspects of management
Difficult to raise additional capital
Long hours often necessary to make business pay
Lack of continuity – as the business does not have separate legal status, when the owner dies the business ends too
Accept any other relevant feature. However, do not credit ‘unincorporated’ and ‘unlimited liability’ as two features. They are the same thing.
Award [1] for each relevant characteristic stated to a maximum of [2].
Application to the organization is not required
b.i. If the profit and loss account is constructed following a generally accepted format and is correct in all respects, award [3].
Award [2] if the candidate produces a correct net profit but does not follow a generally accepted format. Award [1] if the candidate shows some understanding of what a profit and loss account is, but the actual account constructed is not in a generally accepted format and has numerous errors.
We need to be consistent with previous years where the format required is consistent with the guide – as 3 of the headings already given, then marks are for 2 headings and 4 calculations.
b.ii.
For a perfect understanding of variances award [3]. There must be calculations and explicit reference to variances that are favourable or adverse.
For variance analysis that has 1 calculation error and/or makes no reference to variances as favourable or adverse award [2].
For a vague understanding of variances award or more than one calculation error and no reference to favourable/adverse [1].
c. Purchasing economies of scale. Bulk buying of her raw materials such as the material for jeans, stitching and sowing needles. Unit costs may fall.
Technical economies of scale through the purchase of machines to help her produce jeans in larger quantities. Over the long run, unit costs will fall as the scale of production increases.
Given rising demand, marketing economies of scale are possible for JJ as unit costs per jean falls as advertising costs may be constant over a larger range of output.
Accept any other relevant answer.
Mark 1 + 1.
Award [1] for a relevant economy of scale explained and [1] for appropriate application to JJ to a maximum of [2].
N.B As there is limited stimulus information application must necessarily be in the form of reference to jeans, tailoring machinery or tailoring supplies. Do not reward generic references simply to ‘machinery or supplies’.