Question
Refer to the Ducal Aspirateurs case study (DA)
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 € 15 per 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.[2]
b. Explain one advantage and one disadvantage for DA of changing from function-based cost centres to the cost centres proposed by Pierre.[4]
c.i. Calculate the difference between the cost for $D A$ to make the rechargeable batteries and the cost to buy them from $X L$.[3]
c.ii.Suggest one other factor that $D A$ should consider before deciding whether to make the rechargeable batteries or buy them from $X L$.[1]
d. Discuss the likely impact on DA’s organizational culture of the changes recommended by the management consultants.[10]
▶️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 = 10 000 × €15 + €30 000 = €180 000
Cost to buy = 10 000 × €17 = €170 000
Difference/Saving = €10 000 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 € 10 000 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 DA
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.