Question
Refer to the Megamin Mining case study .
MM is reviewing its hotel and mining operations.
To understand customer opinions about its hotels, MM will distribute questionnaires at two of its hotels and use a convenience sampling method. MM is also considering introducing flexitime for hotel employees.
For its gold mining operations, MM wants to increase its market share worldwide to 1 % by 2030. In 2020, MM produced 17 tonnes of the global production of 3200 tonnes.
In another development, MM wants to enter the rapidly growing lithium market. MM has rejected the idea of buying an existing lithium producer and is considering two options: opening its own lithium mine in Australia or entering a joint venture with a lithium mining company.
Option 1: Open a lithium mine in Australia
MM has identified a site in Australia, and the Australian government, which is keen to develop its country’s lithium mining industry, will approve a mining license for it. Development of the mine would take three years and cost $100 million. Table 2 shows the forecasted net returns for the first six years.
Table 2: Forecasted net returns for the lithium mine (in millions of $)
MM will sell the lithium to battery manufacturers in China, a market familiar to the Australian mining industry. Transport costs would be high. Environmental pressure groups oppose the mine because of the water and air pollution they think it would create.
Option 2: A joint venture with CanLith (CL)
CL, a lithium mining company, is seeking expansion with a new mine and needs finance. A joint venture with MM would bring MM’s expertise and corporate values to the expansion. MM and CL would have equal ownership of the new mine and jointly manage it. CL would appoint a board of directors. However, CL has attracted bad publicity because of its poor environmental record, and local people oppose the new mine. Information on the joint venture is shown in Table 3.
Table 3: Information on setting up the joint venture
a. Define the term flexitime.[2]
b.i. Calculate for MM: its market share worldwide in gold in 2020 (show all your working).
b.ii.Calculate for $M M$ : the average rate of return (ARR) for the lithium mine (show all your working).[2]
c. Explain one advantage and one disadvantage for $M M$ of using convenience sampling for its market research.$[4]$
d. Using the case study and additional information from Section B, recommend whether MM should choose Option 1 or Option 2.$[10]$
▶️Answer/Explanation
Ans:
a. A system of working a set number of hours with the starting and finishing times chosen within agreed limits by the employee and employer.
Candidates are not expected to word their responses exactly as above.
Award [2] for a clear, complete definition.
Award [1] for a partial definition that shows some understanding.
b.i. MM’s sales: 17 tonnes
Total market 3200 tonnes
Market share $=\frac{17}{3200} \times 100=0.53 \%$ (allow rounding)
Award [2] if correct answer and working shown.
Award [1] if correct answer but no working, or no \%.
$
\begin{aligned}
& \text { b.iiAverage rate of return }(\mathrm{ARR})=\frac{\text { (total returns }- \text { capital cost) } \div \text { years of use }}{\text { capital cost }} \times 100 \\
& =\frac{(190 \mathrm{~m}-100 \mathrm{~m}) \div 5}{100 \mathrm{~m}} \times 100=18 \% \\
& \text { Total return }=\$(-70-20-10+30+60+100) \mathrm{m}=\$ 90 \mathrm{~m}=\$ 18 \mathrm{~m} \text { per year } \\
& \text { Investment }=\$ 100 \mathrm{~m} \\
& \text { ARR }=\frac{18}{100 \mathrm{~m}} \times 100 \%=18 \% \text { per year }
\end{aligned}
$
Total return $=\$(-70-20-10+30+60+100) \mathrm{m}=\$ 90 \mathrm{~m}=\$ 18 \mathrm{~m}$ per year Investment $=\$ 100 \mathrm{~m}$
$A R R=\frac{18}{100 \mathrm{~m}} \times 100 \%=18 \%$ per year
(alternative method: $\$ 190 \mathrm{~m}$ return from $\$ 100 \mathrm{~m}$ investment = net $\$ 90 \mathrm{~m}=$
$\frac{90 \mathrm{~m}}{100 \mathrm{~m}} \times 100 \%=90 \%$ over 5 years $=18 \%$ average per year)
Award [2] if correct answer and working shown.
Award [1] if correct answer but no working, or no $\%$.
c.Advantage
Easy to identify: hotel guests, who know about the hotel and its problems
Does not involve people not interested in MM’s hotels
Cheap to administer
It can be used to intervene to satisfy dissatisfied customers
Disadvantage
Does not sample potential hotel customers
Not random so there could be bias – existing customers may have different views than the general population
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.
NOTE FOR EXAMS 2024 ONWARD: Option 1 is not a good fit for the new syllabus as it is effectively internal growth and this is not assessed at AO3. Related parts of this multi-part question may be used.
Refer to Paper 1 markbands for May 2016 forward, available under the “Your tests” tab > supplemental materials.
Arguments for Option 1
Australian government is keen – license might be straightforward
Higher ARR
Cost spread over several years
MM in complete control – make all the decisions
Net returns suggest more after year 5. How long does the mine last?
Chinese have trade deals with Australia for minerals
Organic (internal) growth, so safer and less risky than external growth
Arguments for Option 2
Lower investment ($40m, total cost $80m versus $100m)
Equal ownership so equal say – not dominated by CL. Joint management – CL will have expertise
Existing mine so problems sorted
CL will benefit so chances of a symbiotic relationship
But: Lower ARR, opposition
Less time to complete/develop (6 months compared to 3 years)
External growth, so faster than internal growth
Recommendation needed. But rewardable only 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 (e.g. only repeating case material without development.)
Award a maximum of [5] if only one option is considered.
Award a maximum of [8] if both options are considered and there is good use of data but there are no significant judgements.