M17/3/BUSMT/SP2/ENG/TZ0/XX

Business management
Standard level
Paper 2

Monday 1 May 2017 (morning)

1 hour 45 minutes

Instructions to candidates
yy Do not open this examination paper until instructed to do so.
yy A clean copy of the business management formulae sheet is required for this examination
paper.
yy Section A: answer one question.
yy Section B: answer one question.
yy Section C: answer one question.
yy A calculator is required for this examination paper.
yy The maximum mark for this examination paper is [50 marks].

2217 – 5014
7 pages © International Baccalaureate Organization 2017
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Section A

Answer one question from this section.

1. Sotatsu Electronics (SE)

Sotatsu Electronics (SE) manufactures electronic products and is famous for its innovative
televisions. In late 2015, SE introduced a new high-definition television with twice the quality of
the best-selling television of its chief competitor. Determining that it would be two years before its
competitors could have a similar product, SE adopted a price skimming strategy.

Table 1: Select financial information for SE for 2015 and 2016.

Figures in $000 000.
2015 2016
Cash 300 250
Cost of goods sold 2100 2300
Creditors 180 230
Expenses 1200 1300
Fixed assets 1075 1275
Gross profit X 2800
Net profit before interest and tax 1000 Y
Sales revenue 4300 5100
Total current assets 650 700
Total current liabilities 275 300

(a) Define the term price skimming. [2]

(b) (i) Calculate the values of X and Y in Table 1 (no working required). [2]

(ii) Construct a profit and loss account for SE for 2015 and 2016. [4]

(c) Calculate net current assets (working capital) for 2016 (show all your working). [2]
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2. Anubis

Tom operates Anubis as a sole trader, selling cell/mobile phone cases on the internet. The market
is increasingly competitive. The retail price of phone cases is predicted to fall in the second quarter
of 2018. Employees at Anubis will receive a 3 % rise in wages starting from 1 April 2018.

Tom has forecasted the following monthly cash outflows for January through March 2018:
 Heating and lighting: $4000.
 Wages: $50 000.
 Packaging: $15 000.
 Delivery charges: 5 % of sales revenue.
 Cost of goods sold: $220 000.

Additional information:
 Opening balance on 1 January 2018: $8000.
 Sales revenue: $300 000 each month.
 Rent of $2000 paid quarterly: first payment in January 2018.
 Receipt of a tax refund in February 2018: $3000.

(a) Outline two appropriate external short-term sources of finance for Anubis other than
loans from family and friends. [2]

(b) Using the information above, prepare a fully labelled cash-flow forecast for Anubis from
January to March 2018. [5]

(c) Comment on the predicted cash flow for Anubis for 2018. [3]

Turn over
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Section B

Answer one question from this section.

3. Dales

Dales is a public limited hotel chain operating in a highly competitive tourism market. Dales is
positioned as a high-price and high-quality chain. The majority of its staff are on permanent
contracts, but wage rates at Dales are below the average for the hotel industry. Consequently,
staff turnover is high. Recruitment is difficult due to the number of hotels in the areas where Dales
hotels are located and the wages paid.

In 2010, in order to remain competitive, Dales outsourced the cleaning of hotel rooms to Wire.
Outsourcing reduced the cost of cleaning rooms for Dales from 5 % of total revenue per room to
2 %. Net profit after tax and interest increased and share prices rose by 10 %.

Initially, Wire paid cleaners at Dales a low wage of:

 $6 per hour for 8 hours, 5 days per week.
 Cleaners cleaned, on average, 13 rooms per day.

In 2016, Wire introduced a piece rate system:

 $2 is paid per room cleaned.
 Cleaners have a target of 20 rooms per day, 5 days per week.

In recent years, newspaper reports highlighting poor pay and working conditions have damaged
Dales’s brand image. Recent customer feedback has also highlighted concerns about food quality,
room cleanliness and poor customer service at Dales hotels. Room bookings fell during the same
period. Profits in 2016 decreased from $24 m to $4 m.

The current contract with Wire is up for renewal. Dales is considering insourcing.

(a) Outline two common steps taken by a business in recruitment. [2]

(b) (i) Explain two disadvantages for Wire of introducing a piece rate system of wages
for its cleaning staff. [4]

(ii) Calculate the financial impact on cleaners employed by Wire from the introduction
of the piece rate system in 2016 (show all your working). [2]

(iii) Calculate the change in cleaning costs per room from the introduction of the
piece rate system used by Wire. [2]

(c) Recommend if Dales should stop outsourcing the cleaning of hotel rooms. [10]
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4. Secco Vineyards (SV)

Secco Vineyards (SV ) is a family-owned business producing wine in Sonoma, California.

In 1947, SV opened using cost-plus (mark-up) pricing. For SV ’s customers, the wines were
medium priced and available in local grocery stores.

In 1977, Joe Secco, grandson of the founder, created a new strategy. He re-branded SV ’s wine for
a niche premium market.
 SV began to sell directly to customers at its winery instead of in local grocery stores.
 SV stopped using cost-plus (mark-up) pricing and began to sells its wines at much higher prices
than before.
 Regular wine tastings and promotional events were held at its winery. At these events, wine
experts would promote SV ’s wines by creating an elegant experience based on a luxurious
culture of wine consumption: stylish wine glasses, classical music and food that complements
the wine.

However, SV has recently faced intense competition and sales have fallen. Local wine producers
and overseas competitors have entered the market with similar market positioning. In order to
maintain its brand image, SV has not changed its pricing strategies.

SV conducted secondary market research about other possible markets in the US for its premium
wines. The research suggested that other possible markets for high-quality wines, such as those
of SV, exist. As a result, SV is considering two options to increase sales in addition to its current
distribution channel:
 Option 1: open a business-to-consumer (B2C) e-commerce store
 Option 2: sell SV wines to wholesalers serving the whole of the US market for premium wines.

(a) Describe one characteristic of a niche market. [2]

(b) With reference to SV, explain one advantage and one disadvantage of using
secondary market research. [4]

(c) Given the intense competition, explain two pricing strategies SV might consider. [4]

(d) Recommend which of Option 1 and Option 2 SV should consider in order to increase
sales. [10]

Turn over
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5. Gen Y Limited

Gen Y Limited is an internet start-up business owned by Zack Johnson. Zack owns 80 % of
the shares and venture capitalists own the other 20 %. Gen Y has specialist programmers and
coders who create innovative market research data reports for clients. These data reports have
revolutionized Gen Y ’s clients’ ability to understand and respond to customers in their markets.

To retain the best programmers, employees are given cognitive training and are empowered to
make decisions and take risks. They are also regularly praised for the impact that their reports
are having on their clients’ decision making. One day a week, employees can work on their own
“dream, but risky, projects”. Intrapreneurship is strongly encouraged at Gen Y. However, Gen Y
lacks the capital to develop some of these projects into future revenue streams.

Virtually all of Gen Y ’s costs are fixed – salaries. As of 2017, Gen Y has not yet generated a profit.
Without more revenue they will have to reduce the number of programmers. Petra, a new investor,
is being considered to provide fresh capital to invest in Gen Y. Ownership of Gen Y will change to:

Zack 40 %
Venture capitalists 20 %
Petra 40 %

Petra believes in intrapreneurship but is concerned that “dream” projects are not generating profits.
She has said that if she is going to invest in Gen Y two conditions must be met:
 Management at Gen Y will change to an autocratic leadership style.
 Programmers will be expected to meet sales targets.

As a result, programmers will have no autonomy.

(a) Outline two features of an autocratic leadership style. [2]

(b) Apply Daniel Pink’s motivation theory to the programmers at Gen Y. [6]

(c) Explain one reason, other than increased sales revenue, why it is important that
Gen Y generates new revenue streams. [2]

(d) Discuss whether Zack should sell Petra half of his shares with her conditions. [10]
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Section C

Answer one question from this section. The organizations featured in sections A and B and in the
paper 1 case study may not be used as a basis to your answer.

6. With reference to an organization of your choice, examine the impact of globalization on

innovation. [20]

7. With reference to an organization of your choice, examine the impact of ethics on

organizational strategy. [20]

8. With reference to an organization of your choice, discuss the ways in which culture can
promote or inhibit change. [20]