Business and Management Paper 2 HL Markscheme-4

N15/3/BUSMT/HP2/ENG/TZ0/XX/M
Markscheme
November 2015
Business and management
Higher level
Paper 2
34 pages
–2– N15/3/BUSMT/HP2/ENG/TZ0/XX/M
This markscheme is confidential and for the exclusive use

of examiners in this examination session.
It is the property of the International Baccalaureate and

must not be reproduced or distributed to any other person
without the authorization of the IB Assessment Centre.
The markbands on pages 3–4 should be used where indicated in the markscheme.
Section A Section B
Q1 Q2 Q3 Q4 Q5
Level descriptors
(f) (e) (d) (d) (d)
Marks 0–6
• No knowledge or understanding of relevant issues,
0 concepts and theories.
• No use of appropriate terminology.
• Little knowledge and understanding of relevant
issues, concepts and theories.
• Little use of appropriate terminology.
1–2
• No reference is made to the information in the
stimulus material. The response is mainly
theoretical.
• A description or partial analysis/examination with
relevant knowledge and/or understanding of
relevant issues, concepts and theories.
• Some use of appropriate terminology.
3–4
• Some reference is made to the information in the
stimulus material, not just to the name of the
organization.
• A balanced analysis/examination with accurate,
specific, well-detailed knowledge and understanding
of relevant issues, concepts and theories.
5–6 • An analysis/examination that uses appropriate
terminology throughout the response.
• Explicit references are made to the information in
the stimulus material.
Section B
Q3 Q4 Q5
Level descriptors
(e) (e) (e)
Marks 0–9
• No knowledge or understanding of relevant issues,
0
concepts and theories.
• No use of appropriate terminology.
• Little knowledge and understanding of relevant issues,
• Little use of appropriate terminology.
1–2
• No evidence of judgments and/or conclusions.
• No reference is made to the information in the stimulus
material.
• A description with some knowledge and/or
understanding of relevant issues, concepts and
theories.
• Some use of appropriate terminology.
3–4 • No evidence of judgments and/or conclusions.
• Some reference is made to the information in the
stimulus material, not just to the name of the
organization.
• The response is mainly theoretical.
• A response with relevant knowledge and
understanding of relevant issues, concepts and
theories.
• A response that uses relevant and appropriate
terminology.
5–7
• Evidence of judgments and/or conclusions that are
little more than unsubstantiated statements that has
balanced analysis and demonstrates understanding.
• Explicit references to the information in the stimulus
material are made at places in the response.
• A response with accurate, specific, well-detailed
knowledge and understanding of relevant issues,
• A response that uses appropriate terminology
competently throughout the response.
8–9
• A response that includes judgments and/or
conclusions that is well supported and underpinned by
a balanced analysis.
• Explicit references to the information in the stimulus
material are made throughout the response.
Section A
1. (a) Describe one advantage and one disadvantage, for Dan, of using primary
market research. [4]
Possible advantages for Dan of using primary market research include:

• Dan can collect first-hand responses based on tailor-made questions by
distributing questionnaires or interviewing some of his customers, in order to
discover their opinion on the various marketing mix especially the possible
pricing strategies. Dan found valuable information that the customers were
not willing to pay as high a price as before.
• Moreover, given the small size of the organization, the customers chosen are
likely to be a representative sample.
• The information collected is only available for Dan / EcoCycle. Competitors
have no access.
Accept any other relevant advantage.
Possible disadvantages for Dan of using primary market research include:

• Using / targeting his current customers as a sample, he might overlook
potential different, viable segments that might be interested in the different
bicycles he might be selling.
• Primary market research is likely to be more expensive and time consuming
for Dan as a sole trader than the use of secondary market research.
• Dan might not have the knowledge and the experience to design a good,
unbiased questionnaire or interview.
Accept any other relevant disadvantage.
Mark as 2+2.
Award [1] for identifying each appropriate advantage / disadvantage and [1] for
an appropriate and applicable description up to a maximum of [2].
(b) Using Table 1, calculate for Dan, for 2015:
(i) the break-even number of bicycles (show all your working); [2]
Fixed cost
Break-even point =
Contribution
$42 000
=
$1000 − $650 = $350
= 120 bicycles
N.B. Candidates may use a different method.
Award [1] for a correct answer and [1] for correct working. Award up to a
maximum of [2].
(ii) the total profit (show all your working). [2]
Profit = Total revenue – Total cost
= 130 × $1000 – ( $42 000 + $650 × 130 )
= $130 000 – $126 500
= $3500
N.B. Candidates may use a different method, eg contribution per unit x

margin of safety.
maximum of [2]. Award full marks even if the $ sign is not presented.
(c) Explain one benefit for Dan of the income elasticity of demand for his bicycles
being greater than one. [2]
If the income elasticity of demand for his bicycles is greater than one, it means for
Dan’s business that for every 1 % change in customers’ income, their response in
terms of spending on purchasing the bicycles is going to be larger than 1 %.
Practically, given that the economy is forecasted to grow and therefore people
will experience an increase in their income, for every 1 % increase in income,
there is going to be a more significant higher spending on Dan’s bicycles. Dan is
likely to benefit significantly through increased revenue and if costs remain the
same then also through increased profits.
Award [1] for a relevant and correct benefit for Dan of the consumer demand for
bicycles being income elastic identified and [1] for an explanation of this benefit
up to a maximum of [2]. Accept application of names – the correct explanation
should show understanding of the concept.
N.B. If the explanation is generic and not applied to Dan / the product bicycles /
EcoCycles award [1].
(d) Using Table 2, for the new EcoCycle bicycles, for 2016:
(i) Calculate the price that Dan must charge to earn a target profit of $20 000
(with sales of 200 EcoCycle bicycles) (show all your working); [2]
target profit + total cost

Price needed to reach a target rate of profit =
200 units
$20 000 + ( $65 000 + 200 units × $300 )
=
200 units
= $725 per EcoCycle bicycle
maximum of [2].
(ii) using your answer to part (i), and assuming that Dan reduces this price by
5 %, calculate the number of bicycles EcoCycle must sell to still have a
target profit of $20 000. [3]
A 5 % reduction of the price of $725 is $36.25
The new price is therefore: $725 – $36.25 = $688.75
The number of bicycles that must be sold to achieve the same level of profit:
Total revenue – Total cost = $20 000

$688.75X – ( $65 000 + $300X ) = $20 000
$688.75X – $65 000 – $300X = $20 000
$388.75X = $85 000
X = 218.65 to 2d.p
219 EcoCycle bicycles need to be sold to reach a target profit of $20 000.
N.B. Do not accept 218 bicycles as EC will not reach the target profit.
Award credit for a logical / clear method that results in a correct answer
even if there are no headings.
If the candidate rounded up the new price but the working is correct, award
a maximum of [2].
Accept any other method.
Allow candidate own figure rule (OFR).
Award [1] for the correct calculation of the reduced price.
Award [1] for the correct number of bicycles and [1] for correct working.
If no workings are shown, but the final answers are correct, award a maximum of [2].
(e) Explain two reasons why branding of the new EcoCycle bicycles will be
important. [4]
Moving away from GreenRide, and not really having much of a new USP,
Dan needs to brand EcoCycle. The market research clearly indicates that
currently the customers’ perception of the brand is somewhat different to what
Dan expected. Branding has a vital role in creating awareness of the EcoCycle
bicycles as well as the right positioning and perceptions supported by a USP /
some sort of differentiation. Successful branding could lead to more customer
loyalty. Hence, the availability of substitutes, like GreenRide, is reduced in their
minds. EcoCycle bicycle’s demand will increase, market share should also
increase and more revenue / profit is likely to be generated.
Strong branding will create barriers to entry for other bicycle producers. Some
potential competitors may be reluctant to enter the market. EcoCycle’s market
power may increase / increase in demand.
If Dan and David are able to create a strong brand image with the desired
positioning, the more price inelastic they will be to EcoCycle, hence less
responsive to possible increases in the price of the bicycles and be able to
tolerate a high (premium) price. The market research clearly indicates that
currently the customers’ perception of the brand is somewhat different to what
Dan perhaps expected and customers expect a reduction in the price of the
EcoCycle bicycles due to its untested nature. Correct and successful branding
should address this issue, hence more flexibility in setting a high price possibly in
the future to cover the costs and increase profit.
It is not expected that candidates will refer to price elasticity in their answers,
but they do have to show understanding of the current reluctance of the
customers to pay a high price.
N.B. Reward candidates that cover other relevant but different issues not just an
extension of the above points / issues.
Award [1–2] for a response that lacks some depth. For [1] the response may
only refer to one reason why branding is important to the new EcoCycle bicycles.
For [2], one reason is given in depth only and may refer to either only loyalty or
market power and or pricing implications.
Award [3–4] for a response that clearly explains the importance of branding for
the new EcoCycle bicycles. For [4], two reasons are explained and may refer to
building loyalty and the ability of Dan to charge in the future, higher than currently
expected prices / or increased market power. For [3], the explanation includes
two aspects, but it is unequal.
(f) Examine Dan’s decision to create a partnership with David to manufacture and
sell EcoCycle bicycles. [6]
Currently, as a sole trader Dan makes a very small amount of profit: $3500.
This amount is probably not sustainable hence; a solution has to be found.
Through a partnership with David, perhaps Dan can specialize in marketing while
David’s specialization clearly lies in the operation function of the business. Both
have complementary skills. One of the advantages of forming a partnership is
specialization of the partners and sharing the burden and responsibilities of
running the organization. Decision-making in this new business will be improved
due to shared skills / experience.
The increased capacity of the new business will enable Dan / EcoCycle to create
a strategic fit between internal strengths like good manufacturing of the bicycles
and the growth opportunities in the external environment.
It implies, that David will bring a considerable amount of assets and funds to
increase the capacity from 130 to 200 bicycles.
The increased capacity and different costs due to the partnership will indeed
enable Dan to charge a lower price of $725 or less which is around 25 %
reduction in price, which Dan discovered that he must do given the results of the
market research. A price reduction will make the business more customer
focused.
Profit will have to be shared but given quantitative results, the profit for Dan will
increase considerably in 2016, after the partnership has been establish. Even
after dividing the $20 000 between the two partners, Dan will have $10 000 profit,
much more than $3500.
The procedures of forming a partnership are minimal, short and not very
expensive. The partnership does not have to be approved by any legal body.
Financial documents of the business will not have to be published.
However, if the price is reduced due to the lower product positioning and current
customers’ brand perception, the business will not have the capacity to
manufacture and sell the 219 bicycles required to achieve the target profit of
$20 000.
Forming a partnership with David will not enable Dan to have limited liability.
The risk of losing his personal assets which will be larger than before, still exists.
Some disagreement between David and Dan might occur and the partnership
may have to be dissolved if they cannot reach an agreement. It will take some
time to see how well Dan and David can operate together before we can make a
judgment over whether the partnership will be a success.
Accept any other relevant and applicable argument for or against.
It is expected that the candidate goes beyond just a theoretical coverage of the
advantages and disadvantages of forming a partnership and incorporate / apply
perhaps some relevant financial information and other information / issues from
the stimulus material such as the issue of increased capacity and so on.
– 10 – N15/3/BUSMT/HP2/ENG/TZ0/XX/M
Candidates might not use specific figures, but relevant application to the issue of
forming a partnership for manufacturing the EcoCycle bicycles is expected.
Application should go beyond just mentioning the names.
It is not expected that the candidates covers all of the above issues.
For one relevant issue that is one-sided, award up to [3]. For more than one
relevant issue that is one-sided, award up to a maximum of [4].
For one relevant argument for and one relevant argument against award up
to [4].
For [5] it is expected that the examination is relevant and detailed, but it may
lack some balance. For example, it includes only two detailed arguments for
and one detailed argument against.
For [6] it is expected that the examination will contain at least two detailed
arguments for and at least two detailed arguments against Dan’s decision to
create a partnership with David to manufacture and sell EcoCycle bicycles.
Marks should be allocated according to the markbands on page 3.

2. (a) Describe one reason why customers might be reluctant to use an online booking
service (e-commerce). [2]
Possible reasons why customers might be reluctant to use an online booking

service (e-commerce) include:
• Security reasons: sometimes e-commerce is “hacked” and thieves steal credit
card numbers or money.
• Impersonal service: many customers find online booking services impersonal
or intimidating because they are not interacting with a human being.
• Lack of access: though this is less of a problem today, not everyone has easy
access to computers, or the internet, or has a computer and internet access
that can handle the most up-to-date software or applications, thus making
e-commerce difficult.
Accept any other relevant reason.
Award [1] for a correct identification of a reason and [1] for a relevant description.
Award up to a maximum of [2]. Application is not expected.
(b) Identify two features of a partnership. [2]
Possible features include:

• it’s an association between 2 to 20 partners
• partners do not have limited liability
• it is an unincorporated business.
Accept any other relevant feature.
Award [1] for each appropriate feature identified up to a maximum of [2].

(c) (i) Prepare a monthly cash-flow forecast, for BB, for the first six months of
operation. [6]
All figures are in $.
December January February March April 2016 May 2016

2015 2016 2016 2016
Sales revenue 11 000 11 000 11 000 1000 1000 1000
Total receipts
11 000 11 000 11 000 1000 1000 1000
Overheads 2000 2000 2000 2000 2000 2000
Leasing fee 5000 5000 5000
Variable costs
1500 1500 1500 300 300 300
Total
payments 8500 3500 8500 2300 7300 2300
Net cash flow 2500 7500 2500 –1300 –6300 –1300
Opening
balance 1000 3500 11 000 13 500 12 200 5900
Closing cash
balance 3500 11000 13500 12200 5900 4600
Accept slightly different headings / format.
N.B. Allow candidate own figure rule (OFR): if a candidate makes an error
in one row and carries it through the remainder of the forecast, that is only
one error. This provision includes both mathematical errors and conceptual
errors (for example, if a candidate has the leasing fee monthly rather than
every other month, it is one error) and candidates should only lose [1] for
that error.
Award [1] if the candidate conveys some understanding of what a cash-

flow forecast is, but otherwise the forecast is largely inaccurate, incomplete,
or illegible.
Award [2–3] if a cash-flow forecast is drawn, but either it is not in a

generally accepted format or it is untidy, and the forecast contains two or
more errors, which could include, in addition to number placement
problems and mathematical errors, conceptual errors (using the word
“profit” rather than “net cash flow”) or omissions, such as not having a line
like “closing balance”.
Award [4–5] if the cash-flow forecast is drawn essentially correctly and

neatly in a generally accepted format, but there is one error for [5] or two
errors for [4].
Award [6] if the cash-flow forecast is drawn accurately and neatly in a

generally accepted format, and is error free. Substituting the term “net
profit” in the cash-flow forecast for “net cash flow” is inaccurate.
If the candidate has only one row for all cash outflows, subtract [1]
from the total mark awarded.
(ii) Explain BB’s forecasted cash-flow position. [3]
Although the cash balance is positive at the end of six months, the monthly
net cash flows are only positive in the first 3 months. If the figures for
remaining low-season months (June through November) continue, BB’s
cash balance would be negative by the end of month 7 (June) and, by the
opening of high season next summer, the cash balance would be
−$18 200, far greater than the cumulative positive balances for the 3 peak
months. The cash-flow forecast shows that the current business model is
not sustainable.
Award [1] for an accurate basic description.

Award an additional [1] for an explanation that incorporates some reference
to specific figures, which could be actual numbers or references to a
specific row in specific time periods (“net cash flows in December, January,
and February”) is a specific reference to actual numbers, even if numbers
are not present in the text, whereas “In the seasons that they do not rent as
much, the cash inflows do not sustain their cash outflows” is not a specific
reference to specific numbers).
Award [1] if the candidate recognizes that the business will have a deficit or
cash-flow problems in the months to come.
N.B. A candidate could produce a response that earns [1] for a basic
description and [1] for recognizing a deficit in months to come for a total of
[2], even though the candidate did not have specific reference to numbers.
(iii) Calculate the forecasted net profit, without any depreciation, for the first
six months of operation (show all your working). [2]
Method 1
Profit = sales revenue – total costs
Sales revenue = 11000 × 3 +1000 × 3 = $36 000
Total costs = overheads + variable costs + leasing fee

Total costs = 2000 × 6 + 1500 × 3 + 300 × 3 + 5000 × 3
= 12000 + 4500 + 900 + 15 000 = $32 400
Forecasted net profit = 36 000 – 32 400= $3600
Method 2 (allow OFR)
Closing balance in May – opening balance in December

= 4600 – 1000 = $3600
Award [1] for correct working and [1] for the correct answer. Award up to a
maximum of [2].
A candidate may calculate monthly profit for all six months such as:
All figures in $
December January February March April May

Revenue 11 000 11 000 11 000 1000 1000 1000
Expenses 8500 3500 8500 2300 7300 2300
Net profit 2500 7500 2500 −1300 −6300 −1300
This approach is acceptable, even if a total for all six months is not
produced. Award [1] for working and [1] for the correct answer (all six
months correct, though OFR does apply). Award up to a maximum of [2].
(d) In June 2016, BB discovered that some of their forecasts had been inaccurate.
For December 2015, and January and February 2016, variable costs had been
10 % lower than forecasted.
(i) Calculate the impact of lower variable costs on BB’s closing cash balance,
at the end of February 2016 (show all your working). [2]
Variable cost (VC) = 1500
10% lower VC = 1500× 0.9 = 1350 per month
VC should be $150 lower per month
150 x 3 = 450 saving from December 2015 to February 2016
$13 500 closing balance at end of February + 450 = $13 950
Award [1] for correct working and [1] for a correct answer. Award up to a
maximum of [2].
(ii) For March, April and May 2016, revenue was 10 % higher.
Calculate the impact of lower variable costs and higher revenue on BB’s
closing cash balance, at the end of May 2016 (show all your working). [2]
Method 1
10% = $100 increase in total revenue per month x 3 = $300 in total
The closing balance in May 2016 has an improvement of $5350:

4600 + 450 (lower VC Dec to Feb) + 300 (higher revenue Mar to May)
= $5350 closing balance for May
Method 2
Calculating the new variable costs based on 10% reduction = 100: the first
calculation.
Multiply by 3 to arrive to the total reduction of 300: second calculation.
Add to the closing balance at the end of May: third calculation.
Transfer the 450 reduction to the closing balance at the end of May, or use
closing balance of 13 950 at the end of February.
Add the figures together / the saving together of 750 to arrive at the final
closing figure of $5350 at the end of May: (4600 + 750 = 5350).
Accept any other correct working.
Award [1] for correct working and [1] for a correct answer. Award up to a
maximum of [2].
(e) Analyse the role of budgets and variances, in strategic planning, for businesses
such as BB. [6]
Budgets are an important planning tool for businesses, as they are based upon
forecasted revenues and costs, thus providing a business such as BB a
framework as part of its strategic planning. It translates objectives and strategies
/ financial discipline.
A budget is essentially a tool for resource allocation as part of a strategic

planning.
Budgets provides financial direction / discipline for a business / BB. Managers

such as Nicolás and Loura know to limit expenditures to remain within their
allocated resources and to ensure that the forecasted revenue are also met.
However, the process of budgeting is time consuming especially for Nicolás and
Loura as both are inexperienced. Still, given the small size of the business, one
may argue that the process can be quick and relatively efficient.
Budgets, especially if negotiated rather than imposed, can create a sense of

clarity / direction, unity, and if adhered to / achieved, sense of achievement to
BB’s employees.
However, budgets are a form of forecast. Actual revenue or expenditure can

differ due to internal and external circumstances.
For this reason, analysing variances, or instances when revenue or expenditures

differed from the budget can be helpful. If a business can understand why
particular expenses or revenues were higher or lower than budgets, in
subsequent periods, budgets can be adjusted depending on the reasons why a
variance occurred, allowing for better decision-making about allocation of
resources.
Budgets can create resentment and demotivation among BB employees,

especially if unrealistic high targets for revenue and low targets for expenditure
are set. There may also be some disagreement between Nicolás and Loura
especially as they lack experience. Unhealthy competition may occur.
Moreover, analysing variances can also take up time and resources. The
partners of BB, who are essentially the decision makers, can be biased in their
interpretation of the variances. They may have to employ an accountant or
outside person to give them a more objective view of the performance of the
business.
Accept any other relevant analysis.
It is not expected that the candidates covers all of the above issues.
Do not credit an answer that refers to different sources of finance to deal with the
forecasted / budgeted cash flow problems.
It is expected that candidates refer to: the issue of strategic planning; budgets
and not just cash flow.
Since there are two issues / concepts to analyse, one argument for and one
argument against each (budgets and variances) should be judged as a balance
response.
Accept generic application as there is not much specified in the stimulus.

A balance response of one concept / issue, award up to [4].
For [5] it is expected that the analysis is relevant and detailed, but it may lack
some balance. For example, it includes only two detailed arguments for and
one detailed argument against.
For [6] it is expected that the analysis will contain at least two detailed arguments
for and at least two detailed arguments against budgets and variances, in
strategic planning, for businesses such as BB.

Section B
3. (a) Identify two characteristics of a company with a high degree of centralization. [2]
Characteristics include:
• decision-making being made by a small number of directors/managers/owners
• limited, if any, two-way communication between levels of hierarchy.
Accept any other relevant characteristic.
Award [1] for each characteristic correctly identified. Up to a maximum of [2].
(b) Describe one benefit of an employee share-ownership scheme. [2]
Possible benefits to employees of an employee share-ownership scheme include:

• financial gain in the form of dividends or capital gain
• as shareholders, they will have the right to vote at the AGM and approve,
or otherwise, the strategic decision of the board of directors.
Possible benefits to Transfer of an employee share-ownership scheme include:

• increased motivation of staff and hence productivity improvements
• a reduction in waste and an acceptance of the mission statement
• staff turnover will be lower, if motivated, leading to reduced induction, training
and recruitment costs.
N.B. The benefit of an employee share-ownership scheme could be in the

context of the employee and/or the employer.
Award [1] for a relevant benefit identified and [1] for a description of this benefit.
Up to a maximum of [2].
(c) Explain one benefit and one cost of Transfer’s mission statement. [6]
A mission statement is designed to guide the current objectives and operations of

Transfer. Managers, customers, will be attracted to Transfer for its excellent
customer service and commitment to satisfying needs whatever the cost.
This could be a possible USP within the shipping industry, in an era of increased
global competition.
Maintaining their quality benchmark of a first class business, in a first class way,
through the mission statement can provide a sense of direction and can be
motivating for the workers. There is evidence in the stimulus that the workers are
motivated and the staff turnover is very low.
However, the mission statement can be a problem for Transfer given that the firm
has experienced a significant financial loss. “First class service” may have an
expensive cost aspect as the stimulus reveals. “Whatever it takes”, implies
further that Transfer will carry out its service regardless of the impact on
profitability and this may be unwise. The mission statement may be seen as
unrealistic and too ambitious for different stakeholders to believe in it.
The mission statement represents a noble if costly exercise, which it would

appear that Transfer does not have the financial resources to honour.
Accept any other relevant issue.
N.B. Candidates may refer to some benefits to different stakeholders.
N.B. Application could relate not just to repeating the statement, but to the
consequences.
Mark as 3+3.
Award [1] for identification of the relevant benefit / cost, [1] for a clear explanation
and [1] for full application to Transfer and not just the name of the business.
Award a maximum of [3].
(d) Examine the decision to remove all profit centres. [6]
Possible arguments against:

Transfer’s success has been built on regional profit centres with empowerment
for local managers. By removing profit centres the accountability of each
centre in different regions will be removed. Staff will be less motivated as
decision-making power that goes with profit centres will disappear. Constructive
competition between the regions may also be eroded. Overall, Transfer’s quality
may be reduced as the link to profit sharing has gone and the mission statement
and the consequent objectives may not be fulfilled. It might be harder for Heather
to monitor performance of individual parts of Transfer. Removing profit centres is
risky given that employees own 40% of the organization. The link to profit
sharing has gone which could be demotivating.
However, there is evidence from the stimulus that profit centres are not providing
the competitive edge that Transfer’s mission statement would suggest. Costs are
rising and increasing global competition will drive down revenues.
Moreover, the managers did not follow the mission statement and set their own
objectives. Hence centralization will align all regions with Transfer’s objectives.
Consistency will be created. Transfer could avoid duplication of resources by
removing the profit centres and perhaps reach purchasing / promotion /
managerial economies of scale which is very essential now that a loss is being
made. Cost cutting is a must.
The move to centralization will increase efficiency and improve communication.

Moreover, monitoring and compiling profit centre data can be time consuming
and expensive for Transfer. The move to remove all profit centres and increase
centralization would fit more closely with Heather’s leadership style and may
have pleased the other shareholders.
Accept any other relevant examination.
N.B. It is not expected that candidates incorporate all of the above points/issues.
Do not highly credit candidates that show no evidence of understanding of the

meaning / the nature of profit centres, but refer to a decision to remove regional
production. The assumption, based on the stimulus, is that the regional centres
remain.
to [4].
For [5] it is expected that the examination is relevant and detailed, but it may
lack some balance. For example, it includes only two detailed arguments for
and one detailed argument against.
For [6] candidates must give a balanced examination of two possible arguments
for and two possible arguments against the decision to remove all profit centres.

(e) Discuss the effectiveness of Heather’s leadership style at Transfer. [9]
From a financial point of view, given the increase in profits and share price,
Heather’s leadership style could be considered to be a success. Non-employee
shareholders who voted for the changes at the AGM will clearly be very pleased.
The stimulus indicates that the previous organizational structure was too
bureaucratic with empowerment and a resistance to change despite the poor
industry performance leading to the dramatic financial loss. The empowerment
factor may have led to some managers underestimating the extent of Transfer’s
financial difficulties and to set new objectives without considering the financial
implications. Too much emphasis was put on customer service, but with a
decrease in productivity.
The turnaround in Transfer’s performance occurred within six months. This is a

very rapid and significant improvement given the performance of previous years.
However, one may argue that the short-term success is indeed impressive but
may not last in the medium and long term when employees and managers will
fear her and resent the new culture of Transfer. Low level of motivation, potential
high staff turnover may create a real problem for Transfer. An autocratic leader
who will do “whatever it takes” to return Transfer to profitability may severely
affect motivation.
Recruitment of new employees may be difficult when Transfer expand and need
more staff. Customers may also choose competitors due to rumours of the
threats to the employees and Heather’s leadership style. Negative publicity from
a newspaper article is already evident.
Heather’s leadership style may conflict with the mission statement of the
company (although this may be what she intends to happen) and may lead to
industrial action and further unrest, but more importantly to the loss of its USP.
However, the stimulus refers to Heather’s past in turning other companies
around. This might suggest that her tenure is only likely to be short term anyway,
perhaps to be followed by a more paternalistic leadership style.
Possible judgment:
The stimulus indicates that Transfer needed to change after a number of years of
less than satisfactory performance. Centralization and a reduction in
communication may speed up decision making at Transfer and there seems to be
a need for increased productivity. Heather’s changes has quickened the
recovery and was financially successful.
However, effectiveness cannot be judged on quantitative issues only.

Given the change, it could lead to long term qualitative problems, perhaps the
change has been too dramatic and perhaps a paternalistic leadership style
should have been adopted, or perhaps not all of her suggestions should have
been implemented at once, but introduced more incrementally.
Heather’s changes may have been successful financially in the short run, but we
must question whether they will continue to be so over the longer term.
Accept any substantiated discussion.
N.B. It is not expected that the candidates incorporate all of the above
points/issues.
A balanced response is one that covers at least two issues for and at least two
issues against.
For one relevant issue that is one-sided, award up to [3]. If the response is a
one-sided relevant approach with no discussion award a maximum of [4].
Award a maximum of [5] if the answer is of a standard that shows balanced

analysis and understanding throughout the response with reference to the
stimulus material but there is no judgment / conclusion.
Candidates cannot reach the [5–7] markband if they give judgment/conclusions

that are not based on analysis/explanation already given in their answer.

4. (a) Describe one difference between a merger and a takeover. [2]
The difference between a merger and a takeover is that a merger is largely done
in a friendly or voluntary manner. The managements and the shareholders of
both companies agree to bring both firms together under a common board of
directors and create one new legal entity.
In contrast a takeover is commonly hostile or involuntary.
For one company to takeover / take control of another company, the majority of
shares has to be bought by the bidder, usually 51 %. (It can be less.)
N.B. The difference does not have to be based on being hostile or not as a
takeover can also be friendly. The candidates need to show understanding of the
need to buy shares to gain control for a takeover for full marks.
Candidates are not expected to word their description exactly as above.
Award [1] for a basic description that conveys partial knowledge and
understanding of either a merger or a takeover.
Award [2] for a full, clear description that conveys knowledge and understanding
similar to the answer above.
(b) Define the term economies of scale. [2]
Economies of scale are the factors that cause a reduction in average costs / cost
per unit as the organization increases the scale of production.
Award [1] if the candidate refers just to the growth of an organization rather than
to the scale of production.
Candidates are not expected to word their definition exactly as above.
Award [1] for a basic definition that conveys partial knowledge and
understanding.
Award [2] for a full, clear definition that conveys knowledge and understanding
similar to the answer above.
For only a relevant: example or application to the stimulus award [1].

(c) With reference to the airline industry, explain two differences between external
growth and internal growth. [6]
Internal growth within the airline industry occurs when the airline itself grows
organically by using its own resources to increase its scale of operation /
increasing revenue and market share. Typically through investment in more
aircrafts, new routes/destinations (or as stated in the stimulus more travel
options), by targeting new passenger segments / different classes, heavy
promotion, changes and its pricing strategies – to name some examples.
Internal growth will allow each individual airline to maintain full ownership / control
of the process in terms of expenditure and speed. Internal growth is often a
cheaper strategic option than external.
External growth within the airline industry occurs with interaction / involvement of
other airline(s) typically through mergers, acquisition, joint ventures or a strategic
alliance. The stimulus provides examples of friendly mergers between American
airlines as well as between two European airlines on top of the current proposed
takeover (hostile) of Aer Lingus by Ryanair.
External growth will give an airline a faster growth option while reducing
competition in the market. American is now the biggest carrier in the US.
External growth is an expensive option. The proposed takeover of Aer Lingus will
cost Ryanair £560 million.
Accept any other relevant and applicable difference.
Mark as 3+3.
Award [1] for identifying each appropriate difference between the two methods of
growth, [1] for an appropriate explanation and [1] for a further development of
this explanation with reference to the airline industry. Award a maximum of [3].
Award a maximum of [2] for each difference explained if no relevant reference is

made to the stimulus material / airline industry.
(d) Examine the Irish government’s decision to own 25 % of the shares of

Aer Lingus. [6]
One possible reason for the Irish government’s decision to own 25 % of shares
in Aer Lingus is to raise revenue in the form of dividends from the profit of a
commercial airline. Owning 25 % of a commercial airline that can generate profit
can give the Irish government a substantial sum of money. The Irish government
needs revenue to peruse its economic objectives. Dividends shared among all
shareholders is one source of revenue. In short, a profit / commercial motive.
However, it is implied in the stimulus that such an expected profit motive /

commercial interest was perhaps not a good decision as profit / dividends has not
been materialized as yet for the Irish government. Only by selling its shares will
the Irish government get its first commercial return.
Another possible reason / positive benefit is to make a capital gain by selling its
shares when the government sees fit. It is stated in the stimulus that the Irish
government will make a positive return by selling its shares in Aer Lingus.
Hence, a commercial success.
However, some citizens and competitors may argue that the decision to buy
shares in an airline and waiting for some positive return for such a long time is a
waste of tax payers’ money. The money could have been spent on perhaps
more worthwhile provisions by the government.
Furthermore, some critics may argue that this decision reduced the incentive for
Aer Lingus to be a commercial success.
Still, national pride of being part owner of a national airline can be seen as
another possible reason. The Irish government might have a strong national
interest of enabling an Irish airline to compete with other airlines by providing the
funds for investment. There may be significant longer term benefits and future
dividends and returns from having an interest in an airline which is able to
generate longer term growth through being more competitive.
Candidates may mention security / political reasons and any other relevant
reason.
Accept any relevant arguments for and against.
N.B. It is not expected that the candidates incorporate all of the above
points/issues.
to [4].
some balance. For example, it includes only two detailed arguments for and
one detailed argument against.
For [6] candidates must give a balanced examination of two possible arguments
for and two possible arguments against the Irish government’s decision to own
25% of the shares of Aer Lingus.

(e) With reference to one internal stakeholder and one external stakeholder, discuss
the statement that “larger is not always better” from the perspective of the airline
industry. [9]
Candidates should look at the issue from two perspectives: Internal, such as from
the employees / managers, or any relevant internal stakeholders’ point of view.
They should also look at the issues from an external stakeholders’ point of view
such as passengers / customers (see below).
From the customers / passengers point of view:
On the positive side, as indicated in the stimulus, a larger company like American
can experience different economies of scale that can benefit the passengers:
• financial economies of scale – a larger airline could raise more finance
cheaply to buy new and more comfortable aircraft(s)
• technical economies of scale will enable a larger airline to become more
efficient by reducing operating costs per flight, hence the price of a ticket can
be reduced.
Analysts suggest that a merger in order to grow will enable the new airline to
rationalize and create a possible small monopoly/domination on some routes as
well as create some economies of scales, such as operation and purchasing.
The new airline is likely to be more cost efficient which is a significant argument
especially in the short run given the amount of current losses.
Consequently, customers may experience some price reduction as well as a

more comfortable and possibly safer aircraft.
However, given the large size and the larger market share (combined) and the
suggested small monopoly/domination, it is unlikely that the prices will be
reduced, especially if the bargaining power of the airline is likely to increase.
Customers may end up with less choice, a poorer service and higher prices
imposed by a large airline that monopolizes the market. The stimulus makes a
reference to such a possibility.
Other possible internal stakeholders:
Larger airlines such as the newly created American, is likely to be more cost
efficient which is a significant benefit for the operation manager / employees as
well as the finance manager. Efficiency due to size with subsequent lower costs
and increased profit can significantly increase the motivation of managers and
employees. Moreover, a rewards system might be based on such performance.
Managers’ objectives for increased power / self-satisfaction of managing a large

number of employees may also increase.
On the other hand, one may argue that working for a large airline like the creation
of American, the US biggest airline, will reduce employees’ motivation given
some possible lack of contact with managers and from feeling like a small and
insignificant part of a very large group of employees. Customer service, which is
an extremely significant issue in a service industry (people, process) might be
negatively affected.
Communication barriers may be erected in a large organization which may affect

each and every employee negatively.
Internal diseconomies of scale may be created due to the large size which can
negatively affect all employees and managers’ morale and competencies.
External stakeholders such as competitors and or regulatory bodies.
Competitors:
Being a large airline might be seen by the organization strategists as a necessary

action to an increase in global competitiveness of other airline groups like AIG,
KLM / Air France etc and many others yet to be faced in the growing global
market place.
However, being large might not be sufficient / appropriate to create customer

values and global competitiveness which is currently the main problem of the
large airlines. Cost efficiency will not solve these deficiencies, hence, a larger
airline is unlikely to be successful especially if competitors follow suit. It will
become increasingly difficult to create a USP apart from perhaps location or
destinations. There is evidence from the stimulus that there are a number of
mergers / takeovers.
Regulatory bodies:
Also larger airlines are more likely to catch the attention of the American MMC or
any national regulatory body. A reference to such a possibility is also mentioned
in the stimulus. These bodies are likely to put some restrictions on the operation
of the newly created large airline or any other established large airline.
Restrictions may be put on the top management team and decision making in
terms of routes, landing slots, pricing etc. Management freedom may be
reduced. Moreover, finance managers may spend a large sum of money on legal
battles / procedures.
Accept any other relevant and applicable argument for or against the notion of
being large is not always better from the perspective of any relevant internal or
external stakeholder.
In conclusion, one should not undermine the benefits of being a large airline and
the possibilities of reducing costs, increasing prices and hence increasing profit
and cash flow. The profit can potentially be invested in improving customer
service in the medium to longer term, done from a stronger financial position.
However, management at large airlines should be aware of possible inefficiencies
in the extra 3Ps as well as other diseconomies of scale and the inevitable interest
which being large will develop from competitors. Nevertheless, it appears that
merger and acquisitions are the prevailing trend in the airline industry and many
airlines use these strategy even as a defensive measure. The evidence in the
stimulus clearly demonstrate this point whereas the notion that larger may not
always be better perhaps more theoretical / suggested by analysts and hence of
lesser weight.
However, one cannot accept the notion that larger is not always better.
Candidates are expected to use the airline industry as an example and to

comment on the merit or otherwise of their arguments. Other stakeholders could
be considered.
Accept any substantiated discussion.
N.B. It is not expected that the candidate incorporates all of the above
points/issues.
A balanced response is one that covers at least two issues for and at least two
issues against.
In this case, as discussion in relation to two stakeholders is expected, one

argument for and one argument against for each stakeholder is sufficient.
Candidates can provide a balance response comparing and contrasting the
effects on different stakeholders, eg, positive effects on customers but negative
effects on employees, but at least two arguments for and two arguments against
for balance.
If there is no classification of the stakeholders in term of internal / external award

up to a maximum of [7].

stimulus material but there is no judgment / conclusion, or the there is only
reference to either one internal stakeholder (balanced analysis) or one external
stakeholders (balanced analysis with a judgment).


5. (a) Describe one reason for the importance of innovation for SP. [2]
The stimulus indicates that the combination of shorter product life cycles for
online games due to a rapidly changing technological and competitive
environment implies that in order to remain viable and retain its market leader
status, SP will need to keep innovating. It also takes at least three years for a
computer game to be introduced to the market so this innovation should be
ongoing.
N.B. Direct application to SP is not required, but some understanding of the

nature of the industry is.
Award [1] for identification of the importance of innovation with an additional [1]
for a description. Award a maximum of [2].
(b) Identify the first two stages of the product life cycle. [2]
The first two stages of the product life cycle (PLC) are traditionally:
• introduction
• growth.
N.B. Accept “development then introduction” as some textbooks refer to the

former as the starting point of the PLC.
Accept “launch”.
Award [1] per stage identified up to a maximum of [2].

(c) Explain one benefit and one cost of family branding for SP. [6]
Family or umbrella branding occurs when a business uses the same brand name
for a range of products. SP as it is the market leader, will brand new games with
the same established family name and perhaps with a SP logo to reassure
customers that they belong and are associated to SP.
Family branding allows for SP to save funds with brand development of new
products and allow for some marketing economies of scale – unit costs of
advertising, as SP’s advertising expenditure such as above the line could be
spread over a number of products/games.
The use of family branding for the new products in the same industry will create
immediate recognition. Brand loyalty can be transferred from Sigma Starfighter 1
to the new products of Sigma Starfighter 2 as well as to the new app.
However, the major cost of family branding is that with a brand stretched over a
number of products in this case the new app as well as Sigma Starfighter 2,
the possibility arises that if one product/game that SP produces for some reasons
fails to live up to expectations, or has an even shorter product life cycle than rival
product/game(s), the whole SP family brand could be tarnished affecting current
and future brand development in the minds of customers. The new mobile phone
app is something that SP has not tried before, hence the increased level of risk of
brand erosion / extended negative brand image.
It is expected that a specific reference is made either to the app and/or Sigma
Starfighter 1 and/or 2, not just to “the games”.
Mark as 3+3.
Award [1] for identifying / describing each appropriate benefit/cost of family

branding, [1] for an appropriate / further explanation and [1] for application to SP.
Award a maximum of [3].
If the answer makes reference only to branding and not family branding, but is in
context to SP then award a maximum of [4], [2+2].
(d) Analyse the appropriateness of penetration pricing for SP when they launch
Sigma Starfighter 2. [6]
Penetration pricing may be appropriate for SP because:
Given the competitive nature of the online market, penetration pricing may allow
SP to capture and increase its market share. SP may not have a choice but to
use a competition-based pricing strategy regardless of the nature of the
innovative product. Given the short-term cash flow difficulties, SP’s current cash
flow is weak therefore, it may be possible that SP decided to use price
penetration to attract customers and generate immediate cash, even if it does not
cover the R&D.
But
Innovative products normally command price skimming, in order to cover the high
costs of R&D of Sigma Starfighter 2, especially when the product life cycle tends
to be short due to improved technology as well as a strong chance that the
competition will come up with a new and possibly more exciting / innovating
game(s). It does say in the stimulus that the technological and competitive
environment is changing rapidly, hence SP should ensure that profit is generated
at the early stage of its innovative product.
SP’s decision will anger some of their investors from putting its future innovation
and longer-term projects in jeopardy as there are no guarantees that penetration
pricing will lead to an increase in profits. This is an important source of finance
for SP.
Penetration pricing may lead to a “race to the bottom” if competitors follow suit
and this may again impact on the future cash flows / profits for SP, further
threatening their opportunities for innovation.
There may be quality concerns if the market perceives that the price of the new
game is “too low”.
Accept any other relevant analysis.
N.B. It is not expected that candidates incorporate all of the above points/issues.
to [4].
some balance. For example, it includes only two detailed arguments for and one
detailed argument against.
For [6] candidates must give a balanced analysis of two possible arguments for
and two possible arguments against the use of penetration pricing for SP when
they launch Sigma Starfighter 2.

(e) Discuss two problems of financing research and development (R&D) for a
business such as SP. [9]
One has to assume that R&D in such an innovative industry is frequent /

continual and expansive. Hence a significant and frequent amount of finance is
needed for SP to develop its products.
One also has to bear in mind that due to some cash-flow problems SP might not
have enough cash to inject, which also indicates the need to raise large funds.
The stimulus clearly demonstrates that SP is operating within a competitive

marketplace. There will be other businesses in the same industry who will also
be looking for investment finance, hence competition.
However, due to its market leader position / brand image etc, some external
sources of finance like business angels / venture capitalist etc might be willing to
invest.
The other problem is that the time taken – three years – to bring creative
innovative ideas to the market may mean that investors become impatient. There
is a considerable amount of risk which will need to be experienced by investors.
There is also the issue that within a rapidly changing technological market, the
three-year time lag may be too long. A game may be out of date before it is
released. Investors may have to accept lower returns.
Also, SP is looking to give away an app for free. Some potential investors may
be concerned with this idea. Payback periods (if at all) will be much longer.
SP will need to spend time and resources convincing potential investors that
short-term losses will be offset by longer-term profits when the app begins to add
value. Risk averse investors who are not aware of “freemium” type services may
be further reluctant to invest.
However, there might be risk-taking investors, again, like venture capitalists,

who might be attracted by the new app and the general direction taken by SP
despite some short-term difficulties. These investors might be willing to accept
long-term returns on innovative products of the current market leader.
Moreover, as SP operates online, the search for a global investor is possible.
On a more general issue, SP appears to be unincorporated and this severely

limits access to most forms of finance for R&D and many game firms can
operate with a very small asset base and hence they will have very little security
for loans for R&D.
Despite a weak cash flow, some potential investors may see this new app as a
way for SP to confirm themselves as the market leader. Sigma Starfighter 2 has
the potential to be very popular financially and this could have significant benefits
for Sigma Starfighter 1 and other products under the family brand which is very
strong. Profits could grow reducing the reliance on external sources of finance
allowing greater creativity and innovation in the future.
Possible judgment:
Perhaps one may judge the current problem of raising finance as a short-term
problem only, hence not a very significant one. Given the successful past and
the possible future success of the new app and Sigma Starfighter 2, in the
medium-term, if the two products are successful, more cash and profit will be
generated to finance future R&D. Moreover, many other potential sources of
finance can be available as well, possibly through the use of price skimming
rather than penetration in the short run.
Accept any other relevant discussion.
N.B. Accept any relevant argument for and against the problems of financing
R&D for SP and other similar businesses in this industry.
N.B. It is not expected that the candidate evaluates different sources of finance
available for SP.
A balance response covers at least two arguments for and at least two
arguments against.

stimulus material but there is no judgment / conclusion.
Or if the candidate only discusses one problem in financing R&D for businesses
such as SP. The one problem for example may only refer to attitudes to risk.


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N15/3/BUSMT/HP2/ENG/TZ0/XX/M

Business and management

This markscheme is confidential and for the exclusive use

It is the property of the International Baccalaureate and

Possible advantages for Dan of using primary market research include:

Accept any other relevant advantage.

Possible disadvantages for Dan of using primary market research include:

Accept any other relevant disadvantage.

(b) Using Table 1, calculate for Dan, for 2015:

N.B. Candidates may use a different method.

(ii) the total profit (show all your working). [2]

Profit = Total revenue – Total cost

= 130 × $1000 – ( $42 000 + $650 × 130 )

= $130 000 – $126 500

N.B. Candidates may use a different method, eg contribution per unit x

target profit + total cost

= $725 per EcoCycle bicycle

A 5 % reduction of the price of $725 is $36.25

The new price is therefore: $725 – $36.25 = $688.75

Total revenue – Total cost = $20 000

Accept any other method.

Allow candidate own figure rule (OFR).

Award [1] for the correct calculation of the reduced price.

Accept any other relevant and applicable argument for or against.

Allow candidate own figure rule (OFR).

Marks should be allocated according to the markbands on page 3.

Possible reasons why customers might be reluctant to use an online booking

Accept any other relevant reason.

(b) Identify two features of a partnership. [2]

Possible features include:

Accept any other relevant feature.

Award [1] for each appropriate feature identified up to a maximum of [2].

All figures are in $.

December January February March April 2016 May 2016

Accept slightly different headings / format.

Award [1] if the candidate conveys some understanding of what a cash-

Award [2–3] if a cash-flow forecast is drawn, but either it is not in a

Award [4–5] if the cash-flow forecast is drawn essentially correctly and

Award [6] if the cash-flow forecast is drawn accurately and neatly in a

(ii) Explain BB’s forecasted cash-flow position. [3]

Allow candidate own figure rule (OFR).

Award [1] for an accurate basic description.

Profit = sales revenue – total costs

Sales revenue = 11000 × 3 +1000 × 3 = $36 000

Total costs = overheads + variable costs + leasing fee

Method 2 (allow OFR)

Closing balance in May – opening balance in December

December January February March April May

Variable cost (VC) = 1500

10% lower VC = 1500× 0.9 = 1350 per month

VC should be $150 lower per month

150 x 3 = 450 saving from December 2015 to February 2016

$13 500 closing balance at end of February + 450 = $13 950

Allow candidate own figure rule (OFR).

10% = $100 increase in total revenue per month x 3 = $300 in total

The closing balance in May 2016 has an improvement of $5350:

Accept any other correct working.

Allow candidate own figure rule (OFR).

A budget is essentially a tool for resource allocation as part of a strategic

Budgets provides financial direction / discipline for a business / BB. Managers

Budgets, especially if negotiated rather than imposed, can create a sense of

However, budgets are a form of forecast. Actual revenue or expenditure can

For this reason, analysing variances, or instances when revenue or expenditures