Bus Man SL Bep

–3– M11/3/BUSMT/SP2/ENG/TZ0/XX
SECTION A
Answer one question from this section.
1. Informatic
Informatic manufactures computers and is based in Sri Lanka. Informatic uses a method of
batch production and manufactures batches of computers according to customer specifications
such as computer speed and screen size. Production workers are paid by the hour but receive a
lower than average wage for Sri Lanka. To compensate they are offered long-term job security and
other non-financial rewards.
Informatic exports 4000 computers a year to Pakistan using local independent distributors who
have knowledge of the local market as well as experience in delivering and installing computers.
90 % of Informatic’s sales are organized through such distribution channels. Because using local
independent distributors increases the final price of the computer to the customer, senior managers
have decided to offer customers in Pakistan the opportunity to purchase computers directly from
Informatic. Customers have to telephone orders to Informatic in Sri Lanka from Pakistan because
e-commerce sales are not available.
The following are Informatic’s expense and sales price figures:

• fixed costs of $100 000 per year
• variable costs of 80 % of the sales price
• sales price of $1000 per computer.
(a) (i) Define the term batch production. [2 marks]
(ii) Identify two fixed costs for Informatic. [2 marks]
(b) For Informatic:
(i) calculate the break-even quantity in units (show all your working). [2 marks]
(ii) calculate the margin of safety in units (show all your working). [2 marks]
(iii) calculate the net profit if 4000 computers are sold (show all your working). [2 marks]
(iv) prepare a fully labelled break-even chart. [5 marks]
(c) Examine the effectiveness of the new distribution channel for Informatic. [5 marks]
2211-5014 Turn over

–5– M11/3/BUSMT/SP2/ENG/TZ0/XX/M
SECTION A
1. (a) (i) Define the term batch production. [2 marks]
In batch production, items are produced in consignments and undergo a

stage of the production process together. The whole consignment is then
moved on to the next stage of production and another task is performed.
Candidates are not expected to word their definition exactly as above.
Award [1 mark] for a basic definition that conveys partial knowledge and
understanding.
Award [2 marks] 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 mark].
(ii) Identify two fixed costs for Informatic. [2 marks]
For Informatic fixed costs could include:

• rent of the premises
• insurance of machinery
• salary for managers
• accept any other relevant fixed cost for Informatic.
If a candidate refers to “cost of workers” or “workers’ salaries,” the

candidate must make clear that the employees referred to are (a) salaried
(not earning wages) and (b) “permanent” (short of some financial or other
disaster). In other words, if the candidate says workers’ salaries / cost of
workers, the presumption is that these costs are variable (not fixed) unless
the candidate fully and clearly explains that they are fixed.
Also, distribution costs, unless otherwise appropriately explained, are

variable, not fixed.
Award [1 mark] for each correct and relevant fixed cost identified up to a
maximum of [2 marks].
(b) For Informatic:
(i) calculate the break-even quantity in units (show all your working). [2 marks]
Fixed Costs = $100 000
To calculate contribution we need variable costs per unit. They are

equivalent to 80 % of sales price = $800.
Contribution per unit = sales price – variable cost per unit

= $1000 – $800 = $200
fixed costs $100 000

=
Break-even point = = 500 units
contribution per unit $200
[1 mark]
If a candidate who has shown working provides a correct procedure
(thus, demonstrates an understanding of the underlying concepts) but has
made an error in calculation.
[2 marks]
Candidate provides the correct answer with working.
(ii) calculate the margin of safety in units (show all your working). [2 marks]
Margin of safety = current level of output – break-even level

= 4000 – 500 = 3500 units
Apply Own Figure Rule (OFR).
[1 mark]
[2 marks]
(iii) calculate the net profit if 4000 computers are sold (show all
your working). [2 marks]
Method 1
Revenue 4000 computers at $1000 per computer 4 000 000
Variable costs 4000 computers at $800 per computer –3 200 000
Fixed costs –100 000
Profit 700 000
Net profit = $700 000
Method 2
Net profit = margin of safety × contribution
= 3500 units × $200
= $700 000
[1 mark]
[2 marks]
(iv) prepare a fully labelled break-even chart. [5 marks]
Cost/revenue
4 million Total revenue
Profit
Total costs
Break-even
point
500 000 Margin of safety

100 000 Fixed costs
0 500 4000 Number of
computers sold
Award marks as follows:
[1 mark] for each appropriately labelled axis – maximum of [2 marks].
[1 mark] for an accurately drawn and labelled total revenue curve.
[1 mark] for an accurately drawn and labelled total costs curve.
[1 mark] for the identification of the break-even level of output.
Award [0 marks] if a candidate produces a table, and award no more than

[3 marks] if the chart is not neat, not drawn with a straight-edge, or is not to scale.
Ideally, the candidate will draw an arrow pointing to the break-even point and
label the arrow. However, accept as an “appropriately labelled” break-even point
a vertical line from the x-axis to the break-even point provided that the line is
labelled “break-even point”.
(c) Examine the effectiveness of the new distribution channel for Informatic. [5 marks]
Currently Informatic is using local independent distributors to distribute 90 % of

its annual sales. We must assume that the new channel is intended to reduce
selling prices (by eliminating distributors’ fees) by selling directly to customers.
Benefits include but are not limited to:

• cost savings, with an increase in profit margins per computer sold
• if variable costs are reduced, contribution will increase, reducing the
break-even level of computer sales and increasing profits (if the number of
units sold remains the same)
• additional profits generated could be used to pay for the training of staff taking
the telephone orders
• if selling prices are reduced, additional volumes of computer sales will be
generated, perhaps further reducing the break-even level of output.
However:
• a lack of experience in selling through this channel and also not being able to
take advantage of the local knowledge of the Pakistani distributors
• given that orders will be taken by telephone, additional staff training will be
required to process those orders
• the new system may not be able to cope with increased orders
• the new telephone system may not be entirely reliable.
Accept any other relevant examination.
If the response is a one-sided generally relevant approach with no examination,

award a maximum of [3 marks].
If there is no mention of the cost savings, award a maximum of [3 marks].
Marks should be allocated according to the markbands on page 3.

SECTION A
1. Asado Heaven (AH)
Asado Heaven (AH) is a traditional barbeque restaurant run by a sole trader called Roberto Vergerio
and is located in Montevideo’s city centre next to the football stadium. The restaurant serves grilled
meats and a variety of salads and fried potatoes. The meats are cooked in a traditional fashion on a
wood-fired grill that gives it a special flavour. The traditional food is very popular with local residents
and tourists alike.
AH competes with four other traditional barbeque restaurants (A, B, C, D) within the same street.
Roberto has constructed a position map to determine his position among the four main competitors
in terms of price and quality. He is planning to use some below the line promotion to attract new
customers.
Price
High
Competitor A
Competitor B
Competitor C
Asado Heaven
Low High Quality
Competitor D
Low
(This question continues on the following page)
2212-5014
(Question 1 continued)
Currently, the restaurant serves on average 100 meals per day; it opens every day of the month
(assume 30 days) and each meal is sold at an average price of US$10. The business employs a
barbeque chef at a monthly salary of US$500 and two waiters with a monthly salary of US$350 each.
Fixed costs (paid monthly) US$

Insurance 200
Rent 500
Roberto’s salary 400
Other employee salaries X
Other 150
Variable costs per meal served US$

Meat 4
Vegetables 1
Wood for the grill 1
Other 2
(a) Describe two below the line promotion methods that Roberto could use. [4 marks]
(b) Calculate for AH for each month (show all your working):
(i) other employee salaries (figure X) and hence the break-even level
of output. [2 marks]
(ii) the margin of safety. [2 marks]
(iii) the profit or loss at the current level of meals served. [2 marks]
(c) Construct a fully labelled break-even chart for AH. [5 marks]
(d) Using the position map, analyse how AH can differentiate itself from its main
competitors. [5 marks]
2212-5014 Turn over

SECTION A
1. (a) Describe two below the line promotion methods that Roberto could use. [4 marks]
Below the line promotional methods that AH could use include:

 Direct mail could be used to inform customers about delivery services, contact
details, menu, prices and promotions.
 Leaflets and 2 for 1 offers could be handed out in the neighborhood of the
restaurant. AH could offer 2 for 1s either promoted on the leaflets, or at
point-of-sale, or through other means.
 Loyalty programs for frequent customers could be introduced to allow special
discounts or free meals after a number of visits. These could also encourage
brand loyalty and provide AH with a database that could be used for further
promotions.
 Birthday clubs, special date promotions and refer-a-friend tactics could be set
up to increase the number of customers.
 Selling internal merchandising such as special barbeque utensils and aprons
with the restaurant’s logo/name to enhance brand awareness.
 Accept any other relevant below the line promotion method described.
Award [1 mark] for each correct and relevant below the line promotion method
identified up to a maximum of [2 marks]. Award an additional [1 mark] for a
relevant description of each method identified up to a maximum of [2 marks].
(b) Calculate for AH for each month (show all your working):
(i) other employee salaries (figure X) and hence the break-even level
of output. [2 marks]
Other employee salaries (X)  500  (350  2)
Fixed costs  200  500  400  500   350  2  150  US$2450
Contribution per meal  sales price  variable cost per meal

 10  8  US$2
fixed costs 2450

Break-even level of output    1225
contribution per meal 2
Award [1 mark] for the correct workings and [1 mark] for the correct
answer.
Margin of safety  current level of output  break-even level
Margin of safety  30 100 1225  1775 meals
answer.
(iii) the profit or loss at the current level of meals served. [2 marks]
Method 1
Revenue 3000 meals at US$10 per meal 30 000
Variable costs 3000 meals at US$8 per meal –24 000
Fixed costs –2450
Profit 3550
Profit = US$3550
Method 2
Profit  margin of safety  contribution
 1775 meals  2
 US$3550
answer.
(c) Construct a fully labelled break-even chart for AH. [5 marks]
Cost/revenue in US$
30 000 Total revenue
Profit
Total costs
Break-even
point
12 250
Margin of safety
2450 Fixed costs
0 1225 3000 Number of meals
[1 mark] for each appropriately labelled axis – up to a maximum of [2 marks].

[1 mark] for an appropriately drawn and labelled total revenue curve.
[1 mark] for an appropriately drawn and labelled total cost curve.

label the arrow. However, accept as an “appropriately labelled” break-even point
(d) Using the position map, analyse how AH can differentiate itself from its main
competitors. [5 marks]
Roberto has constructed a position map to determine where his restaurant stands
vis-à-vis the other competing restaurants in the street. According to the position
map, AH is competing with restaurants A, B and C in the high quality high priced
segment, meanwhile restaurant D is all alone in the economy segment offering an
inferior service.
The map suggests that AH has a distinct position in the market. On the one hand,
restaurant B is perceived as offering services with the same quality than AH but at
a higher price. Restaurant C on the other hand, is perceived as offering services at
the same price than AH but with a lower quality. Restaurant A in turn, is
perceived as providing better quality services but substantially more expensive.
Roberto could design his future promotions so as to emphasize AH’s distinct

position in the market. His restaurant is perceived as offering good quality service
for good value for money. Future promotions could aim at showing that his
restaurant is cheaper than competitor B for the same service quality, and better
quality service than competitor C for the same price.
Another option for AH is to try to change its market position to a “less crowded”
position to differentiate more effectively from restaurants B and C. It could aim
at the premium segment such as restaurant A, or inversely, at the economy
segment like restaurant D. However, these alternatives would imply competing
with restaurants A or C which are already positioned in their market segments.
It could also entail several risks such as losing customers or drastic changes to the
restaurant’s image.
Roberto should then take advantage of AH’s current position to deepen its
differentiation over its competitors. Future promotions should emphasize AH’s
distinct position on quality service and price.
Accept any other substantiated analysis.
Marks should be allocated according to markbands on page 3.

–2– N12/3/BUSMT/SP2/ENG/TZ0/XX
SECTION A
1. Wavin’ Surfboards (WS)
Wavin’ Surfboards (WS ) manufactures surfboards. The business

was founded in 1978 by Brent Bass who operated it as a
sole trader. In 1991, after years of sales growth and employing
many employees, Brent changed WS into a private limited
company. The growth in scale of operation was a challenge
for Brent, who had a laissez-faire leadership style. He loved
surfing and as a young person he started producing and selling
surfboards at his home. He had not received any business training.
As the business grew Brent struggled to develop the business
and management skills necessary to operate the business.
Due to the high quality and popularity of the surfboards, sales

continued to increase. Brent’s accountant believes that the
company will need a new larger building in two years. The span
of control within the company is currently wide, and increasing
the number of units (surfboards) produced would require
employing more managers. For Brent, this would mean spending [Source: http://www.grainsurfboards.com/,
20 July 2012]
more time supervising managers and less time producing and
promoting surfboards. Brent would also have to decide whether to recruit the new managers
internally or externally.
Brent’s accountant prepared a comparison of the current and proposed new scale of operation.
Current building Proposed new building

Actual units Maximum Initial Maximum
produced capacity units forecasted capacity units
per year produced units produced produced
per year per year per year
Sales in units 2400 3000 3300 6000
Variable costs per unit ($) 800 800 750 750
Fixed costs per year ($) 590 000 590 000 1 050 000 1 050 000
Managers’ salaries per year ($) 450 000 450 000 600 000 900 000
The current sales price per surfboard will remain at $1400 no matter the scale of operation.
(This question continues on the following page)
8812-5014
(Question 1 continued)
(a) (i) Identify one advantage and one disadvantage of internal recruitment. [2 marks]
(ii) Describe one method of external recruitment. [2 marks]
(b) Prepare a fully labelled break-even chart for WS at its current actual sales of
2400 units in the current building. [5 marks]
(c) (i) Calculate the contribution of one surfboard in the proposed new building. [1 mark]
(ii) Calculate the initial forecast profit for WS for its first year of operation in
the proposed new building (show all your working). [3 marks]
(iii) Explain why Brent’s accountant forecasted lower variable costs per unit in
the proposed new building. [2 marks]
(d) Using appropriate calculations for the actual units produced (2400) in the
current building and initial forecasted units produced (3300) in the proposed
new building, analyse the impact of the proposed new expanded scale of
operation on profits and profitability. [5 marks]
8812-5014 Turn over

–5– N12/3/BUSMT/SP2/ENG/TZ0/XX/M
SECTION A
1. (a) (i) Identify one advantage and one disadvantage of internal recruitment. [2 marks]
Advantages of internal recruitment include:

 it is generally cheaper and faster than external recruitment
 it strengthens employees’ loyalty to the company (as they know that
they have opportunities for career development within the company)
 existing employees are already familiar with the practices and culture
of the company (no need for long induction processes)
 other employees and managers know the promoted person better than
a newcomer recruited from the outside.
Disadvantages of internal recruitment include:

 the number of applicants will be limited
 external candidates may be better qualified
 it might create tension amongst workers (as their new manager might
be a previous colleague who is now above them in the chain of
command)
 hiring someone internally will create a vacancy (the position that the
recruited person vacates) so further recruitment will be needed.
Accept any other relevant advantage or disadvantage.
Award [1 mark] for a correct and relevant advantage identified and

[1 mark] for a correct and relevant disadvantage identified, up to a
maximum of [2 marks].
(ii) Describe one method of external recruitment. [2 marks]
Methods of external recruitment include:

 employment agencies
 government-run employment agencies/job centres
 placement companies (“headhunters”)
 recruitment from/coordination with local schools and universities
 advertisements in newspapers, trade magazines, and other media
outlets.
Accept any other relevant method of external recruitment and description.
Award [1 mark] for a correct and relevant external method of recruitment

identified and [1 mark] for a description of the method of recruitment,
up to a maximum of [2 marks].
(b) Prepare a fully labelled break-even chart for WS at its current actual sales
of 2400 units in the current building. [5 marks]
Total fixed costs: $590 000 + 450 000 = $1 040 000

1 040 000
Break-even point:  1733 units
1400 – 800 
Margin of safety: 2400 – 1733 = 667
Cost/revenue
in $000’s
3360 Total revenue
Break-even Profit
point Total costs
2426.2
Margin of safety
1040 Fixed costs
Number of
0 1733 2400 surfboards
[1 mark] for each appropriately labelled axis (the vertical axis must include
reference to both costs and revenue) – award a maximum of [2 marks].
[1 mark] for an accurately drawn and labelled total cost curve.

[3 marks] if the chart is not neat, not drawn with a straight-edge, or is not to
scale.
label the arrow. However, accept as an “accurately labelled” break-even point
(c) (i) Calculate the contribution of one surfboard in the proposed new
building. [1 mark]
sales price per unit – variable cost per unit = contribution
Proposed new building: $1400 – $750 = $650
Award [1 mark] for the correct answer (working not required).
(ii) Calculate the initial forecast profit for WS for its first year of
operation in the proposed new building (show all your working). [3 marks]
Profit can be calculated as follows:

Sales (no. of units  sales price per unit) $4 620 000
– variable costs (no. of units  variable costs per unit) – $2 475 000
– fixed costs (from table) – $1 050 000
– managers’ salaries (from table) – $600 000
$495 000
Alternative method:
Fixed cost 1 650 000

  Break-even = 2538.4615 units
Contribution 650
Margin of safety = Output – Break-even

= 3300 – 2538.4615
= 761.5385 units
Profit = Margin of safety  Contribution

= 761.5385  650
= $495 000.025
Award [1 mark] if the candidate clearly demonstrates an understanding

of how to calculate the profit (candidate shows revenue – expenses =
profit).
Award [2 marks] if the candidate demonstrates that the method is (no. of

units  sales price per unit) – (no. of units  variable costs per unit) –
(fixed costs + managers’ salaries) = profit, but with an error in the
calculation.
Award [3 marks] if the candidate demonstrates the method (show

working) and correctly calculates the answer.
If the candidate produces the correct answer but does not show workings,
award [2 marks].
If the candidate uses the alternative method and rounds the number of
units to 762, accept the profit as $495 300 .
(iii) Explain why Brent’s accountant forecasted lower variable costs per
unit in the proposed new building. [2 marks]
Award [1 mark] if the candidate identifies economies of scale, or

provides a sufficient description of the concept (even if the candidate
does not explicitly state “economies of scale”). Just saying (something to
the effect of) “getting bigger” would not be sufficient to earn a mark.
Award an additional [1 mark] for applying the concept to WS.
(d) Using appropriate calculations for the actual units produced (2400) in the
current building and initial forecasted units produced (3300) in the
proposed new building, analyse the impact of the proposed expanded scale
of operation on profits and profitability. [5 marks]
Using the same approach as for (c)(ii), candidates may calculate the current
profit for the existing building with actual production levels. The current profit
is ($1400  2400) – ($800  2400) – $590 000 – $450 000 = $400 000.
This shows that, when doing a simple comparison with the new building,
profit would increase significantly (from $400 000 to $495 000, so + 23.75 %),
a calculation that the accountant probably did in order to justify the expansion.
In terms of profitability ratio, the profit margins for WS are:

 400 000 
 current building:   100 = 11.9 %
 3 360 000 
 495 000 
 proposed new building:    100 = 10.7 %
 4 620 000 
From these calculations the profitability would slightly decrease. The slight
decrease is mainly due to the sharp increase in fixed costs.
The proposed expanded scale of operation has clear impacts on both profit and
profitability, though Brent Bass would also need to take other factors into
account before deciding on the expansion, especially as financial gain
(measured through profit and profitability) does not seem to be his main
motivation.
Accept any other relevant analysis.
If the response does not include quantitative data, award a maximum of

[3 marks].
If only profit or profitability are considered, award a maximum of [4 marks]:

to achieve the top markband candidates need to refer to both.

2. Aravind Eye Care
Aravind Eye Care is the world’s largest provider of eye surgery. Founded in 1976 in India by
Dr Govindappa Venkataswamy, the non-profit organization can perform 250 000 operations
per year. At Aravind Eye Care, only 40 % of the patients pay for the operation, which costs
them US$60. The other 60 % of the patients, who would otherwise not be able to afford the
operation, do not pay.
Aravind Eye Care has transformed the process of eye surgery in developing economies.
Expensive medical equipment has been purchased but is used 24 hours a day in order to lower
the average cost for each operation. In Aravind Eye Care hospitals, surgeons perform only
the eye operation itself whereas in other hospitals, doctors also provide care before and after
the operation. At the Aravind Eye Care hospitals, each doctor can perform 4000 eye operations
per year, whereas other eye surgeons in India average 400.
With these economies of scale, in 2007 Aravind Eye Care performed 100 000 operations for
fee-paying patients. For these patients:
• the price charged per operation was US$60
• the variable cost per operation was US$20
• fixed costs including overheads were US$3 000 000.
In recognition of their extraordinary efforts to improve health in developing countries,

Aravind Eye Care received the Bill & Melinda Gates Foundation award in 2007.
[Source: adapted from Globality: Competing With Everyone From Everywhere For Everything,
New York and Boston: Business Plus, 2008, and http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991824, 17 June 2008]
(a) Define the following terms:
(i) non-profit organization [2 marks]
(ii) overheads. [2 marks]
(b) Calculate for fee-paying patients in 2007 at Aravind Eye Care (Show all
your working):
(i) the contribution to fixed costs of each fee-paying patient [2 marks]
(ii) the break-even quantity [2 marks]
(iii) the margin of safety. [2 marks]
(c) Prepare a fully labelled break-even chart for Aravind Eye Care in 2007. [5 marks]
(d) With reference to appropriate content theory, examine two factors that could
influence the motivation of doctors at Aravind Eye Care. [5 marks]
2210-5014
2. (a) Define the following terms:
(i) non-profit organization. [2 marks]
A non-profit organization is an organization that does not distribute its

surplus funds to owners or shareholders, but instead uses them to pursue
its goals. Many non-profit organizations are charities; others include trade
unions and public arts organizations. Although many government agencies
meet this definition, in most instances they are not considered non-profits.
understanding.
(ii) overheads [2 marks]
Overheads are indirect expenses that are not chargeable to a particular part
of work or production. Typically overheads are items such as accounting
fees, advertising, depreciation, insurance, interest, legal fees, rent, repairs,
supplies, taxes, telephone bills, travel and utilities costs.
understanding.
(b) Calculate for fee-paying patients in 2007 at Aravind Eye Care (Show all your working):
(i) the contribution to fixed costs of each fee-paying patient [2 marks]
Contribution = selling price " variable cost

Contribution = US$60 " US$20
Contribution = US$40
calculation.
– 10 – M10/3/BUSMT/SP2/ENG/TZ0/XX/M
(ii) the break-even quantity [2 marks]
The break-even quantity occurs when total costs equal total revenue.
Total costs = Total revenue, where

Total costs = Fixed costs + variable costs
Variable costs = quantity sold # US$20
AND
Total revenue = price x quantity sold
FC + Q # US$20 = Q # 60
3 000 000 + 20Q = 60Q
3 000 000 = 40Q
75 000 = Q
calculation.
(iii) the margin of safety. [2 marks]
Fee-paying quantity per year – break-even quantity = margin of safety

100 000 – 75 000 = 25 000
Margin of safety = 25 000
calculation.
(c) Prepare a fully labelled break-even chart for Aravind Eye Care in 2007. [5 marks]
Break-even chart
Aravind Eye Care
Cost/revenue
Millions of US$
7.0
6.0 Break-even point Total revenue

Profit
5.0 Total costs
4.0 Variable costs
3.0 Fixed costs
2.0
1.0 Margin of safety
0 Output/Thousands of fee-paying
10 20 30 40 50 60 70 80 90 100
eye surgeries per year
[1 mark] for each correctly labelled axis – maximum of [2 marks]. For the
y-axis, candidates must label it “cost/revenue”, or something equivalent thereto,
to receive [1 mark]. Just labelling the axis with a US$ sign is insufficient for
a mark.
[1 mark] for an accurately drawn and labelled total costs curve.
[1 mark] for either identification of the break-even level of output or the value of
the break-even level of output.

(d) With reference to appropriate content theory, examine two factors that could
influence the motivation of doctors at Aravind Eye Care. [5 marks]
Candidates should refer to and apply appropriately any of the standard content
theories addressed in a standard-level course (Taylor, Maslow, McGregor and
Herzberg) and might consider the factors below (and any other appropriate
factors).
For example, according to Maslow’s hierarchy of needs, after social needs have
been met individuals want recognition, such as the award from the Bill & Melinda
Gates Foundation, which honoured all employees but especially the doctors at
Aravind Eye Care. After the need for recognition, according to Maslow, people
have the opportunity to self-actualize (to feel complete and valid), which for
medical doctors might well be achieved by providing medical care to the poor.
Factors potentially influencing doctors’ motivation positively may include:

! the focus on surgery alone – specialization could enhance doctors’ skills as
surgeons
! providing an important medical service to many of India’s poor
! freedom from other responsibilities, some of which may be bureaucratic or
unfulfilling
! recognition (such as the award from the Bill & Melinda Gates Foundation)
! gaining concrete experience/immersion in a cost-effective way to provide
health services to the poor – a learning opportunity.
Factors potentially influencing doctors’ motivation negatively may include:

! by only doing surgery, doctors’ work could become routine or they could fear
lack of development of other skills
! lesser opportunity to develop relationships with patients
! lesser autonomy than doctors in traditional eye clinics
! 24 hour-a-day operations require doctors to work non-traditional hours for
surgeons
! because Aravind Eye Care is a non-profit organization, doctors’ compensation
might be lower than working in a for-profit clinic or hospital.
Accept any other relevant examination.
To achieve the top markband the candidate must provide a thorough examination
of factors that might affect the motivation of doctors. The response reflects
detailed knowledge and understanding of motivational theory, to which the
candidate refers to explicitly, appropriately, and meaningfully.

2. Niekerk Manufacturing
Niekerk Manufacturing, a private limited company located on the outskirts of Montevideo,

Uruguay, manufactures small aluminium pipes for companies in a range of industries. The pipes
are designed following customers’ specifications. The good reputation of Niekerk Manufacturing
has led to increased sales in the last several years and the firm is now operating at 100 % capacity.
Jan Niekerk, the owner of the company, even has to decline orders when too many come in at once.
He fears that this is giving his competitors opportunities to increase their sales and is considering
expanding his factory.
In 2005, the sales revenue was $4 500 000.
Current factory ($) Expanded factory ($)

Fixed cost per year 350 000 570 000
Variable cost per pipe 4.5 4.25
Sales price per pipe 5 5
To fund the proposed expansion and increase economies of scale, Niekerk Manufacturing will need
to raise a significant amount of finance. The capacity of the expanded factory with any additional
equipment will be 1 600 000 pipes per year. Jan Niekerk does not anticipate operating at full capacity
in the expanded facility for some time, but he believes it is better to expand now rather than build a
small second factory then a third in a few years.
(a) Define the following terms:
(i) private limited company [2 marks]
(ii) economies of scale. [2 marks]
(b) Construct a fully labelled break-even chart for Niekerk Manufacturing at the
current capacity prior to the expansion. [6 marks]
(c) Assuming Niekerk Manufacturing sells 1 200 000 pipes in the first year in the
expanded factory, calculate:
(i) the net profit [2 marks]
(d) Analyse two appropriate sources of finance to fund the expansion of the factory
and any additional equipment. [6 marks]
8809-5014
– 11 – N09/3/BUSMT/SP2/ENG/TZ0/XX/M
2. (a) Define the following terms:
(i) private limited company [2 marks]
A private limited company is usually a small business, though that is not

always the case. Shares of such companies can only be transferred
privately, and all shareholders must agree on the sale/transfer.
The shares may not be advertised for sale. Typically, private limited
companies are family companies or are owned by close friends,
with shareholders also serving as directors.
Award [1 mark] for a basic definition getting chiefly at the common

characteristics (small “family” business), but without any legal
requirements/limitations.
Award [2 marks] for a full, clear definition that includes legal criteria
and general characteristics.
(ii) economies of scale . [2 marks]
Economies of scale refer to the unit cost reductions that companies

experience as they grow. There can be both internal and external
economies of scale. Internal economies of scale refer to the unit cost
reductions that a single company experiences as it grows, while external
economies of scale refer to the unit cost reductions available to all
companies within an industry as the industry grows.
understanding.
Award [2 marks] for a full, clear definition that includes the idea of
declining average unit cost.
(b) Construct a fully labelled break-even chart for Niekerk Manufacturing at

the cur rent capacity prior to the expansion. [6 marks]
B reak-even chart for Niekerk Manufacturing

Cost/revenue in $000 000s
5
Total revenue
Profit
4
Total costs
3.5
Break-even point
3
200 000 pipes

Margin of safety
1
Fixed costs
0 T housands of pipe
100 200 300 400 500 600 700 800 900 1000
Q uantity
[1 mark] for each appropriately labelled axis – maximum of [2 marks].
[1 mark] for an accurately drawn total revenue curve.
[1 mark] for an accurately drawn total cost curve.
[1 mark] for the identification of the break-even level of output (whatever the
value) and [1 mark] for showing the correct value of the break-even level
of output.
If the break-even chart is accurately drawn but not neatly, using a ruler or
straight-edge, or out of proportion, award a maximum of [3 marks].
If the candidate produces a table rather than a chart, award [0 marks].

(c) Assuming Niekerk Manufacturing sells 1 200 000 pipes in the first year in
the expanded factory, calculate:
(i) the net profit [2 marks]
Revenue 1 200 000 pipes at $5 per pipe 6 000 000

Variable costs 1 200 000 pipes at $4.25 per pipe –5 100 000
Fixed costs –570 000
Profit 330 000
Profit with the expansion and assuming sales of 1 200 000 pipes in the
first year is $330 000.
[1 mark]
If a candidate who has shown wor kings provides a correct procedure
[2 marks]
Candidate provides the correct answer. Workings not required.
fixed costs 570 000

Break-even point: 760 000 units
contribution ($5 4.25)
1 200 000 units per year (projected sales) minus 760 000 = margin of
safety = 440 000 units.
[1 mark]
If a candidate who has shown wor kings provides a correct procedure
[2 marks]
Candidate provides the correct answer. Workings not required.
(d) A nalyse two appropriate sources of finance to fund the expansion of

the factory and any additional equipment. [6 marks]
Niekerk Manufacturing will need additional funds to finance both the

expansion of the facility and to acquire additional industrial equipment to
support the added sales volume. These funds could be generated internally
and externally.
Internal sources of finance: At the existing location, Niekerk Manufacturing

has an annual profit of $100 000 per annum, some of which could be retained
and used to support either the expansion of the building or the new equipment.
From the stimulus material, it is not evident what dividend payout requirements
the firm has, if any.
An additional requirement for funds will be for increased working capital.

The company anticipates its sales volume to increase substantially.
Inventory and trade receivables will also increase substantially, which will be
offset only partially by an increase in trade payables. Since this increased
working capital is not a seasonal requirement, short-term loans of less than one
year would be an inappropriate source of finance. However, since the
increased working capital requirements do not represent any fixed assets, most
lenders will be disinclined to lend money for this purpose. Thus, even if the
firm has no dividend payout requirements, the firm would be ill-advised to
allocate too much of current earnings to the building expansion and
new equipment. Earnings should be reserved for increased working
capital requirements.
External sources of finance: more appropriate for the building and equipment
would likely be external sources of finance, of which there are several options:
issuance/sale of ordinary shares of stock
loan capital, such as a bank loan, for the equipment (and possibly the
expansion of the building), or an insurance company for the building and a
bank loan for the equipment
leasing, for the additional equipment.
The issuance/sale of stock would dilute Niekerk Manufacturing’s ownership in

the company and, in fact, Jan might have difficulty finding investors interested
in a minority position in a private limited company.
More realistic and attractive, from Niekerk Manufacturing’s point of view,

is borrowing funds from a bank or an insurance company or some combination
thereof (finance the equipment with a bank loan and finance the building with
an insurance company or some other long-term lender). Given the anticipated
profitability of the company, this is presumably the most attractive option.
The high levels of anticipated profits should allow for a rapid reduction in debt.
However, if those profits do not materialize, Niekerk Manufacturing could find
itself with more debt than it wants or, potentially, can service.
Leasing is often an option with industrial equipment. However, without

additional information, it is difficult to make any specific judgments of
feasibility. The advantages of leasing are that (1) there usually is little or no
downpayment and (2) lease payments are paid with pre-tax dollars.
The disadvantage of leasing is that, at the end of the lease, the lessor owns the
equipment. If well made and well maintained, industrial equipment often will
outlast the anticipated useful life, which typically determines the length of the
lease or loan. Thus, lessees often have to give up “paid for” equipment with
some remaining useful life. Had the equipment been purchased outright
instead, the company would still possess it.
If the reponse is a one-sided relevant approach with no analysis, award a

maximum of [4 marks]. If only one source of finance is analysed, the analysis
is partial, award a maximum of [4 marks].
For [6 marks] the candidate recognizes that the internal source of funds of
profits is probably an inappropriate source of funds and thus discusses the other
options, appropriately matching the financing need to an appropriate source of
funds. Candidates demonstrate an understanding that the financing need must
be matched with an appropriate source of funds.

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–3– M11/3/BUSMT/SP2/ENG/TZ0/XX

Answer one question from this section.

The following are Informatic’s expense and sales price figures:

(a) (i) Define the term batch production. [2 marks]

(ii) Identify two fixed costs for Informatic. [2 marks]

(b) For Informatic:

(iv) prepare a fully labelled break-even chart. [5 marks]

2211-5014 Turn over

1. (a) (i) Define the term batch production. [2 marks]

In batch production, items are produced in consignments and undergo a

Candidates are not expected to word their definition exactly as above.

For only a relevant: example or application to the stimulus award [1 mark].

(ii) Identify two fixed costs for Informatic. [2 marks]

For Informatic fixed costs could include:

If a candidate refers to “cost of workers” or “workers’ salaries,” the

Also, distribution costs, unless otherwise appropriately explained, are

(b) For Informatic:

Fixed Costs = $100 000

To calculate contribution we need variable costs per unit. They are

Contribution per unit = sales price – variable cost per unit

fixed costs $100 000

Margin of safety = current level of output – break-even level

Apply Own Figure Rule (OFR).

Net profit = $700 000

Apply Own Figure Rule (OFR).

(iv) prepare a fully labelled break-even chart. [5 marks]

500 000 Margin of safety

Award marks as follows:

[1 mark] for each appropriately labelled axis – maximum of [2 marks].

[1 mark] for an accurately drawn and labelled total revenue curve.

[1 mark] for an accurately drawn and labelled total costs curve.

[1 mark] for the identification of the break-even level of output.

Award [0 marks] if a candidate produces a table, and award no more than

Currently Informatic is using local independent distributors to distribute 90 % of

Benefits include but are not limited to:

Accept any other relevant examination.

If the response is a one-sided generally relevant approach with no examination,

If there is no mention of the cost savings, award a maximum of [3 marks].

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

Answer one question from this section.

1. Asado Heaven (AH)

Low High Quality

(This question continues on the following page)

Fixed costs (paid monthly) US$

Variable costs per meal served US$

(ii) the margin of safety. [2 marks]

(c) Construct a fully labelled break-even chart for AH. [5 marks]

2212-5014 Turn over

Below the line promotional methods that AH could use include:

Other employee salaries (X)  500  (350  2)

Fixed costs  200  500  400  500   350  2  150  US$2450

Contribution per meal  sales price  variable cost per meal

fixed costs 2450

(ii) the margin of safety. [2 marks]

Margin of safety  current level of output  break-even level

Margin of safety  30 100 1225  1775 meals

Apply Own Figure Rule (OFR).

Apply Own Figure Rule (OFR).

(c) Construct a fully labelled break-even chart for AH. [5 marks]

2450 Fixed costs

0 1225 3000 Number of meals

Award marks as follows:

[1 mark] for each appropriately labelled axis – up to a maximum of [2 marks].