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Business management
Higher level
Paper 2

Tuesday 25 October 2022 (morning)

1 hour 45 minutes

Instructions to candidates
y Do not open this examination paper until instructed to do so.
y A clean copy of the business management formulae sheet is required for this examination
paper.
y Section A: answer one question.

y Section B: answer two questions.

y A calculator is required for this examination paper.
y The maximum mark for this examination paper is [50 marks].

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6 pages © International Baccalaureate Organization 2022

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Section A
Answer one question from this section.

1. Solar Soccer Academy Ltd. (SSA)

Solar Soccer Academy Ltd. (SSA) is a private limited company set up five years ago by Stephen
Murdock. It provides top-quality soccer (football) skills and technique coaching. So far, SSA has
been a success, and Stephen is deciding whether to open another academy in a neighbouring city.

The cost of building a second academy is $500 000. Stephen has produced forecasted
financial information for the second academy’s first five years of operation (see Table 1).

Table 1: Forecasted financial information for a second academy

Year Cash inflow ($)

1 160 000
2 200 000
3 240 000
4 375 000
5 700 000

Stephen estimates cash outflow to be 25 % of the total cash inflow in years 1, 2 and 3 and
20 % of the total cash inflow in years 4 and 5.

(a) State two features of a private limited company. [2]


(b) Using Table 1 and other information provided, calculate for SSA’s second academy:

(i) the payback period (show all your working); [2]


(ii) the average rate of return (ARR) for the first five years of operation
(show all your working); [2]

(iii) the net present value (NPV) at a discount rate of 4 % (see Table 2)
(show all your working). [2]

Table 2: Discount rates

Year Discount rate

1 0.9615
2 0.9246
3 0.8890
4 0.8548
5 0.8219

(c) Explain one disadvantage for SSA of only using the payback period method in making
its decision to open a second academy. [2]

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2. Florian Stones (FS)

Florian Stones (FS) sells handmade bracelets made from natural stones. FS enjoys strong
brand awareness.

Table 3: Forecasted figures for FS for the year ending 31 December 2022

Fixed costs $15 000

Variable costs per bracelet $40

Price per bracelet $70

Number of bracelets produced 800

(a) Define the term brand awareness. [2]


(b) Using Table 3, draw a fully labelled break-even chart, to scale, for FS for 2022. [4]


(c) Using Table 3, calculate:

(i) the profit or loss in 2022 for FS if production and sales increase to 1200 bracelets
(show all your working); [2]

(ii) the price FS would need to charge per bracelet if it sells 800 bracelets and wants
to make a profit of $10 000. Assume that the costs remain the same (show all
your working). [2]

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Section B

Answer two questions from this section.

3. Davidson Studios Ltd. (DS)

Davidson Studios Ltd. (DS) is a private limited company created in 2018 and equally owned
by two sisters, Emma and Laura Davidson. Both recent graduates, they design and produce
fantasy board games, which are sold to local retailers.

Emma specializes in game design and Laura is the operations manager. The design of
a new game takes 12 months. DS’s first board game was a success and enabled DS to
rent workspace and hire employees. The second game, Held Captive, was a massive
commercial success.

DS had to move to larger premises and recruit more design, marketing and production staff.
DS’s organizational culture empowers employees to solve problems and gives them the
opportunity to manage tasks. Employees also enjoy modern office spaces, generous breaks
and competitive salaries. Quality circles and job rotation are common. Labour turnover is low
and employee morale is high.

As production increased, however, DS ran into problems. With more employees to pay and
invoices due, DS had almost run out of working capital (see Table 4).

Table 4: Selected financial ratios for DS

Year Debtor days Creditor days Acid test (quick) ratio

2019 73 27 1.32

2020 115 36 0.92

2021 157 49 0.61

Two options are being considered to avoid further liquidity problems and continue DS’s
rapid expansion:
y Option 1: Accept an offer from Big Game Industries (BGI), the market leader, to purchase 51 %
of DS’s shares. BGI would keep the DS brand and install a chief executive officer (CEO). Emma
and Laura would have reduced roles in DS.
y Option 2: Accept an offer from a venture capitalist to purchase 35 % of shares. This would
provide a cash injection sufficient for the next 12 months.

(a) Define the term organizational culture. [2]


(b) Using Herzberg’s motivation theory, explain two reasons for DS’s high employee morale. [4]

(c) Explain two reasons for the working capital problems at DS. [4]

(d) Discuss whether DS should choose Option 1 or Option 2. [10]

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4. Easy Ride Ltd. (ER)

Easy Ride Ltd. (ER) is a medium-sized private limited

company that manufactures gasoline (petrol)-powered
scooters that are sold worldwide. Customers think that ER’s
scooters are good value for money. However, increased
global competition in both the gasoline-powered and
electric scooter markets, and a shift in customers’
demands, has resulted in a significant drop in sales.

ER commissioned market research in the Middle

East using focus groups. This research revealed
that consumers:
y perceive competitors as medium-price/medium-quality providers
y have highly innovative products as their top priority
y want products and production methods to be environmentally friendly.

ER’s employees have expressed dissatisfaction with the use of flow production. ER is no
longer profitable and is highly geared.

Given the pace of change in the scooter industry, ER’s management wants to react quickly
and is considering two options for research and development.

Option 1: Adaptive creativity

ER would design and produce different models of electric scooters only. Lacking finance and
expertise in the electric scooter industry, ER would subcontract the production of batteries to
a well-known designer and producer of environmentally friendly batteries. Cellular production
would be used for each scooter model. Employees would need training.

Option 2: Innovative creativity

ER would gain a new competitive advantage by developing cutting-edge gasoline-powered

scooters. ER would create its own research and development department and recruit highly
skilled and innovative product designers. It would reposition the scooters into the high-
price/high-quality market, and flow production would be used. This option would be more
expensive than Option 1 and would take longer to implement.

Loan capital from a bank with low interest rates, aimed at helping small to medium
enterprises (SMEs), is being considered for financing either option.

(a) State two characteristics of flow production. [2]

(b) Explain one advantage and one disadvantage for ER of commissioning market
research using focus groups. [4]

(c) Explain one advantage and one disadvantage for ER of raising finance through loan
capital from a bank. [4]

(d) Recommend whether ER should implement Option 1 or Option 2 as a research and

development strategy, given the pace of change in the scooter industry. [10]

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5. Musical Musings (MM)

Musical Musings (MM) manufactures musical keyboards,

using batch production to produce a limited range.

MM’s products are designed for use in schools and homes.

MM sells directly to schools, and, for the home market, sells
through shops specializing in technology. MM’s costs are
kept low by:
y limiting its product range
y focusing on a small target market, which enables MM to limit the features on its keyboards and
keep the appearance functional.

MM provides free online “Teach yourself to play the keyboard” training courses for all customers.

In 2021, MM employed an average of 50 people. During that year, however, 12 people left
the company. Their reasons for leaving are shown in Table 5.

Table 5: Stated reasons for employees leaving MM in 2021

Stated reason Number of employees leaving MM

Retirement 1
Offered a more interesting job 5
Higher pay at a competitor 3
Lack of promotion opportunities 2
Family reasons 1

MM’s labour turnover rate for 2021 was 24 %. The manufacturing industry average was 15 %.

In 2021, MM’s sales declined. MM is now considering targeting the niche market of
professional musicians. MM would change its product design by adding a range of different
sound features and improving the appearance of its keyboards. To achieve this change,
MM would eventually stop supplying its existing market. Professional musicians would pay
a higher negotiated price for improved keyboards made to their individual specifications.
Changing its production process to job/customized production would be expensive for MM,
however, and it would have to invest in a new marketing strategy.

(a) State two characteristics of a niche market. [2]


(b) Explain two methods that MM could use to reduce its labour turnover. [4]

(c) Explain two ways in which MM’s profits could be affected by changing from batch
production to job/customized production. [4]

(d) Discuss the impact on MM’s marketing mix if MM changes its target market to
professional musicians. [10]


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Disclaimer:
Content used in IB assessments is taken from authentic, third-party sources. The views expressed within them belong to their
individual authors and/or publishers and do not necessarily reflect the views of the IB.

References:
4. (image) Pixabay, 2016. Red and Black Moped Scooter Beside Green Grass. [image online] Available at:
https://www.pexels.com/photo/red-and-black-moped-scooter-beside-green-grass-159192/
[Accessed 2 December 2021].
5. (image) Chang, Y. Y., 2021. [musical keyboard]. [image online] Available at: https://unsplash.com/photos/VnEIGgL6c-k
[Accessed 2 December 2021].
All other texts, graphics and illustrations © International Baccalaureate Organization 2022

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