Cambridge International AS and A Level Business

Example exam-style papers

Paper 3 Case Study
The time allocation for Paper 3 is 3 hours. The paper is divided into two parts. Section A requires students to
answer all questions. Section B provides a choice of two essay questions of which students must answer one. The
essays test understanding of Unit 6: Strategic management.
A sample paper is shown below.

CG Boilers
Cedric Gillings qualified from university with a degree in mechanical engineering in 1985. He worked in the
gas industry for five years before deciding to form a private limited company selling and installing gas boilers
for household use. The business was called CG Boilers (CGB). Cedric set ambitious targets for growth and his
dedication to the business helped achieve the objectives he set. In his first year of trading total sales revenue was
just $10 000 but within five years this had risen to nearly $100 000. Further organic growth provided the funds for
Cedric to invest in designing and producing a range of gas boilers. These proved highly popular and in 2008 he
convinced CGB’s other directors that external growth could help consolidate their market position and improve
profitability. CGB faced competition from a number of far larger businesses and this was preventing CGB from
benefiting from higher profit margins. Cedric recommended that CGB should take over a large manufacturer of
gas boilers thus removing a competitor from the market. In 2008, CGB’s takeover bid of $20m for South Western
was successful.
Now, Cedric is considering further horizontal integration that would result in CGB becoming the largest supplier
of gas boilers in its country.

Manufacturing gas boilers

CGB’s factory assembles a range of gas boilers from components bought in from a large number of suppliers. The
South Western business was losing money when it was taken over by CGB and Cedric had been determined to
reverse this situation. He appointed a new Operations Director, David Jones, to manage the factory and gave him
the following targets:
■ Reduce unit production costs by 10%.
■ Meet strict quality assurance targets.

David introduced Just-in-Time production and reduced the number of suppliers so that for each major
component there was only one preferred supplier. These firms agreed to supply materials up to two times each
day to minimise CGB’s inventory holding costs. This arrangement had worked well until recently, when some
deliveries of components were found to be of poor quality and there were late deliveries from one supplier as a
result of a change in their transport arrangements. Two of the suppliers were also forced into liquidation due to
overseas competition.
As a result of these problems production was disrupted and David was now considering some options to prevent
the problem of insufficient inventory arising again. He had narrowed these down to the following three options:
1 Continue to use Just-in-Time but also hold a ‘buffer’ inventory level for all major components.
2 Encourage two key suppliers to build factories on land next to CGB’s factory.
3 Increase the number of preferred suppliers for each component to three; including one from overseas.

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Cambridge International AS and A Level Business

Forecasting future sales

The demand for gas boilers worldwide is increasing rapidly as emerging market countries experience fast
economic growth and rising incomes. The demand for gas boilers is seasonal in some countries that have cold
winters and hot summers. As a manufacturing business, accurate sales forecasts are very important to CGB.
Workforce planning in the factory and the accurate ordering of materials and components are two important
tasks made easier with sales forecasts. As part of sales forecasting the marketing director has made estimates of
the relationship between pricing and sales and advertising and sales. This data is shown in Table 1 and Table 2.

Price Quantity Advertising expenditure Quantity

$400 30 000 $750 000 30 000
$420 29 400 $1 000 000 33 000

Table 1 Price and demand data Table 2 Advertising expenditure and demand data

Employee performance
Cedric is passionate about his business but does not enjoy dealing with human resource issues. He leaves all
decisions regarding employees to the Human Resources Director and departmental managers. However, Cedric is
concerned by the following issues highlighted in a report from the HR Director:
■ Productivity at the factory has fallen by 5% over the last year and is now 10% lower than the industry average.
■ Labour turnover has increased amongst workers in the factory.
■ It is taking longer than usual to replace staff who leave. This is partly due to a fall in unemployment as a result of
sustained economic growth.

The Human Resources Director takes a hard approach to managing staff. Within the last two years in order to cut
costs he has made the following changes:
■ Increased use of part-time staff with flexible working time contracts.
■ A reduction in the number of kaizen groups within the factory.
■ A reduction in the number of supervisors. Each supervisor having an increased span of control.
■ Reduced expenditure on workplace training.
■ Introduction of manager interviews with employees following any absenteeism.
■ The end of the profit sharing scheme.

Proposed new contract

CGB promotes itself as being a company that ‘makes gas boilers that are not sold under any other brand name’.
This policy may be about to change. CGB’s Marketing Director had been asked by the buyer of a major gas
supplier to produce 3000 gas boiler units under the gas supplier’s brand name. The gas supplier is based in a
country that CGB does not currently sell to. The CGB factory is currently working at 90% capacity. However, the
order would still put workers and equipment under pressure to meet the delivery deadline. The price offered by
the gas supplier’s buyer was $350 per unit including delivery. CGB’s Marketing Director was at first keen to accept
the contract believing it could lead to further orders. Cedric was less sure after seeing the cost data for the order
shown in Table 3.

Labour cost per unit $100

Material and component costs per unit $160
Allocated production overhead costs per unit (based on current annual output 30 000 units) $80
Allocated marketing overhead costs per unit (based on current annual output of 30 000 units) $25
Additional direct costs including transport costs per unit $20

Table 3 Cost data for the gas boiler units

© Cambridge University Press 2014 Cambridge International AS and A Level Business Example exam-style papers – Paper 3 4
Cambridge International AS and A Level Business

Future strategies
Cedric is now planning the next stage of CGB’s development. Constant change is a feature of all businesses
involved in technology based industries. Environmental pressure groups have been trying to persuade the
government to introduce a carbon tax on energy consumption and to toughen regulation in the industry so that
suppliers will be prevented from selling the least efficient boilers. There is pressure to make the industry ‘greener’
and more environmentally responsible.
Advances in production processes have given one of CGB’s competitors a competitive advantage. Cedric believes
the highly regarded quality offered by CAL is helping to prevent a loss of sales. All these external factors present
CAL with threats and opportunities.
Apart from further horizontal integration, Cedric has identified two potential strategies.
Strategy A: Spend more on long term research and development of a new type of gas boiler unit to increase their
efficiency and reduce carbon emissions below those of any comparable product. This could give CGB a unique
selling point in the market and meet environmental concerns.
Strategy B: Invest in production line technology to increase the level of automation in CGB’s factory. This would
significantly reduce the size of the workforce and Cedric believes that the cost savings would allow a reduction in
prices for each unit whilst still allowing a higher profit margin to be achieved.
Cedric proposed these strategies at the latest Board meeting and said: ‘Deciding between these two strategies will
require the analysis of many factors and the use of appropriate decision making techniques.’
Section A
Answer all questions in this section.
1 Analyse two possible effects further horizontal integration could have on CAL’s future success. [10]
2 a Refer to Table 1. Calculate the price elasticity of demand of a change in price from $400 to $420. [4]
b Refer to Table 2. Calculate the promotional elasticity of demand of a change in promotional expenditure
from $750 000 to $1 000 000. [4]
c Discuss the factors that will influence the demand for CGB’s products. [12]
3 Discuss which option CGB should choose to overcome the inventory problems occurring within the factory
producing gas boilers. [14]
4 a Refer to Table 2. Calculate the contribution if the order from the gas supplier business is accepted. [6]
b Recommend whether CGB should accept this order. Justify your answer using your result from 4 a and other
relevant information. [14]
5 Evaluate the extent to which changing the leadership style at CGB will solve the problem of poor employee
performance. [16]

Section B
Answer one question from this section.
6 Evaluate the usefulness to CGB’s directors of doing PEST analysis before choosing between strategy A and
strategy B. [20]
7 Discuss the strategic decision-making techniques that CGB’s directors could use when making the choice
between strategy A and strategy B. [20]

© Cambridge University Press 2014 Cambridge International AS and A Level Business Example exam-style papers – Paper 3 5