CHINMAYA INTERNATIONAL RESIDENTIAL SCHOOL

“CELEBRATING COMMITMENT”

Mock I Examination-February 2022

CLASS: IB II Year
DATE: 23rd Feb 2022 DURATION: 1hr 15m Time: 3:00 pm
SUBJECT: Paper 2 Business Management (SL) MAX.MARKS: 30

GENERAL INSTRUCTIONS:
1. Use ruled sheet and a dark pen. All answers have to be attempted in the ruled answer
paper.
2. Write question number for each answer and page number on your answer sheet.

SUBJECT SPECIFIC INSTRUCTIONS:

 There are two sections A and B

 Section A has two questions answer any one. Each question carries 10marks.
 Section B has three questions answer any one. Each question carries 20 marks.

Best of Luck to All. Be Honest and Sincere

Section A-Answer any one from this section.

Case Study 1-Calorie Count (CC)
Evana Dox has recently set up her own business, called Calorie Count (CC). She has identified a precise
market segment: local middle-aged people struggling to have a healthy lifestyle because of long working
hours. Customers will order meals in the morning, and in the evening Evana will deliver the meals.
Evana is converting the ground floor of her house into a professional kitchen complying with all hygiene
standards and food safety regulations. She will employ her niece Athena, a graduate from a catering
college. 60% of the initial investment and start-up costs will come from Evana’s personal savings; the
other 40% will be financed by external sources.
Evana has carried out secondary market research and found that the net profit margin in catering
businesses of the same size is 35%. However, for her new business Evana knows that her net profit
margin will be much lower.
For her first year of operations, she aims for a net profit margin of 15%. In the first year, she hopes to
sell an average of 50 meals per day, 5 days per week. She estimates that each meal would be sold at an
average price of $17. This price, Evana believes, will be competitive and will generate an adequate
contribution per meal for her business to be successful.

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CC uses a cost-based pricing strategy, with the following estimated costs:
• variable cost per meal: 70% of selling price
• fixed cost per annum: $42000
(a) Identify one variable costs for CC. [1]
(b) Calculate for CC:
(i) the break-even level of output (show all your working); [2]
(ii) the margin of safety, if it sells 50 meals per day, 260 days per year (show all your working); [2]
(c) Construct a fully labelled break-even chart, to scale, for CC. [5]

Case Study 2- KPJ

KPJ operates a cinema in a small town. It uses a price discrimination strategy for cinema tickets.

Table 2: Selected financial information for KPJ for year ending

31 December 2019 at 31 Dec 2019 (all figures in $)

Cost of goods sold (COGS) 122000

Long-term liabilities (debt) 2800
Interest and tax 9500
Gross profit X
Total current assets 8330
Sales revenue 175000
Net fixed assets 63000
Expenses 81000
Total current liabilities 6800
Share capital 60000
Accumulated retained profit 1730

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

(b) Using Table 2, calculate:

(i) X (no working required); [1]

(ii) the current ratio for 2019 (no working required). [1]

(c) Using Table 2, prepare a balance sheet for the year ending 31 December 2019. [4]

(d) Explain the possible changes to KPJ’s balance sheet for 2019 if KPJ spent $30 000 on a new digital
projector. [2]

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 Section B-Answer any one question from this section.

Case Study 3-The Burnt Tomato (BTO)

In 2003, Ben opened a street-food stall selling vegan food. The food stall was successful. Ben spent
little on marketing, mainly advertising on the food stall itself and relocating it to places or events
where many consumers would pass by.

In 2008, Ben used the profits from the food stall to open a restaurant, The Burnt Tomato (BTO),
which initially employed 16 people. In the following years, labour turnover was low. Employees
received an annual bonus, which increased with each year of employment.

In 2015, Ben created a website and began to use social-media marketing. Customers were encouraged
to rate their BTO experience online. Their reviews consistently rated BTO’s experienced staff highly
and showed that they thought the food was exceptional value. Ben replied to all reviews. Many BTO
customers also joined a BTO social media group and communicated with each other and BTO
regularly.

For many customers, the total BTO experience of vegan food and social networking was like being in
a club. Unfortunately, high labour costs, reasonable profits and the use of high-quality ingredients
meant that BTO’s gross and net profit margins were below industry averages.

Aware of the growing demand for vegan food, Ben borrowed money from a family member in 2018
and opened two more BTOs in different cities, hiring 32 new employees. However, in January 2019, a
long-time customer of the original BTO ate at one of the new restaurants and wrote a negative review.
The review went viral and sales at all three BTOs declined.

(a) State two appropriate sources of finance Ben may have used when he first opened his vegan food
stall. [2]

(b) Explain one positive impact and one negative impact on BTO as a result of having low labour
turnover. [4]

(c) Explain one advantage and one disadvantage for BTO as a result of its use of social media. [4]

(d) Discuss Ben’s decision to enlarge the scale of BTO from one restaurant to three restaurants. [10]

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Case Study 4-JVS

JVS is a successful manufacturer of designer clothing. A marketing expert described JVS’s brand
name, Izzys, as one of the business’s major strengths. Because of its market orientation approach, JVS
spends significantly more on market research than its competitors.

JVS’s products are:

• Izzys, a range of high-quality fashion jeans, which contributes 70% towards JVS’s revenue and
profit. The market for this range is not growing.
• IzzDen, a range of denim jackets, which is near the end of the product life cycle. Manufacturing of
this product will cease later this year.

Izzys and IzzDen are sold through high-end independent retailers throughout countries in Europe. JVS
uses a price leadership strategy for these two products. Consumers perceive JVS as fashionable. They
also believe that JVS’s products are worth the premium price.

JVS is considering launching a new product, a range of fashionable shorts – Izzless – aimed at the 15–
19 age group. With this product, JVS would reach a different, but highly competitive, market. Focus
groups revealed that many low-income young consumers want to purchase fashion shorts. JVS would
sell the new shorts to mass market discount retail stores. Consumers would also be able to order online
for next-day delivery.

(a) State two stages of the product life cycle. [2]

(b) Apply the Boston Consulting Group (BCG) matrix to JVS’s current product portfolio. [4]

(c) Explain one advantage and one disadvantage for JVS of using focus groups for its market research.
[4]
(d) Recommend whether JVS should launch the new product, Izzless. [10]

Case study 5-Grunsburg Textiles (GT )

Grunsburg Textiles (GT ) is a textile company founded by the paternalistic leader Henrik Steiner. As
the company grew, it became very committed to corporate social responsibility (CSR). “Our aims,”
GT says on its website, “include making profits, providing safe and secure employment, contributing
to society through investment in environmentally friendly production practices and supporting ethical
causes”. Many people believe that GT’s success is tied to its reputation for taking care of its employees
and for its commitment to CSR.

In 2015, GT purchased €44 million in new environmentally friendly equipment. It financed the
purchase with a bank loan. GT originally forecasted that the new equipment would generate €8 million
in annual net cash flow. Instead, the actual increase in GT’s annual net cash flow from the new
equipment was only €6 million. The Chief Financial Officer (CFO), Elaine, warned Henrik that unless
net cash flow increased significantly, the average rate of return (ARR) would be significantly lower
than originally forecasted.

GT is struggling to make the loan payments and to have sufficient working capital. Elaine determined
that one way to shorten the working capital cycle is debt factoring. However, when she approached
several (debt) factors, she was discouraged by their proposed discount rates.

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 Elaine knows that the situation is worse than she had warned. If the economy were to weaken and
revenue to decline, she believes that the company could go out of business. Proposals for a solution
include cutting back on GT’s commitment to its employees and CSR practices.

(a) State any two stages of the working capital cycle. [2]

(b) Calculate for GT:

(i) the payback period for the €44 million investment in new equipment based on the forecasted
increase in net cash flow (show all your working). [2]

(ii) the average rate of return (ARR) based on an annual increase in net cash flow of €6000 and
assuming an asset life of the new equipment of eight years (show all your working). [2]

(c) With reference to GT, explain one advantage and one disadvantage of debt factoring. [4]

(d) Examine Elaine’s proposals to cut back on GT’s commitment to its employees and CSR practices.
[10]