BUSINESS MANAGEMENT

HIGHER LEVEL
PAPER 2

1 hour and 30 minutes

Instructions to candidates:

• Do not open this examination paper until instructed to do so.

• A clean copy of the business management formulae sheet is required for this
examination paper.
• Section A: Answer all question
• Section B:Answer one question.
• Answers must be written within the answer boxes provided
• A calculator is required for this examination paper.
• The maximum mark of this examination paper is [40]
SECTION A [14]
Answer all questions.
DuffJD
DuffJD provides a laundry service for towels and sheets to three hotel chains in a major
city, Hoyluk. It provides each hotel chain with trade credit.

(a) Define the term trade credit. [2]

Competition in this market is increasing, as two rivals are planning to offer laundry
services to hotel chains in Hoyluk.

(b) Using the financial data from DuffJD for 2018, calculate:
(i) The contribution per unit per item laundered [1]
 (ii) The margin of safety [1]

(c) Draw a fully labelled break-even chart for DuffJD for 2018 using the data provided
[4]
(d) Draw a fully labelled break-even chart for DuffJD with an increase of 1000 in the
fixed costs. [4]

(e) Explain how an increase in the fixed costs might affect the margin of safety [2]
SECTION B
Answer one question.
Creative Software Systems (CSS)
Creative Software Systems (CSS), a private limited company, designs custom software
packages for public sector organizations. Ebru Aga is the sole shareholder, though she
is considering an employee share ownership scheme.
For years, CSS managed its employees closely, setting individual targets for
performance and requiring regular progress reports. Following motivational theories,
CSS tied financial rewards to frequently measured performance outcomes. Though
managers clearly explained to individual employees how additional financial rewards
were linked to specific contributions they made, many employees still felt the system
was unfair.
(a) Explain the difference between intrinsic and extrinsic motivation according to
CSS [4]

After reading a theory of motivation, Ebru reconsidered her management style and
CSS’s system of financial rewards. She liked when theorists reported that a major
American company allowed employees to work 20% of their time on projects of their
choice. Ebru implemented the following three changes:
• Change 1: Adopting a project-based organizational structure for CSS projects.
(a) Explain one advantage and one disadvantage for CSS of implementing a
project based organizational structure (Change 1). [4]
Ebru had to deal with two employees that she knew they were not happy about the new
changes, but he wanted to understand their cultural background. Indian employee had
a high power distance but the Spanish employee had a medium power distance.
(b) According to Hofstede’s Cultural Insights explain the concept of Power
distance and the cultural implications [4]

CSS`s is considering an internal growth strategy involving investing in new electric

software’s and employing more staff to deliver a greater number of deals more
efficiently. CSS must raise a large sum of finance. Major shareholders disagree
regarding the internal growth strategy.
(c) Explain one advantage and one disadvantage for SD of using an internal
growth strategy. [4]
The other changes in discussion are:

• Change 2: Eliminating performance-related pay (PRP). (According to their

performance in their tasks they receive a higher or lower pay)
• Change 3: Allowing employees to spend 20% of their time on any project they wish,
either one of CSS’s or their own “dream project”.

Employees’ reactions were mixed. Some employees were thrilled. They had many
ideas of their own that they wanted to explore. Other employees, however, did not like
the change. In the 20% of their time given to any project they wished; they chose to
work on projects given to them by CSS. They felt it was unfair. Although they were
advancing important projects of the company, they would no longer get performance-
related pay (PRP), while others spent their time on projects that might not contribute to
CSS’s profitability.
(d) With reference to two motivational theories, discuss Ebru’s decision to
eliminate performance-related pay (PRP) (Change 2) and to allow employees to
spend 20% of their time on any project they wish (Change 3). [10]
KA

KA is a public limited company that designs, manufactures, and sells air conditioners.
KA’s unionized employees are motivated and efficient despite not being involved in any
decision making. However, they are resistant to change. The market and competition for
air conditioners are growing rapidly. KA operates at full capacity, but stock turnover has
slowed.
Primary market research revealed that: consumers do not differentiate KA air
conditioners from those of its competitors. All products are perceived as medium price,
and medium quality KA’s customer service is rated as poor customers demand energy-
efficient products using ecologically sustainable production methods.

(a) Define the term primary research. [2]

To exploit opportunities and overcome weaknesses and threats, KA’s management has
decided to redesign its products so that they are energy efficient.

(b) According to the SWOT analysis, explain one weakness and one threat
for KA’s. [4]

KA is considering two options:

Option1: Implement lean production methods, which includes investing in ecologically
sustainable machines that will increase capacity by 10%. However, the financial manager
is worried about KA’s ability to meet high initial costs. The forecasted payback period is
three years and average rate of return (ARR) is 4%.
(c) Explain what means to have a 4% of ARR. [2]

Option 2: Outsource the production to QS, a company known for its reliability and high
capacity to produce excellent quality air conditioners using kaizen manufacturing
principles. However, QS refuses to sign an exclusive long-term contract with KA, insisting
instead on renegotiating the contract every two years. KA will have to close its production
facility and will use the cost savings to improve customer service and to reposition and
differentiate its air conditioners.
(d) With reference to QS, explain two features of kaizen. [4]

(e) Explain two possible human resources strategies that KA management

could use to reduce the employee’s resistance to change [4]
(f) Evaluate the two options that KA is considering. [10]