Business

Management
IBDP 2
Higher Level Paper 2

Candidate Name/Number:

Tuesday, 5 March 2024

● Reading time - 5 minutes.

● Working time – 1 hour 45 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 questions.
● 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 for this examination
paper is [50 marks].
 Section A
Answer all the questions in this section.

1. Jimmy’s Falafel Shack (JFS)

Oscar and Faaris are partners who co-founded the business Jimmy’s Falafel Shack. There are 10
locations, and the chain specialises in falafels as well as other foods from the Middle East and
Mediterranean. Though falafels and sandwiches/salads that have falafels in them are the most
popular menu items and offer fairly high gross profit margins for the partners, in any given JFS
location there may be up to 20 items on the menu. In two locations they have also started selling
Jimmy’s Falafel Shack branded merchandise like t-shirts, hats, and mugs. Seeing that many of these
items have been resold online, Oscar would like to continue adding merchandise sales to their
restaurants, though not every location has enough physical space to do this without overcrowding
the entrance and waiting areas.

JFS’s partners have received multiple offers from potential franchisees in other countries, though
they are unsure whether they should expand through this method. They would prefer to expand into
new markets by raising additional finance while retaining full ownership and control of their
business operations, but franchising would allow for quicker growth and possibly more profits.
Below are the current monthly cost and revenue data for the locations in which they are currently
operating.

Average meals sold per month 68,000

Average cost of ingredients per meal $4

Average labor costs per meal $2

Utilities (monthly) $55,000

Salaries and other administrative costs (monthly) $230,000

Rent (monthly) $75,000

Average selling price per meal $12

a. Calculate the break-even quantity of output per month for JFS. [1 mark]

b. Calculate the margin of safety at their current level of production. [1 mark]

c. If Oscar and Faaris are targeting a profit of $80,000 per month, then what is the
number of meals that they must sell? Show all your working out.
[2 marks]

d. Construct a fully labelled break-even chart for JFS. [4 marks]

 e. If Oscar and Faaris thought they could produce and sell 75,000 meals in a month,
calculate the target price they would have to charge to break even.
[2 marks]

2. Cuckoo

Cuckoo is a privately held software development company producing a wide range of programs for
businesses and home consumers and is best known for its set of artistic software platforms such as
photo and video editing. Its products are commonly used by professional artists and visual arts
production studios, though it also has a wide range of applications in office and home settings.
Cuckoo was founded and run by Carlo Baert for over thirty years until he recently announced his
intent to retire.

Carlo was somewhat famous for being an inspirational figure to his employees and in the corporate
world in general, but he also had a reputation for aggressively defending Cuckoo and its employees,
to the point of openly mocking other firms’ leaders and workforce from time to time. In an era when
business suits were the norm, Carlo often wore unique mismatched clothing and encouraged his
employees to question social norms. Under Carlo’s leadership, the company often had a reputation as
one of the best places to work, though news outlets occasionally ran stories of former employees
pushing back on that reputation, and it is not as consistently rated among the best places to work in
software anymore.

Carlo could be very demanding of his workers, and the workplace could appear quite strange to
outsiders. He once led his team of upper management on a team-building exercise in which they had
to survive together on an island for a week, and ahead of major product launches, it was not
uncommon to see news stories of Cuckoo employees sleeping overnight at the office and being
expected to put in 100-hour work weeks. Though he delegated many responsibilities to people under
him and tried to hire middle and upper management leaders who he felt showed good intuitive
thinking and management, he also expected an “intense focus on seeing things through the
customer’s eyes” that some people believed led to software development and customer service
approach that tried to do too many things and led to inflated costs. Many lower-cost versions of
competing software are now available, though ratings on Cuckoo software remain strong.

a. Define the term intuitive management. [2 marks]

Carlo has agreed to aid the transition to a new CEO for up to six months. The board hoped that the
firm’s chief operating officer would step into the role, but she announced she was leaving the firm at
the same time as Carlo and the two most logical internal replacements left the firm in the last year to
head other companies.

b. Explain one advantage and one disadvantage to Cuckoo if its leaders were to use scientific
thinking in its development of new software. [4 marks]

c. With reference to Cuckoo, explain two features of leadership. [4 marks]

3. Artisan Woodcrafts (AW)

Artisan Woodcrafts (AW) is a small business that produces custom-made furniture. Over the past
year, the company has been experiencing cash flow difficulties due to a combination of slow-paying
clients and a delay in receiving a large order of materials from a supplier. As a result, AW has been
struggling to pay its suppliers on time, which has damaged its credit score (credit rating) and made it
difficult to secure new lines of credit. The company has also been unable to invest in new equipment
or hire additional staff, which has limited its ability to grow. The chief executive officer (CEO) has
asked the finance manager to construct a
four-month cash flow forecast and has provided him with the following information:

● Sales in January = $20,000, February = $25,000, March = $30,000, April = $35,000.

● 50% of sales are paid for in cash, with the remainder received one month later.
● Rent is $4,000 per month
● Cost of sales are $10,000 in January and February, and $11,000 for March and April.
● Salaries and wages are $10,000 per month.
● Other expenses are $5,000 per month.
● A loan payment of $3,000 is due in February.
● There was $10,000 in the bank at the end of December.
● Sales in December were $30,000.

a. Prepare a cash flow forecast for AW for January to April. [4 marks]

 b. Outline one way to improve the cash flow position at AW. [2 marks]

Going forward, the company has received additional funds from a business angel who would like AW to
invest in new machinery to be able to increase capacity. The production manager has made two
suggestions: Machine A and Machine B. Due to the company’s liquidity issues, the CEO is anxious about
the investment and is unsure which machine to choose.

Cost of machine A = $45,000 Cost of machine B = $30,000

The machine is expected to generate the The machine is expected to generate the
following net cash flows: following net cash flows:

Year 1 = $15,000 Year 1 = $8,000

Year 2 = $16,500 Year 2 = $9,500

Year 3 = $13,500 Year 3 = $10,000

Year 4 = $23,000 Year 4 = $17,700

c. Calculate the payback period for Machines A and B (show all your working out).
[4 marks]
 Section B

Answer one question from this section.

1. Proti-Munch

Protein bars are a convenient snack that contains a high proportion of protein and are becoming very
popular amongst fitness enthusiasts’ groups.

Lucas became a regular protein bar consumer during his university years. After graduating in the
United Kingdom (UK), he started his business operating as a sole trader and launched a range of tasty
high-protein bars called Proti-Munch (PM).

a. State two challenges that Lucas may have encountered when starting his own business. [2
marks]

PM benefits from having different distribution channels and is sold in different supermarkets, as well
as health food and convenience stores around the UK. Sales of PM are increasing, but Lucas is very
ambitious and wants to develop the brand further and create a range of PM protein products.

Lucas has formed a partnership together with his school friend, Roberto. Roberto is highly creative
and will bring new ideas to the business. Lucas and Roberto undertook extensive primary and
secondary market research and came up with two new products to add to the PM product range.

b. Explain one advantage and one disadvantage of PM operating as a partnership.

[4 marks]
PM’s product portfolio now includes protein bars, protein biscuits, and protein shakes. Lucas and
Roberto are concerned about maintaining an adequate level of profit for their partnership and they
want to use contribution per unit to help them determine the price of their new products.

Table 1: Forecasted financial data for PM’s product portfolio (in $)

Product Protein bar Protein biscuits Protein shakes

Selling price ($) 2.50 1.50 3

Unit variable cost ($) 1.50 1 2.25

Quantity (units) 250,000 180,000 120,000

Total fixed costs ($) 200,000

c. Use the data in Table 1 to

(i) Calculate the forecasted unit contribution for the three products. [2 marks]

(ii) Calculate the forecasted total profit for PM (show working). [2 marks]

PM’s brand is now well-established in the UK and benefits from customer loyalty. PM’s sustainable
packaging grabs the attention of customers as it is distinctive, has a healthy nutritional profile, and
clearly shows the ingredients. Customers also like the taste of PM’s products. Lucas and Roberto
have identified two growth strategies:
Option 1: Add Protein Powder as a new product to PM’s product portfolio. The target market will be
the same as the existing one and the product will be sold in the UK using the same distribution
channels. The partners agree this new addition will further meet customers’ requirements and
complement their product range. However, there are already many competitors offering protein
powder products.

Option 2: Launch their main product, the Protein Bar, in a new international market, Country
X. Country X’s modern lifestyle is changing and the demand for protein bars is increasing. PM’s
brand and packaging can bring it competitive advantages. The partners agree that this option provides
a good opportunity for PM.

d. Using the Ansoff matrix, evaluate the two possible growth strategies for PM.
[10 marks]
 2. Tinker Creek Brewing Co. (TCB)

Tinker Creek Brewing Co. is a family-owned brewery that makes non-alcoholic beer and has been
in operation for 15 years. Having been a small operation until the last five years, it has grown
rapidly more recently as the market for non-alcoholic beverages appeals to a wider audience, and it
now has over 50 employees. While many of the big beer companies now produce non-alcoholic
products, TCB has focused on higher-priced brews that are remarkably similar to ones with
alcohol, and it has won several awards for product quality.

TCB has always had a culture of strong teamwork, and the family that owns it has rewarded
productive employees with competitive pay packages and opportunities for career advancement.
Employees are encouraged to develop multiple skills through
on-the-job training and enlargement. The owners also attempt to hire people who they think will
have a high need for both achievement and affiliation. TCB has a relatively low labour turnover;
however, as the business continues to grow and expand, the owners are facing the challenge of
filling key positions within the company.

a. Define the term job enlargement. [2 marks]

One of the biggest needs is for a new head brewmaster, basically a creative director of the
company’s beer products. The current brewmaster and co-founder of the company is retiring and the
owners are struggling to find a suitable replacement. The family is considering several internal
candidates who have worked their way up through the ranks and have a thorough understanding of
the company's brewing process and culture.
However, they are also considering external candidates who may bring new ideas, including
people from larger beverage companies who may be able to help TCB refine its processes and
reduce costs. While many customers are willing to pay more for
non-alcoholic beers, and the owners firmly believe in their product superiority, they are also
concerned that as large traditional beer brewing companies start to devote more resources to non-
alcoholic products, that they will cut into TCB’s market share.
 b. Explain two methods of recruitment that TCB may go through to fill the needed
positions. [4
marks]

In addition to the head brewmaster position, the company also needs to hire a new sales manager
and marketing coordinator. The sales manager will be responsible for managing the company's
relationships with distributors and retailers, as well as developing new sales strategies, as TCB’s
owners want their products to be distributed nationally in grocery stores and bars as soon as
possible. The marketing coordinator will be responsible for creating and implementing marketing
campaigns to promote the brewery's products.

c. Explain one advantage and one disadvantage to TCB if it were to use

performance-related pay. [4 marks]
d. With the use of the motivational theories of McClelland and Deci and Ryan, evaluate
the effectiveness of TCB’s ability to motivate its employees. [10
marks]