Business management

Standard level
Paper 2

Tuesday 27 October 2020 (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 one question.
y Section C: answer one question.
y A calculator is required for this examination paper.
y The maximum mark for this examination paper is [50 marks].

8820 – 5014
7 pages © International Baccalaureate Organization 2020
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Section A

Answer one question from this section.

1. MiniVS (MV)

MiniVS (MV) imports light bulbs, which it sells business to business (B2B) to customers in the
UK. In 2020, MV ran into cash-flow problems and had to use debt factoring.

MV has now solved its cash-flow problems. It operates a cost-plus (mark-up) pricing strategy
and places a 100 % mark-up on the light bulbs that it purchases from suppliers.

The forecasted opening cash balance for January 2021 is £20 000.

Table 1: Forecasted data per month for MV for the

first six months of 2021 (all figures in £)

Months 1–3 Months 4–6

Cash sales per month 75 000 70 000

Warehouse overheads 5000 5000

Office salaries 30 000 30 000

Marketing costs 1000 1000

The finance director is concerned that the online market for light bulbs in the UK is becoming
increasingly price competitive. She believes that if suppliers raise prices in the second half of
2021, MV will have to abandon its cost-plus (mark-up) pricing strategy to be price competitive.

(a) State two features of debt factoring. [2]

(b) Using the information in Table 1, construct a fully labelled cash flow forecast for MV for
the first six months of 2021. [6]

(c) Explain the potential impact on MV’s gross profit margin if the prices charged by its
suppliers increase in the second half of 2021. [2]
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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 122 000

Long-term liabilities (debt) 2800

Interest and tax 9500

Gross profit X

Total current assets 8330

Sales revenue 175 000

Net fixed assets 63 000

Expenses 81 000

Total current liabilities 6800

Share capital 60 000

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]

Turn over
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Section B

Answer one question from this section.

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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4. Nigris & Speroni (NS)

Nigris & Speroni (NS) is a national grocery store chain. In the tertiary sector, it benefits from
economies of scale, including purchasing economies of scale. Its stores use sophisticated
computerization to manage stock and monitor customers’ purchasing habits. NS is currently
experimenting with cleverly placed products and short-term promotions to increase impulse
purchases, which occur when a customer makes unplanned purchases. Something in the
store – a smell, a vivid display, samples of products – triggers a customer’s desire for items.

NS has above-average prices compared to the industry average, but at least one other
chain is more expensive. The grocery store industry is competitive and grocery stores use
many different pricing strategies. NS is considering adopting an online ordering and delivery
service for customers, which would operate from its stores.

Each of NS’ stores is given a number to identify it. Store number 507 is called NS 507.

Table 3: Selected financial information for NS 507 for 2019

Gross profit $5 300 000

Net profit margin 3%

Sales revenue $20 000 000

On 1 January 2020, an organic grocery store, U-Foods, opened near NS 507. U-Foods sells
high-quality foods, including organically produced fruits and vegetables, organically raised
meats and sustainably sourced seafood (not from fish farms). It charges higher prices than
NS 507 and has higher margins. The few processed foods that it sells are organic and low in
salt. Unlike NS 507, U-Foods does not sell cigarettes or high-sugar beverages and cereals. It
is also not considering an online ordering and delivery service like NS is.

In the first six months of 2020, however, NS 507 lost market share. Sales revenue was
12 % lower than in the first six months of 2019, even though the number of customers and
transactions did not change.

(a) State two types of business, other than grocery stores, that operate in the tertiary sector. [2]

(b) Explain two elements of U-Foods’ marketing mix other than price. [4]

(c) Calculate for 2019:

(i) NS 507’s gross profit margin (no working required); [1]

(ii) NS 507’s net profit before interest and tax (no working required). [1]

(d) Explain one economy of scale, other than purchasing economies of scale, from which
NS might benefit. [2]

(e) Discuss two possible methods that NS 507 could use to regain lost market share. [10]

Turn over
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5. Pablo’s Peanuts (PP)

Pablo recently emigrated from Argentina to Miami, Florida, which has a large Hispanic*
population. However, he could not find caramelized peanuts – known as garrapiñada –at any
of the Latin American markets in Miami. These tasty sweet snacks, sold by street vendors,
are very popular in Latin American countries. Pablo began testing different recipes to make
the snack himself. Once convinced he had the perfect product, he conducted primary market
research in several Hispanic neighbourhoods. He was overwhelmed by the positive response.

As a result, Pablo set up Pablo’s Peanuts (PP) as a private limited company. He then
purchased a food truck (a large vehicle equipped to cook and sell food). From Tuesday to
Sunday, he drove to different Latin American markets in the Miami area to cook and sell his
product. PP soon became profitable, but meeting demand was difficult.

Pablo wants PP to grow. To do this, he needs a second food truck and an employee. The
second truck would require an investment of $100 000. Pablo’s break-even analysis shows
that the expected increased output would more than double PP’s profits if the cost of fuel for
the food trucks remains constant.

Pablo is considering two options to finance the second truck:

y Option 1: A local Miami bank, clearly impressed by the break-even analysis data, is willing to
lend Pablo $100 000 with a 10 % interest rate.
y Option 2: A business angel, Ana Perez, with a strong portfolio of Latin American food products,
has approached Pablo. She is offering $100 000 for 35 % of shares in PP.

Table 4: Financial data related to both options

Option 1: Bank loan Option 2: Business angel

Investment $100 000 @ 10 % interest $100 000 for 35 % of shares in PP

Expected operating profits $210 000 $210 000

Expected annual dividends

$10 000 $13 000
to Pablo

Expected annual dividends

$0 $7000
to the business angel

Gearing ratio 50 % 0%

* Hispanic: relating to Spain or to Spanish-speaking countries, especially those of

Central and South America

(a) State two characteristics of a business angel. [2]

(b) Explain two reasons why Pablo conducted primary market research. [4]

(c) Explain one advantage and one disadvantage of using a break-even analysis for PP. [4]

(d) Recommend whether Pablo should choose Option 1 or Option 2. [10]

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Section C

Answer one question from this section. The organizations featured in sections A and B and in the
paper 1 case study may not be used as a basis to your answer.

6. With reference to an organization of your choice, examine the impact of culture on

organizational ethics. [20]

7. With reference to an organization of your choice, discuss the ways in which innovation can
influence organizational change. [20]

8. With reference to an organization of your choice, examine the impact of globalization on

marketing strategy. [20]