Business management

Higher level
Paper 2

1 May 2024

Zone A morning Zone B morning Zone C morning

Candidate session number

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].

2224 – 5009
20 pages © International Baccalaureate Organization 2024

20EP01
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Section A

Answer all questions in this section.

1. Medias Calentitas (MC)

Medias Calentitas (MC) is a cooperative that produces luxury woollen socks. MC’s socks
have unique patterns, and they are knitted with luxury cashmere* wool. MC’s machinery,
valued at $100 000 on start-up, has a useful life of 10 years and an estimated residual value
of $30 000.

MC has set a target profit of $47 000 for 2025. The demand for MC’s socks is price inelastic.

Selected financial information for MC is shown in Table 1.

Table 1: Selected financial information for MC

Price per pair of socks $40

Variable cost per pair of socks $30

Fixed costs per year $70 000

Maximum production capacity per year 11 000 pairs

* cashmere: a type of luxury wool obtained from some breeds of goat

(a) State two features of a cooperative. [2]

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(b) Using straight-line depreciation, calculate MC’s total annual depreciation expense for
its machinery (show all your working). [2]

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(Question 1 continued)

(c) Using Table 1, calculate:

(i) the number of pairs of socks MC needs to sell to achieve an annual target profit
of $47 000 (show all your working); [2]

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(ii) the price MC must charge to achieve a target profit of $47 000, assuming it will
sell 9750 pairs of socks per year (show all your working). [2]

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(d) Explain one advantage for MC of the demand for its socks being price inelastic. [2]

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20EP03
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2. Universal E-Bikes Ltd. (UEB)

Universal E-Bikes Ltd. (UEB) manufactures electric bicycles as a sustainable form of urban
transport. UEB’s research and development department’s innovative design obtained a patent.

To increase output and improve the quality of its bicycles, UEB invested in modernizing
its factory. The investment included developing innovative software to customize orders,
purchasing battery production machinery, and introducing manufacturing robots.

Table 2 shows UEB’s expected net cash flows for a period of four years.

Table 2: Expected net cash flows from UEB’s modernized

factory (all figures in millions of $)

Year Net cash flow

0 –3

1 0.75

2 1.00

3 1.10

4 1.15

(a) Define the term patent. [2]

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(b) Using information from Table 2, calculate, for UEB’s modernized factory:

(i) the payback period (show all your working); [2]

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(Question 2 continued)
(ii) the average rate of return (ARR) (show all your working). [2]

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(c) Complete Table 3 by calculating the present value for UEB’s modernized factory for the
first four years, using a discount rate of 6 %.
Table 3

Year Net cash flows Discount rate at Present value in

in millions of $ 6% millions of $

1 0.75 0.9434 ..............

2 1.00 0.8900 ..............

3 1.10 0.8396 ..............

4 1.15 0.7921 ..............

Total: . . . . . . . . .

Using your completed Table 3, calculate the net present value (NPV) for UEB’s
modernized factory for the first four years (show all your working). [2]

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Net present value (NPV): $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(d) Many economists have forecast that interest rates are going to rise.
Explain how an increase in interest rates could impact your answer to part (b)(ii) or (c). [2]

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20EP05
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3. Sol Market (SM)

Sol Market (SM) is a 120-room tourist hotel in Portugal.

The hotel manager, Cristiano, wishes to increase room bookings in the quieter months
(November–February). In the busy months, capacity utilization (number of rooms booked) is
almost 100 %.

In the quieter months, SM uses cost-plus (mark-up) pricing.

Cristiano created a budget, which is shown in Table 4.

Table 4: SM’s budget for November 2023 to April 2024

(A) Adverse variance

(F) Favourable variance

Month Average daily rooms booked Average Daily Days Monthly

room change in per change in
rate (€) revenue month revenue
variance (€) variance (€)

Budgeted Actual Variance

figures figures

Nov 2023 23 22 1 (A) 60 60 (A) 30 1800 (A)

Dec 2023 17 18 1 (F) 60 60 (F) 31 1860 (F)

Jan 2024 22 19 3 (A) 60 180 (A) 31 5580 (A)

Feb 2024 30 27 3 (A) 60 180 (A) 29 5220 (A)

Mar 2024 60 55 5 (A) 100 500 (A) 31 15 500 (A)

Apr 2024 75 76 1 (F) 150 150 (F) 30 X

Six-month change in revenue variance Y

(a) Define the term cost-plus (mark-up) pricing. [2]

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(Question 3 continued)

(b) Using information from Table 4, calculate:

(i) the actual average capacity utilization for SM in December 2023

(show all your working); [2]

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(ii) the monthly change in revenue variance for April 2024, X, and state whether it is
adverse or favourable (show all your working); [2]

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(iii) the total six-month (November 2023–April 2024) change in revenue variance, Y,
and state whether it is adverse or favourable (show all your working). [2]

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(c) Explain one method that SM could use to improve capacity utilization in the
quieter months. [2]

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Section B

Answer one question from this section.

4. Avuela PLC (AV)

Avuela PLC (AV), a public limited company, is a low-cost airline that offers cheap flights in
South America. AV operates all over the continent flying to small cities and remote areas.
Its target market is travellers who like difficult-to-reach destinations. AV charges $5 for each
20-kilogram piece of luggage, a charge that is 80 % lower than luggage charges from its
competitors. AV’s customer satisfaction and brand loyalty are strong. Backpackers magazine
named AV the customers’ favourite airline for five years in a row.

(a) Define the term target market. [2]

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AV employs only 50 pilots, of which 20 are captains. Each of AV’s flights has two pilots: the
captain, with overall responsibility for flight safety and punctuality, and a first officer, who is
less experienced. Captains also carry out the training of first officers.

AV’s fleet of aircraft is one of the oldest in the region. The maintenance director recently
said, “Unless new aircraft are purchased or leased, it is likely that safety issues may occur.”
Several captains have resigned. The pilots’ union is in conflict with AV and argues that:
flying into remote and secluded airports is dangerous and stressful
salaries are below the industry average
captains should be better paid for training first officers.

AV plans to recruit pilots externally to fill the captains’ vacancies. AV will hire an agency to
manage the recruitment process, which will take six months. Some of AV’s first officers are
expressing strong interest in applying for the vacancies.

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(Question 4 continued)

(b) Explain one advantage and one disadvantage for AV of recruiting captains externally. [4]

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New low-cost airlines offering discounts and loyalty programmes are entering the South
American market. AV now faces some challenges:
It relies on low prices to sell tickets.
Its customer database is limited, and data collected is not used.
It wants to develop a customer loyalty programme but lacks experience.

(c) Explain one advantage and one disadvantage for AV of creating a customer
loyalty programme. [4]

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FL, a European airline that operates internationally, wants to increase its operations in South
America. It has a modern aircraft fleet and numerous highly qualified departments including
human resources (HR), marketing, IT, and safety and security. FL has a customer loyalty
programme, but its customer satisfaction is low. FL does not deal with customer complaints
successfully, and flight cancellations and delays are above the industry average.

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(Question 4 continued)

Acquisitions and mergers are increasing in the airline industry. FL has proposed to AV a joint
venture. AV’s shareholders are unsure about the deal. AV’s chief executive officer (CEO) has
written a report on both airline companies. Selected financial information from this report is
shown in Table 5.

Table 5: Selected financial information from the CEO’s report (all figures in %)

AV FL Industry average
2022 2023 2022 2023 2022 2023
Increase in aircraft 7 9 0.5 0.5 3 4
repair costs
Profit margin –1 –2 0.5 1 0.2 1.5
Gearing ratio 1.6 1.5 16 18 6 5

Figure 1 shows the market share for airlines operating in South America.

Figure 1: Market share for airlines operating in South America

FL
3%

LL AV
13 % 20 %

GG
13 %
BB
20 %
DD
14 %

CC
17 %

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(Question 4 continued)

(d) Using Table 5, Figure 1, and other information in the stimulus, examine whether AV
should accept FL’s joint venture proposal. [10]

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20EP13
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20EP14
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5. Airport Services (AS)

Airport Services (AS) is a supplier of baggage handling and general security services to six
small local airports across Europe.

AS’s 400 employees are given extensive training, including a three-week induction
training programme.

(a) Describe one feature of induction training. [2]

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Many of AS’s longest-serving employees left during the COVID-19 pandemic. The employees
moved into other jobs and have not returned to AS. New employees had to undergo training,
and Brian Garbett, the chief executive officer (CEO), feels that they do not show the level of
commitment to the role compared to previous employees.

Since 2021, there has been increasing tension between managers and employees at AS.

Between February and March 2024, Brian decided to carry out an employee survey. Only
35 % of employees responded. He wonders whether he should offer performance-related pay
(PRP) to improve relations between managers and employees.

A summary of the key findings from the employee survey is shown in Table 6.

Table 6: Findings from the employee survey for AS

Employee opinions about: Happy Acceptable Unhappy

Hours of work 15 % 70 % 15 %
Salary 5% 20 % 75 %
Support from management 5% 15 % 80 %
Do managers listen? 7% 14 % 79 %
Do you feel valued? 4% 9% 87 %

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(Question 5 continued)

(b) Comment on the employee survey carried out by Brian. [2]

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(c) With reference to expectancy theory and Table 6, explain one reason why Brian
should be concerned by the results of the employee survey. [2]

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After the survey was completed, Brian noticed that manager–employee relations worsened.

An employee representative approached Brian and demanded a 15 % increase in pay. The

employee representative highlighted that the employees’ living standards had fallen over the
last two years. Brian was worried by the pay increase demanded and was hoping to agree
a 6 % increase, plus an extra 2 % for overtime work. He informed the representative of his
proposed percentage.

The employees are unhappy with a 6 % pay increase and have threatened industrial action,
including work-to-rule and strikes. This industrial action would target the upcoming summer
holiday period at airports that AS serves.

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(Question 5 continued)

(d) Explain two disadvantages for AS of its employees implementing a work-to-rule. [4]

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AS recently accepted contracts to offer services at an additional three airports. Baggage

handling and security are essential services for airlines that cannot be easily replaced. Brian
is unsure of how best to deal with the likely conflict.

Brian’s initial reaction is to consider extreme approaches to the conflict, such as threats of
redundancies. However, the results of the employee survey led Brian to think he needed to
use a different approach to resolve the conflict.

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(Question 5 continued)

(e) Using the information provided in the stimulus and in Table 6, discuss two possible
approaches to conflict resolution that Brian could use at AS. [10]

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20EP19
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20EP20