Business 9609/32 February/March 2020: question paper and mark scheme

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0 No creditable content

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1 Analyse the likely impact of changes in interest rates on FE. 10 Level Knowledge Application Analysis 3 marks 2 marks 5 marks 2 3 marks 2 marks 4–5 marks Three relevant Two points applied Good use of theory points made to explain impact 1 1–2 marks 1 mark 1–3 marks One or two relevant One point applied Some use of theory points made to explain impact 0 No creditable content Note: Analysis should link to impact on FE. Knowledge • Interest rates are part of government monetary policy • Interest rates impact the cost of borrowing / reward for saving • Interest rates affect the exchange rate and demand in the economy Application • Linking interest rate increase (2%) to FE’s need for external finance: expansion of factory, takeover of Southvolt, building of new factory in country M • Possible appreciation of currency in country M • Reference to gearing of FE (45.85% / 84.7%) • Cost of wind turbines and need for borrowing for investment by power plant operators • Finance deals offered to businesses • $800m loans @ 4% interest $32m; @6% interest $46m Analysis • Increase in interest rates will increase the cost of borrowing making expansion plans less profitable • Increased costs for FE may mean that prices are increased which will reduce demand • Appreciation of exchange rate will make FE less competitive in markets to which they export turbines from country M or FE may have to reduce the dollar price in order to remain competitive thus reducing their operating margins • Increase in interest rates may reduce demand for wind turbines due to their high capital cost. Reduced sales will reduce profits for FE. • Potentially greater impact on sales to household market rather than industrial market because luxury good and high proportion of income 1 1–2 marks 1–2 marks 1–3 marks 1–3 marks Some under- Some Limited use of Limited attempt to show judgment standing application to reasoned either within the answer shown FE argument or OR use of theory a weakly supported to support conclusion/recommendation with points made some focus on FE

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2(a) Refer to lines 29–31. Calculate the forecast capacity utilisation for 2020 2 in FE’s factory Current output CU = × 100 (1) Capacity Or Forecast output × 100 (1) capacity 425 CU = × 100 = 94.4% ( 2 ) 450 94.4 (1) 2(b) Refer to Table 1. Calculate the difference in unit cost of towers 3 produced by expanding the factory or outsourcing. Unit cost if factory extension 0.02 + 0.33 = ($)0.35 (m) (1) Unit cost if outsourcing 0.37 + 0.01 = ($)0.38 (m) (1) Difference = $0.03 m or $30 000 (3) 0.03 or 30 000 (2) Possible answers with working (Deduct further mark if no $ or m) $0.02 m (2) $0.05 m (2) $0.04 m (1) OFR 2(c) Refer to your results from 2(a) and 2(b) and other information. 12 Recommend to FE’s directors whether to outsource production of the towers. Knowledge – Application Analysis – Evaluation – Level 2 marks – 2 marks 4 marks 4 marks 2 2 marks 2 marks 3–4 marks 3–4 marks Two or more Application of Good use of Good relevant two or more theory to judgement points made points to FE answer shown question 1 1 mark 1 mark 1–2 marks 1–2 marks One relevant Point applied Some use of Some point made to FE theory to judgment answer shown question 0 No creditable content Note to examiners: • Own figure rule from 2(a) & (b) applies • L1 AN and EVAL if only use 2(a)/(b) results or only use other information Knowledge • Definition of outsourcing: when a business contracts out activity to a third party • Key factors in decision: reliability of outsourcing company, impact on quality, relative cost, time period Application • Capacity utilisation is already 94.4% so hard to increase production further • Cost of outsourcing is $38 000 per unit. • Outsourcing is more expensive per unit by $30 000 • Need for borrowing $150m for factory expansion • Expansion increases capacity by 75 more wind turbines relative to outsourcing (675 compared to 600) • FE’s focus on quality and 100% in-house production • Use of difference in timescale – 12 months v 4 months to increase production 2(c) Analysis • Any reduction in quality from outsourcing could damage FE’s reputation and result in lower sales or impact ability to charge higher prices • Extension of the factory may cause a reduction in production in 2020 and impact sales to existing customers. • Factory extension will take 12 months therefore may result in being unable to meet 7% increase in demand so loss of sales will result • Outsourcing is more flexible so if demand doesn’t continue to increase FE can vary contract according to level of demand maintaining a competitive cost per unit • Factory extension will increase gearing, increasing costs due to forecast rise in interest rates • Outsourcing is more expensive which will increase price or reduce profit margins Evaluation • A supported recommendation should follow consideration of pros and cons of outsourcing • Is FE certain that the costings are accurate? • Long run v short run consideration. Initially after building extension FE will be operating below capacity thus additional fixed costs will be spread over a lower number of towers. This will increase the cost of in house production above that of outsourcing and thus reduce profit. • How long will it take to increase sales to use the capacity of the extended factory? • Will the extension disrupt production of wind turbines to meet existing customer orders? • Factory extension increases fixed costs significantly due to borrowing and if demand doesn’t increase there will be spare capacity resulting in an increase in unit cost • How long will it take to negotiate contract with CT? 2 3 marks 3 marks 3–4 marks 4–6 marks Good under- Good Good use of Some judgment shown in the main standing application to reasoned body of the answer and an attempt shown FE argument or to support conclusion / use of theory recommendation, focused on FE to explain OR points made to effective and well supported explain points conclusion / recommendation, made focused on FE

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3 Evaluate changes to the marketing strategy of FE needed to increase 16 its market share of the household market for wind turbines. Knowledge Application Analysis Evaluation Level 2 marks 2 marks 6 marks 6 marks 2 2 marks 2 marks 4–6 marks 4–6 marks Two or more Application of Good use of Good relevant two or more theory to judgment points points to FE answer shown question 1 1 mark 1 mark 1–3 marks 1–3 marks One relevant Some Some use of Some point made application to theory to judgment FE answer shown question 0 No creditable content Knowledge • Marketing strategy is the use of marketing mix with a marketing budget to achieve marketing objectives • Definition of market share: sales/market sales × 100 • Marketing mix is the 4Ps/4Cs • Market research to understand customer needs Application • Use of information regarding the elements of the existing marketing strategy for B2B (specialist magazines, finance deals, premium pricing but linked to selling to households • This is B2C (as end consumer is households) • Need to appeal to retailers or local equivalent such as businesses who sell and install turbines to households • Current strategy hasn’t worked Analysis • Price may need to be competitive to attract households who may be price sensitive • Increased promotion directed at households to raise awareness of FE’s entry into the market • Focus on green energy credentials of purchasing a wind turbine in promotion to attract customers • Elements of promotion may need to be informative as households may lack information about the benefits of renewable energy • To attract retailers to stock wind turbines use of promotions to increase margins to the retailer • Change in channel of distribution, e.g. direct to households may enable FE to offer more competitive prices to attract customers 3 Evaluation • Success may depend on willingness of FE to increase marketing budget to finance increased promotion to attract consumers • PED will be significant in determining whether price should change • Need for variety of changes to marketing mix to re-focus on target market • Depends on competitor activity • Any changes should be informed by market research • Justification of most important change 3 7–10 marks Good judgment shown throughout with well supported conclusion / recommendation, focused on FE

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4(a)(i) Refer to Tables 2 and 3. Calculate for 2019: 2 inventory turnover cost of sales Inventory turnover = (1) value of inventories cost of sales OR = (1) average inventories 3400 = = 1.7 times ( 2 ) 2000 1.7 (2) $1.7 or 1.7% (1) 3400 = 3.4 (1) 1000 365 = 215 days (1) 1.7 2000 × 365 = 215 days (1) 2000/3400 x 365 = 215 days (1) 3400 4(a)(ii) gearing 4 debt Gearing = × 100 (1mark ) debt + equity Or Non-current liabilities Gearing = × 100 (1mark ) capital employed Or Fixed cost capital Gearing = × 100 (1mark ) capital employed Or debt Gearing = × 100 (1mark ) equity Debt + equity = 800 + 900 + 45 = 1745 (1) Or Equity = 900 + 45 = 945 (1) 800 Gearing = × 100 = 45.8% ( 4 )( Allow 45.84% ) 1745 Or 800 Gearing = × 100 = 84.7% or 84.66% (4) 945 OFR Gearing = 45.8 or 84.7 (3) Possible errors: Partial calculation of capital employed 800 × 100 = 94.7% (3) ( + 45 ) 800 800 × 100 = 47.1% (3) ( 800 + 900 ) 800 × 100 = 1778% (3) 45 800 × 100 = 88.9% (3) 900 845 × 100 = 89.4% (3) 900 4(a)(iii) current ratio 3 CA CR = (1 mark) (if no relevant calculation) CL CA = 2000 + 1200 = $3.2bn (1) CL = 370 + 2211 + 20 = 2601 (1) 3200 3200 CR = = 1.23 or 1.23:1 (3) (Allow 1.2 if shown) 2601 2601 $1.23 or 1.23% (2) Possible answers allow rounding to 1dp if working shown 1200 = 0.46 (2) 2601 2000 = 0.77 (2) 2601 3200 = 1.24 (2) 2581 3200 = 1.43 (2) 2231 3200 = 8.21 (2) 390 OFR applies 4(b) Evaluate the usefulness of ratio analysis to FE’s managers when 12 making decisions. Knowledge Application Analysis Evaluation Level 2 marks 2 marks 3–4 marks 3–4 marks 2 2 marks 2 marks 3–4 marks 3–4 marks Two or more Application of Good use of Good relevant two or more theory to judgment points points to FE answer shown question 1 1 mark 1 mark 1–2 marks 1–2 marks One relevant Some Some use of Some point made application to theory to judgment FE answer shown question 0 No creditable content Note to examiners: • Own figure rule from 4(a) applies Knowledge • Ratios used to assess business performance / efficiency /liquidity / shareholder • Help with decisions regarding budgets/shareholder dividends / borrowing • Knowledge of what different accounting ratios show - Gearing – dependence on debt finance - Inventory turnover – measure of financial efficiency. Higher the number the more efficient the business - Liquidity ratios – ability to meet short term debt - Profitability ratios – ability to generate profit from sales / assets • Knowledge of other business ratios, e.g. labour turnover Application • Need for finance for expansion plans – extension to factory / new factory / takeover will impact gearing • Gearing is not high though it is close to 50% • Appropriate interpretation of current ratio, e.g. shows FE has sufficient short term assets to cover short term debt • Calculation of other ratios, e.g. - Acid test 0.46:1 - Operating profit margin 9.5% - Gross profit margin 19% 4(b) Analysis • Gearing helps make decisions about finance. High gearing indicates increased level of risk in terms of being unable to service the debt so whether or not to borrow money and how much to borrow • Gearing will impact decisions about how to finance expansion and be used to support application for finance as FE has low gearing so managers may consider further borrowing • Liquidity ratios help make decisions regarding working capital requirements • Profitability ratios can highlight where managers need to take action; for example, to control costs • Shareholder ratios may be used to make decisions about dividends to be paid to ensure that financial strain isn’t placed on business • Quantitative nature of ratio analysis will make decisions more scientific and add validity to decisions made • Ratio analysis may not be useful as there may be disagreement about interpretation of ratios / competition for resources / bias in departmental perspective / window dressing Evaluation • One ratio by itself is not very useful. Need to be able to see trends. • Inter-firm comparisons may be necessary to make judgements about performance of FE • Only a quantitative technique. Managers increasingly consider qualitative factors when making decisions • Ratios alone do not necessarily indicate the true cause of business problems. • Decisions also depend on other factors, e.g. external environment – forecast increase interest rates will impact decision to increase borrowing • Too much emphasis may be placed on ratios at expense of more qualitative factors

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5 Evaluate the significance of workforce planning to FE’s future 16 success. Knowledge Application Analysis Evaluation Level 2 marks 2 marks 6 marks 6 marks 2 marks 2 marks 4–6 marks 4–6 marks Two or more Application of Good use of Good 2 relevant two or more theory to judgment points points to FE answer shown question 1 mark 1 mark 1–3 marks 1–3 marks One relevant Some Some use of Some 1 point made application to theory to judgment FE answer shown question 0 No creditable content Knowledge • Analysing and forecasting the numbers of workers and the skill of workers that will be required by FE to achieve its objectives • Part of HRM – the effective management of organisations workers to gain competitive advantage. • Workforce audit Application • Reference to engineer shortages • Reference to the long training time for engineers • Use of overtime by FE • FE’s expansion plans and workforce planning Analysis • If FE doesn’t have sufficient engineers then it will result in dissatisfied customers leading to a loss of sales • Maintenance contracts may include clauses for financial penalties if work is delayed • Costs will increase if FE is always using overtime as rates of pay likely to be higher • Increased pressure on staff due to lack of employees can lead to an increase in labour turnover and therefore increase FE costs • Expansion of factory / building of new factory will require new workers to be recruited. Identifying skills and numbers needed will increase efficiency of the expansion and prevent bottlenecks. Evaluation • Workforce planning is necessary but not sufficient to ensure success. • Workforce planning is just part of the HR function. Workers need to be motivated to contribute their most to the business. • Only effective if it is linked in closely to firm’s long-term objective Questions 6 and 7 use this marking grid: Knowledge Application Analysis Evaluation Level 3 marks 3 marks 4 marks 10 marks

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6 Evaluate the usefulness of decision tree analysis to FE’s Directors 20 when making the strategic choice between options A and B. If no understanding of decision tree and only consider other SC techniques then L1 all skills (Max 9 marks) AN / EVAL must have link to DT or SC techniques If show K of DT but only AN / EVAL of other SC techniques then max K3 APP3 AN2 EVAL4 If only general factors in choice identified then zero Knowledge • Decision trees – consider payoffs and probabilities • Investment appraisal – using forecast cash flows - ARR, Payback, NPV, Discounted payback • Ansoff – classifies strategies - Market penetration, Product development, Market development, Diversification - Relates to risk • Force Field Analysis – driving forces and constraining forces Application • Difference in cost of investment of $400m. A is 50% more than B. Cost is constraining factor for A. • Expected value Option A: 2.32 – 1.2 = $1.12bn • Expected value Option B:1.44 – 0.8 = $0.64bn • ARR of A is above the current profit margin (PM = 9.5%) • ARR of B is below current profit margin • Option A – market penetration • Option B – diversification? Other interpretations possible Analysis • Decision trees help to quantify the decision and encourage consideration of all outcomes – important for a profit seeking PLC. Encourage consideration of risk and attempts to quantify it thus FE will be able to minimise its exposure to risk • Ansoff identifies the nature of the expansion – and considers the risk element too so a risk averse business might opt for market penetration • Payback is important where cash is limited. FE has a gearing ratio approaching 50% so paying back loan capital as early as possible could be important. 6 • Force field analysis. By identifying driving and constraining factors FE can seek to reduce the constraining factors and build on the driving factors thus increasing the chances of success. Helps identify key issues for the Board to consider in making the decision. Evaluation • SC based only on DT will ignore other significant factors when making the decision • Attitude of Board of Directors to risk important • Overall judgement based on preceding analysis and a consideration of the other techniques and information that need to be considered before this type of major strategic decision is made. • Ansoff – problem with quantification of risk. How useful is this for making a decision? Too many other factors to take account of. • Decision tree – how were the probabilities and expected outcomes estimated? • Investment appraisal – only considers quantitative factors • Force field analysis – highly subjective. Weighting of factors can influence recommendation

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7 Discuss the importance of FE’s Directors developing a detailed 20 corporate plan before implementing strategies for future growth. Knowledge Definition: A corporate plan is a detailed report on a company’s future long-term aims / objectives and the strategies it will follow to achieve them. • A business / corporate plan: - Gives direction to the business. The plan provides FE directors with a clear focus for what the company should be trying to achieve in the medium term. - Helps motivate staff. It provides a sense of purpose. - Enables planning at different levels of the business and ensures all staff are working towards the same goals. - Acts as a means for control and review. Actual outcomes can be compared with the objectives set and the performance of FE can be assessed. - Helps ensure that resources are used effectively and that all departments are working together. • The planning process itself is useful. It encourages directors and managers to consider the current situation of the firm and to set objectives accordingly. • How dynamic markets may undermine plans • Potential link between profitability and having clear business plans. • Planning of finance (sources and time-scales) will impact on expenses which can affect profitability Application • Lack of planning when entering the household market has resulted in poor performance and failure to meet objectives • Contingency planning may have been important to minimise the damage to FE • Need for planning re: expansion through factory in country P or takeover of Southvolt • Demand for renewable energy growing rapidly. To be responsive FE will need to plan new factories in advance of changes in the market Analysis • Planning is time-consuming and can be expensive, the more detail the greater the time and cost • Benefits of direction given for employees and their motivation linking to efficiency and achievement of objectives • SWOT analysis / Porter’s Five Forces and links to effective decision making regarding expansion. Analysis will reduce risk to FE in its decision making and thus help to ensure profitability. • Takeover of Southvolt is moving into a different product market. Planning will help reduce the problems associated with takeovers such as clash of cultures. • Business planning will support application for finance from financial institutions. 7 Evaluation • As there is a dynamic business environment, there is a need to adjust plans accordingly • Needs to be flexible and adaptable to meet new situations. • Reliability of information – how much is spent on market research/data gathering and how relevant is it? Interpretation of information used in planning can be influenced by skills and training of leadership. • Monitoring and review essential to ensure costs are not increasing in this rapidly changing market.