Business 9609/34 May/June 2021: question paper and mark scheme

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1 Analyse how TT might be affected by an increase in interest rates in 10 the Eurozone. Level Knowledge Application Analysis 3 marks 2 marks 5 marks 2 3 marks 2 marks 4–5 marks Knowledge of interest Two points Good use of theory rates and one or two applied and/or reasoned impact(s) of an argument to explain increase impact(s) 1 1–2 marks 1 mark 1–3 marks Knowledge of interest One point Some use of theory rates and / or one applied and/or reasoned impact of an increase argument to explain or knowledge of two impact(s) impacts of an increase Knowledge Definition of interest rates: • Cost of borrowing / reward for saving. • Part of the external environment. • Interest rates used by central bank to control inflation. Understanding of an increase in interest rates and impact: • Increases the rewards for saving and the cost of borrowing • Contractionary monetary policy by the ECB. • Decrease in consumer demand • Exchange rate impact • Decisions about borrowing Application Use of case material / context • Luxury wooden toys • CAM machine investment • Potential investment in joint venture • Special order to US • Imports from outside Europe • 40% of exports to US • Exports to Far East 1 Analysis • Higher interest rates increase incentives for consumers to save, may spend less on luxury toys • Higher interest rates will reduce discretionary income of consumers as the cost of mortgages and loans will increase. Therefore, spending on goods and services will decrease. • Borrowing will be more expensive, which may affect CAM machine and other investment decisions • TT could earn more interest on any bank balances and increase current assets • Higher interest rates may cause Euro to appreciate against other major currencies: – So exported toys will be more expensive in terms of other currencies – Any imported toy materials or components will be cheaper for TT if the Euro appreciates – TT’s toys are luxury items, probably aimed at high income consumers and also relatively price inelastic, so small price rises caused by currency appreciation may not have a big impact. 1 1–2 marks 1–2 1–2 marks 1–3 marks Some marks Limited use of Limited attempt to show judgement either understand Some reasoned within the answer ing shown applicatio argument or use OR n to the of theory to a weakly supported conclusion/ case support points recommendation with some focus on the made business in the case

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2(a) Refer to Appendix 1 and lines 35–37. Calculate the impact on TT’s 6 profit if the special order from the US toy retailer is accepted. Formulas (1 mark total if no relevant calculations) Contribution per unit = selling price – variable cost Total contribution = contribution per unit × no of units Profit = TR – TC Unit contribution Selling price $30 Production cost $24 Packaging $2.50 Transport $1.50 (1) Total VC per unit = $28 (3) Contribution per unit: $30 – $28 = $2 (4) Total contribution $2 × 50 000 = $100 000 (6) Profit will increase by $100 000 (6) Totals Approach Total revenue:50,000 × $30 = $1 500 000 (1) Total VC = $28 × 50 000 = $1 400 000 (4) Total contribution = $100 000 (6) Profit will increase by $100 000 (6) Profit based on use of different VC calculations Just used VC of production: Unit contribution = 30 – 24 = $6 (2) Profit = 6 × 50 000 = $300 000 (4) VC + packaging Variable cost = 26.5 (2) Unit contribution 30 – 26.50 = $3.50 (3) Profit = $175 000 (5) Including FC Production VC + FC Unit contribution = $3 (1) Profit = $150 000 (3) VC + Packaging + FC Variable cost = $29.50 (1) Unit contribution = $0.50 (2) Profit = $25 000 (4) All VC + FC Variable cost = $31 (2) Contribution per unit: $30 – $31 = ($1) (3) Total contribution ($50 000) (5) Profit will decrease by $50 000 (5) OFR 2(b) Refer to your answer to part (a) and other information from the case. 12 Advise TT whether to accept the special order from the US toy retailer. Level Knowledge Application Analysis Evaluation 2 marks 2 marks 4 marks 4 marks 2 2 marks 2 marks 3–4 marks 3–4 marks Two Two points Good use of Good relevant applied theory and/or judgement points reasoned shown argument 1 1 mark 1 mark 1–2 marks 1–2 marks One One point Some use of Some relevant applied theory and/or judgement point reasoned shown argument Knowledge Understanding of factors in decision: • Contribution • Profit • Impact on other customers • Capacity utilisation Application Use of results to 2(a) / case study information. (OFR applies) • Difference in price $30 rather than $35 • Large order of 50 000 units • Nine-month time frame for delivery • Need to double annual output • Order is from biggest toy retailer in US • Capacity currently 50% so will double to 100% for toy trains • Contribution reduced from $7 to $2 • Increase in demand for toy trains following the footballer raising awareness of TT’s toy trains Analysis • This could lead to more orders in the future and therefore increase the rate of growth of TT. • Reduced price of $5 could lead to other retailers asking for lower prices. Therefore, reducing profit for TT or causing other retailers to be dissatisfied if lower prices not given. • Capacity issues – effectively closes off current capacity to other orders/customers. Could result in dissatisfied customers and loss of long-term orders reducing revenue from other customers. • Sales through this large retailer could dilute TT’s sales to other retailers in the US. 2(b) Evaluation • Supported recommendation to either accept or reject the special order • Elements that the evaluation/judgement might depend on: – Is TT capable of meeting the order within the nine-month deadline? • Significance of other factors that may also influence decision – Opportunity to gain greater access to a large retail market – Current utilisation of only 50% – Sales seem to be increasing generally, why accept this order at the lower price? 2 3 marks 3 marks 3–4 marks 4–6 marks Good Good Good use of Some judgement shown in the main body understand applicatio reasoned of the answer and an attempt to support ing shown n to the argument or use conclusion/ recommendation, focused on case of theory to the business in the case explain points OR made effective and well supported conclusion/ recommendation, focused on the business in the case

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3 Refer to Appendix 3 and other information from the case. Discuss 16 whether TT’s directors made the right decision in choosing candidate Y as the new Marketing manager. Level Knowledge Application Analysis Evaluation 2 marks 2 marks 6 marks 6 marks 2 2 marks 2 marks 4–6 marks 4–6 marks Two Two points Good use of Good relevant applied theory and/or judgement points reasoned shown argument 1 1 mark 1 mark 1–3 marks 1–3 marks One One point Some use of Some relevant applied theory and/or judgement point reasoned shown argument Knowledge • Recruitment – finding the right person for the job • Recruitment process – advertising, shortlisting and interviewing to compare candidates Factors that could influence the decision including: • Leadership style • Ability to work in a team • Salary required • Experience of management • Emotional intelligence • Experience of the market Application • Candidate Y less experience as a manager • Both have marketing degrees • Candidate Y may need training to understand the toy market • Candidate Y is ambitious • Candidate X has experience of working as a marketing manager • Higher current salary of candidate X by $7000 • Candidate X has worked for a company that target children’s market previously • Candidate X lacks experience with IT. Candidate Y • Need to develop IT at TT 3 Analysis Chains of reasoning highlighting factor(s) in making the choice • Discussion of current/future marketing strategies, role of marketing manager • Candidate will need to be adaptable to niche or possible mass market for toys • Candidate Y has less experience so may need more support to grow into the role. • Candidate Y may be cheaper to employ reducing additional labour costs associated with creating the role. • may have experience of computer game launches. • Candidate Y is ambitious and looking for promotion, this might mean that they are more likely to leave after a short period of time causing disruption. However, it might mean the candidate is more motivated and works harder to impress senior managers. • Candidate Y has little knowledge of toy market and so may take time and training cost to be ready to fulfil role effectively • Candidate X has knowledge of market for children’s clothes – related products. Is therefore more likely to have knowledge and experience of similar product launches. • Candidate X has more experience of management so might be more effective in the short term. • Candidate X may be a good team player and therefore may integrate better into TT’s management team. Evaluation • Supported judgement as to whether candidate Y was the right choice. • Elements that the evaluation/judgement might depend on: – Extent to which it is important for TT to keep costs down. – Future marketing plans may be very different, either for joint venture or merger – which candidate may be more adaptable? – Timescale: how soon can the candidate start the job? • Significance of other factors that may also influence decision. – Which candidate was best ‘on the day’? – Importance of experience. – Cost of training required and time to fit into role. • Limited information – were candidates asked about marketing ideas? • What is the most important factor? • Either candidate could probably do the job, was candidate Y chosen to fit with existing team? 3 7–10 marks Good judgement shown throughout with well supported conclusion/ recommendation, focused on the business in the case

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4(a) Refer to Appendix 2. Calculate, for the purchase of the CAM equipment: 4(a)(i) the payback period 2 Year Net cash flows ($m) Cumulative cash flow ($m) 0 (2.5) (2.5) 1 0.4 (2.1) 2 0.6 (1.5) 3 0.7 (0.8) 4 0.7 (0.1) 5 0.8 0.7 6 $0.9 0. Payback during Year 5 0.1 0.8 × 12 = 1.5 Therefore, during month 2 of year 5 4 years 1.5 months OR 4 years 46 days OR 4.125 years OR 4 years 2 months (2) During Year 5 (1) Some correct cumulative net cash flows beyond Year 0 (1) 4(a)(ii) the accounting rate of return (ARR) 4 Rationale Content Marks Correct answer with or without 10.67% OR 10.8% OR 4 units. 10.4% Working not required 21.33% OR 21.6% OR Alternative formula 20.8% Annual profit (units not necessary) 1.6m / 6 = 0.266m OR 3 0.27m Allow 0.26m OR OFR based on error in ARR calculation – original investment not deducted 0.683 / 2.5 × 100 = 27.3% 0.683 / 1.25 × 100 = 54.6% – profit not divided by 6 1.6 / 2.5 X 100 = 64% Profit 4.1m – 2.5m = 1.6m 2 OR OFR for annual profit – original investment not deducted 4.1m / 6 = 0.683m OR original investment not 4.1 / 2.5 × 100 = 164% deducted and not divided by 6 Total cash inflows 4.1m 1 OR Correct formula (annual profit / capital cost) × 100 OR (annual profit / average investment) × 100 No creditable content 0 4(b) Refer to your answers to part (a) and other information from the case. 14 Recommend whether TT should purchase the CAM equipment or outsource toy train production. Justify your recommendation. Level Knowledge Application Analysis Evaluation 2 marks 2 marks 5 marks 5 marks 2 2 marks 2 marks 4–5 marks 4–5 marks Two Two points Good use of Good relevant applied theory and/or judgement points made reasoned shown e.g. argument well supported conclusion 1 1 mark 1 mark 1–3 marks 1–3 marks One One point Some use of Some relevant applied theory and/or judgement point made reasoned shown argument Knowledge • Investment appraisal is a way of assessing future returns from a capital purchase. • Payback looks at the month/year by which the net cash flow generated by the investment pays back the original sum. • ARR looks at the average yearly return. • Neither method considers the time value of money • Factors influencing decision such as: – Cost – Impact on quality – Availability of finance – Length of payback – Profit Application • Payback during Year 5 • Positive return of £0.26m per year – 10.7% comparison with bank rate (OFR) • Purchase of machine will decrease production costs by 20% • Outsourcing also reduces costs due to production in ‘low cost’ country. • Interest rates rising • Reference to other financial data, such as calculation of reduced production cost of train sets $24 – 20% = $19.20 • Quality issues with outsourcing plus safety standards for toys • Gearing 0% • Outsourcing company is 3000 km away 4(b) Analysis • Payback during Year 5, after which positive cash flows will contribute to profit. • Interest rates rising – could increase cost of loan and reduce return Have TT got any internal sources of finance? • Purchase of CAM will increase capacity of the company long-term • Possible quality issues with outsourcing plus safety standards for toys and impact on demand and TT’s reputation • Flexibility due to outsourcing but maybe communication problems with producer 3000 kilometres away (developing country?) • Subcontracting is flexible as TT can increase/decrease orders according to demand. • Loss of control over quality could result in reputation damage if toys do not meet quality standards thus reducing sales • Outsourcing company may benefit from economies of scale and therefore have lower prices thus enabling TT to make greater profit • Outsourcing company has to make a profit. This could result in a higher price per unit to TT Evaluation • Decision may depend on value after six years / speed of depreciation. How accurate is the figure given? • Other factors to consider e.g. – NPV as this considers time value of money – Depends on availability of finance • Will increased demand continue? If unsure outsourcing may be better as less risk

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5 Discuss whether TT should introduce Total Quality Management 16 (TQM). Level Knowledge Application Analysis Evaluation 2 marks 2 marks 6 marks 6 marks 2 2 marks 2 marks 4–6 marks 4–6 marks Good use of Good Two Two points theory and/or judgement relevant applied reasoned shown points argument 1 1 mark 1 mark 1–3 marks 1–3 marks Some use of Some One Point theory and/or judgement relevant applied reasoned shown point argument Knowledge Definition: • TQM makes everyone in the business responsible for quality in their area. • Impact on quality. Getting it right first time. • No need for quality control inspection once TQM established • Need for training • Change in culture and working practices Application • Current quality control system using inspectors • Quality inspectors no longer needed • Importance of toy safety standards • Premium wooden toys • Old established workers may find it more difficult • Workers complain of lack of empowerment Analysis • In this case, the current quality control processes seem cumbersome – inspection of each individual item. This is inefficient and increases costs • Quality is very important to meet the toy safety standards and maintain the current good name of the company • TQM would give workers the responsibility of ensuring that their part of the production task meets the required standard, including the sourcing of raw materials. Potential increase in motivation • The wages of quality controllers will be saved thus reducing costs and enabling TT to increase profits or reduce price • Getting production ‘right first time’ should save costs of wastage • Training will be required prior to implementation of TQM. This will increase costs. There may be resistance from workers who may not like change 5 Evaluation • Supported recommendation • Elements that the evaluation/judgement might depend on: – The current culture of TT does not seem welcoming to TQM – If merger option is chosen, TT may need to consider quality systems used by Company B. – Judgement may depend on the nature of staff in all the different jobs with the company. – Has the current workforce got the skills/interest in moving away from current practice? Questions 6 and 7 use this marking grid: Knowledg Applicati Le Analysis Evaluation e on vel 4 marks 10 marks 3 marks 3 marks

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6 Discuss the usefulness of strategic choice techniques to TT’s 20 directors when choosing between the joint venture with company A or the merger with company B. Knowledge • Joint venture – when companies co-operate in a new project, often in another country, to share expertise. • Merger – when a company joins with another company with a view to mutual benefit, in this case vertical integration. • Strategic choice techniques – Ansoff’s matrix, Force Field analysis, Decision Trees investment appraisal. • Quantitative v qualitative techniques • Understanding of SWOT, PEST, Porter’s Five Forces and Boston Matrix as strategic analysis techniques prior to SC. Application • Merger is example of vertical integration – Ansoff – might be considered as diversification, market development or market penetration • Ansoff might best consider joint venture to be product development, or diversification. • Force Field Analysis for merger – Culture issues of merger as restraining factor. – Existing 20 shareholders and their attitude toward the merger. – Increased access to retail outlets as driver. – Infrastructure and employees would not be changed as driver. – Potential loss of TT identity as it joins other brands owned by company B • Force Field Analysis for joint venture – $3.5m cost as restraining factor – Similarities between TT and Company A in terms of size, organisational structure and working practices as a driver. Analysis • Analysis of how strategic choice techniques might guide strategic decisions: – Identification of restraining forces that need to be addressed when making decisions or alternatives sought such as financing the joint venture. – Weighting of forces in FFA helps managers focus on relevant factors to the decision resulting in better decision making – Ansoff encourages consideration of risk involved in strategic decisions which protects the business from bad choices that are too risky. – Decision Trees provide quantitative information allowing comparisons of options so that the most profitable decision, on average, can be identified. 6 Evaluation • Elements that the evaluation/judgement might depend on: – Subjective nature of assigning numbers to driving and restraining forces in Force Field Analysis – Accuracy of DTA estimating future pay-off and probabilities. – Need for a range of quantitative and qualitative approaches to inform decision making. – Dynamic nature of business environment making predictions about future difficult • Significance of other factors that may also influence decision – Decision may depend on objectives of director/shareholders – merge or not? Do they want to stay within the organisation or take the return? – Need for strategic analysis prior to SC

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7 Assume TT merges with company B. Evaluate strategies senior 20 management could use to manage the necessary changes. Knowledge • Change management: planning, implementing, controlling and reviewing the movement of an organisation from its current state to a new one • Understanding strategies used by management to ensure that workforce are informed, ‘on board’ and included when a major change is introduced. – Need for communication with workers – Ways in which workforce may be included, e.g. project champions, project groups. – Role of resistance – Change in leadership style to manage change – Importance of business culture – Role of informal groups • Understanding of corporate planning Application • Mission statement of TT • New merged company will increase in size – growth issues • Infrastructure and employees of both companies would not be changed • Company B is a large retailer so this is vertical integration, however the case indicates that Company B also owns other toy brands, so they may have some manufacturing expertise as well/horizontal integration • Company cultures are very different regarding delegation and teamwork. Analysis • Communication of clear objectives to give goals for all employees to work towards. • Communicating the reasons for the merger so that employees understand the changes can reduce resistance. • Company cultures are very different – a major area that would need to be planned for. If merger is opportunity for greater delegation in TT then training may be needed to give workers the skills to cope with extra responsibility. • Integrating staff and brands will need to be carried out with care, risk to TT’s brand of ‘minority’ status. • Informal groups will be important – how to get them ‘on board’? 7 Evaluation • Success of any change management strategy will depend on management approach and, to some degree, whether change is supported from top down. • Best strategies will be those that prepare staff, show the benefits, then carry them along as change develops • Will TT directors and staff be able to adapt to these changes? What are likely to be the main obstacles? • Company mergers often do not deliver the promised ‘synergy benefits’ • Timing will also be important. • To what extent will employees see this as a major threat?