Business 9609/33 May/June 2022: question paper and mark scheme

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1 Analyse two opportunities for TK resulting from changes in the external 10 environment (lines 17–23). Level Knowledge Application Analysis 3 marks 2 marks 5 marks 2 3 marks 2 marks 4–5 marks Knowledge of Points applied to Good use of theory external TK and/or reasoned environment and argument to explain two opportunities benefit(s) 1 1–2 marks 1 mark 1–3 marks Knowledge of Point applied to TK Some use of theory external and/or reasoned environment (1). a argument to explain Knowledge of benefit(s) external environment and one opportunity (2) Note: Repeating text from the case study is not APP. Question is about opportunities to TK. No marks for threats. Opportunities must be linked to case. Knowledge Definition of external environment, factors outside the control of a business, such as government policies, economic factors and demographic and social changes. Reference to PEST analysis. Opportunities Economic growth – increase in GDP Government policy to promote economic growth Social changes, age structure of population and changing working patterns Technological – use of smartphones and ecommerce. 1 Application Increasing incomes mean more demand for non-essentials, such as takeaway and delivered food Government grants and loans help TK to recover from lack of demand caused by the recession Fewer consumers eating out in restaurants Demographics in cities where TK are located are likely to purchase delivered meals as they tend to be income rich / time poor Use of mobile phone apps – most TK customers use these TK specialises in meal delivery including USP of quality and packaging Analysis Building of chains of arguments linked to Knowledge and Application points raised above Positive impact of increasing incomes on demand and therefore sales and profits. Analysis of benefits of using mobile phone apps, such as efficient ordering and less errors which will reduce costs and better customer satisfaction which will increase sales. Government grants may encourage investment in updated technology to increase efficiency. Younger high-income professionals changing culture away from cooking at home will give TK opportunities to increase sales and expand. 1 1–2 marks 1–2 marks 1–2 marks 1–3 marks Some Some Limited use of Limited attempt to show judgement understanding application to reasoned either within the answer shown the case argument or OR use of theory a weakly supported conclusion/ to support recommendation with some focus points made on the business in the case

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2(a) Refer to lines 60–64 and Table 1. Calculate, for Kitchen 2, the: 2(a)(i) average daily capacity utilisation. 2 Capacity utilisation = current output / maximum capacity × 100 (1 mark if no relevant calculation) Current average daily output = 1000 Maximum capacity = 2200 Average capacity utilisation = 1000 / 2200 × 100 (1) = 45.45(%) (2) 45.45, 45.5 or 45 (2) Other answers 0.45 (1) 2(a)(ii) total contribution for the last six months. 4 Total contribution = total sales revenue – total variable costs (1) Total variable cost = ($)1.19m (1) 1.4m – 0.38m – 0.80m – 0.01m (2) 1.4m – 1.19m (3) = ($)0.21m OR ($)210 000 (4) 0.21 (3) 0.19m (3) 0.19 (2) (If fixed costs are incorrectly included then loss is ($0.01m) (1) OFR Note: Allow (unit) contribution = selling price – variable cost per unit (1) 2(b) You may refer to your results from 2(a) and other information. 12 Recommend whether TK should close Kitchen 2. Justify your recommendation. 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 or more Two or more Good use of Good relevant points theory and/or judgement points made applied to TK reasoned shown argument to answer question 1 1 mark 1 mark 1–2 marks 1–2 marks One relevant One point Some use of Some point made applied to TK theory and/or judgement reasoned shown argument to answer question OFR for answers to 2(a) Knowledge Contribution is the contribution to fixed costs of producing and selling goods. Capacity utilisation is the proportion of total capacity currently being used Rationalisation is reducing the scale of operations. Understanding of methods of costing such as full costing and contribution costing. Differentiation between fixed costs which do not change with output and variable costs. Application Revenue from Kitchen 2 is lower than the average for 8 kitchens for a 6- month period (25.4/2 = $12.7m, then 12.7/8 = $1.59m) Reference to calculations e.g. capacity utilisation seems low at 45% Reference to low income area and lower spend per order. On full cost basis, including head office and marketing costs, the kitchen has made a loss of $0.01m over the last six months. TK has strategy of growth so rationalisation would be a backward step. If TK close Kitchen 2, other kitchens would need to cover the $0.02m head office costs. Kitchen 2 makes a contribution of $0.21m to fixed costs. 2(b) Analysis Development of knowledge and application points made above. Falling sales in Kitchen 2 may be a drag on the company if it continues, leading to lower profits. Low capacity utilisation suggests inefficient use of resources with fixed costs being spread over a limited quantity of output resulting in higher unit costs. Rationalisation may negatively impact staff motivation in other kitchens leading to higher labour turnover. Marketing and further research may reveal a way in which sales can be increased. Objectives will influence decision – if growth is an objective, then closure would work against this, impact on shareholder confidence. Evaluation Only award EVAL if the candidate has also demonstrated APP. Supported decision – to close or not to close? – As Kitchen 2 makes a positive contribution (OFR) it should be kept open, to close would result in a reduction in profit. – Closure will benefit profits in the long term as if falling sales continue then profits will decrease. Limited data – only six months figures, is it a trend or an exception? Is the area where Kitchen 2 is located slower in coming out of the recession? In which case things could get better. Other evidence needs to be taken into account e.g. attitude of Thierry and Board of Directors Need for far more research into consumer tastes and competition in the area before decision is made. Is marketing mix appropriate for this area? 2 3 marks 3 marks 3–4 marks 4–6 marks Good Good Good use of Some judgement shown in the understanding application to reasoned main body of the answer and an shown the case argument or attempt to support conclusion/ use of theory recommendation, focused on the to explain business in the case points made OR effective and well supported conclusion/ recommendation, focused on the business in the case

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3 Evaluate the importance of product and process innovation to the future 16 profitability of TK. 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 or more Two or more Good use of Good relevant points theory and/or judgement points made applied to TK reasoned shown argument to consider whether product and process innovation is important 1 1 mark 1 mark 1–3 marks 1–3 marks One relevant One point Some use of Some point made applied to TK theory and/or judgement reasoned shown consider whether product and/or process innovation is important Knowledge Innovation – The development and introduction of new/updated products and processes, maintaining or improving competitive advantage. Definition of profitability and/or profit: – Profit = revenue minus costs – Profitability is the link between profit and revenue and capital employed Product as part of the marketing mix Process innovation reducing unit costs First mover advantage of being leader of innovation in a market or in an operations process Capital cost of research & development (R & D) Application TK has been at forefront of innovations in the food delivery business Thierry was an early adopter of the smartphone app for food delivery Patent on food packaging container Response of innovations to change in social trend, i.e. less eating out, more deliveries Necessity of continuous innovation in food menus such as vegan dishes, as well as keeping ‘customer favourites’. Advantage of trials in response to need for ‘contactless’ delivery (possible reference to Covid) 3 Analysis Development of knowledge and application points from above. Innovation has differentiated TK from other delivery companies leading to growth of revenue, profit, and the company. Innovation is often costly in the short term, such as development of packaging, which leads to higher costs, lower profits, lower shareholder dividends. Innovations offer solutions to problems but require substantial investment and therefore carry risk – will the ADVs prove to be a costly experiment with no future benefit? Innovation in menus can enable TK to take advantage of changing social trends such as consumption of non-meat products and give TK a competitive advantage leading to increased sales Evaluation Only award EVAL if the candidate has also demonstrated APP. Conclusion as to the past and future importance of innovation. Importance of continuing the trend for innovation as a way of maintaining competitive advantage. Other important internal and factors which determine profitability, such as marketing e.g. letting customers know about innovative menu ideas. The meaning of success in terms of profitability? Brand image? The external environment is dynamic and may change in the future and affect profitability differently. Impact of changing environment will depend on the management of TK and its flexibility in responding to change. Contingency planning may be significant. Need for continuous research to lead to new ideas. Need to maintain USP of high quality food which might be threatened by constant change to the menu. 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)(i) Refer to Table 2. Calculate for 2021 the: 2 operating profit margin operating profit margin = operating profit / sales revenue × 100 (1 if no calculation) 3.98 / 25.4 × 100 = 15.67% (2) 15.67, 15.7 or 16 (2) Note: 0.1567, 0.157 or 0.16 (1) 4(a)(ii) return on capital employed (ROCE) 3 ROCE = operating profit / capital employed × 100 (1) $3.98m / $30m × 100 (2) = 13.27% (3) 13.27, 13.3, 13 (3) Note: Use of profit for the year: 3.18m / 30m = 10.6% (2) If no calculation, allow profit / capital employed × 100 OR profit for the year / capital employed (1) 4(a)(iii) gearing ratio 3 Gearing ratio = non-current liabilities / capital employed × 100 (1) $15m / $30m × 100 (2) = 50% (3) 50 (3) Other answer 0.5 (2) OR NCL / Shareholders equity × 100 OR debt / equity × 100 (1) $30m – $15m = $15m shareholders’ equity (1 if no further calculation) So $15m / $15m × 100 (2) = 100% (3) 100 (3) Other answer 1 (2) 4(b) You may refer to your results from 4(a) and other information. 12 Recommend whether TK should finance the automated delivery vehicle (ADV) trial by a new share issue. Justify your recommendation. 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 or more Two or more Good use of Good relevant points theory and/or judgement points made applied to TK reasoned shown e.g. argument to well supported analyse factors conclusion 1 1 mark 1 mark 1–2 marks 1–2 marks One relevant One point Some use of Some point made applied to TK theory and/or judgement reasoned shown e.g. argument to one factor very analyse factors important Knowledge Understanding of factors influencing decision. Dividend yield – the % return based on current share price Dividend cover ratio – the ability of the company to pay dividends from profit ROCE – the operating profit as a % of capital employed Understanding of implications of new share issues, dilution of control and dividends Other reasons why investors might buy shares, e.g. level of return on other investments Other possible ways of financing trial, such as bank borrowing or reducing dividends Possible importance of gearing ratio Possible importance of operating profit margin Application Use of calculated shareholder ratios and ROCE - OFR Dividend yield – 8.57% is above average for the catering industry Dividend cover – 2.12 times ROCE – 13.27 % Capital cost of $1.5m – approximately 107 000 shares if they can be sold at current market price TK have ambitious innovation plans for ADVs In current economic situation interest rates are likely to be low, so incentive to purchase shares. Gearing is currently 50%, relatively high 4(b) Analysis Development of knowledge and application points from above. Reasons why share capital may be suitable – Above average dividend yield may attract investors and consequently a share issue is likely to be successful. – Share capital is permanent so does not need to be repaid and no interest costs therefore profitability would be greater. – Debt finance will increase gearing. Reasons why share capital may not be suitable – Issuing new shares may lead to a dilution of control of TK for Thierry which he may not want. – Shareholders will expect dividends every year reducing retained profit whereas a loan would only incur expenses for the duration of the loan. – A share issue may result in a reduction in the share price which current shareholders will be unhappy about. Evaluation Only award EVAL if the candidate has also demonstrated APP. Recommendation and justification of whether new share issue is the best source of finance. It depends on: – Investors’ willingness to buy shares – Evaluation of alternative source of finance – Debt finance (loans) has to be repaid with interest so may not be suitable as this is a high-risk investment – Will banks be willing to lend money for high-risk investment This is a competitive industry, and innovation will be important, it has been one of the features of TK so shareholders may look favourably on this. ADV investment is speculative – will investors be willing to take the risk? Other evaluative comment e.g. importance of the trend of ratio results or comparison with similar businesses.

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5 Evaluate whether introducing Just in Time (JIT) will be sufficient to 16 solve the inventory problems at TK. 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 or more Two or more Good use of Good relevant points theory and/or judgement points made applied to TK reasoned shown argument 1 1 mark 1 mark 1–3 marks 1–3 marks One relevant One point Some use of Some point made applied to TK theory and/or judgement reasoned shown argument Knowledge JIT as part of lean production Lean production – aims to cut down waste during production, including inventory holding costs Enterprise Resource Planning as a possible way of managing resources and facilitating JIT. Application Meals produced in batches of different dishes Demand difficult to predict due to changes in trends, weather, media reviews Many ingredients are perishable so limited storage time possible HR issues, such as flexible contracts for many employees in each kitchen Inventory problems have led to wastage/disappointed customers Quality really important as it is TK’s USP Analysis Development of knowledge and application points from above. As demand is difficult to predict TK may overstock certain ingredients and if demand does not emerge there will be wastage of fresh ingredients. JIT will reduce stock holdings which will reduce wastage of food so reduce costs. However, with JIT, if demand is not accurately predicted there may be insufficient stock to satisfy customers which may lower future sales. Quality is an important USP, in terms of food, packaging and service. JIT may increase quality as food will be fresher however there is a risk that certain ingredients will not be available when required. JIT will require more frequent deliveries from suppliers so strong supplier relationships become more important to guarantee deliveries on time. 5 Evaluation Only award EVAL if the candidate has also demonstrated APP. Judgement as to how successful JIT may be in solving inventory problems Need for all departments to work together to coordinate marketing and operations, as some inventory problems may be solved by influencing consumer demand, for instance by images on the app. Evaluation of possible limitations on change e.g. – Lead times and flexibility of suppliers – Depends on reliable suppliers and a good relationship with them – Attitude of Thierry and directors as there is risk involved in changing to JIT – Accuracy of sales forecasting – Cost of training employees and/or introducing ERP Judgement as to whether JIT may be the best technique to introduce. Other evaluative comment e.g. importance of market research. Questions 6 and 7 use this marking grid: Level Knowledge Application Analysis Evaluation 3 marks 3 marks 4 marks 10 marks

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6 Evaluate the usefulness to TK’s directors of the strategic choice data in 20 Appendix 1 as they make the decision between option 1 and option 2. Appendix 1 Note: Focus should be on strategic choice techniques NOT strategic analysis techniques. Knowledge Strategic choice is part of strategic management and involves the process of identifying and deciding between different options. Strategic choice techniques such as Ansoff’s Matrix, decision trees, force field analysis and investment appraisal. Strategic choice techniques help evaluate the risks and rewards from different strategic options. Understanding of different choice techniques: – Investment appraisal: payback and ARR. How quickly investment is recovered and the average profitability of the investment. – Decision trees – inclusion of probability to calculate the monetary outcomes from investments and make choice based on quantitative data – Force field analysis – considers driving and restraining factors in a decision – Ansoff’s matrix – considers risk of growth strategies with reference to product and market Quantitative and qualitative factors. Reference to strategic analysis techniques when preparing for choice such as SWOT, PEST, Boston matrix, Porter’s 5 Forces, Core competencies and others. 6 Application Use of the techniques/factors for two options – Appendix 1 examples. Ansoff’s matrix – Option 1 is product development or market development – Option 2 is product development or diversification. Option 2 has higher probability of success - less risk Option 1 has higher EMV and ARR Option 1 capital cost is $1.5m greater – link to high gearing of 50% Driving and restraining forces. – Complementary product for option 2 – Economic growth and demand for luxury restaurants – High competition in restaurant market in Europe – Not using core competence in option 2 Analysis How techniques may be used and the advantages and disadvantages. Force field analysis encourages managers to consider different aspects of a decision. By identifying restraining forces action can be taken to mitigate the negative effects of those restraining forces. Better decision making by considering the quantitative aspects of the choices. – Use of probabilities in decision trees reducing risk for TK of option choice. – ARR enables TK to choose option with highest return which may be important to shareholders as will influence dividends. The use of techniques to analyse aspects of the options. Interpretation of Ansoff’s matrix to compare the relative risk of each option therefore guiding decision making. e.g. option 2 might be considered to be diversification and therefore higher risk than option 1 so is therefore a better option How information identified might guide strategic choice, e.g. short-term impact of higher initial cost of option 1 balanced against higher risk of failure, but higher EMV How SC techniques, linked with data, might guide strategic choice. Advantages/disadvantages of using qualitative and quantitative techniques Evaluation Only award EVAL if the candidate has also demonstrated APP. Judgement/evaluation about usefulness of strategic choice techniques supported by e.g. – Is Ansoff useful in this case as risk more influenced by factors such as economic growth impacting incomes. – Subjective nature of Force Field Analysis – Limitations of using only quantitative or qualitative techniques. Elements that the evaluation/judgement might depend on such as: – Accuracy of estimates for quantitative techniques – Importance of understanding where the business is now in order to move forward with strategic choice – Other information 6 Evaluation of other factors that influence choice such as: – Attitude of directors – Attitude to risk – Influence of strategic analysis – Corporate objectives of TK – Impact of different strategies on stakeholders – Long-term v short-term impacts – Other information that might be useful – Capital available. Justification of most useful technique(s) with supporting argument. Techniques encourage directors to consider the possible quantitative outcomes of each strategy. This will help decide which is the best and therefore reduce risk. Evaluation that strategic choice on its own is not enough to fully support a decision. TK operate in a dynamic environment so analysis may quickly become outdated.

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7 Evaluate the importance to TK of contingency planning when 20 implementing strategies to diversify the activities of the business. Knowledge Definition of contingency planning Preparing an organisation’s resources for unlikely events that may have a significantly detrimental impact on the business. May also be referred to as scenario planning or business continuity planning. Understanding of strategies Understanding of diversification of business activities Benefits Reassures customers and staff that their interests are being considered. Reduces potential impact on customers resulting from a significant disruptive event. A plan will enable a business to respond more quickly when a significant disruptive event occurs. Recognising major risks may actually reduce the risk of the event happening. Limitations Disruptive events will still occur. Cannot have contingency plans for all eventualities. Need and cost associated with developing a plan. Application Recognising major risks, associated with option 1 and option 2, such as: Food contamination in either option Failure of equipment – could impact storage of food in either option Failure of snack supplies in option 2 Fire in restaurants or kitchens in option 1 Lockdowns/recession keeping people in their homes and away from restaurants Cyber attack on restaurant booking system Analysis Planning can be expensive and time consuming. There is the planning process and also the need to train staff for each possible eventuality. Dynamic markets make regular updates to contingency planning essential, so ongoing time and expense. With contingency planning the public relations response to disasters is much more likely to be quick and appropriate so that senior managers can manage media attention and customer and employee concerns. Effective communication of what the company intends to do, by when and how, will reduce the impact of bad PR and loss of customer loyalty. Contingency planning makes crisis management easier when a crisis occurs leading to a lower chance of sales being negatively affected. Contingency planning will mean that TK is less reliant on which employees happen to be present when a crisis occurs. 7 Evaluation Only award EVAL if the candidate has also demonstrated APP. Judgement of extent to which contingency planning is important to success of option 1 and option 2. Contingency planning is just one element of business planning to implement a diversification strategy. Avoiding significant disruptions may be better than planning what to do if they happen. Plans need to be updated frequently as the business develops increasing costs. Cost to TK needs to be balanced against the potential costs of not doing it. Which potential disasters could/should be planned for? Evaluation of time spent on preparing and testing contingency plans. It is impossible for TK to plan for all eventualities.