Business 9609/32 October/November 2022: question paper and mark scheme

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0 No creditable content

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1 Analyse two benefits to APF of vertical integration. 10 Level Knowledge Application Analysis 3 marks 2 marks 5 marks 2 3 marks 2 marks 4–5 marks Knowledge of two Two points Good use of theory benefits and vertical applied to APF to explain benefit(s) integration 1 1–2 marks 1 mark 1–3 marks Knowledge of one or One point applied Some use of theory two benefits or to APF to explain benefit(s) knowledge of vertical integration and/or one benefit 0 No creditable content Note: • Do not credit reproduction of phrases/data in the case study without use and/or comment. • Benefits should be linked to vertical integration not horizontal integration • L2 AN can be accessed even if the impact of only one change is analysed. Knowledge • Integration with firms in the same industry between a customer and/or a supplier of the business. Firms joining together at different stages of production. Firms joining together which are in different sectors of the economy; primary, secondary, tertiary. Benefits include: • Provides a secure outlet for APF’s own product. • Can control the promotion and price of its own product. • Control over quality, price and delivery of supplies. • Absorb profit margins of a customer business and/or a supplying business. • Competitive advantage. • Synergy. • Economies of scale. • Adds value to output. • Avoid supply disruption. 1 Application • APF farms fruit (primary producer) but also processes the fruit e.g. producing fresh chilled juice. • Keeps profit that would otherwise go to processing business. • Adds value to output of fruit through processing. • Helps meet goal of increasing shareholder value. • Gives control of sale of blueberries and avocados through the chain of retailers. • Fruit farming is low added value relative to other stages of supply chain. • Economies of scale reducing average costs by eliminating overhead by consolidating management and streamlining processes. Large scale operations may provide purchasing economies of scale. • Lower pricing strategies can be used. A company that's vertically integrated can transfer the cost savings they create to the consumer. Analysis • Higher value added will increase profit for APF which increases shareholder value. Fruit farming may have low value with most of the value added at the processing stage as with the chilled fresh juices. Cost of fruit is $0.35 but selling price of juice is more than double that. • Can control pricing of fruit in retail chain owned, therefore, determine the margins earned and be more responsive to customer demands increasing sales and profit. • Can be effective selling point within marketing as APF can claim to have greater control over quality of the end product which benefits the consumer and can increase sales. • APF can control the branding of its products from the primary to the retail stage more effectively. • Increases sales, reduces costs and increases efficiency leading to greater profit therefore improving shareholder value. 1 1–2 marks 1–2 marks 1–2 marks 1–3 marks Some Some Limited use of Limited attempt to show judgment under- application reasoned either within the answer standing to APF argument or use OR shown of theory to a weakly supported support points conclusion/recommendation with made some focus on APF

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2(a) Refer to Table 2 and lines 52–57. Calculate the forecast total 5 contribution from the proposed order for fresh juice. Rationale Content Marks Correct answer (units not required). $1.8m 5 Working not required. Statement of correct calculation 19.5(m) – 17.7(m) 4 TR & TVC 19.5(m) & 3 17.7(m) Total variable cost OR 17.7(m) 2 Unit variable cost AND Revenue 0.59 & 19.5(m) Unit variable cost OR 0.59 1 Total variable cost of fruit OR $12(m) Total variable cost of labour OR $2.7(m) Total variable cost of packaging OR $3(m) Revenue OR 19.5(m) Correct formula No creditable content 0 Relevant formulae: Total contribution = Contribution per unit X total sold (1 if no relevant calculations) OR Contribution per unit = selling price – variable cost (1 if no relevant calculations) OR Total revenue – total variable costs = total contribution (1 if no relevant calculation) Calculations: Revenue = 0.65 X 30m = ($)19.5m (1) Unit variable costs = 0.40 + 0.09 + 0.10 = ($)0.59 (1) Total variable cost = 0.59 X 30m = ($)17.7m (2) Total contribution = 19.5m – 17.7m (4) = $1.8m (5) Common answers • Missed transport costs $4.8m (4) • Missed labour cost $4.5m (4) • Missed fruit cost $13.8m (4) OFR 2(b) You may refer to your answer to 2(a) and other information. 12 Recommend whether APF should accept the proposed order for fresh juice. 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 points Good use of Good relevant points applied to theory to judgement made APF answer shown question 1 1 mark 1 mark 1–2 marks 1–2 marks One relevant One point Some use of Some point made applied to theory to judgment APF answer shown question 0 No creditable content Note: OFR from response to 2(a) applies. Knowledge • Meaning of ‘special order’ in general, i.e. ‘one off’ factors in making the decision: • Available capacity / capacity utilisation • Unit and total contribution to fixed costs • Impact on profit • Possibility of future orders • Impact on production of other products • Relevance of timescale for order Application • Reference to and use of results. • Contribution is $1.8m • Additional revenue of $19.5mCurrent spare capacity 24m litres • Capacity utilisation 80% • Capacity utilisation with special order will be 105%, so over full capacity (126/120 x 100) • Sales of juice have not met growth target. • Labour turnover problems. • Delivery required in first three months of 2023. • Order will not be APF branded. • Annual fixed costs of $12m. • Availability of fruit to meet the order from APF farms or other suppliers. • Fresh juice has a short shelf-life. • 30m litres is full capacity for first quarter. 2(b) Analysis Analysis of reasons why order should/should not be accepted. • Special order will add to profit but could more have been added if juice was sold at usual selling price of $0.85. • Impact on existing customers. As order will take APF over capacity then may be unable to meet existing customer needs resulting in dissatisfied customers and therefore loss of future sales. • Special order may lead to future orders which will increase sales and profit. • Limited time available for delivery of the juice increases the chance that it could cause disruption to other customer orders. • Output is increasing each year. If this trend continues then APF will soon reach capacity. This will be more valuable than accepting the special order. • The order would take up capacity for 3 months stopping fulfilment of other orders. • Order will increase market share in US which is their leading market so will consolidate their position and reputation. Evaluation • Recommendation with supporting argument. • Elements that the evaluation/judgement might depend on: – Contribution is positive so worth considering. – Total contribution will only add $1.8m to profit if other forecast orders can also be met. – Can APF start production now to fulfil the order? Depends on shelf- life of the product, which is likely to be short (fresh juice). – To fulfil the order APF may have to increase capacity resulting in more fixed costs. – To what extent might special order lead to more sales in future? – Fruit is a seasonal product so will APF be able to meet the order? • Short/long term impact on APF • Evaluation of other factors that might influence the decision. ARA 2 3 marks 3 marks 3–4 marks 4–6 marks Good Good Good use of Some judgment shown in the main under- application reasoned body of the answer and an attempt to standing to APF argument or use support conclusion/recommendation, shown of theory to focused on APF explain points OR made to explain effective and well supported points made conclusion/recommendation, focused on APF

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3 Evaluate the importance to APF’s operational effectiveness of 16 workforce planning. 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 points Good use of Good relevant points applied to theory to judgment APF answer shown question 1 1 mark 1 mark 1–3 marks 1–3 marks One relevant One point Some use of Some point made applied to theory to judgment APF answer shown question 0 No creditable content Note: • Importance must be to APF. • If comment made on impact on employees, it must be linked to what it may mean for the business. Knowledge • Definition and importance of workforce planning, e.g. looking at future business needs to identify workforce skills and needs. Provides a plan for recruitment needs. • Helps determine types of employee contracts required based on workforce needs. • Link between employee performance and workforce planning • Link between workforce planning and employee training. • Planning where and how employees are to be used. • Core and peripheral workers • Operational effectiveness relates to efficiency within production, capacity utilisation and being able to meet customer demands. Application • Problem with labour turnover at juice factory. • Need for seasonal employees for picking fruit. • Perishable nature of product. • Need for employees to meet special order from retailer. • Harvesting fruit is labour intensive. Much of the work is seasonal. • Shortage of skilled technicians has disrupted production. • Planning of peripheral workers such as seasonal fruit pickers and core workers such as skilled technicians. 3 Analysis • Identification of workforce needs in terms of numbers and skills will help APF operations be efficient and ensure that there is no shortage of workers with the right skills which would otherwise disrupt production and lead to delays. Any delays to production could affect sales. • Insufficient farm workers during harvesting season will result in unpicked fruit which goes to waste. Thus, costs involved in growing the fruit will not be recovered. • Either strategic option will require more workers so workforce planning will help implementation of strategies and aid meeting the objectives set. • Possible workforce planning approaches can be developed e.g. the mix of flexible versus permanent contracts required and how this might impact costs on fruit farms. Evaluation Only award EVAL if the candidate has also demonstrated APP. • Judgement of the usefulness of workforce planning to operational effectiveness. • Essential to organise workforce better to improve future performance in terms of operations. • Workforce planning can only be effective if linked in closely with the firm’s long-term objectives. • Without a workforce plan APF may fail to meet customer demands. • Evaluation of other factors that influence future operational effectiveness. – External factors may mean that workforce planning fails e.g. weather and disease impacting crop yields. Therefore, workforce planning needs to be flexible. – Internal factors such as organisational structure, leadership and motivation. 3 7–10 marks Good judgment shown throughout with well supported conclusion/ recommendation, focused on APF

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4(a) Refer to Table 3. Calculate the accounting rate of return (ARR) for the 3 investment in enterprise resource planning (ERP). ARR = Annual profit / capital cost X 100 OR ARR = Annual profit / Average investment cost X 100 (1 mark if no relevant calculation) Annual profit = Profit / number of years Profit = $9.5m (1) Annual profit = $1.9m (2) ARR = 19% OR 19 (3) If used average investment (assuming residual value of investment is $0): ARR = 1.9 / 5 X 100 = 38% (3) $19m or $38m (2) If capital cost is not subtracted then 39% (2) Working should be evident. OFR 4(b)(i) Refer to Table 4. Calculate, for 2022, the: 3 inventory turnover Inventory turnover ratio = Cost of sales / value of inventories (1) 140.2 / 25.8 (2) = 5.43 times (3) Allow 67.2 days or 68 days (allow 67 days) (3) Candidates may use the average inventory, so the inventory for 2021 added to 2022 and then divide by 2 so the answer would be: 140.2 / 22.05 = 6.36 times (3) OR (22.05 / 140.2) X 365 = 57.4 days 58 days (allow 57 days) (3) $6.36m or $58m (2) If used 2021 data then max 2 marks 2021= 6.22 OR 58.7days (2) OFR 4(b)(ii) days’ sales in receivables. 3 Days’ sales in receivables ratio = trade receivable / revenue X 365 (1) OR Trade receivables / credit sales X 365 (1) 40.8 / 255.6 X 365 (2) 58.26 days OR 58.3 OR 59 days (allow 58 days) (3) $58.26m (2) 1.9 months (2) If used 2021 data then max 2 marks 2021 = 45.2 days (2) OFR 4(c) You may refer to your answer to 4(a), 4(b) and other information. 12 Evaluate the benefits to APF of investing in enterprise resource planning (ERP). Level Knowledge Application Analysis Evaluation 2 marks 2 marks 3–4 marks 3–4 marks 2 2 marks 2 marks 3–4 marks 3–4 marks Two or more Two points Good use of Good relevant points applied to theory to judgment APF answer shown question 1 1 mark 1 mark 1–2 marks 1–2 marks One relevant One point Some use of Some point made applied to theory to judgment APF answer shown question 0 No creditable content Note: K2 APP 2 if no knowledge of ERP and only refers to investment appraisal and/or financial efficiency Knowledge • ERP is using dedicated software to integrate orders, materials, labour and distribution to minimise cost, reduce inventory levels and waste. • ERP enables customer orders to match raw material supplies to enable JIT. • Enables APF’s orders to be delivered quickly. • Reduces cost of ordering and holding inventory. • All departments can access same information so no communication issues. • Reduces waste due to deterioration in overlong storage. • Increases competitive advantage. • Cost of staff training. • Time and disruption during integration of ERP system. • Understanding of ARR / inventory turnover / days’ sales in receivables Application: • May facilitate meeting increasing demand for juice orders. • Link to sustainability and shareholder value. • Complex supply chain management. • Use of ARR figure of 19% • Payback 2 years 8.7 months. • Change in ratios since 2021: – Inventory turnover reduced from 6.36 times to 5.43 times or from 59 to 68 days – Days’ sales in receivables increased from 45.2 days to 58.26 days. 4(c) Analysis • JIT production will reduce inventory holding costs and increase profit. • May enable increase to maximum capacity as less inventory will be held. This will facilitate meeting increasing demand for juice orders. • ERP enables customer orders to match raw material supplies to enable JIT. This will reduce APF costs of storage and reduction in value of fruit due to ageing. • Enables APF’s orders to be delivered quickly, providing better customer service and meeting customer expectations of fast delivery. This will help retain customers. • All departments can access same information so no communication issues. • Reduces waste due to deterioration in overlong storage thus improving efficiency. Link to sustainability and reputation of APF. • Enables rapid response to change and customised pricing. • Can be adapted to enable/facilitate expansion or new products. • Increases competitive advantage helping APF to increase market share. Evaluation Only award EVAL if the candidate has also demonstrated APP. • Elements that the evaluation/judgement might depend on: – Cost savings are estimates made by APF. Can these figures be trusted? Have training costs of introducing ERP been factored into the net cost savings. – If ERP is used to reduce inventory holding costs, then success depends in part on the reliability of suppliers of fertilisers etc to deliver on time. – ERP will help with the vertical integration of the business by connecting more effectively the different stages of production. – Data is the lifeblood of every modern company, ERP makes it easier to collect, organize, analyse, and distribute this information to every individual and system that needs it to best fulfil their role and responsibility. – How long will it take to implement - given the complexity of the supply chain? – Danger of obsolescence as newer systems developed. • Evaluation of other factors to consider e.g. – NPV as this considers time, value of money. – Depends on ability to recruit suitable employees to manage the system. – Depends on availability of finance.

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5 Evaluate the importance, to APF’s future success, of marketing 16 planning. 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 points Good use of Good relevant points applied to theory to judgment APF answer shown question 1 1 mark 1 mark 1–3 marks 1–3 marks One relevant One point Some use of Some point made applied to theory to judgment APF answer shown question 0 No creditable content Knowledge • Definition of marketing planning: market research, marketing objectives, budget, marketing mix • Understanding of meaning of success in terms of profit, sales, market share, customer satisfaction and meeting objectives set Application • Link between marketing planning and APF’s success in taking advantage of changing consumer trends towards healthier foods. • Failure of APF to meet sales targets for chilled fresh juice. • Role of planning in entering new markets such as country D or selling almond based products: – Designing marketing mix to deal with competitive nature of almond market in the US. – Reference to income elasticity of demand for avocados. – Need for marketing to address cultural differences in country D for success. – Reference to Vasco’s concerns about competition in the US almond milk market. Analysis • Benefits of tailoring marketing according to differences in target markets to ensure that new products gain market sales. For example, if entering the almond milk market in the US – planning will ensure that competition is considered when setting price and determining promotion to be used. This will help increase the chances of a successful launch. 5 • If entering country D which has lower consumption per capita, APF will benefit from market research to understand the cultural differences that might affect the approach to promotion in the market. Also identify the level of competition to determine successful pricing strategy for entering the market. • Need to cover costs to make a profit. Planning pricing so as to ensure that costs are covered whilst taking into effect the impact of price on demand. • More effective targeting of marketing budget when planned therefore achieving greater sales from each dollar spent. Evaluation Only award EVAL if the candidate has also demonstrated APP. • Judgement of the importance of marketing planning to future success: – Marketing planning gives a clear direction to the business making success more likely. – Particularly important for new markets such as country D or almond market. • Elements that the evaluation/judgement might depend on: – Planning depends on effective market research to identify needs of customers and determine how best to appeal to them. • Judgement of other factors that are also important to success such as operations. Questions 6 and 7 use this marking grid: Level Knowledg Applicatio Analysis Evaluation e n 4 marks 10 marks 3 marks 3 marks

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6 Evaluate the strategic choice techniques used in Appendix 1 when 20 APF’s directors make the choice between option 1 and option 2. Note: • Focus should be on strategic choice techniques NOT strategic analysis techniques • If there is no reference to, or knowledge of, SC techniques then limit to K 2 APP 2 AN 0 EVAL 0 for other factors related to the choice between options 1 and 2. • Award L2 Eval if there is some judgment shown in the main body of the answer and an attempt to support conclusion/recommendation, focused on APF. 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 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 Five Forces, Core competencies and others. 6 • Elements that the evaluation/judgement might depend on such as: – Accuracy of estimates for quantitative techniques – Other information • Evaluation of other factors that influence choice such as: – Attitude of directors – Attitude to risk – Influence of strategic analysis – Corporate objectives of WTZ – 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.

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7 APF operates in a dynamic business environment. Evaluate the 20 importance to APF’s future profitability of contingency planning. Note: • If there is no knowledge of contingency planning then limit to K 2 APP 2 AN 0 EVAL 0 for other points relating to profitability • Award L2 Eval if there is some judgment shown in the main body of the answer and an attempt to support conclusion/recommendation, focused on APF. Knowledge • Profitability relates to the ability of the business to generate profit from revenue and capital employed. Measured by operating profit margins and ROCE. • Contingency planning: preparing an organisation‘s resources for unlikely events. This may also be referred to as crisis management, scenario planning and business continuity planning. • Allow reference to business having a ‘Plan B’. Benefits: • Reassures customers and staff that their interests are being considered. • Reduces potential impact on customers in the event of a major disaster. • Recognising major risks may actually reduce the risk of the disaster happening. Limitations: • Disasters still occur. • Can’t have contingency plans for all eventualities. Application • Recognising major risks, such as: – disease of crops e.g. destruction of 30% of avocado crop in 2014. – impacts of weather on production of fruit e.g. rains and flooding in 2017. – trade disputes as APF is an exporter e.g. 2018. – failure of equipment – could impact juice production etc. – fire in factories producing juice. – food safety. Analysis • Can be expensive and time consuming especially for small businesses. There is the planning process and also the need to train staff for each possible eventuality. • With fore planning the public relations response to a disaster is much more likely to be quick and appropriate so that senior managers can manage the media attention and communicate effectively what the company intends to do, by when and how from disasters both in terms of costs and bad PR and loss of customer loyalty. • Avoiding disasters is better than planning what to do if they happen. • Plans need to be updated frequently as the business develops increasing costs. 7 Evaluation Only award EVAL if the candidate has also demonstrated APP. • Judgement of extent to which CP is important to success. • Recognition that other factors will have significant impact on success of APF, for example, leadership, financing and culture of the business • Cost of CP needs to be balanced against the potential costs of not doing it. Which potential disasters should be planned for? • How much time is spent on preparing and testing contingency plans?