Practice Paper 1 (Cambridge International IGCSE Business)

[case-study] EQR owns 150 cafes. It sells a range of drinks, including coffee. Being ethical is important to EQR. The Managing Director has been analysing EQR’s statement of financial position. The business has the objective to increase its 6% market share. The Managing Director plans to grow the business by selling franchises for $85,000. She is also considering ways to increase added value.

Outline two ways EQR could increase added value.

Extract:

FBT Travel Agency

FBT Travel Agency is a large private limited company based in Country X. Founded in 1998, it has grown from a small family-run business to a major player in the travel industry, specialising in both domestic and international travel packages. The company employs 500 people across its head office and 50 high-street branches, which are located in major cities and towns throughout Country X. FBT's core business involves creating and selling holiday packages that include flights, accommodation, and activities. It caters for various market segments, from budget travellers to luxury seekers. In recent years, FBT has also started offering cruise packages and adventure tourism options to diversify its product range. The company is considering expanding its online presence to compete with internet-based travel companies. Currently, 32% of FBT's bookings are made online, but management believes this could be significantly increased with better digital platforms and marketing. They are debating whether to close some of their physical branches and invest more in their website and mobile app. FBT is also considering diversifying into the business travel market. This would involve creating a new division to cater specifically to corporate clients, offering services such as conference bookings, group travel arrangements, and loyalty programs for frequent business travellers. The travel industry has faced significant challenges in recent years due to global events and changing consumer preferences. The COVID-19 pandemic had a particularly severe impact on FBT's operations, as shown in their financial performance over the past three years:

FBT’s Financial Performance 2020-2022

Year Revenue ($ million) Profit ($ million) Number of customers (thousands) Online bookings (%) 2020 150 15 500 20% 2021 120 8 400 25% 2022 135 12 450 32%

The company faces several external challenges, including: 1. Increased competition from online travel agencies offering lower prices 2. Economic uncertainty affecting consumer spending on travel 3. Changing regulations in the tourism industry, particularly regarding sustainability 4. Rapid technological changes requiring constant updates to booking systems and platforms However, there are also opportunities, such as: 1. Growing demand for sustainable and eco-friendly travel options 2. Increasing interest in adventure tourism 3. Potential for expansion into emerging markets in neighbouring countries FBT's management team needs to make strategic decisions to ensure the company's future success in a rapidly changing market. They are particularly focused on improving their digital capabilities, streamlining their operations, and finding new ways to generate revenue

Consider the advantages and disadvantages of FBT Travel Agency expanding into the following two sectors.

• Secondary sector (by manufacturing travel accessories)
• Primary sector (by acquiring a small chain of eco-lodges with farmland)

Which sector should FBT choose to expand into? Justify your answer.

Refer to the following insert when answering the question.

Extract:

{align=center} Cherished Chocolates (CC)

CC is a public limited company. It employs 4000 workers in country X and many are members of a trade union. CC has manufactured chocolate bars in country X for 50 years. It imports most of its raw materials, such as cocoa beans. Over the last 10 years CC has expanded and now sells in other countries. Many of these countries have no trade restrictions. The Directors of CC know that globalisation has opportunities and threats for CC.

CC produces a number of brands of chocolate bars, such as Tiabar, in country X. Its most popular chocolate bar, Choco, has the highest market share. The total market for chocolate bars is no longer growing in country X. CC plans to reduce the number of brands it sells in country X. It has to decide which of the two brands shown in Appendix 1 to stop selling. NM operates in country Z and sells its own brands of chocolate bars, including Nuttybar.

NM employs 500 workers. In country Z chocolate bars are distributed through small retail outlets. The wage rates in country Z are lower than in country X. However, incomes in country Z are starting to rise.

The Directors of CC are planning to take over NM to expand into this market rather than setting up a factory. The takeover will cost $35 million, some of which will be financed by a bank loan. The shareholders of NM are being offered CC shares in exchange for NM shares.

The Directors of CC know there might be diseconomies of scale after the takeover. They also have to decide who will be the Operations Manager for NM’s factory in country Z. They could keep NM’s existing Operations Manager or move CC’s Operations Manager from country X. Information about the two managers is shown in Appendix 2.

{align=center} Appendix 1

{align=center} The product life cycles of two of CC’s brands of chocolate bars in country X

{align=center} Tiabar - Growth stage

{align=center} Choco - Late maturity stage

{align=center}

Option 1 – stop producing Tiabar

A brand aimed at young children which is a new target market for CC. The market research at the development stage showed positive results from test marketing and sales have been growing steadily. There are many multinational chocolate bar companies targeting this age group.

Option 2 – stop producing Choco

The market leader in country X. It is a well established brand targeting adults. Sales are high but have not been increasing for several years. No new competitors have entered this market in the last two years.

{align=center} Appendix 2

{align=center} Information about the two Operations Managers for NM’s factory in country Z

{align=center} Appendix 3

{align=center} Selected information from the financial statements for CC and NM for 2021

Explain two diseconomies of scale CC might experience as it expands.

Refer to the following insert when answering the question

Explain two advantages to Pamela of operating as a sole trader.

[case-study] Pamela is a sole trader. She started her successful photography business 30 years ago. She specialises in taking pictures of people and places for use in posters, calendars and fashion magazines. It is a niche market. Pamela uses cost-plus pricing as part of her marketing mix. Offering a high quality service is important to Pamela and her 2 employees.

Extract:

RMT Clothing Ltd

RMT Clothing Ltd is a medium-sized clothing retailer based in Country X. It was founded in 1995 and has grown to 50 stores across the country, selling affordable fashion for men and women aged 18-35. RMT currently employs 800 people, and had annual revenue of $85 million last year.

The company is facing increasing competition from online retailers. RMT's CEO, Sarah Jones, is considering whether to close 10 underperforming stores and invest in expanding the company's e-commerce operations instead. This would involve making 100 store staff redundant but hiring 50 new employees to work on the website and in the distribution centre.

RMT's financial performance over the last 3 years is shown in table 1 below.

Table 1: RMT’s Financial Performance 2020 to 2022

The company's main stakeholders have differing views on the proposed changes. Shareholders are concerned about falling profits and want to see a clear plan for growth. Employees are worried about potential job losses. Customers have been complaining that RMT's website is difficult to use compared to competitors.

RMT is also facing external challenges including rising energy and material costs, as well as changing consumer preferences towards more sustainable fashion. However, there are opportunities to expand into new international markets through e-commerce.

Sarah needs to decide on the best strategy to ensure RMT's long-term success in a rapidly changing retail environment.

Consider the advantages and disadvantages of the following two options for RMT to achieve its objective of improving financial performance:

• Close 10 stores and expand e-commerce operations
• Keep all stores open but reduce costs

Which option do you recommend? Justify your answer.

Refer to the following insert when answering the question

Do you think job enrichment is a better way for a business to motivate its employees than profit sharing? Justify your answer.

Outline two advantages to GHT of having a short chain of command.

[case-study] GHT is a public limited company. It produces steel products including gates and garage doors. GHT has a flat organisational structure and a short chain of command. GHT has many stakeholder groups including 600 employees. The Managing Director is considering introducing job rotation to improve employee motivation. He has also been analysing some financial data. An extract is shown below.

Extract of revenue and cost data for one of GHT’s products (product X)
Units sold in 2020	30 000
Price per unit	$100
Variable costs per unit	$60
Fixed costs	$900 000
Break even output (units)	22 500

Extract:

{align=center} Sports Safety Equipment (SSE)

SSE manufactures sports safety equipment in country Z. It is a public limited company which has been successful for over 30 years. The main product SSE manufactures is safety helmets for different sports, such as bicycle riding, cricket and skateboarding. SSE has one large factory making the safety helmets. The factory uses flow production. The production workers each specialise in one task on the production line. SSE’s raw materials are imported.

SSE sells its helmets in several other countries and is planning to expand into many more. It will need to carry out market research before entering new markets in other countries. Each country has different sports that are popular and the style of helmets varies from country to country.

SSE plans to build its own factories in its most important markets in other countries and will need to choose a suitable source of finance. The Human Resources Director has decided to use internal recruitment for the managers of the new factories. There will need to be effective communication between the managers of the new factories and SSE’s head office in country Z.

Most of SSE’s sales in country Z are through sports equipment shops. Customers like to try on the helmets to check they fit correctly. SSE currently sells its helmets in other countries through its website.

SSE is also increasing its product range. The latest new product being developed is a children’s cricket helmet. A break-even chart for this new product is shown in Appendix 3.

{align=center} Appendix 1

{align=center} Extract from SSE’s website

{align=center} If you want the best protection when playing sport then buy an SSE safety helmet!

{align=center} We supply a wide range of safety helmets for you when playing sport.

{align=center} Whatever the sport - SSE produces a helmet for you.

{align=center} You can order directly from this website by entering your head measurements below.

{align=center} Get the perfect fit for you!

{align=center} Appendix 2

{align=center} Email from SSE’s Managing Director to SSE’s Finance Director

To: Finance Director

From: Managing Director

Date: 1 September 2023

Re: Demand for SSE’s products Demand for SSE’s products in country Z is forecast to increase. Our government has imposed import tariffs on safety helmets. We may be able to increase our prices.

The exchange rate in country Z is expected to fall. However, other countries have introduced import quotas on safety helmets.

We will have to consider all the likely effects of these changes.

{align=center} Appendix 3

{align=center} Projected weekly break-even chart for SSE’s new children’s cricket helmet

{align=center} The maximum output and sales for this product is 1000 units per week.

Explain one advantage and one disadvantage to SSE of using internal recruitment for its new managers.

Refer to the following insert when answering the question.