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Business management
Higher level
Paper 2

Tuesday 27 October 2020 (morning)

2 hours 15 minutes

Instructions to candidates
y Do not open this examination paper until instructed to do so.
y A clean copy of the business management formulae sheet is required for this examination
paper.
y Section A: a
 nswer one question.
y Section B: a
 nswer two questions.
y Section C: answer one question.
y A calculator is required for this examination paper.
y The maximum mark for this examination paper is [70 marks].

8820 – 5012
7 pages © International Baccalaureate Organization 2020
 –2– 8820 – 5012

Section A

Answer one question from this section.

1. Jill’s Jeans (JJ)

Jill created Jill’s Jeans, which operates as a sole trader. JJ makes custom-design jeans.
Jill designs all the jeans and sells them online and at local markets.

Because of increasing demand in 2020, JJ has benefitted from economies of scale.

Table 1: Budgeted and actual figures for the year ending 31 October 2020

Budgeted figure ($) Actual figure ($)

Cost of goods sold 3000 2500

Expenses 1000 800

Sales revenue 5000 4000

(a) State two features of a sole trader. [2]

(b) Using information in Table 1, for JJ, prepare:

(i) a profit and loss account for the budgeted figures and the actual figures
(show all your working);[3]

(ii) a variance analysis (show all your working).[3]

(c) Explain one possible economy of scale from which JJ has benefitted. [2]
 –3– 8820 – 5012

2. Beautiful Benches (BB)

Dan, a young entrepreneur, is planning to start his own small business making hand-made
wooden garden benches – Beautiful Benches (BB).

Table 2: Forecasted sales revenue for BB for the first four months
of operation, starting 1 January 2021 (all figures in $)

January 2000

February 1000

March 2500

April 3000

To be competitive, BB offers its customers credit. They pay 50 % when they buy a bench and
50 % one month later.

Table 3: Selected forecasted financial information for BB for 2021

(all figures in $ and per month unless stated otherwise)

400 per month, payable in advance every

Rent
three months, starting 1 January 2021

Administration/Dan’s salary 1500

Marketing 200

60 % of the same month’s sales

Cost of sales revenues. BB will receive one month of
credit from the suppliers

Support for young entrepreneurs provided

150
by the local government

Utilities 180

Agreed loan 3000 in the fourth month of operation only

Tools/machinery 1000 in the first month of operation only

Dan was advised to pay close attention to BB’s working capital cycle.

(a) Define the term working capital cycle.[2]

(b) Prepare a monthly cash flow forecast for BB for the first four months of operation. [6]

(c) Explain one strategy that BB could use to significantly improve its forecasted cash flow
for January 2021. [2]

Turn over
 –4– 8820 – 5012

Section B
Answer two questions from this section.

3. MusiCology

MusiCology (MC) is a private limited company. Rob, the chief executive officer (CEO),
founded it to encourage young people to play musical instruments, believing that too many
young people either prefer to just listen to music or are abandoning traditional methods
of making music in favour of generating it on computers. MC’s mission statement is:
“MusiCology supports the playing of real music by real musicians on real instruments.”
The business relies heavily on social media.

MC offers downloadable online lessons and demonstrations prepared by professional

musicians. Some of the lessons and demonstrations are free and some are paid for.

Because MC has not been profitable, Rob asked Abbi, a technology specialist and successful
provider of venture capital, for financial support. Abbi agreed, but insisted that MC organize a
live music concert in six months that would be broadcast globally. She also thinks that MC’s
mission statement needs updating.

Abbi is confident that, with her social media connections and influence, the concert will be
successful. She has contacted several artists, asking them to play, and their responses have
been positive. The concert will also be pay-per-view*. Some artists have agreed to play for
free, and several musical instrument manufacturers will sponsor the event. Abbi predicts
significant profits.

Rob likes the idea of the concert, but he doubts MC has the ability and resources to organize
such an event. He is also concerned that some musicians will play computer-generated
music, and fears a negative reaction on social media.

Table 4: Selected financial information for MC for 31 October 2020

Current ratio 0.8

Forecasted net loss for year ending May 2021 $8 million

Gearing ratio 75 %

Forecasted profit for MusiCology if concert goes

$24 million
ahead in May 2021

* pay-per-view: a system that allows businesses to charge for premium content that
otherwise might be shown for free

(a) Describe one feature of a private limited company. [2]

(b) Explain one advantage and one disadvantage for MC of having a mission statement. [4]

(c) Explain one advantage and one disadvantage for MC of using venture capital to
provide financial support. [4]

(d) Discuss whether MC should organize the live concert. [10]

 –5– 8820 – 5012

4. ExotIce

ExotIce (EI) is a private limited company producing and selling ice cream from a centrally
located shop in a large capital city. Lena, the founder and chief executive officer (CEO), owns
80 % of the shares. Her two daughters, who travel the world to find new and exotic natural
ingredients for new flavours, each own 10 % of the shares. The family value their freedom in
the decision-making process and the collaborative and supportive nature of EI’s culture.

EI’s unique selling point/proposition (USP) is based on:

y outstanding quality and a variety of exotic flavours made from fat-free natural ingredients
y excellent service provided by highly trained, committed and efficient employees
y customer involvement – with the use of sophisticated technology and staff support, customers
can experiment to create their own flavours of ice cream.

A strong brand name and brand loyalty has led to rapid growth in EI’s market share.
However, long queues (lines) are forming and the number of customer complaints is
increasing. Lena is worried about the negative impact on EI.

Lena is considering two strategic growth options:

y Option 1: Opening eight new shops locally and nationally over the next four years. To finance
this internal growth, EI will sell new shares. After the sale, Lena will own 51 % of the shares.
y Option 2: Franchising EI nationally. A small focus group conducted by one of Lena’s daughters
and made up of local entrepreneurs revealed a strong interest in EI’s USP. Ten franchises will
open each year for the next five years throughout the country.

(a) Define the term unique selling point/proposition (USP).[2]

(b) Explain the importance of people and processes in EI’s extended marketing mix. [4]

(c) Explain one advantage and one disadvantage for EI of using a focus group. [4]

(d) Recommend which of the two strategic growth options, Option 1 or Option 2,
EI should implement. [10]

Turn over
 –6– 8820 – 5012

5. Fort Industries (FI)

Fort Industries (FI) manufactures aircraft. Jacques Fort founded the business in 1957 as a
private limited company. He owned 100 % of the shares and managed the company strictly,
making most of the decisions himself. FI grew through both internal and external growth.
Later, it began to manufacture aircraft parts for other manufacturers.

Jacques led his workforce by using Taylor’s motivation theory. He regularly set clear
objectives and monitored his employees carefully. Employees had to meet international
quality and safety standards. Although Jacques was controlling, employees had job security
and believed that he had their best interests at heart.

FI became a public limited company in 1988 and grew. Jacques found this transition difficult.
He liked privacy and rarely spoke to the media. This had to change. Employees also began
to ask for less supervision, wider spans of control and greater control over quality standards.
Jacques retired in 2000 and his son, Henri, took over as CEO. Henri consults widely with his
executive team and line managers on all decisions.

Recently, FI has been struggling with liquidity. Henri implemented strict cost controls and
analysed the following ratios (see Table 5).

Table 5: Liquidity ratios for FI for 2019 and 2020 and industry averages for 2020

FI Industry averages

Ratio 2019 2020 2020

Current ratio 1.2 0.9 1.5

Acid test (quick) ratio 0.9 0.5 1.2

Often, FI has to delay payment to creditors. Employees are concerned that by saving money,
safety standards at FI have been reduced.

Henri is considering two options to solve the liquidity problem:

y Option 1: A long-term loan.
y Option 2: Issuing and selling additional shares in FI.

(a) State two types of external growth. [2]

(b) Explain one advantage and one disadvantage for FI of motivating its employees using
Taylor’s motivation theory. [4]

(c) Explain two reasons why Jacques may have found the transition difficult when FI
became a public limited company. [4]

(d) Recommend whether Henri should choose Option 1 or Option 2.[10]

 –7– 8820 – 5012

Section C

Answer one question from this section. The organizations featured in sections A and B and in the
paper 1 case study may not be used as a basis to your answer.

6. With reference to an organization of your choice, examine the impact of culture on

organizational ethics.[20]

7. With reference to an organization of your choice, discuss the ways in which innovation can
influence organizational change.[20]

8. With reference to an organization of your choice, examine the impact of globalization on

marketing strategy.[20]
References:

2. Emporioconceito, n.d. [Wooden bench]. [online] Available at: https://pixabay.com/photos/emporium-bank-rustic-

concept-1061889/ [Accessed 30 April 2020].