M14/3/BUSMT/HP2/ENG/TZ0/XX

22145012

BUSINESS AND MANAGEMENT

HIGHER LEVEL
PAPER 2

Thursday 22 May 2014 (morning)

2 hours 15 minutes

INSTRUCTIONS TO CANDIDATES

 Do not open this examination paper until instructed to do so.

 Section A: answer one question.
 Section B: answer two questions.
 A calculator is required for this examination paper.
 Clean copies of the Business and Management formulae sheet and discount tables are required
for this examination paper.
 The maximum mark for this examination paper is [75 marks].

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© International Baccalaureate Organization 2014
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SECTION A

Answer one question from this section.

1. AH Ltd

Jose owns AH Ltd, a private limited company, that provides climbing and adventure tourism
opportunities for children in Ecuador. AH Ltd is partly financed by a non-governmental organization
(NGO), which promotes outdoor and other healthy activities in Ecuador. An increase in tourism has
meant that AH Ltd has been working at full capacity. However, some issues have begun to emerge.

In a meeting with Jose, an NGO representative expressed concern over the quality of the climbing
equipment being used. Several minor accidents involving children had occurred. In addition, the
NGO representative had not been kept up-to-date on the financial position of AH Ltd. After the
meeting, Jose showed the following financial figures to his accountant, Marco.

Selected financial information from AH Ltd’s accounts as at 31 March 2014 (all figures in US$m).

Cash 0.1
Creditors 0.8
Debtors 0.2
Fixed assets – equipment 1.5
Fixed assets – land and building 9
Loan capital 4
Retained profit 2
Share capital 4

Marco is concerned that the information from AH Ltd’s accounts does not show a true reflection of
AH Ltd’s financial position. For example, Jose has not made any provisions for depreciating the value
of the equipment since purchasing it three years ago. Marco has informed Jose that the equipment
should be depreciated using the reducing balance method at a rate of 40 % per year.

Jose wishes to expand the business to offer more climbing opportunities. Marco, however, warns
that the current equipment needs to be replaced to meet international quality standards. Additional
funding from the NGO is not possible, and banks in Ecuador give few loans to small businesses such as
AH Ltd.

(This question continues on the following page)

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(Question 1 continued)

(a) Define the following terms:

(i) debtors [2 marks]

fixed assets.
(ii) [2 marks]

(b) Explain one advantage and one disadvantage for AH Ltd of working at full
capacity. [4 marks]

(c) (i) Using the information provided from AH Ltd’s accounts, prepare a balance
sheet for AH Ltd as at 31 March 2014. [3 marks]

(ii)
Using the reducing balance method of depreciation, calculate the total
depreciation charge on the equipment purchased three years ago (show all
your working). [3 marks]

Prepare AH Ltd’s new balance sheet as at 31 March 2014 taking into

(iii)
account the depreciation charge calculated in part (ii). [3 marks]

(d) Explain one advantage for AH Ltd of using a straight line method of depreciation
instead of a reducing balance method of depreciation. [2 marks]

(e) Examine two appropriate sources of finance for AH Ltd to fund the replacement
of the old equipment. [6 marks]

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2. Himalayan Trekking

Himalayan Trekking (HT) is a trekking (mountain walking) agency based in Nepal. It has been
operating guided treks for tourists in Nepal, Tibet and Bhutan for over 20 years. With a duration of
between one and three weeks, HT offerings include treks to the Everest Base Camp, tours to Buddhist
sites in Tibet, and treks even to the inaccessible Kingdom of Bhutan. Brand loyalty is very strong,
with repeat bookings from many clients (trekkers).

The market for trekking has been growing very rapidly with many new businesses setting up to meet
the increased demand for “adventure” holidays. In this competitive market, HT’s unique selling
proposition (USP) is to provide an unforgettable wilderness experience in a socially and ethically
responsible manner. It only uses locally produced food and local guides and trekkers camp without
wasting too many resources. All clients have to sign a contract to agree that they will act in a socially
responsible manner throughout the trek. Though it always had a strong sense of social responsibility,
HT had not promoted this aspect of the business until the management realized that changes in
attitudes towards social responsibility could be used to gain competitive advantage.

HT’s brochure states that:

• It is a market leader in adventure tourism for Nepal, Tibet and Bhutan. It caters to a wide range of
clients from experienced to inexperienced trekkers.
• In recognition of protecting the fragile environment, economic systems and cultures it treks in, HT
has been awarded a global quality standard.
• By employing local guides and using locally produced food, HT adds much value to the local
region.
• It only employs staff that have previous social and environmental experience.
• It financially supports a non-governmental organization (NGO) for Nepali orphans by giving 5 %
of its turnover to Child Environment Nepal (CEN).

Selected financial information for HT for 2013:

Annual fixed costs (trekking permits set by $800 000

governments in Nepal, Tibet and Bhutan)
Average variable cost per trekker (food, local $5000
guides, transport costs)
Average price charged per trekker $10 000
Number of clients (trekkers) 300

(This question continues on the following page)

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(Question 2 continued)

(a) (i) Define the term unique selling proposition (USP). [2 marks]

Identify two external stakeholders of HT.

(ii) [2 marks]

(b) (i) Calculate how many clients (trekkers) HT would need to meet its target
profit figure of $400 000 per year (show all your working). [3 marks]

(ii)
Using the financial information provided, prepare a fully labelled
break-even chart for HT for 2013. [6 marks]

(c) In 2014, the following changes occurred:

• annual fixed costs increased by 20 %
• rising fuel costs of flights increased average variable costs by 40 % per trekker.

The average price charged per trekker remained the same ($10 000) as did the
number of clients (300).

(i) Taking these changes into account, calculate the new break-even quantity
and margin of safety for HT in 2014 (show all your working). [4 marks]

Explain one possible response from HT to the change in the break-even

(ii)
quantity and margin of safety calculated in part (i). [2 marks]

(d) Examine why changing attitudes to social responsibility might be important

for HT. [6 marks]

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SECTION B

Answer two questions from this section.

3. Turners

Turners is a famous hotel located in a large city. It is positioned as having the highest quality of
customer service and most of the employees have worked for Turners for over ten years. Regular
customers like knowing the employees at reception and other areas of the hotel. Many customers
have commented on the unique style of customer service at Turners. They like the fact that the people
in the photographs used in promotional materials are actually the people they interact with when
staying at Turners.

Turners has an expensive, award-winning restaurant. Turners had used a price skimming strategy
with room rates at over $1000 per night. However, new competition from three other recently opened
hotels and other changes in the external environment have resulted in revenue becoming more cyclical.
Profits are falling.

Surprisingly, the General Manager, Shane Peterson, also received some negative customer feedback
from a random sample of customers. Firstly, they claim that Turners’ online booking system is
slow and unreliable. Customers complain of an overbooked restaurant and untidy leisure facilities.
Business customers argue that the newer competing hotels offer better customer service, high-speed
internet and other business services for no extra charge. As a result, Shane is reviewing Turners’
marketing mix.

Shane has to focus on improving customer service as well as reducing costs. He is considering
two options:
• Reducing labour costs by implementing Handy’s shamrock organization.
• Outsourcing Turners’ staff training programme. Currently, it uses an internal, on-the-job staff
training programme where experienced staff train new employees.

The cost savings from using Handy’s shamrock organization would reduce salaries and wages by 7 %.
Outsourcing Turners’ staff training programme would reduce training costs by 9 %. These combined
savings could allow Turners to offer high-speed internet and other business services for no extra
charge to customers.

(a) Define the term price skimming. [2 marks]

(b) Identify two key features of random sampling. [2 marks]

(c) Explain the importance of people, process and physical evidence for Turners. [6 marks]

(d) Examine the usefulness for Turners of using Handy’s shamrock organization. [6 marks]

(e) Evaluate whether Turners should outsource its staff training programme. [9 marks]

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4. Walgreens–Alliance Boots

Walgreens, a public limited company, is the biggest chain of drug stores in the United States (US).
It has made an offer for a 45 % stake in Alliance Boots, the biggest chain of drug stores in the
United Kingdom (UK). Walgreens has 8000 stores in the US, Alliance Boots has more than 3000
stores in Europe and beyond. The combined sales of both companies is US$112 billion. A proposed
merger between the two companies would create the world’s largest chain of drug stores.

Walgreens’ market share has fallen due to increased competition from online drug retailers and
supermarkets that can provide similar products at a lower price. There have also been some concerns
over customer service in Walgreens’ stores.

In contrast, Alliance Boots has a strong brand image, based on its quality own-brand products and
excellent customer service with trained staff, who can provide medical advice for some illnesses.

The merger would have the following positive outcomes:

• increased internal economies of scale
• a world-leading chain of drug stores would be created
• there would be enough finance for an Alliance Boots expansion into China and South America
• Alliance Boots would be provided with immediate access to the US market
• Walgreens would be given access to Alliance Boots’ research and manufacturing expertise
• a strategic move would be provided for both companies to survive economic problems.

The new combined Walgreens–Alliance Boots may also raise issues over control, strategic direction
and decision making.

Walgreens’ shareholders were not happy about the proposed merger. Walgreens shares fell by 6 %.
Analysts believed that this strategy was not right for Walgreens, whose sales fell by 10 % in the
last year. Walgreens would be merging with a business that is exposed to the economic downturn in
Europe. Alliance Boots’ shareholders were also worried. They feared that its reputable brand image
could be eroded, especially if stores were created all over the world.

[Source: © International Baccalaureate Organization 2014]

(a) Define the term public limited company. [2 marks]

(b) Describe the method of growth used by the proposed merger. [2 marks]

(c) Explain the changes to two of Porter’s five forces resulting from the proposed
merger. [6 marks]

(d) Examine the claim that the merger would result in “increased internal economies
of scale”. [6 marks]

(e) Discuss whether the proposed merger of Walgreens with Alliance Boots will
result in the positive outcomes stated (apart from economies of scale). [9 marks]

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5. Matchpoint Tennis Club (MTC)

Matchpoint Tennis Club (MTC) is a famous members-only club. MTC owns tennis courts, changing
rooms and a restaurant. The majority of members are between 30 and 50 years old. Most members
have high incomes and successful careers. However, MTC faces increasing competition from
Best Sports, a multinational provider of sports centres. An economic downturn has also reduced
MTC’s profits. Until recently, the restaurant made a valuable contribution to fixed costs but this has
fallen significantly in the last 12 months.

Last year, Seb, a former successful tennis player, became the new Managing Director of MTC. With
the objective to increase revenue, he wrote a five-year plan with the following strategies:
• double membership of MTC
• open the restaurant to the general public
• open a sports equipment and clothes shop under the family brand “Matchpoint”
• employ professional tennis coaches (teachers).

Tina, the Marketing Director, agreed with Seb about the strategies. In order to achieve the first strategic
objective (double membership), she prepared a marketing budget and proposed the following tactics:
• overall reduction in membership fees of 10 %
• discounts for people aged below 18 and over 60 years old
• advertisements in local newspapers and on social networking sites
• a new range of club branded merchandise such as T-shirts and coffee mugs.

Alex, the Human Resources (HR) Manager is concerned about the impact the five-year plan will
have on employees. Employees already argue that they work too hard for low pay. An increase in
the number of members would increase their workload and responsibilities further. Alex tried to
convince Seb that membership of MTC was already at saturation point on the product life cycle and
that existing members would not like some of the proposed changes to the club.

Alex also stated that since Seb joined the business last year, the friendly atmosphere at the tennis
club has disappeared. That atmosphere has been replaced with a focus solely on profit making. Alex
would prefer a focus on providing a good quality service for existing members.

(This question continues on the following page)

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(Question 5 continued)

(a) Define the following terms:

(i) family branding [2 marks]

contribution to fixed costs.

(ii) [2 marks]

(b) With reference to MTC, explain the difference between objectives, strategies and
tactics. [6 marks]

(c) With reference to MTC, examine the dynamic nature of organizations and the
relative importance of driving and restraining forces. [6 marks]

(d) Discuss the likely success of Seb’s five-year plan to achieve an increase in
revenue for MTC. [9 marks]

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