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2019 Standard Level Paper 1 Mock Examination RDM Exemplar Answers Interactive Click or Tap to go Question 1 1 A B Question 2 A B Question 3 A B Question 4 A B C D

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com M19 3 BUSMT SP1 ENG TZ0 XX BUSINESS MANAGEMENT STANDARD LEVEL PAPER 1 Practice examination 2019 Radeki de Dovnic Manufacturing 1 hour 15 minutes INSTRUCTIONS TO CANDIDATES Do not open this examination paper until instructed to do so A clean copy of the IB Business Management case study Radeki de Dovnic Manufacturing is required for this examination paper Read the case study carefully A clean copy of the IB Business Management formulae sheet is required for this examination paper Section A answer two questions Section B answer question 4 A calculator is required for this examination paper The maximum mark for this examination paper is 40 marks P a g e 2 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com SECTION A Answer two questions from this section QUESTION ONE a Outline the importance of wholesalers line 52 to Radeki de Dovnic Manufacturing 4 marks Wholesalers are businesses that purchase large quantities of products from a manufacturer and then separate or break the bulk purchase into smaller units for resale to retailers They profit from buying cheaply in bulk purchasing economies of scale and on selling smaller units at a large mark up RDM has used the two intermediary channel of distribution previously when it produced its stoves for sale Wholesalers would have allowed RDM to concentrate on mass producing its standardised goods at low cost using mass flow methods of production They would not achieve the maximum price for these goods because wholesalers take a profit mark up and they would lose some control over its marketing mix However wholesalers would reduce costs to RDM especially stock holding costs and retail delivery Wholesalers would have been a good way for RDM to enter foreign markets RDM would be unfamiliar with Currently wholesalers are unimportant to RDMs marketing mix PLACE as the healthcare products they now specialise in are customised to the individual needs of each customer This means that a direct selling distribution model is better aligned with RDM s strategic objectives Award 3 4 marks if the student s answer meets the following criteria The student demonstrates knowledge and understanding Appropriate terminology is used and explained The response is applied to the stimulus material P a g e 3 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com b With reference to Radeki de Dovnic Manufacturing distinguish between capital expenditures line 54 and revenue expenditures 6 marks Capital expenditures are for fixed assets which are expected to be productive assets for a long period of time An example is the expensive production line machinery such as robotics that RDM has purchased to produce its mass customised goods Revenue expenditures are for costs that are related to specific revenue transactions or operating periods such as the cost of goods sold salaries and wages or repairs and maintenance expenses Thus the differences between these two types of expenditures are as follows Timing RDM s capital expenditures are charged to expense gradually via depreciation and over a long period of time RDM s revenue expenditures are charged to expense in the current period or shortly thereafter Consumption RDM s capital expenditure is assumed to be consumed over the useful life of the related fixed asset AS s revenue expenditure is assumed to be consumed within a relatively short period of time For example components of the healthcare products are used in the production process They are purchased used and sold hopefully in relatively quick succession which is why they are classified as cost of goods sold a revenue expense Size A more questionable difference is that capital expenditures tend to involve larger monetary amounts than revenue expenditures This is because an expenditure is only classified as a capital expenditure if it exceeds a certain threshold value if not it is automatically designated as a revenue expenditure However certain quite large expenditures can still be classified as revenue expenditures as long they are directly associated with sale transactions or are period costs The initial capital expenditures at RDM when they are establishing a new function manufacturing facility will be very high However perhaps after this revenue expenses such as wages salaries or raw materials components will be larger Information about RDM s revenue expenditures would typically be found in the firm s profit and loss statement and its capital expenditures are found in RDM s balance sheet fixed assets Award 5 6 marks if the student s answer meets the following criteria An analysis of the relevant issues is made with good use of business management tools where applicable techniques and theories Appropriate terminology is used throughout the response There is effective use of the stimulus material P a g e 4 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com QUESTION TWO a Outline two key features of a democratic leadership style and two key features of a paternalistic leadership style line 89 4 marks Jan has a democratic leadership style and his father whom he replaced had a paternalistic leadership style A paternalistic leadership style is an approach that involves a dominant authority figure who acts as a patriarch or matriarch and treats employees and partners as though they are members of a large extended family In exchange the leader expects loyalty and trust from employees as well as obedience A paternalistic leader creates such an amicable ambience at the workplace that employees consider their team as a family Yearning to belong to a group is a natural human tendency Just like families have a head organisations have leaders who occupy an authoritative position to determine what s best for the team Paternalistic leadership is an approach where Kristi n was equipped to adhere to the interests of RDM s employees and the organisation Democratic leadership on the other hand is different in that two way communication is used which allows direct feedback from staff to the leader and other members in the team Here Jan would provide workers with information about the business to allow full staff involvement and engagement in the wider organisation and not just necessarily their task at hand RDM s workforce is highly skilled and engaged in cognitively demanding tasks and have higher expectations of their experience from work they expect higher level needs to be partly satisfied at work Democratic leadership is better suited to fulfil these needs Award 3 4 marks if the student s answer meets the following criteria The student demonstrates knowledge and understanding Appropriate terminology is used and explained The response is applied to the stimulus material P a g e 5 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com b With reference to Radeki de Dovnic Manufacturing explain the importance of branding line 123 6 marks A brand is an exclusive name symbol or design used to identify a specific product or business And a brand identity is how a business presents itself to and wants to be perceived by its consumers This corresponds to the intent behind the branding the way a company chooses its name designs its logo uses colours shapes and other visual elements in its products and promotions crafts the language in its advertisements and trains employees to interact with customers all with the goal of cultivating a certain image in consumers minds Brand identity is distinct from brand image Brand image the actual result of efforts to establish a brand identity successful or unsuccessful Branding is a way for RDM to differentiate its products from that of its competitors The brand is the distinguishing name or symbol that is used to differentiate its products from another competitor Branding can have a real influence on the marketing of RDM It can create a powerful image or perception in the minds of consumers either negative or positive and it can give RDM s products a unique identity Successful brands can often charge premium prices as consumers are loyal to their products and the image that it generates Attempting to establish a weak brand or rebranding is often expensive Increasing brand awareness and brand loyalty would be primary goals of any promotional activities of the business It can cost millions of dollars to attempt to create an effective brand image and success cannot be guaranteed If a brand image receives bad publicity such as poor product quality and product failures then the image of all products in the corporate brand will be damaged Thus RDM needs to be sure that its suppliers are supplying a quality product There are the following distinct advantages of RDM having a successful brand Price advantages Firms that s sell undifferentiated products that have a variety of substitutes tend to compete on price and find it difficult to charge higher prices than their rivals Recognition and loyalty Having a recognisable brand increases RDM s competitive advantage as there is a greater chance of the product being sold brand loyalty or perceived trustworthiness Supplier trust Having an established brand would enable RDM to secure supply contracts with important healthcare providers such as a large hospital chain this could be an important factor in the company s growth and evolution Award 5 6 marks if the student s answer meets the following criteria An analysis of the relevant issues is made with good use of business management tools where applicable techniques and theories Appropriate terminology is used throughout the response There is effective use of the stimulus material P a g e 6 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com QUESTION THREE a With reference to Radeki de Dovnic Manufacturing analyse team working as a nonfinancial method of motivation line 87 4 marks Team working is where production is organised so that groups of workers undertake complete units of work This approach to work places each member of staff at RDM into a small team of employees Some traditionalists argue that moving away from pure division of labour where one worker performs just one simple task all of the time will result in lower productivity and time wasting team meetings Supporters of job enrichment would respond by claiming that more challenging and interesting work as allowed by team working or cell production at RDM will lead to Lower labour turnover and thus cost savings on recruitment retention and development programmes at RDM More and better ideas from the workforce on improving RDM s product and the firm s manufacturing process Consistently higher quality product at RDM especially when total quality management TQM is incorporated This will feed back to the firm as more repeat customers and good word of mouth promotion There are a number of benefits to RDM from team working Team spirit should improve the motivation of staff productivity at RDM should increase as a result Teams are more flexible than hierarchical systems New teams can be formed and redundant teams disbanded as the needs of RDM change Management costs may be reduced as fewer middle managers and supervisory staff are required to be employed at RDM lower costs increase productivity all things being equal Award 3 4 marks if the student s answer meets the following criteria The student demonstrates knowledge and understanding Appropriate terminology is used and explained The response is applied to the stimulus material P a g e 7 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com b Explain two reasons why organisations such as Radeki de Dovnic Manufacturing implement corporate social responsibility strategies 6 marks CSR refers to the consideration of ethical and environmental issues relating to business activity A business that adopts CSR will normally act morally towards its various stakeholder groups A key point here is that CSR is about how a business like RDM makes a profit and it s not about how they spend it This means CSR at RDM applies to how they interact and treat their key stakeholders such as the company s employees and suppliers Employees will be made to feel they belong and will be paid fairly and enjoy good working conditions and benefits e g paid parental leave RDM will work hard to have a good relationship with its individual suppliers treating them fairly and not exerting undue pressure on these key stakeholders to keep cutting costs One key reason that RDM would have CSR strategy is that this would help the company in attracting the best motivated and efficient employees may as many workers will prefer to work for and be associated with a socially aware business RDM operates in a competitive environment where innovation and problem solving are key to differentiating itself from the competition Its highly trained talented and motivated staff e g production engineers provide much of this positive differentiation Having the CSR strategies enables RDM to attract retain and motivate the talent they employ Another key reason to RDM having a CSR strategy is that the image of the business and its products can be improved with a green and socially responsible approach This could be a major competitive advantage It would be incorporated in the brand image of the company and again be a positive source of differentiation when selling its products winning over new customers and entering relationships with important suppliers Higher long term profitability for RDM should result from each factor above Award 5 6 marks if the student s answer meets the following criteria An analysis of the relevant issues is made with good use of business management tools where applicable techniques and theories Appropriate terminology is used throughout the response There is effective use of the stimulus material P a g e 8 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com SECTION B Answer the compulsory question from this section QUESTION FOUR To help with the operations management strategy at RDM Jan has tasked his chief financial officer CFO to provide him with detailed financial forecasts and cost estimates regarding alternative locations for the possible new production facility When reporting back to Jan the CFO summarised the financial information in table 1 below The quantitative information relates to the initial cost and profitability of two alternative locations for the production facility Poland and Germany Each of these locations has good rail road and seaport infrastructure for exporting into European markets and even further abroad if opportunities arise Germany would benefit from economies of scale more so than Poland After a period of research the CFO was able to produce profitability forecasts based on annual net cash flows for each location and these are summarised in table 1 below The costs to purchase the land and build the factory in each country are equivalent After six years the robotics necessary for mass customisation would likely need to be replaced Table 1 Net cash flow forecast estimates for production facilities in two European countries Year Option A Poland Option B Germany 0 120 m 170 m 1 40 m 30 m 2 50 m 40 m 3 50 m 50 m 4 50 m 60 m 5 50 m 70 m 6 50 m 80 m RDM has the option of financing the alternative production facilities through an initial public offering IPO i e to go public line 117 It also has the option of securing funding with a long term bank loan and the CFO notes that while interest rates are at historic lows bank lending restrictions are relatively tight in the current economic and regulatory environment P a g e 9 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com RDM does not have the option of issuing additional shares privately to raise the large amount of capital that is required to finance this project even for the lowest cost country The balance sheet of RDM is shown Table 2 below and this provides important financial information to bankers and prospective shareholders interested in a possible IPO Table 2 RDM balance sheet Radeki de Dovnic Manufacturing Balance Sheet as of 30 April 2019 m m Fixed assets Fixed assets 50 Accumulated depreciation 2 Net fixed assets 48 Current assets Cash 1 Debtors 1 2 Stock 3 5 Total current assets 5 7 Current liabilities Overdraft 0 5 Creditors 1 5 Short term loans 2 2 Total current liabilities 4 2 Net current assets Working capital 1 5 Total assets less current liabilities 49 5 Long term liabilities debt 30 Net assets 19 5 Financed by Share capital 11 Retained profit 8 5 Equity 19 5 P a g e 10 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com a Define the term economies of scale 2 marks Economies of scale are a reduction in average per unit costs as output increases For example if RDM produced 10 000 units of Product B the average per unit cost to the firm may be 10 00 If output increased to 100 000 units then average per unit cost may decrease to 6 50 EOS Award 2 marks if the student s answer meets the following criteria There is a clear definition which must include reduction in average per unit costs as output increases or similar words b Investment appraisal i Calculate the payback period for the project in each location 2 marks Option A Poland Option B Germany Payback period estimate Sometime in Year 3 Sometime in Year 4 Difference 140 m 120 m 180 m 170 m 20 m 10 m Average monthly cash inflow in estimate year 50 m 12 months 60 m 12 months 4 17 m 5 0 m Number of months 20 m 4 17 m 10 m 5 m 5 months rounded up 2 months 3 years and 5 months 4 years and 2 months Payback period Award 2 marks if the student s answer meets the following criteria The payback calculations for both locations are correct P a g e 11 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com ii Calculate the average rate of return for the project in each location 2 marks Poland Project profit 290 m 120 m 170 m Average annual profit 170 m 6 28 33 m ARR 28 33 m 290 m x 100 9 79 ARR is therefore 9 79 Germany Project profit 330 m 170 m 160 m Average annual profit 160 m 6 26 67 m ARR 26 67 m 330 m x 100 8 08 ARR is therefore 8 08 Award 2 marks if the student s answer meets the following criteria The ARR calculations for both locations are correct P a g e 12 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com 2 Analyse the appropriateness of the production method to be used in RDM s new factory 4 marks The production method used by RDM is mass customisation the use of flexible computeraided production systems to produce items that meet individual customer requirements at mass production cost levels The company s mass customisation production process uses the very latest of technologies such as AI big data and cloud computing This means that The company s mass customisation manufacturing process provides it with the opportunity to manufacture other products for different markets to diversify and increase its revenue streams New markets may be opened up by using the mass customisation model to target markets other than healthcare devices RDM s USP is probably based around the fact that customers can adapt products to their own specifications and order specific quantities that can be quickly fulfilled through RDM s mass customisation production process Automated by robotics and essential for fast mass customisation and continuous flow This process is efficient highly productive and probably a source of competitive advantage Mass customisation provides opportunities for developing new products in markets other than healthcare without disrupting the production of current healthcare products As such this manufacturing process is one RDM should maintain and develop and develop over time However it should be mindful of several issues with such a production process including RDM s mass customisation means that the costs associated with each customer s order will be different from one customer to the next Human input is required at this stage to cost the project accountants and ensure the requested specifications work engineering This add to costs and time to produce the customised product The expensive cost of capital and the expense of R D programmes needed to stay at the cutting edge of the latest technologies Award 3 4 marks if the student s answer meets the following criteria The student demonstrates knowledge and understanding Appropriate terminology is used and explained The response is applied to the stimulus material P a g e 13 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com 3 Recommend a preferred source of finance for RDM to establish the new production facility 10 marks RDM s capital expenditure on the proposed project are those funds used by a company to acquire or upgrade physical assets such as property industrial buildings or equipment This type of outlay is made by companies to maintain or increase the scope of their operations These expenditures can include everything from replacing a roof to building a brand new factory While the financial considerations may or may not make a strong case for opening a new manufacturing facility in Europe RDM will have to seriously weigh the advantages with the disadvantages of such a move The chief problem being the one of financing Such a large capital expenditure can only be financed by going public an IPO as a public limited company to raise share capital and sourcing a long term loan to raise loan capital This is because issuing additional shares privately will not raise enough funds presumably because the family and associates do not have the personal finance required to inject such a large amount of capital into the private company Let s just make a quick distinction between share and loan capital Share capital is the money invested in a company by the shareholders Share capital is a long term source of finance In return for their investment shareholders gain a share of the ownership of the company Whereas loan capital is part of a business capital used that is 1 not equity capital 2 earns a fixed rate of interest instead of dividends and 3 must be repaid within a specified period regardless of the business financial position It is that part of a company s capital structure which is raised by loans It is likely that RDM would investigate the terms and conditions offered by a bank or finance company for a long term loan however the CFO may have the knowhow to organise a corporate bond A bond also known as a fixed income security is a debt instrument created for the purpose of raising capital They are essentially loan agreements between the bond issuer and an investor in which the bond issuer is obligated to pay a specified amount of money at specified future dates In general there are advantages and disadvantages to securing loan and share capital with the advantages of one source of finance being the disadvantages of the other In terms of debt financing securing loan capital the advantages to RDM are fourfold Firstly as no shares are sold the ownership of the company does not change and is not diluted by the issue of additional shares Secondly loans will be repaid eventually so there is no permanent increase in the liabilities of the business Thirdly lenders have no voting rights therefore there is no loss of control of the company for RDM s owners and directors Finally interest charges are an expense and are thus tax deductible reduce the total company tax paid by RD In terms of share financing securing share capital the advantages to RDM are also fourfold Firstly the funds never have to be repaid and thus do not negatively impact the firm s cashflow position over time Secondly dividends do not have to be paid every year In contrast interest must be paid when demanded by the lender Dividends being a sum of money paid regularly typically annually by RDM to its shareholders out of its profits or P a g e 14 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com reserves Thirdly much larger amounts of finance can possibly be raised than through debt financing and it is far from certain tyhat a friendly bank would be willing to loan RDM the 120 m 170 m needed for the investment project Finally the injection of funds will be an asset to RDM a current asset initially as cash reserves increase but shifting to long term assets as the investment in the new location is made This strengthens RDM s balance sheet which in turn may make it easier to secure long term loans in the future to pursue other expansion opportunities The main question between the two sources of finance is whether RDM s owners would likely be okay with the change in ownership structure that is associated with raising share capital for the firm through an IPO If they are likely to be okay with such a change then share capital would probably become the preferred finance option However there are clues in the case study that the Radeki de Dovnic family may be hesitant in ceding ownership Let us examine this further As a privately owned family company directors can maintain overall control over the business as they control the trading of shares in their company Owners shareholders of private businesses have more of a say as there are less shareholders so they have more influence over business decisions If the company went public to finance expansion then the family s ownership would necessarily be diluted A public limited company PLC is a company that can advertise and sell its shares to the general public via the stock exchange There are advantages and disadvantages of RDM raising share capital through an IPO An initial public offering IPO or stock market launch is a type of public offering in which shares of a company are sold to institutional investors and usually also retail individual investors an IPO is underwritten by one or more investment banks who also arrange for the shares to be listed on one or more stock exchanges Through this process colloquially referred to in the case study as going public a privately held company is transformed into a public company Initial public offerings can be used to raise new equity capital for the company concerned to monetise the investments of private shareholders such as company founders or private equity investors and to enable easy trading of existing holdings or future capital raising by becoming publicly traded enterprises After the IPO shares traded freely in the open market are known as the free float Stock exchanges stipulate a minimum free float both in absolute terms the total value as determined by the share price multiplied by the number of shares sold to the public and as a proportion of the total share capital i e the number of shares sold to the public divided by the total shares outstanding Although an IPO offers many benefits there are also significant costs involved chiefly those associated with the process such as banking and legal fees and the ongoing requirement to disclose important and sometimes sensitive information The key advantage to RDM of going public is that public limited companies can often raise vast sums of money for financing their investment projects The money raised through selling shares becomes permanent capital meaning that it does not have to be repaid unlike loans Interest does not have to be paid instead shareholders are paid a dividend but only if the P a g e 15 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com company makes a profit The interest payments on a loan of such a size are likely to be sizeable and a feature of RDM s balance sheet for the long term While the investment decision must look promising it does require a huge amount of capital to be raised up to 170 million The family can still maintain majority control in RDM and still go public if they maintain a combined shareholding at 51 percent or above Whether the 120 170 million can be raised in an IPO with the family maintaining such control is uncertain Currently RDM is profitable and all dividends in the pool are paid to the family Investing in a new production facility will lead to greater profitability and thus a bigger total dividend pool However the family s share of the dividend pool will be diluted The family will want to carefully assess whether a smaller share of a larger dividend pool makes financial sense for these key stakeholders If the family can maintain majority control of RDM and increase their total dividend payment then the new production facility may well make financial sense However the effect on RDM s corporate culture of such a move must be considered Given what we know about RDM it is suggested here that being privately held is integral to its corporate culture and that the family owned private firm would be associated with the following traits Generational continuity Long term focus Independence Nimbleness Emotional attachment Investment into the workforce Flexibility Lean hierarchies Innovativeness Customer focus Social responsibility Strong regional ties Going public would affect each of these current organisational traits likely to be associated with RDM For example large organisations suffer from communication problems As RDM becomes larger relationships may become more impersonal to both customers and employees Given this loan finance must be a valid option for the new production facility Examining RDM s balance sheet we can see that the company has net assets of almost 20 million which could be used as collateral to secure a long term bank loan If the forecasted financial information is reasonably accurate then the expected profitability of the venture should make loan repayments manageable Further the size of the loan may mean that RDM may be able negotiate favourable terms for itself coming from financial economies of scale However there are two important factors that must be considered here Firstly using loan capital to finance the expansion is a long term prospect and the financial forecasting used in the estimates becomes less and less accurate over time It is unlikely that the financial forecasts P a g e 16 17

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com and estimates provided by the CFO are going to be as accurate in year 6 of the project as they would be in say year 2 Secondly the extremal economic environment can and almost certainly will change over the course of the investment project For example new competitors may enter the market and or key markets in Europe may be plunged into recession perhaps from the effects of Brexit or an Italian banking crisis Take for example a recession in a key market that results in a yearly loss There is a very real risk of economic recession given the cyclical nature of economic activity Firms and consumers are less willing to spend in recessions and this could result in a substantial yearly loss for the firm It is likely that RDM will be operating in a recessionary economic environment at least some of the time in the six year lifespan of the project Loan repayments cannot easily be delayed and default can have serious considerations to the firm For example in case of default the lending bank could require RDM to sell core assets and or force the company into liquidation A contingency plan must be made for recessionary years if loan finance is going to be used to pursue the new investment opportunity Award 9 10 marks if the student s answer meets the following criteria Good understanding of the demands of the question including implications where relevant Relevant business management tools where applicable techniques and theories are explained clearly and applied purposefully and appropriate terminology is used throughout the response Effective use of the stimulus material in a way that significantly strengthens the response Evidence of balance is consistent throughout the response The judgments are relevant and well substantiated P a g e 17 17