External Growth 6 marks
CGE is a private limited company. CGE has a tall hierarchical organisational structure. It is a book retailer which plans to take over one of its competitors for $900m. If the takeover happens, CGE would have 7 500 bookshops across 20 countries. CGE’s Managing Director said: ‘We expect to reduce total costs by $200m each year after the takeover. We will stop all off-the-job training of employees.’ The Managing Director thinks CGE would benefit from becoming a public limited company but some of the other directors cannot decide if this is a good idea.
Identify and explain one advantage and one disadvantage to CGE of becoming a public limited company (6 marks)
|Advantage: Better access to capital i.e. raising share capital from existing and new investors to pay for the takeover |
Disadvantage: Cannot control who buys the shares so easier to be taken over by other book retailers
People in Business
FIT uses batch production to make sugar free energy bars. The products are sold using several distribution channels. FIT employs 600 production workers. FIT has problems with many employees leaving. Following the dismissal of the Operations Manager, the Human Resources Director has to recruit a new manager. She said: ‘The person must have good communication skills to help solve the communication barriers FIT has with employees.’ The Human Resources Director has to decide whether to use internal recruitment or external recruitment for the new manager.
(e) Do you think external recruitment is better than internal recruitment when recruiting a new manager for a large business? Justify your answer. (6 marks)
|No because external recruitment might be more expensive which will increase costs |
Yes because, the business might have no choice as there may not be suitable internal applicants. So, there may be no new ideas which could increase efficiency.
Although a higher cost, using external recruitment would be better as it will result in the appointment of a manager whose cost savings will soon outweigh the cost of external recruitment, especially in a large business where there is much more opportunity for cost savings.
Pricing 6 marks
CHIP makes a range of computer processors that it sells to other manufacturers. The Managing Director has been looking at CHIP’s income statement. She is worried about the effects of an increase in the cost of materials. She said: ‘Changes in technology have improved our production methods. CHIP needs to remain competitive as imports of computer processors are increasing.’ The Managing Director has to decide whether CHIP should increase its prices.
(e) Do you think CHIP should increase its prices? Justify your answer. (6 marks)
|Yes because this could increase revenue so more money available to cover costs such as an increase in material costs.|
No, because keeping prices low may increase market share because it is a competitive market as lower price attracts customers.
Although increasing costs may increase revenue, as it is a competitive market with increasing numbers of imports sales could be sensitive to a change in price.
The decrease in margins due to rising costs of materials may be off set by the increased efficiency in production.
Technology 6 marks
4. DLI is a private limited company in country X. It owns 135 supermarkets, of which 35 are operated as franchises. One of DLI’s objectives is to expand by opening 30 more shops in the next 18 months. The Managing Director said: ‘Market research shows that fewer people are going to the local markets every day to buy their food. It is important for us to set prices at the right level.’ The Managing Director is thinking about whether to introduce new technology into the business.
(d) Explain two factors DLI should consider when deciding whether to introduce new technology into its business. (6 marks)
|Factor 1: Cost of technology |
Explanation: as DLI has 135 locations which they may not be able to afford to introduce the technology in all supermarkets
Factor 2: What efficiency gains will there be?
Explanation: Technology with lower average cost so DLI can lower the prices of its food
Cash Flow 6 marks
2. Fernando is a sole trader. He provides painting and decorating services to business customers. His business does not benefit from any economies of scale because it is small. Fernando has to pay his suppliers within 2 months. However, he gives customers 4 months to pay. Fernando uses an old van he has borrowed from his father to travel to his customers’ offices and shops. As the van often breaks down, Fernando is thinking of buying a new van.
Do you think asking customers to pay more quickly is the best way for a small business to improve its cash flow? Justify your answer. (6 marks)
|(e) Yes because there will be no need to borrow so no interest paid so does not increase cash outflows |
No, because customers may be unable or unwilling to pay more quickly so may look for alternative suppliers so reducing cash inflows.
As the business is small, it may be better to ask suppliers for more time to pay as the business may not have many customers so does not want to risk losing them by asking them to pay more quickly
Exports 6 marks
ABB makes a range of paints. It exports 60% of its products. The Managing Director has been Looking at ABB’s cash-flow forecast. He said: ‘Success is not just about our return on capital employed.’ The Managing Director is worried about the introduction of new legal controls to protect the environment. This will mean ABB will have to reduce the number of chemicals that are used to make paint. He thinks these new legal controls will be bad for business.
Identify and explain two possible problems for ABB when exporting its products. (6 marks)
|Problem 1: Different tastes |
Explanation: different countries might prefer different paint colours adding to production costs
Problem 2: Effect of exchange rates
Explanation: as an appreciation in own currency would mean its products are more expensive so not able to export as much as 60%