| Date | November 2018 | Marks available | 4 | Reference code | 18N.1.SL.TZ0.4 |
| Level | Standard level | Paper | Paper 1 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 4 | Adapted from | N/A |
Question
AFA was at a critical point. Sam and Finn had not fully resolved their disagreements. They seemed to be constantly arguing but Sam could also see that new issues were emerging. At their most recent meeting in early 2018, Finn provided the following financial information to illustrate the declining trend in gross profit margin.
Table 1: Selected financial information for AFA
In addition, the recruitment of new staff was becoming a problem, as the wages that AFA offered were much lower than fair trade competitors. In a meeting between Sam and Finn, they argued over the best way to financially reward and motivate newly recruited workers, given the lower wages paid by AFA.
Finn argued for a reward system based on fringe payments (perks), as this was being offered by AFA’s main competitors, the supermarkets. Sam countered that AFA should form a cooperative involving all physical stores. He argued that creating a worker cooperative could give all members a sense of community and fulfillment and motivate them so that all members of the cooperative would benefit. There would also be additional stakeholder benefits. Finn argued that a worker cooperative was too difficult to organize and operate and would not solve the problem of recruiting staff.
In the meantime, AFA was continuing to attract a good deal of publicity. Sam had appeared on a national television show about young, innovative entrepreneurs. After the television show ended, one very large international retailer with a strong online presence contacted Sam about the possibility of a takeover. Sam initially refused, but as the details of the takeover became clear he started to seriously consider the opportunity. By selling the business Sam would have enough fresh capital to start new, innovative businesses and make some of his other visions and ideas into reality. In addition to the corporate social responsibility (CSR) AFA was generating, the takeover would give AFA access to other intangible assets. However, the international retailer had indicated that it could not guarantee keeping all existing and newly recruited employees and managers. Finn and Kim were both very worried that Sam would even contemplate the takeover, which they felt was an act of betrayal to all the stakeholders of AFA.
Refer to the As Fair As case study (SL/HL paper 1 Nov 2018).
Define the term intangible asset.
Refer to the As Fair As case study (SL/HL paper 1 Nov 2018).
Calculate the gross profit margin of AFA for 2016 and 2017.
Refer to the As Fair As case study (SL/HL paper 1 Nov 2018).
Explain one possible reason for the trend in gross profit margin for AFA between 2016 and 2017.
Refer to the As Fair As case study (SL/HL paper 1 Nov 2018).
Explain one benefit and one cost to AFA of using fringe payments (perks) to financially reward staff.
Refer to the As Fair As case study (SL/HL paper 1 Nov 2018) in the supplemental material.
Discuss whether Sam should accept the offer of a takeover.
Markscheme
An intangible asset is an asset that lacks physical substance and usually is very hard to evaluate, but it can add value to the business. It includes patents, copyrights, franchises, goodwill, trademarks and brand names with links to product positioning of a good or service that a business may offer.
The definition does not need to be worded exactly as above.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the answer above.
NOTE: Some candidates may write their definition in the context of AFA; in such cases, the main examples of intangible assets would be brand image (due to ethical behaviour and CSR leading to competitive advantage, customer loyalty, positive word-of-mouth) and goodwill.
GPM 2016 6.6 %
GPM 2017 5.17 %
Award [1] for each correct answer which includes the % (percentage) sign.
NOTE: candidates are not asked to show their working. Candidates may round up the results of their calculations for example, 5.1% or 5.2% instead of 5.17%.
Given that sales revenues have increased, the likely cause of the decrease in gross profit margin is that direct costs have risen faster. There is evidence of diseconomies of scale being experienced by AFA and this calculation backs this up.
Another possible reason is fluctuation/increase of foreign currency exchange rates (as AFA works with “wholesalers that import products from many parts of the globe”, line 46).
Another possible reason is the increase of the cost of goods sold, which could be linked to the fact that price of fair trade goods may fluctuate/increase.
Award [1] for a possible reason for the trend in gross profit margin, with an additional mark for application to AFA.
Example of explanation of a benefit:
- For AFA, given the low wages, it is likely that fringe payments will act as an incentive to existing and new staff. Private health care, for example, would allow Sam and AFA to demonstrate a commitment to the well-being of its employees in the same spirit that the fair trade movement does for its suppliers. Motivation could improve and address some of the issues raised by the mystery shopper that Finn employed.
Example of explanation of a cost:
- The cost to AFA is that even with considerable revenue growth, fringe payments will increase direct costs, which will put further pressure on gross margins. Sam and Finn would also need to draw up new contracts of work,
clearly stating how the new fringe benefits would be calculated and distributed. There are additional managers who may be attracted to this rewards scheme and this may create some jealousy if they are not fairly applied. One key question is whether the fringe payments will apply to all staff.
Award [1] for each benefit and cost identified, with an additional [1] per cost/benefit with direct application to AFA.
Refer to Paper 1 markbands for May 2016 forward, available under the "Your tests" tab > supplemental materials.
There is considerable evidence from the stimulus that Sam and Finn's relationship is on the verge of breaking down. The mystery shopper incident has fuelled suspicion on both sides and a lack of trust and cooperation is evident. It would appear that Sam does not wish to involve himself in the day-to-day running of the business and instead focus on “big picture” thinking. This offer from the international retailer coming at this time would be very tempting. Entrepreneurs such as Sam sometimes do sell a business looking for new opportunities as they may have achieved their own personal goals in setting up a new sustainable business. The goodwill offered by the purchaser would easily allow Sam to put his entrepreneurial qualities to good use in new markets. There is considerable evidence from research that some serial entrepreneurs enjoy setting up new enterprises as an exciting challenge and when the final goal is achieved move on. Sam does seem to be restless and bored easily and the current tensions/conflicts may force his hand.
However, whilst the positive publicity from the reality television show has lifted Sam, it could be easily taken away if the takeover occurs. “Temperton sells out” headlines would not help Sam or AFA and could impact on the brand value of the business. There is also the hypocrisy from Sam (given that he wanted to help internal and external stakeholders in the best way that he could) that the sale of AFA would create. Can he afford to tarnish his image?
Finn and Kip provide the conscientious voice against the sale. AFA is doing well and its position in the market is established. There is, however, still much to do. Why quit now when the actual goal has not been fully achieved?
There is conflict at AFA and this is to be expected. It would be a great shame for all the hard work carried out if Sam were to accept the offer. However, Sam and Finn appear to be drifting apart. Perhaps a change at the top is needed to bring fresh thinking to AFA at a time of expansion as long as Kim and Finn remain loyal to AFA.
Mark according to the paper 1 markbands for May 2016 forward, section B.
