State two reasons for selecting a specific location for production.

Using the information in Table 1, calculate for Location A the payback period (show all your working).

Using the information in Table 1, calculate for Location A the average rate of return (ARR) (show all your working).

Explain two types of financial rewards, other than salary, that RDM might offer its engineers and computer scientists.

Recommend whether RDM should choose Option 1 or Option 2.

Reasons for selecting a specific location of production include:

• Access to resources or raw materials.
• Access to appropriate technologies, including infrastructure.
• Proximity to markets.
• Proximity to suppliers, including suppliers of financial services.
• Proximity to other firms in the industry or related (clustering)
• Access to available appropriate workforce.
• Access to transportation systems.
• Cost of land.

Accept any other valid reason.

Award [1] for each reason identified up to [2]. Maximum award: [2].

$16.0M per year profits. Cost: $64.0M.

$\frac{64}{16}$ = 4 years

or

Capital outlay $64 000 000
Expected yearly profit $16 000 000

Answer: exactly 4 years

Award [1] for the correct workings and [1] for the correct answer with the unit “years”.

ARR = [(80 000 000 − 64 000 000) ÷ 5 ÷ 64 000 000] × 100 = 5 %

Award [2] for correct answer with working and with the percentage sign.

Award [1] if the percentage sign is missing,

Do not credit the formula alone.

Types of financial reward other than salary that RDM might offer its engineers and computer scientists include:

• commission – but difficult for these types of employees
• profit-related pay – could be suitable
• performance-related pay (PRP) – but may be difficult to measure performance for individual employees
• employee share ownership scheme – could be suitable
• fringe payments (perks) – such as company car, health care, etc.

Accept any other relevant financial reward.

Mark as a 2 + 2.

Award [1] for an appropriate financial reward identified and an additional [1] for explanation and application. Award a maximum of [2] for each financial reward identified, explained, and applied to the stimulus. Maximum award overall: [4].

Refer to Paper 1 markbands for May 2016 forward, available under the "Your tests" tab > supplemental materials.

With Option 1, advantages for RDM include:

• Retention of “proprietary” hold on its knowledge of automation and robotics.
• Continuation of operating in a market (medical devices) that is growing and where RDM is known and has a solid performance.
• Remaining free from relationships with other companies, which can cause conflicts. Conflicts could emerge with ZI operational details. They could also emerge because of conflicts of culture in the two organizations. Jan has worked for years to create a democratic, innovative culture at RDM, which could conflict with the more traditional industrial culture at ZI.

Disadvantages of Option 1 include:

• Need of capital, which will have to be raised either through issuance of shares or debt.
• If long-term finance comes from share capital, dilution of the ownership of the Radeki de Dovnic family will occur.
• Loss of opportunity to work closely with another company, from which other opportunities may emerge.

Accept any other relevant advantage or disadvantage of Option 1.

With Option 2, advantages for RDM include:

• Substantially lower capital outlay ($6.0M versus $50.0M or $24.0M).
• On balance, a good location near highly profitable markets.
• Potential opportunities that could occur by forming an alliance with ZI. In light of RDM’s flexibility in manufacturing, it could easily fill some types of orders for ZI or even become one of its suppliers.
• The infusion of innovative ideas from the expansion of RDM’s labour force of engineers and computer scientists.

Disadvantages of Option 2 include:

• Loss of proprietary knowledge of automation and robotics, which would be passed on to another company that, after the period of the strategic alliance, could potentially become a competitor.
• The need to expand significantly the recruiting and training function to find twenty more computer scientists and engineers.
• ZI will not want new hires from RDM overseeing the reconfiguration of its processes, which will require RDM to transfer many of its experienced people to the new location. They may not want to do that (affecting motivation) or may refuse to do it (thus leaving RDM and taking their expertise elsewhere).
• Potential problems that come from relationships with other companies: conflicts over operation operational details, culture conflict, etc.

Accept any other relevant evaluation.
Marks should be allocated according to the paper 1 markbands for May 2016 forward section B.

Candidates were asked to state two reasons for selecting a specific location for production. Most candidates answered correctly, with a wider responses such as the cost of land, the cost and/or availability of raw materials, local workforce, infrastructure, transport, proximity to markets, proximity to suppliers etc. The question was accessible and did not present any particular difficulty.

For (4)(bi) and (4)(bii), candidates had to do some calculations, which is always challenging for some, even though the formula of the ARR was provided. A small number of candidates did not achieve full marks because they did not show their workings (although the instructions explicitly stated “show all your working”) or did not include the unit: “years” for (4)(bi), “%” for (4)(bii).

For (4)(bi) and (4)(bii), candidates had to do some calculations, which is always challenging for some, even though the formula of the ARR was provided. A small number of candidates did not achieve full marks because they did not show their workings (although the instructions explicitly stated “show all your working”) or did not include the unit: “years” for (4)(bi), “%” for (4)(bii).

Candidates were asked to explain two types of financial rewards that RDM could use. As for (2)(a) and (3)(b), many candidates wrote generic answers, typically defining bonus or fringe benefits in general, without application to the case study. As a consequence, the marks awarded to (4)(c) were overall disappointing; many candidates clearly had some theoretical knowledge of financial rewards, but did not link this to the case.

Candidates had to recommend one of two strategic options. Both had advantages and disadvantages; candidates who achieved the highest marks considered the advantages and disadvantages of both options, whereas candidates who discussed only one option produced one-sided, limited answers. One fairly common approach did not work well: some candidates started their response with their recommendation: “RDM should choose Option A because….” and the whole response was just a justification, without considering other arguments, other perspectives.