| Date | May 2019 | Marks available | 10 | Reference code | 19M.2.SL.TZ0.3 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Discuss | Question number | 3 | Adapted from | N/A |
Question
Ace Industries (AI)
Ace Industries (AI) manufactures plastic containers, mostly for the soft and fruit juice industries. The operations management department uses flow production for its standard-sized products and batch production for its customized products.
AI’s sales are growing rapidly. It currently has a 6 % share of the plastic container market. However, it has recently struggled to meet customized orders on time. Some customers have complained about product quality. Currently, AI is organized by region, which allows the company to have strong relationships with customers, who feel that AI knows them and cares about their interests. The human resource department is proposing restructuring the organization by function. Not everyone at AI agrees with this change. Many think that the problems of late delivery and poor quality could be solved through greater delegation.
Lloyd Rinnegrat, Chief Financial Officer, has suggested that AI’s management think more deeply about their rapid growth. Except Lloyd, most people at AI believe that rapidly growing sales are good – that by increasing its market share AI will, in the long run, benefit by being a large organization. However, Lloyd argues that being a small organization has many merits, as shown by the changes in AI’s recent gross profit margins and net profit margins.
Table 1: Selected financial data for AI
The marketing department has predicted that the soft and fruit juice industries are moving away from major mass-produced drinks and toward niche products, such as exotic fruit drinks and speciality beverages for very particular markets.
[Source: © International Baccalaureate Organization 2019]
Outline two features of batch production.
Draw a possible organizational chart for a manufacturing firm like AI if it is organized by function.
Calculate the total size of the plastic container market in 2019 (show all your working).
Calculate the difference in AI’s net profit before interest and tax between 2018 and 2019 (show all your working).
Explain how delegation might help AI improve its delivery times.
With reference to AI, discuss Lloyd’s view that being a small organization has merits.
Markscheme
Features of batch production include:
- Limited quantity produced according to specific specifications.
- Non-continuous: batches are produced at intervals.
- Batches more from stage to stage of production together (in other words, stage 1, one process occurs. Then, the batch moves to the next stage, where another process is done, etc).
Accept any other relevant feature.
Award [1] for each feature identified up to [2].
The organizational chart does not have to appear exactly as above. Award [1] if the candidate demonstrates some understanding of an organizational chart. Award [2] if the candidate draws an organizational chart that is organized by function and has at least three functional areas labelled (operations, marketing, accounting and finance, HR, etc).
$421 000 000 = 0.06 × (total market size)
= $7 016 666 666.67
Accept $7 016 666 667
Award [2] for correct answer and workings. Award [1] for correct process but with a mathematical error.
PLEASE NOTE: Market size is not included in the syllabus for 2024 exams onward. Related parts of this multi-part question may be used.
0.08 × 376 000 000 = 30 080 000
0.07 × 421 000 000 =
The difference between AI’s profit in 2018 and 2019 was −$610 000.
Award [2] for correct answer and working. Award [1] for correct process but with a mathematical error.
PLEASE NOTE: Delegation is not included in the syllabus for 2024 exams onward. Related parts of this multi-part question may be used.
Delegation occurs when authority and responsibility are passed down the chain of command and subordinates are empowered to make decisions. When properly done, delegation leads to more effective decision making by subordinates, as they now feel the weight and bear the responsibility for their decisions. In the case of AI, if employees who deal with the customers’ orders and manage the operations line had greater authority, they could better align customized sales, which requires some reconfiguration of tooling for each batch, with capacity and availability.
Award [1] for some understanding of delegation and award an additional [1] for an explanation of how delegation could improve delivery time.
Refer to Paper 2 markbands for May 2016 forward, available under the "Your tests" tab > supplemental materials.
Advantages of being a small business include:
- can implement change quickly (flexibility)
- can maintain relationships with customers and employees
- can maintain consistency of brand identity
- management can focus, including having tight control over operations
- there are fewer risks associated with overtrading.
Disadvantages of being a small business include:
- less recognition/awareness in the market place
- fewer opportunities for economies of scale
- less ability to compete on price
- lesser access external sources of finance.
AI is transitioning into a large organization, but its growth affects the business. AI, for example, is not delivering orders on time, customers are complaining about product quality, and the company is not making the same margins it previously was. Unless AI can specifically pinpoint benefits from higher market share, which presumably explains the rapidly rising sales, the company may want to consider whether its sales growth is worth the problems.
Marks should be allocated according to the paper 2 markbands for May 2016 forward.
Examiners report
Many candidates had some understanding but many did not provide two features of batch production.
Many candidates earned full marks on this question and labelled plausible organizational charts.
Many candidates knew how to calculate the total size of the plastic container market.
Many candidates did well on this question.
Responses on this question about delegation were surprisingly weak. Many candidates had no idea what delegation was or, if they had some understanding struggled to explain how delegation might improve delivery times.
While many candidates knew some merits and demerits of small organizations, answers tended to be theoretical with limited application to the stimulus.
