Define the term retained profit.

Explain one advantage and one disadvantage for CH of having a mission statement.

Explain two possible external sources of finance CH could use to continue production of anti-venom vaccines.

Discuss CH’s decision to stop producing anti-venom vaccines.

Retained profit is profit that is not given to shareholders in the form of dividends but is held back as part of shareholder equity to provide a source of funds for possible future activities.

Accept any other relevant definition.

N.B. no application required. Do not credit examples.

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. A candidate must demonstrate an understanding that retained profit is part of shareholder equity and that it can be used as a source of funds for possible future business activities.

Advantages for CH of having a mission statement include:

• Provides an example of where a business currently sits in the eyes of its stakeholders, such as customers, employees and managers. CH produces vital anti-venom vaccines, but its mission statement demands that CH carry out its operations in a socially responsible manner. Mission statements can have an influential role in setting organizational objectives.
• CH’s mission statement may act as a motivating force for employees and could lead to low staff turnover and/or benefits for the recruitment of new employees.

Disadvantages include:

• Some mission statements may be written as vague statements of intent. It can be difficult to ascertain exactly what the business stands for in terms of setting sustainable business objectives. This may discourage some investors. CH is stating that profitability is secondary after CSR. Yet this profitability is being used to finance future growth and research. Investors may not commit funds given this perceived confusion from the mission statement.

Accept any other relevant advantage/disadvantage.

Mark as 2 + 2.

• For an identification or a description of one advantage/disadvantage with or without application [1].
• For explanation of one advantage/disadvantage with no application [1].
• For explanation of one advantage/disadvantage and application [2].

Application must refer to the issues around CH having a mission statement.

The question is sufficiently broad to allow candidates to explain a range of possible sources of finance, but any candidate who looks at internal organic sources, such as increasing sales/profits, must be not given credit.

Possible external sources include:

• As CH is a private limited company, the decision could be taken to raise funds through an initial public offering. CH could be “floated or listed” on the appropriate local share market to raise funds.
• Angel investors who have strong ethical/CSR intent could provide funds.
• The NGO has demanded action. Given the number of deaths and injuries from snakebites, the NGO could be approached to provide new finance or governments in those countries predominantly affected. There could be the possibility of a private public partnership.

Accept any other relevant possible source.

Mark as 2 + 2.

• For an identification or a description of one possible source of external finance with or without application [1].
• For explanation of one source with no application [1].
• For explanation of one source and application [2].

Application must refer to the possible sources of finance for production of anti-venom vaccines of anti-venom vaccines.

Refer to Paper 2 markbands for 2016 forward, available under the "Your tests" tab > supplemental materials.

Answers at the top level will look at the ethical arguments of retaining the production of anti-venom vaccines versus the final implications for doing so.

CH’s mission statement alludes to “putting customers first and profits second”. The decision to stop producing the anti-venom vaccines will be viewed as hypocritical by stakeholders and will lead to a loss of its market leader status. There could be a consumer backlash/boycott, and this will hamper marketing attempts for any new life-saving vaccines. The drop in revenue could be considerable and as a result there may be no profits to finance research and development. The comments from the NGO are unhelpful and will bring increased scrutiny and further unwelcome publicity. Stopping production may damage the economic sustainability of CH to the point where they may cease to exist.

However, the increased competition and wave of price reductions cannot be ignored. We must assume that this new competition has a product that competes with CH on price because, as the market leader, we would assume CH has a certain degree of brand loyalty. Clearly, consumers see the competition from Brazil, Mexico and India as a substitute, and unit sales of CH’s vaccine have fallen significantly. If CH does not stop production and cut its losses now, it may not have time or finance to develop new life-saving vaccines, through which it may be able to recreate its market leader status.

The profit motive is the reward for entrepreneurial initiative and risk. CH is quite within its rights to stop production of a loss-making vaccine and switch to a market that may be underdeveloped, albeit one with considerably more risk. Ironically, if the decision to stop production is made quickly, CH may be the beneficiary of some panic buying, boosting short-term revenues before the anti-venom vaccine is withdrawn from the shelves.

Given the ethical and moral issues in this case, CH may be wise to wait and carry out some further market research on the competition. It is indicated that for two years, the new competition will be unable to fill the gap left by CH if it decides to leave this market. CH is still the market leader. Possibly CH could emphasize its product quality over the competition and see if this acts as a spur.

A conclusion with judgment is expected.

A balanced response is one that covers at least two arguments for and at least two arguments against.

Marks should be allocated according to the paper 2 markbands for May 2016 forward with further guidance below.

For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].

Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.

Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.

Candidates cannot reach the top marks if there is no relevant reference/ application to the stimulus.

Many candidates earned 1 mark but far fewer earned 2. Responses were not precise.

Many candidates knew an advantage and disadvantage of a mission statement. When candidates lost marks it was typically because of lack of application. Many candidates did apply to the guide.

For the most part, candidates could name two possible sources of finance, though explanations were sometimes weak.

Responses were not as strong as might have been hoped for. Often candidates merely summarized the stimulus, which resulted in fewer marks.