Define the term public limited company.

Explain one advantage and one disadvantage for DA of changing from function-based cost centres to the cost centres proposed by Pierre.

Calculate the difference between the cost for DA to make the rechargeable batteries and the cost to buy them from XL.

Suggest one other factor that DA should consider before deciding whether to make the rechargeable batteries or buy them from XL.

Discuss the likely impact on DA’s organizational culture of the changes recommended by the management consultants.

A limited company (incorporated), often a large business, with the legal right to sell shares to the general public (publicly traded). Its share price is quoted on the national stock exchange. It has limited liability (not necessary in answer but helpful)

References to ‘owned by the government’ or ‘local authorities can be rewarded as state involvement in plcs is common in some countries

Award [1] for a partial definition and [2] for a full, clear definition. This answer does not need to be in context and the definition does not have to use the words above. A full, clear definition needs more than just a reference to limited liability.

A cost centre is a section of a business to which both costs and revenues can be allocated.

Currently cost centres are based on functional areas such as Marketing, HRM. Proposal is to base them on product (washing machines, vacuum cleaners, toasters etc,) and, where appropriate, project (eg click and fix).

Advantages of change include:

• Easier to monitor and control production of products
• Easier to see which products to drop, or modify
• Easier to set targets – difficult for large functional areas
• This is because functions are not directly related to products.

Disadvantages of change include:

• Costs of implementing change
• Disruption
• Lack of continuity
• Possible unwanted competition between products or projects.

Please note context may be a challenge. Candidates need to mention functional areas, products, projects that appear in the case.

References to budgets need to be linked to cost centres.

Award [1] for each relevant advantage identified and [1] for a description of how that advantage relates to AFA. Award [1] for each relevant disadvantage identified and [1] for a description of how that disadvantage relates to DA.

Where a candidate ONLY refers to existing cost centres max award [1], for understanding cost centres.
Where a candidate does not refer to new cost centres but does mention impacts of changing: max award [2].

Cost to make = 10 000 × €15 + €30 000 = €180 000
Cost to buy = 10 000 × €17 = €170 000
Difference/Saving = €10 000 in favour of buying

Reward alternative methods of getting to the same answer e.g. by starting with unit costs and cost differences. Although working is preferable the question does not require it.
The answer € 10 000 also achieves [3]

Award [3] for a correct answer which must include €.

Award [2] for a correct answer with wrong units or reasonable attempt with units. E.g. not making a final subtraction.

Award [1] for an attempt.

If the answer does not appear in (i) but does appear in (ii) then (i) can be rewarded retrospectively – you will have to go back to mark entry for (i).

Factors could include:

• Quality control issues (in-house easier to control)
• Reliability of suppliers
• Suitable workforce at DA
• DA’s experience with manufacturing
• Policy on core activities
• Impact on employees
• Impact on DA

Award [1] for any relevant factor – does not have to be in context. Do not reward relative costs.

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

Changes include:

• Changing from an annual salary to low basic wage with bonuses
• Reducing social benefits
• Penalties for failing to meet targets
• Some elements of changing to task culture from person culture (candidates do not need to name these culture types)

Culture currently based on:

• Family business
• Strong social values
• Benefits to employees and their families such as housing, hospitals etc
• Looked after employees in hard times
• Recently included employee focused HRM strategies and management including consultation, redeployment
• CSR

Focus is changed to managing costs. The switch is from ‘soft’ to ‘hard’ HRM, part of the culture.
The current ‘soft’ approach is more consistent with a family business than ‘hard’ HRM.

‘Balance’ could be achieved by comparing old and new methods; positive and negative impacts on stakeholders and/or DA.

Marks should be allocated according to the paper 1 markbands for May 2016 forward section B.

Theoretical answer or context limited to naming the business or simplistic development max [4].

Discussion of only either the existing situation or the new situation or only focuses on motivation, or on impacts other than on culture [5].

Discussion of culture with no clear balance [6].

Cultural change considered, good use of evidence, particularly from section B, but no effective conclusion award a maximum of [8].

For [10] the answer needs to be clearly relevant to DA, with good use of context, a clear sense of how culture will change and a clear conclusion. 

Most candidates mentioned the key features of public limited companies — limited liability, openly traded by the general public on the stock exchange. In some countries public limited companies have some significant ownership of shares by the state and such answers were allowed even though in many countries this is not appropriate.

There is a general lack of knowledge of cost centres. The concept is central to the management of many businesses, so this is a significant gap in many candidates' knowledge. Of those candidates who did know what cost centres are, few were able to develop the idea in relation to the proposed change in the structure of the business. Good answers referred to the fact that there would be far more cost centres under a 'product' approach but that it would be easier to manage product performance including target setting. Candidates could mention the various products and the actual functions in this business. Some candidates confused cost centres with budgets.

Many candidates got the correct answer of €10,000. Some candidates quoted dollars, or no units. Others forgot to take the difference between the two total costs. Some candidates forgot to include the fixed costs.

Almost all candidates were able to identify a factor, but a few candidates did not recognize the significance of the word 'other' in the question.

Organizational culture does not seem to be an area of strength for most candidates. The pre-release material provided a range of cultural issues at DA and it is surprising that candidates seem to not to have appreciated the importance of the existing culture at DA to its effective functioning. The proposals provided a major change to the culture, shifting the business from one based on 'soft HRM' to 'hard HRM'. The changes proposed would totally change the business. Many weaker answers focused on the impact of the proposed changes on motivation while other answers focused on whether the change was a good idea or not.

Good answers contrasted the likelihood that DA may become leaner and more efficient with the greater likelihood that the extensive good will and loyalty of the workforce might be destroyed. Good answers also involved ethical considerations and likely loss of customer loyalty and brand loyalty.