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Date November 2021 Marks available 10 Reference code 21N.2.HL.TZ0.4
Level Higher level Paper Paper 2 Time zone Time zone 0
Command term Discuss Question number 4 Adapted from N/A

Question

Smith’s Foods Ltd (SF)

Charles Smith and seven friends started a private limited company, Smith’s Foods Ltd (SF), to produce ready-made healthy meals for people with diabetes*. Using a cost-plus (mark‑up) pricing strategy, SF’s mission is to make inexpensive, widely available meals that help diabetics manage their carbohydrate intake accurately.

Despite reliance on inexpensive social media marketing, SF grew rapidly. Due to this rapid growth, however, the quality of its products deteriorated, and a number of its meals were found to contain different quantities of carbohydrate than those stated on the packaging. Negative comments appeared on SF’s Instagram page. Charles responded quickly to reassure customers and offered refunds. SF’s response led to the company receiving an industry award for ethical behaviour.

Charles introduced flow production to reduce the cost of SF’s meals, which changed SF’s scale of operations and increased its gearing ratio. However, Charles had little business experience of using flow production and problems emerged.

External stakeholders began to look into SF’s operations. One supermarket chain, Good Foods (GF), contacted Charles and offered to take over SF, keeping Charles on the board of directors. This takeover would allow SF’s meals to be produced at a lower cost and reach a wider target market. GF would also finance research and development into new meals with more carefully controlled carbohydrate levels.

However, SF would close. Negative publicity would be considerable. The remaining shareholders have threatened to launch a new business, creating their own brand of meals for people with diabetes in direct competition with GF.


* diabetes: a medical condition that causes a person’s blood sugar level to become too high. People with diabetes need to be mindful of the amount of carbohydrates (which includes sugar) they include in their diet.

Define the term cost-plus (mark-up) pricing strategy.

[2]
a.

Explain two benefits for SF of using social media marketing.

[4]
b.

Explain one benefit and one cost to SF of using a flow production method.

[4]
c.

Discuss whether Charles should accept GF’s offer of a takeover.

[10]
d.

Markscheme

Cost-plus pricing is a pricing method where the total cost of producing is calculated which includes variable costs (direct costs) and a fixed cost component (or part of the overhead). Then a profit margin per unit is added to obtain the selling price.

Award 1 mark for a partial definition where the candidate has mentioned costs and a small profit margin being added to achieve the selling price

Award 2 marks for a full clearer definition which includes reference to both variable and fixed costs being calculated with a profit margin being added to achieve the selling price.

a.

Social media marketing allows accurate targeting through social media. Below the line could allow targeting to families who have a strong interest in purchasing diabetic meals though Facebook or Reddit groups.

Cheap and quick to set up and very wide reach. Evidence that SF has grown fast indicating that below the line promotion has exceeded expectations.

The speed of response of social media may be instant. Charles' quick response on social media managed to reduce the impact of the negative publicity after the quality issue.

Below the line promotion allows SF to create customer loyalty programmes which can be managed online and have continued direct links to current and potential customers looking for diabetic meals.

Award [1] for a benefit of social media marketing with an additional [1] for application to SF.

Mark as [2+2].

b.

The benefits of a flow production method to SF could include:

The costs allude to an increase in complexity of the business and the stimulus indicates that some problems are emerging. Hence some costs could include:

Award [1] for a benefit of flow production with an additional [1] for application to SF.

Mark as [2+2].

c.

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

SF is clearly a successful business although struggling to maintain control. The offer of a takeover comes at a critical time.

There are a number of arguments against the takeover:

However, there are a number of arguments for takeover:

The decision is difficult. The other shareholders do not want this move and can ill afford the additional negative publicity. A conflict carried out on social media could become damaging to the brand which relies on positive social media word of mouth. The offer is tempting but SF is in fair financial shape despite the higher gearing ratio. Charles has limited experience and perhaps needs more time. It might be sensible for Charles to wait and discuss further with the other shareholders since a majority agreement is required to sell.

Marks to be awarded using the paper 2 mark bands for May 2016 forward and the following is to be noted.

Candidates are expected to provide a conclusion with a substantiated judgment.

For one relevant argument for acceptance of the takeover that is one-sided, award a maximum of [3].

For two relevant arguments, but the discussion of both is one-sided, award a maximum of [4].

For two relevant arguments, one treated in a balanced way and another in an unbalanced way, award a maximum of [5].

For two relevant arguments, both treated in balanced ways, but no real conclusion, award a maximum of [6]. Conclusions must be more than nominal (for example, when a candidate opens a final paragraph with “In conclusion . . . “ but then has no real conclusion, award a maximum of [6].

d.

Examiners report

Cost-plus (mark-up) pricing – the key to full marks was understanding that costs involve both fixed and variable costs. In fact, this is one of the major drawbacks of this method, insomuch as companies often understate the apportioned fixed costs attributable to each unit of production.

a.

Social media marketing has clearly a cost advantage and most candidates recognised this. Some candidates found it difficult to apply to SF i.e., the link to past rapid growth. In addition, many candidates missed the point about responding directly to their target market especially when trying to respond to the various complaints, outlined in the stimulus.

b.

Many candidates incorrectly included increased gearing as an advantage. Other responses did not recognize that flow production is simply another form of mass production and attempted to contrast the two. Some candidates confused flow production with cell production. Another common error was that many candidates felt there was a decline in quality control. The opposite is in fact the case due to the standardization of products.

c.

This question was well answered by most candidates. However, many candidates mistook the actual nature of a takeover where the acquired company usually remains intact and often keeping most of the existing management and support structures and even its name. This is particularly so where the acquired company has strong brand recognition.

d.

Syllabus sections

Last exams 2023 » Unit 1: Business organization and environment » 1.6 Growth and evolution » The following external growth methods: mergers and acquisitions (M&As) and takeovers, joint ventures, strategic alliances, franchising
First exams 2024 » Unit 2: Human resource management » 2.2 Organizational structure » 2.2.3 Appropriateness of different organizational structures given a change in external factors
First exams 2024 » Unit 1: Introduction to business management » 1.5 Growth and evolution » 1.5.5 External growth methods
First exams 2024 » Unit 2: Human resource management » 2.2 Organizational structure
First exams 2024 » Unit 1: Introduction to business management » 1.5 Growth and evolution
Last exams 2023 » Unit 1: Business organization and environment » 1.6 Growth and evolution
First exams 2024 » Unit 1: Introduction to business management
Last exams 2023 » Unit 1: Business organization and environment
First exams 2024 » Unit 2: Human resource management
Last exams 2023
First exams 2024

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