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

Explain two benefits for SF of using social media marketing.

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

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

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.

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].

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

• It is likely to lead to SF meeting the growing demand for its meals quickly and in the process reducing the unit costs of production.
• This may allow SF to reduce the price of its meals as they use cost-plus pricing.
• The benefits of flow production imply that SF will be true to its mission statement.
• Enables SF to control quality more effectively and avoid the mis-labelling issues.

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:

• Charles’ management style will also come under increased pressure as he does not have experience of transitioning to and using this new technology.
• Communication and coordination issues may arise leading to higher unit costs effectively a diseconomy of scale.
• Investment in flow production involves high capital costs resulting in possible borrowing and higher gearing.
• Pausing production e.g. for changing recipes, can be expensive.
• If flow production creates too many additional meals even with growing demand, SF could be left with meals it cannot sell.

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

Mark as [2+2].

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:

• The move to flow production has reduced costs and prices and this factor may lead to even higher sales and by assumption profits.
• Although Charles has limited experience of using flow production the future growth of SF could be considerable.
• The company will thrive, and they possibly do not wish to accept the offer. By not accepting the offer Charles will eliminate the possibility of a rival company as the remaining shareholders will not create one.
• This will cause great resentment among the shareholders and given that SF has already survived one episode of poor publicity through the quality control issue, Charles can ill afford any more. There is evidence from the stimulus that this negative publicity could grow considerably.
• The creation of a direct competitor run by the remaining shareholders under albeit a new brand could confuse their loyal customers.

However, there are a number of arguments for takeover:

• The distribution channels offered by the supermarket will boost SF’s profile further and allow them to work with a business with greater levels of experience in the same area.
• The takeover will also allow SF to develop its mission and expand the range of meals offered given that there is finance for research and development into new nutritional meals.
• Finally, after the success of diabetic meals how long will it be before other large supermarket chains come up with their own branded diabetic meals. SF could be outmaneuvered and undercut by future competition. SF’s
  market value would appear to be high but will this be the case in 2–3 years?

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].

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.

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.

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.

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.