State two ways in which market share can be measured.

Draw an organization chart for HA.

Explain the impact of price changes by foreign competition on HA’s break-even point.

Explain why HA had to raise additional external finance to increase production.

Recommend whether HA should choose Option 1 or Option 2. 

The term market share refers to the percentage of a sales that one company has within a particular market, such as athletic gear.

Ways that market share can be measured include:

• by revenue (value), in terms of currency ($, €, ¥, etc.).
• by unit sales (volume).

N.B. candidates are not being asked how to calculate market share, and, thus, they are not expected to provide a definition. For [2], they have to convey the idea that two ways exists to measure it.

Award [1] for each correct way of measuring market share up to [2]. Maximum award: [2].

The chart does not have to be drawn exactly as above.

Award [1] for drawing an organizational chart and additional [1] for each of:

• information that conveys some understanding of “by product”
• information that conveys some understanding of hierarchy (must have at least four levels)
• information that conveys some understanding of a narrow span of control (two or three reporting units per manager).

Maximum award: [4].

N.B. to convey the idea of organized by product, candidates may use the actual products (running shorts, sweat shirts, and sports bras) or generic products (product A, product B, product C) as long as they have exactly three products.

HA is selling more units of product, but sales revenue has not been rising as foreign competitors, using penetration pricing, have driven prices down. Thus, the average sales price per unit is falling. Further, the gross profit margin has been declining, which means that HA has not been able to reduce per unit cost as much as sales price per unit. With a declining contribution per unit, HA has seen its break-even point move to the right on the X-axis.

Award [1] for stating that the break-even point moves to the right, and an additional [1] for an explanation with application to the stimulus.

Candidates may answer this question in one of three ways:

1. One way puts emphasis on the word external in the question. If a candidate chose this emphasis, they need to say something like “Because foreign competitors have used penetration pricing to gain market share, HA has had to lower its prices, which is why gross and net profit margins have declined. As a result, HA has not been able to generate sufficient internal finance to support increased production and has had to turn to external finance.”
   
   Both of the other ways candidates can answer this question emphasize the increase in production:
   
   
2. Candidates may believe that HA needs more working capital to support increased trading activity. HA has had increased unit sales volume, which means that it has been manufacturing and selling more product, even if at lower margins. For most companies, increased trading means increased inventory and accounts receivable. The asset accounts must be financed. Increased accounts payable will fund some of that increased trading activity, but probably not all of it. With margins declining, HA probably cannot fund this need internally and, thus, has had to turn to external sources of finance.
   
   
3. Candidates may believe that HA needs property, plant, and equipment to support increased production. However, because of contracting margins, in the past few years, HA probably has generated insufficient funds internally to finance long-term assets. Thus, they have obtained finance externally.

Award [1] for some understanding of one of the three issues above and an additional [1] for application to the stimulus. Up to a maximum of [2].

N.B. In all three cases, the key is for candidates to link contracting margins or lower prices (which is why HA’s margins are lower) to external finance (rather than internal) or to increased production (increased working capital requirements or more property, plant, and equipment).

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

Reasons for outsourcing include:

• Lower costs, which is usually why companies outsource overseas.
• Lower investment in fixed assets: no need to expand current manufacturing facilities and some possibility of selling off existing facilities.
• Lower fixed costs, which can be an advantage were sales to fall in the highly competitive market.

Reasons against outsourcing include:

• HA relies on high-quality manufacturing, which overseas manufacturers may not be able to deliver.
• HA exposes itself to additional risks, such as political risk of the home countries where the new manufacturers are located.
• Depending on where most of HA’s sales occur, it may lose the advantage of saying manufactured in the home country or in Europe.
• Outsourcing, if to developing countries, may raise ethical and environmental concerns.

Accept any other relevant reason for or against outsourcing.

Reasons for setting up online business-to-consumer (B2C) retail stores include:

• The online retail market is rapidly growing.
• Consumers have increasing expectations that goods will be available online.
• B2C eliminates links in the downstream supply chain that erode profit margins.

Reasons against setting up online retail stores include:

• HA has only operated in the secondary sector and has no experience in retail.
• Though capital outlays will be less than if HA started to build brick-and-mortar stores, setting up an online presence will require capital outlays at a time when the business is having to turn to external finance just to fund manufacturing operations.
• The online market is no less competitive than traditional approaches.

Accept any other relevant reason for or against setting up online retail stores.

Award marks as follows:

N.B. A balanced argument is one that has a reason for and a reason against the options.

Marks should be allocated according to the Paper 2 markbands for 2016 forward.

Many candidates knew at least one way to measure market share (value).

Many candidates earned 2 or 3 marks and some earned 4.

Many candidates appeared to understand, or at least have some understanding, of the issues in both of these questions but, in their responses, they did not clearly explain reasons.

Many candidates appeared to understand, or at least have some understanding, of the issues in both of these questions but, in their responses, they did not clearly explain reasons.

As noted above, many candidates knew the expectations of the ten-mark question and did a solid job. Candidates often made detailed use of the stimulus.