Evaluate how cost structures, revenue choices, contribution and break-even affect profitability and decisions in IB Business Management HL cases.
Carol's Designs (CD)
Carol Rodríguez is passionate about design. She runs Carol's Designs (CD) with two assistants, making and selling party dresses directly to consumers through her website. Customers provide their style preferences and measurements. Then, Carol emails a computer-designed drawing for the customer's approval. CD uses job/customized production.
An emerging talent in dress design, Carol decided to use e-commerce because she could not afford the fixed costs of an expensive physical location and traditional promotional techniques. Through her website, she promotes and sells her designs to a large audience and collects valuable information and opinions from her customers. The business-to-consumer (B2C) approach, essential for her business growth, requires regular website updates.
E-commerce sales have steadily increased worldwide, and Carol's dress orders have increased too. However, CD regularly misses delivery deadlines and is often short of cash. Carol's bank suggested that she find a partner. She approached Juan Pérez, an engineer and business angel, about becoming a 50 % partner in CD. Juan thinks Carol needs to delegate design and focus on the operation of the business.
CD uses social media marketing. Alexia Bros, a famous actress, ordered a dress for this season's cinema festival, and Carol uploaded pictures of Alexia wearing her newly designed dress. Recently, however, some negative comments, including customer complaints about delays in delivery times, have appeared on social media. Carol did not have time to reply to these complaints. She is planning to hire a social media marketing manager.
Define the term fixed cost.
Fixed cost is defined as those costs that do not vary through output or quantity produced.
Award [1] for a basic definition that conveys partial knowledge and understanding. e.g. fixed costs do not change.
Award [2] for a full definition that conveys knowledge and understanding similar to the answer above. e.g links directly to output. Output can also be sales for retail businesses.
N.B. no application required. Do not credit examples.
Cheap4U (C4U)
Cheap4U (C4U), a public limited company (plc), operates a successful low-price airline service. C4U offers a basic service targeting low-income families and students. It is positioned as offering the lowest price for a flight. Staff training for flights is on-the-job and C4U uses non-financial motivation such as job enlargement. C4U has recently experienced difficulty in recruiting enough flight staff. As a result, flight staff are overworked and there have been complaints by some passengers about poor service.
In 2013, C4U suffered its first loss in 11 years. C4U carried out a review and the following three issues were identified:
- given the staff shortages, C4U flights are often delayed or cancelled.
- some advertising for popular flights is considered to be unethical. For example, cheap one-way flights are promoted without stating that the return flight is twice as expensive.
- new low-price competitors are emerging, using newer and more fuel-efficient aircrafts.
C 4 U is considering offering a new international flight service, Quality4U ( Q 4 U ). This service will only be offered at certain times. Q4U will target higher-income consumers by offering excellent aircraft facilities, free internet access and more comfortable seats. Four new fully equipped aircrafts will need to be purchased. C4U's gearing ratio is rising at over 80 %. New sources of finance will be required.
C 4 U is also considering new methods of staff training for the new Q4U service:
- One new method of off-the-job training could be conducted by a hotel which is famous for its high quality of customer service. This new training method will increase C4U's costs at a time when its working capital is limited.
- Secondly, all flight staff will have to study for and pass an examination to meet international quality standards of customer service. C4U's senior management is insisting that staff study in their own free time. Flight staff have complained and have consulted their representatives about possible industrial action, as they feel that they are already overworked.
Explain how each of the three issues identified, could have impacted on C4U's revenue, leading to its first loss in 11 years.
(b) Explain how each of the three issues identified, could have impacted on C4U's revenue leading to its first loss in 11 years.
The first issue might have irritated and frustrated customers who through word-of
mouth promotion and social media raised complaints, leading to a loss of goodwill. The delays and cancellation were perceived as poor customer service, it resulted in a fall in demand of existing customers as well as lower demand from new customers and hence revenue - informed through social media of the unreliability on the part of C 4 U.
The second issue is an ethical one. If the advertising is misleading and flight prices for return fares are deemed unfair, existing and new customers would have possibly transferred to competitors, leading to a fall in demand for C4U services and thus lower revenue for its flight services.
The third issue is the increase choice availability of substitutes / bargaining power of consumers. A larger number of competitors with higher efficiency levels are likely to result in customers being taken away from C 4 U, hence a fall in total revenue and profit.
Mark as 2+2+2 for each issue.
Award [1 mark] for application to C4U, award an additional [1 mark] for a developed explanation of how the fall in revenue / demand / sales could have occurred up to a maximum of [2 marks] per issue.
N.B. given the fact that this question is very easy, it is very important that the candidate actually explains how / why the total revenue falls / fall in demand / sales. It is also expected that for full marks, the candidates go beyond just copying the information from the stimulus.
Do not credit explanation of "increase in cost".