IB Business Management SL 3.1.1 Role of finance Question Bank
Practise IB Business Management SL/HL 3.1.1 by applying role of finance concepts to exam-style questions.
- Syllabus
- First assessment 2024
- Course
- Business management SL
- Level
- SL
Exam points
- identify the relevant model, concept or evidence
- apply the correct subject framework to the question
- evaluate the result using clear evidence and subject terminology
3.1.1—Role of finance question 1
[Maximum number: 2]
Hums Athletics (HA)
Hums Athletics (HA) manufactures running shorts, sweat shirts, and sports bras. Operating only in the secondary sector, HA has a head office and three manufacturing facilities, one for each product. These are located in its home country in Europe. Labour costs are high. The quality of labour is excellent.
HA produces goods under its own HA brand, which it sells to wholesalers. HA also manufactures for other sportswear companies. HA puts the other sportswear companies' logos on the running shorts, sweat shirts, and sports bras. Sales to other sportswear companies are an important revenue stream for H A.
HA has many levels of hierarchy. Managers at each level have a narrow span of control, and the company is organized by product. HA's management believe that these features of organizational structure ensure product quality, which they view as essential for brand loyalty.
The sportswear manufacturing industry is becoming more competitive. Some foreign manufacturers have begun using penetration pricing to gain market share. For three years, none of HA's revenue streams have increased, despite increasing unit sales. HA's gross and net profit margins have declined. However, its sales have increased for the last three years. HA has had to raise additional external finance to increase production.
In response to the increasing competition, H A is considering two options:
- Option 1: Outsourcing some of its manufacturing overseas.
- Option 2: Entering the rapidly growing online business-to-consumer (B2C) retail market.
Market research has shown that consumers increasingly expect to buy online.
Explain:
why HA had to raise additional external finance to increase production.
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).
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