IB BM SL 4.5.1 Product

[Maximum number: 4]

KapTan

KapTan (KT), which manufactures rechargeable batteries for cordless consumer products like vacuum cleaners, began five years ago as a business with a product orientation. It sells business to business (B2B). Multinational companies dominate the rechargeable battery industry, and KT suffered from cash-flow problems in its first year of trading. Its profits are small and, in the last two years, have fallen.
KT has now developed an innovative battery that is small and lightweight. This battery is an emergency power source allowing electric cars to reach a charging station. However, the battery can only be used ten times before it runs out. KT has insufficient finance to create a battery that can be recharged an unlimited number of times.
Through market research, KT has discovered that:
- no other emergency batteries for electric cars exist
- owners of electric cars fear running out of power
- KT's new battery could be obsolete in five years.
KT has the capacity to produce 90000 of these new batteries each year. The average cost is $\$200$ per unit. KT has insufficient funds to invest in additional capacity.
KT is considering two options:
Option 1: Market and sell directly to existing car owners through business to consumer (B2C) at a retail price of $\$400$ . KT will need to borrow significant capital to finance this option.
Option 2: Accept an offer of a five-year strategic alliance with a manufacturer of electric cars. KT would provide its product exclusively at $\$250$ per unit. Sales are guaranteed.

$Table 2: \(\boldsymbol{K$

Table 2: \(\boldsymbol{K

With reference to Option 1, for K T, explain the relationship between the product life cycle, investment, profit and cash flow.

Initial research and development costs plus the costs involved in launching a product usually means a product will be a loss maker in its early years. Cash flows may be negative. As sales grow and the product moves into the growth phase, profits are likely to be positive but the company will require additional working capital Not until the product reaches the maturity phases of the life cycle are cash flows and profits likely to be positive. In the decline phase, cash flows and profits are likely to remain positive. The cash flows especially should be solid with the contraction of necessary working capital. For K T, the investment in R\&D for the new battery will have had a negative effect on cash flow and profits. Once the product is launched, Option 1 forecasts see quite large sales and therefore large cash inflows. However, we do not know about the marketing costs, which will increase cash outflows. Sometime in year 2, further investment would be needed if sales targets in years 3 and 4 are to be fulfilled as projected sales exceed capacity. This investment would increase fixed costs and reduce profits.

If a candidate shows some understanding the relationship between the product life cycle, investment, profit and cash flow, but with no application to the stimulus, award [1].

If the candidate shows clear understanding of the relationship between the product life cycle, investment, profit and cash flow, but with no application to the stimulus, award [2].

If the candidate shows some understanding of the relationship between the product life cycle, investment, profit and cash flow and has some application to the stimulus, award [2].

If the candidate shows clear understanding of the relationship between the product life cycle, investment, profit and cash flow and has some application to the stimulus, award [3].

If the candidate shows clear understanding of the relationship between the product life cycle, investment, profit and cash flow and has detailed application to the stimulus, award [4].

If a candidate writes or draws some sort of table (such as exist in several of the textbooks IB students use) listing the stages of the product life cycle and showing the relationship between stages of the life cycle and their relationship to investment, cash flow and profit, accept and award [2] marks if well executed with no application to the stimulus and award [1] if poorly executed with no application to the stimulus.

If the candidate applies to the stimulus, either by making inserts into the table or with commentary before or after it, award an additional [1 to 2] according to the depth and quality of the application.

IB Business Management SL 4.5.1 Product Questions

Exam points

IB Business Management SL 4.5.1 Product Questions question 1