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1.2 Types of business entities Topic Practice

1.2 Types of business entities Topic Practice
IB Business Management syllabusBusiness Management SL/HLFirst assessment 2025

Students practise distinguishing business entities by defining terms, stating features, calculating share percentages, and interpreting ownership changes across PPPs, PLCs, and…

Exam points

  • calculate share percentages from pie charts and interpret implications for control
  • state two features of a public-private partnership using its joint public

Question 1(a)

[Maximum number: 2]

1. Solar Soccer Academy Ltd. (SSA)
Solar Soccer Academy Ltd. (SSA) is a private limited company set up five years ago by Stephen Murdock. It provides top-quality soccer (football) skills and technique coaching. So far, SSA has been a success, and Stephen is deciding whether to open another academy in a neighbouring city.
The cost of building a second academy is $ 500000. Stephen has produced forecasted financial information for the second academy's first five years of operation (see Table 1).

Table 1: Forecasted financial information for a second academy

Table 1: Forecasted financial information for a second academy

Stephen estimates cash outflow to be 25 % of the total cash inflow in years 1,2 and 3 and 20 % of the total cash inflow in years 4 and 5.

State two features of a private limited company.

Question 2(a)

[Maximum number: 2]

2. Menlo Seat Covers (MSC)
Menlo Seat Covers (MSC) manufactures car seat covers. The business operates as a private limited company owned 100 % by Tony Mehta, who is also the only employee. MSC sells its products only online. The market is increasingly competitive. Tony will give himself a 16.66 % pay increase starting 1 April 2024.
Tony forecasts the following monthly cash outflows for the first four months of 2024:
- Heating and lighting: $ 3000.
- Salary: $ 6000.
- Packaging: $ 2000.
- Delivery charges: 5 % of sales revenue.
- Purchases: $ 20000.
Additional information:
- Opening balance on 1 January 2024: $ 14000.
- Sales revenue: $ 35000 each month.
- Rent of $ 4500 paid quarterly: first payment in January 2024.
- MSC will receive $ 8000 from the sale of used equipment in March 2024.
Tony would like to expand the business but, lacking sufficient internal sources of finance, must seek external sources.

State two features of a private limited company.

Question 2(a)

[Maximum number: 2]

2. Les Légumes Contentes (LLC)
Les Légumes Contentes (LLC) is a cooperative of farmers that sells organic produce. LLC's starting capital is $ 5000. It needs a bank loan to buy refrigerators for its store. The bank has requested a cash-flow forecast. The forecasted figures are shown in Table 3.

Table 3: Forecasted figures for LLC for the first four months of operations, beginning 1 January

Table 3: Forecasted figures for LLC for the first four months of operations, beginning 1 January

State two features of a cooperative.

Question 3(c)

[Maximum number: 4]

3. 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.

Explain one advantage and one disadvantage for CD of forming a partnership.

Question 3(a)

[Maximum number: 2]

Tijeras (TJ)

Tijeras (TJ), a private limited company, manufactures surgical scissors. It has four shareholders and operates one factory in Peru. TJ sells in Central American and South American markets. Its sales have grown for the last 10 years, which has led to both economies of scale and diseconomies of scale.

The chief operating officer (COO) analysed the situation. He discovered that:
- current work areas are overcrowded
- workers are specializing more than in previous years
- maintenance costs are increasing
- the firm now buys raw materials in bulk.

The market for surgical equipment, including scissors, in the United States (US) is large and highly competitive. Recently, some hospitals in the US purchased TJ's scissors.

Table 3: Selected financial information for TJ on 31 May 2021 and 2022 and for the years ending 31 May 2021 and 2022

Table 3: Selected financial information for TJ on 31 May 2021 and 2022 and for the years ending 31 May 2021 and 2022

The COO determined that TJ needed more manufacturing capacity and put forward two options:
- Option 1: Keep the current factory in Peru and build a second one in Mexico, closer to the North American market. TJ's bank has agreed to provide a long-term loan to finance the new factory.
- Option 2: Build a new factory that is large enough for all of T 's manufacturing-capacity needs and sell the old factory for $ 400000. This new factory cannot be financed solely with external borrowing.

Table 4: Forecasted costs of Option 1 and Option 2

Table 4: Forecasted costs of Option 1 and Option 2

State two features of a private limited company.

Question 5(a)

[Maximum number: 2]

5. Frez PLC (FR)
Frez PLC (FR) has 6000 employees in its 100 supermarkets and 250 in its head office. FR operates a 360-degree feedback appraisal system for head office employees. FR's directors believe that this system has improved retention and morale of head office employees. This year, to reduce head office costs, FR offered head office employees the option of teleworking, which 60 % accepted. They will work at the head office only one day per month.
Each FR supermarket has 10 departments. Departmental managers have concerns about their workload caused by their large span of control. Labour turnover at F R supermarkets is increasing each year because departmental managers are leaving. In January, FR increased its supermarket opening hours and hired an additional 1000 part-time employees. FR is considering extending its 360-degree feedback appraisal system to all supermarket employees.
Recently, demand from supermarket shoppers for a home delivery service increased, although industry experts disagree on whether this demand will continue. FR's main competitors already provide delivery services.
FR has decided to launch a home delivery service. It will require 500 vans, which would be replaced every five years. FR is considering two options:
- Option 1: purchase the vans at a unit cost of $ 34000 each, financed by a five-year bank loan at 3 % interest.
- Option 2: Lease the vans at a unit cost of $ 13000 per year per van. The minimum term for the lease will be 24 months.
FR already borrowed $50 million in 2019 to finance the modernization of its supermarkets.

State two features of a public limited company.

Question 5(a)

[Maximum number: 2]

5. Frez PLC (FR)
Frez PLC (FR) has 6000 employees in its 100 supermarkets and 250 in its head office. FR operates a 360-degree feedback appraisal system for head office employees. FR's directors believe that this system has improved retention and morale of head office employees. This year, to reduce head office costs, FR offered head office employees the option of teleworking, which 60 % accepted. They will work at the head office only one day per month.
Each FR supermarket has 10 departments. Departmental managers have concerns about their workload caused by their large span of control. Labour turnover at F R supermarkets is increasing each year because departmental managers are leaving. In January, FR increased its supermarket opening hours and hired an additional 1000 part-time employees. FR is considering extending its 360-degree feedback appraisal system to all supermarket employees.
Recently, demand from supermarket shoppers for a home delivery service increased, although industry experts disagree on whether this demand will continue. FR's main competitors already provide delivery services.
FR has decided to launch a home delivery service. It will require 500 vans, which would be replaced every five years. FR is considering two options:
- Option 1: purchase the vans at a unit cost of $ 34000 each, financed by a five-year bank loan at 3 % interest.
- Option 2: Lease the vans at a unit cost of $ 13000 per year per van. The minimum term for the lease will be 24 months.
FR already borrowed $50 million in 2019 to finance the modernization of its supermarkets.

State two features of a public limited company.

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