Unit 1 Introduction to business management

1.1 What is a business?

1.2 Types of business entities

1.3 Business objectives

1.4 Stakeholders

1.5 Growth and evolution

1.6 Multinational companies (MNCs)

Unit 2 Human resource management

2.1 Introduction to human resource management

2.2 Organizational structure

2.3 Leadership and management

2.4 Motivation and demotivation

2.5 Organizational (corporate) culture

2.6 Communication

2.7 Industrial/employee relations

Unit 3 Finance and accounts

3.1 Introduction to finance

3.2 Sources of finance

3.3 Costs and revenues

3.4 Final accounts

3.5 Profitability and liquidity ratio analysis

3.6 Efficiency ratio analysis

3.7 Cash flow

3.8 Investment appraisal

3.9 Budgets

Unit 4 Marketing

4.1 Introduction to marketing

4.2 Marketing planning

4.3 Sales forecasting

4.4 Market research

4.5 The seven Ps of the marketing mix

4.6 International marketing

Unit 5 Operations management

5.1 Introduction to operations management

5.2 Operations methods

5.3 Lean production and quality management

5.4 Location

5.5 Break-even analysis

5.6 Production planning

5.7 Crisis management and contingency planning

5.8 Research and development

5.9 Management information systems

Unit 6 Business management toolkit

6.1 Business management tools

IB Business Management HL 5.5 Break-even analysis Question Bank

[Maximum number: 8]

1. Designer Dolls (DD)
Designer Dolls (DD) is a start-up business that will create hand-crafted unique dolls using a job/customized production method. As part of their business plan DD undertook a break
even analysis.

Table 1: Forecasted figures for DD for the first year of operation

(a)

Describe one limitation of a break-even analysis.

[ 2 ]

(b)

Calculate:

[ 4 ]

(i)

the number of dolls that DD needs to sell to achieve a profit of $ 4000 (show all your working);

[ 2 ]

(ii)

the profit or loss in the first year if DD sells 400 dolls (show all your working).

[ 2 ]

(c)

Assuming that the quantity of dolls to be sold in the second year is 550 and costs remain unchanged, calculate the price per doll that D D would need to charge to make a $6500 profit.

[ 2 ]

[Maximum number: 9]

1. EcoCycle
Dan Perdue is a sole trader who sells bicycles. His unique selling point (USP) is bicycles that are made from recycled materials using environmentally friendly processes. Dan's customers are willing to pay high prices for these types of bicycles, and they have a price inelastic demand. Currently Dan purchases the bicycles from GreenRide, a local manufacturer. GreenRide bicycles are well made, rarely have defects, and are well known to environmentally conscious cyclists. The income elasticity of demand for Dan's bicycles is greater than one.

Table 1: financial data for Dan's bicycles, for 2015:

The economy is forecasted to grow in the upcoming years. To take advantage of the growth potential, Dan is considering forming a partnership with David Brown, a skilled mechanic who knows how to manufacture bicycles. Both Dan and David would be equal partners and split the profits. The partnership will begin on 1 January 2016 and would trade under a newly created brand, EcoCycle. Recycled materials and environmentally friendly processes would be used to manufacture all the EcoCycle bicycles.

Table 2: forecasted financial data, for EcoCycle bicycles, for 2016:

Dan, however, conducted primary market research which indicated that respondents were only willing to pay a much lower price for the untested, unknown brand EcoCycle.

(a)

Using Table 1, calculate for Dan, for 2015:

[ 4 ]

(i)

the break-even number of bicycles (show all your working);

[ 2 ]

(ii)

the total profit (show all your working).

[ 2 ]

(b)

Using Table 2, for the new EcoCycle bicycles, for 2016:

[ 5 ]

(i)

calculate the price that Dan must charge to earn a target profit of $ 20000 (with sales of 200 EcoCycle bicycles) (show all your working);

[ 2 ]

(ii)

using your answer to part (i), and assuming that Dan reduces this price by 5 %, calculate the number of bicycles EcoCycle must sell to still have a target profit of $ 20000.

[ 3 ]

[Maximum number: 4]

1. Roscas
Roscas produces and sells sugar donuts. Monthly fixed costs are $15000, monthly sales revenue is $ 70000, and total variable costs per month are $ 25000. To increase its productivity rate, Roscas wants to buy a new high-efficiency machine that produces chocolate-filled donuts. The finance manager has forecasted the following information.

Table 1: Forecasted information for the production of chocolate-filled donuts

Table 2: Forecasted cash flow for the new machine

(a)

Using the information provided above and in Table 1, calculate:

[ 4 ]

(i)

the total contribution per month for the production of 20000 chocolate-filled donuts (show all your working);

[ 2 ]

(ii)

the monthly profit if Roscas sells sugar donuts and chocolate-filled donuts (show all your working).

[ 2 ]

[Maximum number: 7]

1. Creative Toys (CT)
Creative Toys (CT) manufactures toys and markets them business-to-customers (B2C) online only. The business operates in a leased industrial site and relies on word-of-mouth promotion only. To make customers believe that CTs toys are better than its competitors, CT sets prices slightly higher than the competition. Production and sales are mostly between 1 October and 24 December. Most of the employees work on temporary contracts during this busy period. For the remainder of the year, CT operates well below capacity utilization.
Table 1 contains selected data for CT, for 2014:

Table 1

In 2014, the management of CT considered a change of the marketing mix to include above the line promotion, lower prices, and an additional sales method called "toy parties". Toy parties would be hosted by newly recruited CT sales representatives and attended by parents and their children. At the parties parents could see the toys and children could play with them. Sales would be made at the parties by the new sales representatives, who would be paid on a commission-only basis.

Toy parties could be held throughout the year and make CTs total sales less seasonal. Based on market research, management has estimated that the parents' demand for toys is price elastic and is planning to set lower prices for all toys sold online and at toy parties. The management has prepared forecasted financial data for CT, for 2015, based upon the proposed change to the marketing mix, shown in Table 2 below.

Table 2

The Finance Manager will carry out a variance analysis in order to determine whether the proposed change to the marketing mix has been successful.

(a)

Using information from Table 1:

[ 7 ]

(i)

calculate the break-even level of output for CT, for 2014 (show all your working);

[ 2 ]

(ii)

construct to scale a fully labelled break-even chart for CT, for 2014.

[ 5 ]

[Maximum number: 8]

Mutombo Window Fans (MWF)

Mutombo Window Fans (MWF) manufactures and sells window fans to wholesalers across eastern Africa. Although the business began small, it experienced rapid internal growth through aggressive, commission-based sales.

Currently, MWF sells 300 window fans per month. Each fan sells at an average price of $ 100.

$Table 1: Forecasted fixed costs for 2020 (all figures in \$)$

Table 1: Forecasted fixed costs for 2020 (all figures in \$)

$Table 1: Forecasted fixed costs for 2020 (all figures in \$)$

Table 1: Forecasted fixed costs for 2020 (all figures in \$)

$Table 2: Variable costs per fan for 2020 (all figures in \$)$

Table 2: Variable costs per fan for 2020 (all figures in \$)

(a)

(i)

Calculate, for M W F, the break-even level of output for 2020.

[ 2 ]

(ii)

Construct a fully labelled, to scale, break-even chart for MWF for 2020.

[ 4 ]

(iii)

Calculate the profit if MWF sells 3600 window fans in 2020.

Answer two questions from this section.

[ 2 ]

[Maximum number: 8]

2. Sock Paradise (SP)
After conducting primary market research, Pam opened Sock Paradise (SP), which sells colourful socks. SP operates a retail stall in a large department store and sells online through its own website.
Table 2 shows selected financial data for SP for 2020.

Table 2: Selected financial data for SP for 2020

At the end of 2020, the department store told Pam that it would increase rent by $14000 per year starting on 1 January 2021. Pam forecast total sales for 2021 as 18000 pairs of socks; other costs and prices were forecast to remain unchanged.

(a)

Using the selected financial data in Table 2, calculate for SP for 2020:

[ 6 ]

(i)

the break-even level of output (show all your working);

[ 2 ]

(ii)

the margin of safety (show all your working);

[ 2 ]

(iii)

the net profit (show all your working).

[ 2 ]

(b)

Explain how the impact of the increase in rent and the forecast increase in sales in 2021 could affect SP's profitability.

Answer two questions from this section.

[ 2 ]

[Maximum number: 3]

2. Jill Anderson
Jill Anderson operates a restaurant. Although Jill's meals are viewed as being excellent quality, sales are slowing. Jill is considering replacing existing meals with gluten-free meals. The following financial and forecast information is for the month of May 2018. Jill's restaurant can only produce either existing or gluten-free meals.

Table 1: Existing meals

Table 2: Estimated costs and price if Jill produces the gluten-free meals

A local gluten-free manufacturer, which is not part of Jill's existing supply chain, has offered to supply already prepared gluten-free meals at $ 8 per meal. Jill is unsure whether to make or buy the gluten-free meals.

(a)

Calculate:

[ 3 ]

(i)

the total contribution of existing meals sold per month (show all your working);

[ 2 ]

(ii)

the contribution per unit of a gluten-free meal if Jill decides to buy-in the gluten

free meals (show all your working).

[ 1 ]

[Maximum number: 2]

2. Café Lucchini (CL)
Fabi Lucchini will open the only café, selling hot and cold drinks only, in her small village. The economy is weak so the local government will pay 50 % of the rent for the premises in which C L will operate.
Fabi has forecasted the following figures for the first six months of operation, beginning on 1 July 2016:

An option is to install cooking facilities and serve meals to increase CL's sales revenue. Fabi estimates that she could sell 40 meals per day at an average variable cost of $ 5 and at an average sales price of $ 10. Serving meals would increase her fixed costs by $ 3000 per month.

(a)

Calculate the break-even quantity of meals that CL must sell to pay for the increase in fixed costs of $ 3000 to provide these meals (show all your working).

[ 2 ]

[Maximum number: 8]

2. Florian Stones (FS)
Florian Stones (FS) sells handmade bracelets made from natural stones. FS enjoys strong brand awareness.

Table 3: Forecasted figures for FS for the year ending 31 December 2022

(a)

Using Table 3, draw a fully labelled break-even chart, to scale, for FS for 2022.

[ 4 ]

(b)

Using Table 3, calculate:

[ 4 ]

(i)

the profit or loss in 2022 for FS if production and sales increase to 1200 bracelets (show all your working);

[ 2 ]

(ii)

the price FS would need to charge per bracelet if it sells 800 bracelets and wants to make a profit of $ 10000. Assume that the costs remain the same (show all your working).

Answer two questions from this section.

[ 2 ]

[Maximum number: 2]

2. Stay Float (SF)
Stay Float ( S F ) is a family-owned private limited company that produces rowing boats. Dan is the Marketing Director and Ori, his brother, is the Finance Director. Together they own 75 % of S F 's shares. The main target market is university boat clubs that require custom-made rowing boats. S F produces two models of boat, "The Single" and "The Quad", using a job production method. Each model of boat is treated as separate profit centres.
S F is market-orientated and highly responsive to customer needs. Customers are willing to wait a long time for the completion of a boat because of its high quality and flexible design. Employees are highly skilled and motivated. S F uses a price skimming strategy.
Increasing overseas competition of cheaper mass-produced rowing boats and a cut in university activity budgets has caused a fall in demand for S F 's boats. As a result, S F is experiencing cash flow difficulties. Dan and Ori are considering two different strategic options to reduce costs and find new market segments for both boats:
- (Option 1) change the production method to flow production to improve the working capital cycle. However, Ori is concerned about how this will be financed.
- (Option 2) subcontract the production of the "The Quad" overseas and continue producing "The Single" at the current location.
Sales price for "The Single": $ 15000.
Sales price for "The Quad": $25 000.
Current financial data for 2014:

Financial data if S F subcontracts "The Quad" overseas (Option 2):
- production capacity for the subcontractor: 40 boats.
- the total fixed cost will be reduced by $ 14000.
- S F will pay a variable cost of $ 14000 per boat to the subcontractor.
- S F will reduce the price of the mass-produced "The Quad" by 20 % and double the quantity sold in the first year.
- the quantity of "The Single" (6 boats) sold will remain unchanged.

(a)

Calculate for S F (show all your working):

[ 2 ]

(i)

the break-even quantity for "The Single" if the subcontracting option (Option 2) is chosen.

[ 2 ]

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