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Business Management
Exam Mock
Markscheme

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Question 1
1. Common features of wholesalers include:
• An intermediary along a distribution channel that breaks large quantities ofproduct into
small stock quantities for retail businesses.
• generally offering stock for predominantly one industry (furniture, fruit, electronic parts,
auto parts, etc) and building up product knowledge to help retail businesses increase the
opportunities for retail success.
• allow retail businesses to purchase on credit or even allowing retail business to purchase
stock on a sale or return basis.
• given the large quantities of stock purchases, being able to experience significant
purchasing and marketing economies of scale.
Accept any other relevant feature.
Award [1] for a relevant feature with appropriate description up to a maximum of [2].
It is not expected that candidates explain the benefits to any stakeholder
Application to the organisation is not required.
Do not credit an example of BF or any other organisation.
2. Stock COGS × 365 = stock turnover in days
4000 12166 × 365 = 120.006 days (assuming 4000 is average stock)
Accept 121 days
Accept 120 days
Do not credit for the use of a correct formula as it is given.
Award [1] for some minimal understanding like at least two figures used arecorrectly.
Award [1] for a final correct answer without working
_Award [2] for correct use of formula with clear working with no mathematical errorsand
the correct answer is given in days from working shown.
_
_For [2], “days” must be present, as this is the standard unit used.
_
Do not accept a response that calculates the times it takes the stock to be turnedover.
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3. Cash + Debtors + Stock Current liabilities = current ratio

2000 + 1973 + 4000 800 + 1000 = 4.43
Accept 4.4
Award [1] for some minimal understanding like all the figures/total for CA or CL are correct
Award [2] for correct use of formula with no mathematical errors/the calculations are clear
and correct.
[2] cannot be awarded if the candidates expresses the figures in times/ units etc.
4. Debtors Total sales revenue × 365 = Debtor days
6134 26000 × 365 = 86.11 days
If a leap year figure is used, please accept 86.34 days.
Accept 87 days.
Accept 86 days.
Do not credit for the use of a correct formula as it is given.
Award [1] for some minimal understanding like at least two figures used are correct.
Award [1] for a final correct answer without working
Award [2] for correct use of formula with no mathematical errors. Units (days) are required
for full marks.
5. Given the changes in the current ratio from 4.4 to 5.47, one can say that BF’s liquidityhas
increased. Candidates may term this increase as an improvement or deteriorationas BF’S
ratios are high. The important issue is the increase in liquidity.
The application should refer to the possible reasons/contributors for the changes like:
An increase in stock from 4000to6164
An increase in debtors from 1973 to
6134.P ossiblyduetosomediff icultiesof shif tingthestockasevidentin2016of an
2000 to $500.
Award [1] if the candidate comments that the liquidity of the company hasincreased.

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Award [2] for a clear explanation of one possible reason for the changes witha use of
actual figures.
It is expected that the candidates refer to some actual changes like debtors/stock forfull
marks.
Candidates need to explain the changes- why/ the possible contributors torather than
just ‘what’.
It is expected that the candidates comment on the direction of the change notjust say it
has changes.
Allow for OFR.

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Question 2
1. Features include:
It provides a sense of direction to the entire organization in terms of what to
accomplish or pursue and which markets the organization will serve and how.
It reflects the corporate philosophy, identity, character, and image of the organization
which can be used to communicate with external stakeholders such as customers,
pressure group etc.
It could act as a motivator for employees by providing them with goals and a feeling of
belonging to the organization.
It defines the overall aims and objectives of an organization.
Accept any other relevant feature.
**N.B.**No application required. Do not credit examples.
Award [1] for a basic description of one feature that conveys partial knowledge and
understanding.
Award [2] for a full description of one feature that conveys knowledge and understanding
similar to the answer above.
2. A unique selling point/proposition (USP) is a feature that differentiates a product or an
organization from its rival products and competitors. BM’s USP is based on the production
of specialist food for unhealthy dogs.
Advantages include:
BM sells a differentiated product; BM could benefit from more sales opportunities
compared to other dog food brands that only sell generic food for dogs.
BM could benefit from dominating a niche market.
BM could use their USP for promotion. For example, BM already promote the brand
through veterinarians that recommend BM food for their patients.
BM can benefit from improved brand image and brand loyalty as they reach the
market segment of unhealthy dogs that needs exactly what BM offers.
BM may benefit from being able to charge higher prices for its product.
Accept any other relevant advantage.
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Mark as [2] + [2].

Award [1] for each correct advantage identified or described and [1] for a relevant
explanation with application to BM. Award up to a maximum of [2].
[2]cannot be awarded per advantage if the response lacks either explanation and/or
application. For example: For an identification or description of an advantage with or
without application, award[1]. For explanation of an advantage with no application,
award**[1]**.
For explanation of an advantage and application, award**[2]**.
3. A cost-plus pricing is a strategy by which the selling price is calculated by adding a profit
margin to the full cost of product.
Advantages to BM include:
This strategy is especially helpful for BM as they do not have direct competitors in the
market, and they can charge the mark-up to costs that they want.
It is an easy pricing strategy for BM to apply, as they do not have to consider,
customers preferences or do further market research.
It’s a valid pricing strategy for BM, as pet owners would be prepared to pay a high
price for such specialist pet food.
It can cover the full cost of production. Given that raw material costs are rising, BM
can ensure a profit is made and all costs are covered when a product is sold.
Disadvantages to BM include:
BM’s costs of raw materials are increasing, a cost-plus pricing strategy could lead to a
very high price that BM customers may not be willing to pay
A cost-plus pricing strategy could be highly inefficient for BM, as it gives very little
incentive to reduce costs.
BM sales are stagnant which means that, probably due to the uncompetitive market,
BM is not paying sufficient attention to customer needs.
Accept any other relevant advantage / disadvantage.
Mark as [2] + [2].
Award [1] for each correct advantage / disadvantage identified and **[1]**for a relevant
explanation with application to BM. Award up to a maximum of [2].
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[2]cannot be awarded per advantage / disadvantage if the response lacks either

explanation and/or application. For example: For an identification or description of an
advantage disadvantage / with or without application, award[1]. For explanation of an
advantage /disadvantage with no application, award**[1]. For explanation of an
advantage / disadvantage and application, award[2]**.
4. Refer to Paper 2 markbands for 2016 forward, available under the 'Your tests' tab >
supplemental materials.
If BM diversifies into specialist food for cats, it will open up to a larger and growing new
market. The demand for cats is increasing, BM could also take advantage of its brand
image as customers already know BM’s high quality. BM’s excellent brand image is an
asset that can be capitalized in the development of new specialist food for cats. Vets who
already recommend BM’s dog food would presumably recommend BM’s specialist cat
food.
In addition, BM has experience in developing new products. Even if the costs of building
its own research facilities are high, BM could get the necessary finance by becoming a
private limited company.
However, introducing a new product into an existing market (Product Development) is a
risky move. However, BM has the know-how of producing and selling specialist dog food.
If BM becomes a private limited company to get the necessary finance, ownership will be
diluted. Dr. Jones and Dr. Morris could lose some control of their business as decisions will
have to be shared. BM’s current focus on quality could be compromised if the new
partners prioritize profit maximization. What is more, the finance raised through the
private limited company may not be enough to fund BM’s research facilities and the
warehouse that will need refurbishing to stock more products.
**N.B.**With reference to Ansoff, cat owners might be considered a different market to
dog owners hence Market Development.
As an alternative BM could introduce a new channel of distribution for the specialist dog
food. A two intermediary distribution channel is one that includes a wholesaler that buys
the goods from the producer and sells to the retailers.

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So far, BM dog food was only distributed through veterinarians and large pet shops and
BM food was not available for customers in certain areas. A two intermediary distribution
channel that includes a larger supermarket chain, a wholesaler and many small pet shops,
will enable BM to reach a larger customer base. Now, potential customers in different
areas will be able to buy BM. BM will still pay for transport costs to the delivery to
veterinarians and large pet shops, but they will not have to add transport costs to
distribute to other small retailers around the country as the wholesaler will pay for
transport costs.
In addition, the wholesaler and the supermarket chain could store the food and help BM to
reduce stocks. This could be very convenient for BM as it would not need to refurbish the
warehouse.
However, a major disadvantage is that BM‘s selling price will be more expensive to final
customers as a wholesaler is introduced. BM’s price is probably already high and a higher
markup could lead to a very high price to final customers. Alternatively, BM could accept
reduced profit margins and keep the price stable.
Another disadvantage is that in supermarkets and small pet shops, BM food will probably
be sold without sales advice and recommendation from veterinarians and large pet shops
owners. BM food will be sold among cheaper brands of lower quality, without specialist
features. Competition could be strong as customers may not be well informed. BM could
lose potential sales.
BM could lose control over the marketing mix. In addition, the supermarket chain could
use promotions or change other elements of the marketing mix that BM would not be able
to control.
Candidates could apply the Ansoff matrix model. For instance:
If BM diversifies into specialist cat food, it will be marketing a new product in a new
market. This alternative entails several risks as BM will be moving into a market in which it
has no experience at all. Diversifying into specialist cat food can also be seen as an
expensive option as new food will have to be researched and developed. New premises
will also be needed. However, if BM is successful, it will be growing in sales and spreading
its product portfolio. Synergies and common know-how could help to reduce costs to
produce a successful new product for cats.
**N.B.**Reward candidates that understand the distinction between related and
unrelated diversification, with the former representing considerably less risk.
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If BM chooses to open a new distribution channel for the food for dogs, it will be adopting
a market development strategy and will be selling into unreached areas. New customers
will be able to access BM’s food and sales will probably increase. Costs and risks seem to
be lower for this option, however, if BM increases its price due to more intermediaries,
sales could remain stagnant.
Even if diversifying appears to be risky and costly, BM should consider the right balance
between risk and reward when choosing what to do. A new distribution channel could be
safer in the short run; however, diversifying can be highly rewarding and strategically
speaking a better option for BM’s future.
Accept product development strategy as it could also be seen as a new product (cat food)
in the existing broader market of pet food.
Accept any other relevant and applicable argument for and against each option.
To sum up: candidates can provide a judgment, a conclusion or recommend any option
provided it is well substantiated.
Marks should be allocated according to the Paper 2 markbands for 2016 forward with
further guidance below.
For one relevant argument that is one-sided, award up to [3]. For more than one relevant
argument that is one-sided, award up to a maximum of [4].
If a candidate evaluates/addresses only one option, award a maximum of [5].
A balanced response is one that provides one argument for and one against for each
option.
Candidates may contrast one option with another for a balance, as long as at least two
arguments are given for each option.
Award a maximum of [6] if the answer is of a standard that shows balanced analysis and
understanding throughout the response with reference to the stimulus material but there
is no judgment/conclusion.
Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are
not based on analysis/explanation already given in their answer.

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Question 3
1. One feature of a cooperative:
decision making is usually shared by all members
any profits (or surpluses) and losses arising from this decision are also shared
decision making is regarded as more democratic
membership is voluntary
although a for-profit business there is usually some sort of social improvement goal.
Award**[1]** for a partial description of a cooperative.
_Award [2] for a fuller description which may include an element of profit (surplus) or loss
sharin_g.
2. Unit contribution is 10.20−6.40 = $3.80
Total contribution = 3200 × 3.80 =12 160
Total profit = 12160−7980 = $4180
Award [1] for a correct calculation for both total contribution and one mark for total profit
similar to the working shown above.
If the candidate correctly calculates total profit but does not make any reference to
contribution, then award [1] only.
If candidate incorrectly calculates contribution but applies correctly to Total Profit then
OFR and 1 mark.
Do not penalize lack of $ sign.

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3.

Award [1] for correct labelling of both x and y axis − total costs and revenue (y) and output
or units produced (x).
Award [1] for accurate total cost curve.
Award [1] for accurate total revenue curve.
Award [1] for identifying the break-even point = Do Not reward calculations of BE quantity
when not accompanied by chart.
Candidates are NOT required to produce Fixed Costs FC or show the B/E Revenue line.
Accuracy of TC and TR is based on the ability to approximate the B/E quantity based on
the scale chosen for the x and y axes (this allows for the cases where graph paper has not
been used).
If B/E not accurate but identified DO NOT penalize if either TR and/or TC already
penalized. Hence OFR applied.
4. The new promotional strategy will allow SSL to generate considerable goodwill, publicity
and social responsibility. This will boost output from the current level of 3200 to the
maximum of 4000. SSL may be able to reduce costs through greater bulk buying of
ingredients and this could lead to an increase in profits.

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As SSL has a minimum order size of 50, the promotional offer is likely to encourage more
schools to order.
Award [1] for an advantage and an additional [1] for clear application to SSL.

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Question 4
1. A cooperative is a type of ‘for profit social organization’ that is established owned and
managed collectively by members, each of whom has a financial interest in the business
and a say in how the business is run.
A cooperative operated by its members for their mutual benefit and can be organized by
producers, consumers or employees
Award [1] for a partial answer showing some partial knowledge of cooperatives such as
that it is an organization which is owned and run by all its members.
Award [2] if there is a further understanding that cooperatives exist for profit but with
some social objectives that benefit its members.
Candidates do not have to identify the different types for full marks
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the
answer above.
2. One positive impact of social media (Facebook, Instagram) marketing on JP’s promotional
strategy is cost effectiveness, the use of various types of social media is cheap and often
free. This can positively impact on JP’s finance given the financial difficulties outlined in
the stimulus.
A second impact could be to strengthen the brand loyalty of the business, given that
social media marketing is being used by famous musicians with a lot of followers which
would be important given that JP’s guitars are more expensive than those of the
competition.
One negative impact is that celebrities endorsing JP’s guitars can be unpredictable and
beyond JP’s control. Any poor behaviour or negative publicity can damage JP’s branding
in the eyes of potential customers. Increased competition has meant that JP will need to
ensure that its social media marketing presents the right image for the business. A
negative impact on branding can lead to a fall in demand and further financial difficulties.
Although cost effective, the use of social media marketing may make it difficult for JP to
accurately measure the impact of its promotional strategy. Given that JP only uses social
media it is very important for management to assess its effectiveness. Also, if social media
marketing is not carried out professionally, it could contribute to a negative image such as
a lack of response to customer complaints being viewed publicly.
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Accept any other relevant positive impact / negative impact.

The impact has to be applicable to social media marketing not any type of promotion.
Mark as 2 + 2.
For an identification or a description of one benefit / cost with or without application [1]:
For explanation of one benefit / cost with no application [1].
For explanation of one benefit / cost and application [2].
Application must refer to the impact of social media marketing on JP’s promotional
strategy.
3. Candidates can refer to marketing, operation or Human Resource Management issues.
It is expected that the candidates demonstrate explicit understanding of the term/ practice
of using quality circles.
The benefits to JP of using quality circles revolve around the
motivational/productivity/teamwork/cooperation/possible empowerment benefits gained
from participation. The fact that JP is a cooperative also implies that quality circles will
align with the culture of the organization (supportive, common goals).
Meeting together to find better methods of production/ practices creates high quality
products/ guitars. JP established a Unique Selling Point based on quality which creates
brand loyalty.
Empowered staff are more motivated and therefore staff turnover is also very low which
reduces recruitment costs and training as well as increased efficiency when the higher
levels of needs/ the motivators of employees are met. There is evidence in the case study
that JP workers are productive and take pride in their work.
Accept any other relevant benefit.
Mark as 2 + 2.
For an identification or a description of one benefit with or without application [1].
For explanation of one benefit with no application [1].
For explanation of one benefit and application [2].
Application must refer to the benefits to JP of using quality circles.
4. Refer to Paper 2 markbands for 2016 forward, available under the 'Your tests' tab >
supplemental materials.

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There are a number of compelling reasons as to why JP should accept the takeover bid.
Financially, one may argue that JP needs the financial strengths of XYZ. JP’s financial
future will be guaranteed. Price competition is eroding sales, indicating that financial
sustainability is in doubt.
The number of redundancies will probably be reduced and jobs will be saved. The
cooperative may be kept intact. However, if the takeover does go ahead then a number of
roles may be lost due to duplication.
The stimulus indicates that XYZ has a strong balance sheet, large cash reserves and are
also experts at marketing. JP is likely to benefit from XYZ’s expertise in the latter area
given that its brand loyalty and awareness are dependent on social media marketing,
which can be difficult to control and measure, as the stimulus indicates.This marketing
expertise and finance will allow JP to promote its products through more traditional
methods by enhancing/growing brand awareness and loyalty further. One may judge this
argument as a significant one given the current problems that JP is facing.
However, the motives for the takeover are narrow. They seem to be driven by financial
considerations only. The takeover could change the culture at JP and the cooperative has
already refused to consider the bid. Staff turnover is very low and the fear is that the
takeover may force some staff to consider their position at JP. Staff turnover may rise,
increasing recruitment and training costs, as it is assumed that quality circles would be
kept. Expertise could be lost.

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As a large company, the combination of XYZ’s financial power and JP’s determination to
remain as they are will cause conflict. XYZ is likely to be a profit maximizing organization
with few social objectives. JP’s culture will have to change. JP will not remain as a for
profit social enterprise.
XYZ has experience in kitchen appliances rather than producing musical instruments.
Given the competition, XYZ might not be successful unless it finds ways of reducing costs
as marketing might not be effective. Still, one may argue that marketing and financial
expertise are transferable.
XYZ’s management tendency for strict control is highly likely to result in abandoning the
practice of quality circles that requires empowerment and trust. The interest and
motivation of JP’s employees is likely to be diminished considerably with further
implications for quality and branding.
Perhaps JP should reject the offer and find some sources of finance to take the
cooperative through this difficult time as it is likely that remaining as a cooperative is very
important for the members while XYZ has just financial objectives – as stated in the
stimulus.
The members of the cooperative will have to prioritize their objectives - being a social
enterprise with some mutual benefits of changing into a for profit corporation.
Ultimately, JP may have to revisit its financial forecasts and as a cooperative may have to
take a more pragmatic view. If the warnings of additional jobs being lost come to fruition,
the cooperative will have to accept the offer. The opportunities for growth in their market
are considerable and may allow the business to regain market share. As the cooperative
enjoys the successes of the business, the decision to accept the bid is warranted,
although some concerns over culture loss and empowerment of the workforce must be
taken into account if the transition is to be a smooth one.
A conclusion with judgment is expected.
Accept any substantiated judgment.
_A balanced response is one that covers at least two arguments for and at least two
arguments against.
It is expected that a substantiated judgment is provided
_
_Candidates cannot reach the top two mark bands if the issue of being a cooperative- for
profit social enterprise is not covered.
_

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_Marks should be allocated according to the paper 2 markbands for May 2016 forward
with further guidance below.
_
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue
that is one-sided, award up to a maximum of [4].
_Award a maximum of [6] if the answer is of a standard that shows balanced analysis and
understanding throughout the response with reference to the stimulus material but there
is no judgment/conclusion.
_
_Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are
not based on analysis/explanation already given in their answer.
_
Candidates cannot reach the top marks if there is no relevant reference/application to the
stimulus.

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Question 5
1. CSR is the decision/attempt by a business to take responsibility for their action/activities
by considering the interests of and the impact on a wide range of stakeholders in society.
The business accepts the moral and legal obligations to society, not just to investors, that
result from its operation.
Candidates are not expected to word their definition exactly as above.
Award [1] for a basic definition that conveys partial knowledge and understanding similar
to the above answer. The first mark would typically come from awareness that there is
some morale guidance.
Award [2] for a full, clear definition that conveys knowledge and understanding similar to
the answer above. Individual stakeholders do not need to be named to gain full marks.
Do not credit an example.
2. One advantage for CM of using a cost-plus pricing strategy is the fact that it will be CM
that covers all the costs and ensures a certain percentage of profit to be made. It is
evident given the figures above that CM makes a profit. CM’s ability to make a profit
ensures long-term survival. CM’s meals are perceived as good value for money, hence the
strategy is effective.
Given the increase in competition, CM can be flexible and reduce the margin set above the
costs. Flexibility in pricing is an important factor when there is an economic downturn, as
well as increased competition.
A possible disadvantage is that CM’s costs are likely to be higher than competitors who
supply non-organic meals. Together with the customers’ unwillingness to pay a premium
price during an economic downturn, CM might see a further fall in demand as seen in the
fall in total revenue in 2018.
Accept any other relevant advantage / disadvantage.
Award [1] for each role identified and an additional [1] for development with application to
CM. Award a maximum of [2] per advantage/disadvantage. **[2]**cannot be awarded per
role if the response lacks either explanation and / or application.

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For example:
For an identification or a description of an advantage/ disadvantage with or without
application [1].
For explanation of relevant advantage/ disadvantage with no application [1].
For explanation of a relevant advantage/ disadvantage and application [2].
3. A possible advantage for CM of changing the stock method from JIC to JIT:
As CM buys agriculture produce/ stock, these products need to be well stored and
possibly refrigerated. Moving to JIT will significantly reduce costs of storage and spoilage.
The gross profit margin, which has fallen by 2 %, is likely to increase rather than decrease.
The very high current ratio of 2.4 will fall, as _CM_will not stock financially unproductive
assets.
A possible disadvantage for CM of changing production /stock method methods from JIC
to JIT:
Given the nature of the industry, the farmers are likely to prefer CM buying large quantities
seasonally. Ordering lower quantities when needed might create problems/costs for the
farmers, who might not prioritize CM any longer.CM will also lose its reputation for CSR
based on long-term commitment to farmers to buy large quantities.
Moreover, given the unpredictable nature of farming, not having buffer stock could result
in CM being out of stock with the consequences of losing clients/reputation and therefore
revenue and profit. CM is likely to lose its reputation for flexibility with the retailers in terms
of quantity and delivery if not enough agriculture produce is available.
Accept any other relevant/applicable advantage / disadvantage.
Award [1] for each advantage / disadvantage identified and an additional [1] for
development with application to CM. Award a maximum of [2] per advantage /
disadvantage.
[2] cannot be awarded per role if the response lacks either explanation and / or
application.
For example:
For an identification or a description of an advantage/ disadvantage with or without
application [1].
For explanation of a relevant advantage/ disadvantage with no application [1].
For explanation of a relevant advantage/ disadvantage and application [2].
4. Refer to Paper 2 markbands for 2016 forward, available under the 'Your tests' tab >
supplemental materials.
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It is expected that candidates make constant reference to/use of the figures and other
relevant information in the stimulus combined with theoretical understanding of the
advantages and disadvantages of the possible strategies.
Some of the possible strategies:
Reduce cash outflow. CM is facing cash flow crisis as seen by its deteriorating acid test
ratio of 0.6. Without stock, which contributed to a high current assets ratio, CM cannot
meet its long-term liabilities. It is evident that there is a big difference between debtors
and creditors days. CM paid the farmers within five days in 2018, which is very quick and
got significantly quicker – twice as fast – but received money from the retailers after 70
days in 2018, a significant increase from 50 days. CM is too generous to retailers with the
credit term. Despite thefact that the relationship with retailers and the suppliers is CM’s
competitive advantage, it is financially dangerous given the decreasing and very low acid
test.
Seek alternative suppliers with cheaper agriculture produce might be seen as an extreme
solution, as CM’s relationship with the farmers and the quality of the organic ingredients
are key to its competitive advantage. It might take a long time to find different suppliers.
Perhaps agreeing a longer credit term would be a better solution. Currently, CM pays
after five days. One can assume that the farmers are likely to prefer a request for a longer
pay period than a more drastic one.
Cut expenses. Gross profit margin is considerably higher than net profit margin for a
manufacturing company and is getting worse over time. CM should look at some
unnecessary expenses like marketing or administration. However, cutting salaries or staff
might impact on the employees’ motivation and cutting marketing might create some
difficulties in competing with the new competitors. However, going out of business due to
lack of cash can be judged as a more significant threat.
Do not accept better stock control due to JIT.

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Tighter credit control. Cash payments only for the retailer will clearly reduce/eliminate
debtor days. The acid test ratio is worrying and CM must take immediate actions to solve
this short-term liquidity problem. However, the relationship with the retailers might
deteriorate and they might start buying non-organic frozen food from the emerging
competitors. It appears that CM’s bargaining power with the retailer is weak and this
option is unlikely to be successful. One, however, may argue that increasing the creditor
days is unlikely to be met with much objection from its suppliers given the very low
starting figures and long-established trust. CM might also be able to ask its debtors – the
retailers – to pay sooner, even after two months, a demand which is likely to be seen as
reasonable.
Changing pricing policy. CM can possibly reduce the price of its products. While CM may
be more competitive and this strategy may work well given the economic downturn and
the increased competition, CM may suffer losses or a reduction in profit. However,
customers may perceive the frozen organic meals as even better value for money and
increase demand. Moreover, perhaps CM can withstand a reduction in profit in the short
term and we can see that CM is profitable. The liquidity issue ought to be sorted. CM
should prioritize its cash flow problem first, then deal with a low acid test to generate cash
to survive.
Enhance marketing to generate more sales in cash. CM might be able to reduce its
increasing level of stock and reduce stock turnover in days, which has clearly deteriorated
considerably from 20 to 40 days. However, any type of promotion may incur more
expenses, especially in cash. The data indicates that the net profit margin is considerably
lower than the gross profit margin, which indicates that CM does not control its expenses
well.
Improved product portfolio. Perhaps CM should also consider non-organic meals or
other types of products to enhance its portfolio and create more revenue streams.
However, cannibalism can be created – CM may also have to compete more directly with
the increasing number of providers of non-organic frozen meals. Market research has to
be done so perhaps this option is not the most appropriate one in the short term.
Seeking alternative short term sources of finance. Accept relevant applicable
suggestions like the use of overdraft and short-term loans, to deal with CM’s short-term
liquidity crisis. However, these options are more of first aid rather than solution to some
ongoing problems and are likely to be more theoretical given the lack of information in the
stimulus.
It is not expected that the candidates cover all of the above.
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Accept any other relevant arguments for and against any relevant suggested strategy.
Accept any other relevant examination.
A conclusion with judgment is expected.
A balanced response covers at least one argument for and one argument against__each of
two different strategies.
Marks should be allocated according to the paper 2 markbands for May 2016 forward with
further guidance below.
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue
that is one-sided, award up to a maximum of [4].
Award a maximum of [6] if the answer is of a standard that shows balanced analysis and
understanding throughout the response with reference to the stimulus material but there
is no judgment/conclusion.
Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are
not based on analysis/explanation already given in their answer.
It is expected that the candidate goes beyond just providing some relevant arguments for
or against any suggested strategy and finish off with some conclusions and judgment.
Award a maximum of [4] marks if the answer, regardless of balance and judgment makes
no reference to either the figures or headings in Table 1.
Candidates, in order to reach to the top markband, should show clear evidence of
substantiation/well supported.
For the top markband, candidates must make use of the financial information given in their
discussion.

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Question 6
1. Consumers’ faithfulness to a particular brand, which will allow a business to see repeat
purchasing by consumers and/or over the longer term, much more acceptability in raising
the price of its products/services.
Accept any other relevant definition.
N.B.: no application required. Do not credit examples.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the
answer above.
2.
On the job training is cheaper than sending recruits on external training. This is
particularly advantageous for LB, as there are no hotel training schools nearby.
External training will mean travelling and hosting costs that LB is unlikely to face due
to cash-flow problems. Adding on external training costs could worsen LB’s cash-flow
postilion.
On the job training will enable new recruits to familiarize themselves with the hotel’s
culture and Felix´s way of doing things. A recent survey has revealed that guests are
pleased with LB due to employees’ polite and helpful attitude, which means that
Felix’s on the job training has been effective. It is unlikely that new recruits will acquire
this specific know-how with external training.
With on the job training, trainees will actually serve guests while they receive training.
This could help LB with its cash-flow problems, as labour costs could be saved.
Felix will be able to watch the new recruits closely to follow their training. He will be
able to screen closely their potentialities and weaknesses and transmit the hotel’s
culture to them.
Accept any other relevant advantage
Do not credit an explanation of general training
Mark as 2 + 2.
Award [1] for each correct advantage identified or described and [1] for a__relevant
explanation with application to LB. Award up to a maximum of [2].
[2] cannot be awarded per advantage if the response lacks either explanation_and/or
application._
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_For example: For an identification or description of an advantage with or

without__application [1]. For explanation of an advantage with no application [1]._For
explanation of an advantage and application [2].
3. Physical evidence is referred to as the environment in which the goods or services are
delivered. It is a crucial element for hotels like LB, as hotel customers make their choices
based on the appearance and state of hotelfacilities to a great extent. Guests’ judgements
will be based on LB’s physical evidence, including its location at the beach, to decide
whether or not to book a room. There is, however, evidence from the stimulus that LB’s
facilities need upgrading.
People makes reference to the way employees relate to and communicate with customers.
This is another crucial element for a hotel. LB’s employees are polite and helpful and
particularly good with children. This has proved to be very important for LB’s brand loyalty
and customers’ perceptions of it, and also provides a service that is perceived as very
good value for money.
Process could be related to the way LB provides a unique way of making payment for
guests. LB provides a mechanism that allows customers the opportunity to pay on
departure and avoid paying in advance.
Accept any other relevant explanation.
Mark as 2 + 2.
Award [1] for each correct element of the extended marketing mix identified
and__described and [1] for a relevant explanation of the importance with application
to__LB. Award up to a maximum of [2].
[2] cannot be awarded per element of the extended marketing mix that has
been__identified if the response lacks either explanation and/or application.
For example: For an identification or a description of an element of the
extended__marketing mix with or without application [1].
For an explanation of an element of the extended marketing mix with no__application [1].
For an explanation of an element of the extended marketing mix and__application [2].
4. Refer to Paper 2 markbands for May 2016 forward, available under the 'Your tests' tab >
supplemental materials.
Proposal 1
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LB could follow Felix’s proposal to solve its cash-flow problems by reducing cash
outflows and raising additional finance. It is probably a lower-risk strategy than
Rose’s.
Negative cash outflows could be reduced by delaying payment to suppliers in winter,
instead of paying cash. However, LB could lose the generous discounts they get,
which in turn could lead to increasing direct costs. Eventually, some suppliers may not
accept delayed payments and may demand cash on delivery.
LB could also delay hotel maintenance and refurbishments. However, _LB_already
needs some upgrades. Deteriorated facilities couldn't negatively affect customer
perception and brand loyalty. Sales may eventually fall.
LB can cut other overhead spending such as advertising or promotion costs. These
costs will reduce payments without affecting the quality of the service provided.
However, future demand may fall if LB is not promoted effectively.
Felix could lay-off some hotel staff or ask them to switch to part-time working. He
may even close the hotel completely for the winter season. However this risks losing
the services and know-how of key staff, who may not return in the high-season.
Felix has also proposed to raise additional finance. LB could ask for a short-term loan
or look for a new business partner. Probably, interest rates will be lower than overdraft
rates and LB could save on some costs by substituting the overdraft for a less
expensive source of finance. A new business partner will probably require some form
of managerial control but fresh/innovative thinking can be introduced into LB.
Alternative short-term sources of finance, such as the sale of assets and debts
factoring, seem unlikely to work for LB. It seems that LB does not have assets to sell
and there is no evidence that LB has many debtors.
Proposal 2
On the other hand, Rose believes that LB’s cash flow problems are due to low
capacity utilization in winter. She has proposed to attract a new segment of
customers.
If new business customers come in winter, cash inflows will increase. However, to
attract these customers, LB will need to build new facilities, such as a convention
centre or a gymnasium, to cater for the needs of this particular market segment. This
would involve a significant amount of finance that LB does not have.
LB could try to find external finance, such as a long-term loan, equity finance or a
venture capitalist. However, these alternatives seem unlikely for LB in the short term.
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All of them take time to be found. Bank loans are expensive and LB may not have
enough assets to present as collateral. Floating the company could be quite
expensive for a family-owned business.
Venture capitalists are not easy to find, particularly if the business is not a promise of
extraordinary profits.
LB will need to conduct extensive market research around the new market segment
and currently this will increase outflows at a time when monthly cash flows are
negative.
It can be concluded that Rose’s alternative seems to be more risky and expensive than
Felix’s. What if business customers are not attracted? LB will be indebted with facilities
that would remain obsolete for its current market segment. Felix’s proposal, on the other
hand, seems more plausible and conservative. Some of the alternatives, such as delaying
payments, could work without much risk involved. However, LB should also find a way to
increase inflows by tackling its capacity utilization problem. Diversifying into another
market segment (such as elderly tourism?) that may not involve a great investment could
help to increase inflows in winter.
Marks should be allocated according to the paper 2 markbands for May 2016 forward with
further guidance below.
A balanced response is one that covers at least one argument for and one__against each
proposal.
For one relevant argument that is one-sided, award up to [3]. For more than one__relevant
argument that is one-sided, award up to a maximum of [4].
_If a candidate evaluates/addresses only one proposal, award a maximum of [5]._Award a
maximum of [6] if the answer is of a standard that shows balanced__analysis and
understanding throughout the response with reference to the__stimulus material but there
is no judgment/conclusion.
Candidates cannot reach the [7–8] markband if they give judgment/conclusions__that are
not based on analysis/explanation already given in their answer.

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Question 7
1. A target market is defined as a group of consumers with similar needs and
wants/characteristics (demographic) that a business decides to focus on in terms of its
operations and/or marketing. A4A’s target market for its adventure parks has been
families.
Candidates are not expected to word their definition exactly as above.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full, clear definition that conveys knowledge and understanding similar to
the answer above.
Award [0] if the candidate writes “target market is when an organization targets a
particular part of a market”. Or a similar answer where the candidate repeats the question
using the same terminology in the answer.
Do not credit an example.
2. A mission statement is a way of communicating to its stakeholders the current purpose of
a business, what the organisation is for. It is clear from the mission statement that A4A
exists to provide great adventures for teenagers and adults which are safe and affordable.
It can be used to guide current objectives. For A4A, the mission is to provide fun, safe and
affordable adventures hence predatory pricing is being used.
A mission statement can provide a sense of purpose and direction and act as a
motivational force for employees. It is stated that many of the managers are long serving
ones who have been at A4A with Tama since its creation. Moreover, employees’ motivation
is important for any provision of any service especially when teenagers are the recipient of
the service.
The mission statement could also act as an incentive to encourage ethical external
sources of finance by investors who are motivated by A4A’s objective (or mission) to
provide adventures for all. A4A may be able to raise finance for the implementation of its
chosen option particularly option 2 which has a capital spending requirement.
Accept any other relevant explanation.
Mark as a 2+2.

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Award [1] for each role identified and an additional [1] for development with application to
A4A. Award a maximum of [2] per role.
[2] cannot be awarded per role if the response lacks either explanation and / or
application.
For example:
For an identification or a description of a role with or without application [1].
For explanation of role with no application [1].
For explanation of a role and application [2].
3. Predatory pricing (also undercutting. Some textbooks may refer to destroyer pricing which
is illegal and anticompetitive) is a pricing method where a product or service is set at a
very low price, intending to drive competitors out of the market, or create barriers to entry
for potential new competitors.
Predatory pricing has the advantage for A4A as a competitive tool given that its target
market is teenagers and adults who we assume would be price sensitive given that there
are other competing forms of adventure activity entertainment. Therefore A4A is trying to
get rid of the competitors by using this pricing strategy.
“Affordable” pricing is enshrined in its current mission statement and predatory pricing
thus also deemed to be appropriate and ethical. A reference to competitors should be
accepted as application as there is not much more info in the case about the competitors.
However for disadvantages:
A4A has already started to experience a fall in profit. Predatory pricing can only be
used in a short term especially now given the fall in revenue and profit A4A might start
to experience a loss. Therefore this pricing strategy does not fit the changes in the
external environment as stated in the stimulus that caused a fall in
profit.
Predatory pricing has been considered in some countries as illegal or anti-competitive
(but there is no evidence from the stimulus that this has occurred for A4A).
There could be “quality concerns” by some stakeholders that much lower than
competitor prices may imply a poor quality service and safety concerns. This could be
significant given that in the stimulus a new service aimed at special needs children
and adults is to be introduced.
If costs rise, then A4A could lose its competitive advantage if it is forced to change its
pricing method to be more market based.
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The stimulus suggests that profits and revenues are falling. Predatory pricing limits
the possibility of reducing prices further to fuel sales growth.
Accept any other relevant explanation.
Mark as a 2+2.
Award [1] for an appropriate advantage/disadvantage identified and an additional [1] for
development of the explanation illustrating the appropriateness of predatory pricing with
respect to A4A. Award a maximum of [2].
[2] cannot be awarded per advantage/disadvantage if the response lacks either
explanation and / or application.
For example:
For an identification/description of an advantage/ disadvantage with or without application
[1].
For explanation of an advantage/ disadvantage with no application [1].
For explanation of an advantage/ disadvantage and application [2].
4. The two possible growth strategies are linked to two cells of the Ansoff matrix.
Catering for children and adults with disabilities and access requirements could be
considered as market development as there is a new market to be catered for with an
existing product (A4A’s current facilities).
The corporate team building market, which would require A4A creating a new product to
cater for a new target market could be referred to as diversification.
The Ansoff matrix would highlight that the latter diversification option would be the riskiest
given the lack of familiarity and experience in servicing the corporate senior leadership
team market.
The first growth strategy is likely to be cheaper and quicker for A4A to organize. It is
assumed that no modification will be required as opposed to the diversification strategy.
There will possibly be additional health and safety concerns given that the market
development strategy is focusing on children and adults with disabilities and
access requirements. A4A might have to adapt the facilities after all hence more costs
than currently are expected. Moreover, additional training costs will be necessary but one
may judge this extra cost as short term only and relatively minor. This option is classified
as a medium-risk strategy on the Ansoff matrix, as A4A is not familiar with the market only
but very familiar and experienced with the product. This risk can be reduced by training
and accumulated experience hence this argument can be judged as of lower significance.
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The mission of A4A need not be damaged and might even be improved. A4A will be able
to dispose of its predatory pricing strategy, which is risky as there will be none or fewer
competitors. One may argue that A4A cannot continue with its predatory pricing for long
due to losses if sold below production costs or due to government
intervention. Still, a different higher pricing strategy might deter the clients.
However, staff training across all four centres will be an important consideration in both
options but especially in this market development given that safety is part of A4A’s
mission. Tama will need to ensure that he has clear guidelines in place to run this service
for children and adults with disabilities and access requirements. As said above, this is
likely to increase costs.
Profit growth may be small and there are issues of sustainability for the whole of A4A’s
workforce if this market development strategy is not successful as highlighted by two of
the senior managers.
The second growth strategy, diversification, is riskier, as A4A will not be familiar with the
product/service and the market. The expected profitability of the second option will
protect all 342 jobs across the 4 centres and therefore assumes greater significance than
the market development option. Set up costs are likely to be higher given that A4A is
moving into a higher valued/priced niche market, but higher prices and thus revenues
should compensate. The new pricing method is likely to be more sustainable in the long
run than predatory pricing that might end soon when A4A starts to make a loss or is sued
by competitors/attracts government intervention. This new pricing method may confuse
some potential customers given A4A’s mission and knowledge of A4A’s predatory pricing
strategy. Still, organisations that pay for corporate team building activities are unlikely to
expect predatory prices. Hence, this argument can be judged as rather insignificant.
The significant costs of building the centre should also not be overlooked. This can put
enormous financial strain on A4A especially in the short term. However, given the pricing
strategy above and the new positioning, A4A can become profitable in the medium to
longer term.
The second option, diversification, also damages A4A’s mission statement, as some
senior managers think so. Resentment is already growing and Tama can ill afford conflict
at a difficult financial time especially as long serving managers with experience are the
ones who seem to be the most concerned. Tama’s loyalty to his senior staff will be tested
and he may have to make some managerial changes if this resentment grows and if the
diversification option is selected.
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It is expected that candidates provide a conclusion and a final judgment that is

substantiated. For example: on balance, the second growth strategy is recommended
despite the higher level of risk.
Accept any other relevant evaluation.
For the top markband, candidates must apply the Ansoff matrix correctly to their
discussion.
Do not penalize if the matrix is not drawn provided it is well explained/ used.
If the Ansoff strategic options are not used or not used correctly but the response
covers some relevant and balanced arguments for each option award up to [4] even
if evaluation is evident.
Marks should be allocated according to the paper 2 markbands for May 2016 forward.
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue
that is one-sided, award up to a maximum of [4].
If a candidate evaluates / addresses only one growth strategy, award a maximum of [5].
Award a maximum of [6] if the answer is of a standard that shows balanced analysis and
understanding throughout the response with reference to the stimulus material but there
is no judgment/conclusion.
Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are
not based on analysis/explanation already given in their answer.

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Question 8
1. Cost-plus pricing is a pricing method where the total cost of producing is calculated which
includes variable costs (direct costs) and a fixed cost component (or part of the
overhead). Then a profit margin per unit is added to obtain the selling price.
Award 1 mark for a partial definition where the candidate has mentioned costs and a small
profit margin being added to achieve the selling price
Award 2 marks for a full clearer definition which includes reference to both variable and
fixed costs being calculated with a profit margin being added to achieve the selling price.
2. Social media marketing allows accurate targeting through social media. Below the line
could allow targeting to families who have a strong interest in purchasing diabetic meals
though Facebook or Reddit groups.
Cheap and quick to set up and very wide reach. Evidence that SF has grown fast indicating
that below the line promotion has exceeded expectations.
The speed of response of social media may be instant. Charles' quick response on social
media managed to reduce the impact of the negative publicity after the quality issue.
Below the line promotion allows SF to create customer loyalty programmes which can be
managed online and have continued direct links to current and potential customers looking
for diabetic meals.
Award [1] for a benefit of social media marketing with an additional [1] for application to
SF.
Mark as [2+2].
3. The benefits of a flow production method to SF could include:
It is likely to lead to SF meeting the growing demand for its meals quickly and in the
process reducing the unit costs of production.
This may allow SF to reduce the price of its meals as they use cost-plus pricing.
The benefits of flow production imply that SF will be true to its mission statement.
Enables SF to control quality more effectively and avoid the mis-labelling issues.
The costs allude to an increase in complexity of the business and the stimulus indicates
that some problems are emerging. Hence some costs could include:
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Charles’ management style will also come under increased pressure as he does not
have experience of transitioning to and using this new technology.
Communication and coordination issues may arise leading to higher unit costs
effectively a diseconomy of scale.
Investment in flow production involves high capital costs resulting in possible
borrowing and higher gearing.
Pausing production e.g. for changing recipes, can be expensive.
If flow production creates too many additional meals even with growing demand, SF
could be left with meals it cannot sell.
Award [1] for a benefit of flow production with an additional [1] for application toSF.
Mark as [2+2].
4. Refer to Paper 2 markbands for 2016 forward, available under the 'Your tests' tab >
supplemental materials.
SF is clearly a successful business although struggling to maintain control. The offer of a
takeover comes at a critical time.
There are a number of arguments against the takeover:
The move to flow production has reduced costs and prices and this factor may lead to
even higher sales and by assumption profits.
Although Charles has limited experience of using flow production the future growth of
SF could be considerable.
The company will thrive, and they possibly do not wish to accept the offer. By not
accepting the offer Charles will eliminate the possibility of a rival company as the
remaining shareholders will not create one.
This will cause great resentment among the shareholders and given that SF has
already survived one episode of poor publicity through the quality control issue,
Charles can ill afford any more. There is evidence from the stimulus that this negative
publicity could grow considerably.
The creation of a direct competitor run by the remaining shareholders under albeit a
new brand could confuse their loyal customers.
However, there are a number of arguments for takeover:

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The distribution channels offered by the supermarket will boost SF’s profile further
and allow them to work with a business with greater levels of experience in the same
area.
The takeover will also allow SF to develop its mission and expand the range of meals
offered given that there is finance for research and development into new nutritional
meals.
Finally, after the success of diabetic meals how long will it be before other large
supermarket chains come up with their own branded diabetic meals.SF could be
outmaneuvered and undercut by future competition. SF’s
market value would appear to be high but will this be the case in 2–3 years?
The decision is difficult. The other shareholders do not want this move and can ill afford
the additional negative publicity. A conflict carried out on social media could become
damaging to the brand which relies on positive social media word of mouth. The offer is
tempting but SF is in fair financial shape despite the higher gearing ratio. Charles has
limited experience and perhaps needs more time. It might be sensible for Charles to wait
and discuss further with the other shareholders since a majority agreement is required to
sell.
Marks to be awarded using the paper 2 mark bands for May 2016 forward and the
following is to be noted.
Candidates are expected to provide a conclusion with a substantiated judgment.
For one relevant argument for acceptance of the takeover that is one-sided, award a
maximum of [3].
For two relevant arguments, but the discussion of both is one-sided, award a maximum of
[4].
For two relevant arguments, one treated in a balanced way and another in an__unbalanced
way, award a maximum of [5].
For two relevant arguments, both treated in balanced ways, but no real__conclusion, award
a maximum of [6]. Conclusions must be more than nominal_(for example, when a
candidate opens a final paragraph with “In conclusion . . . “__but then has no real
conclusion, award a maximum of [6]_.

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Question 9
1. Secondary market research or desk research refers to the collection of second hand data
by a business for decision-making that is derived from second hand sources /published
sources by a third party. It has not been collected first hand by the business themselves.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the
answer above. For [2] there should be some indication that the organisation is actually
carries out a research/ action.
Some students are likely to define secondary sources while the definition is about
research.
No examples are needed
No application is required.
2. One advantage of using sales forecasting is that it will allow a firm such as MM to look at
future sales forecasts of its product portfolio and make changes where necessary. This will
save the business considerable expense, stocking costs and influence future cash flow
needs. Forecasting allows MM to plan ahead and can also impact on human resource
planning and finance needs if cash flow forecasts indicate that there may be a shortage.
There is evidence form the case study that MM’s product portfolio revenue streams are
changing. MM is experiencing changing sales of all of its stock so is planning by using
forecasts, André can avoid over stocking and tying up valuable capital in unsold DVDs or
CDs for example or can transfer more resources towards the fast selling computer games.
Decision making at MM may be more accurate. To be forewarned is to be forearmed.
Disadvantages for MM are linked to the inevitable fact that sales forecasts are merely that
– future predictions are based on past data, which, given the existence of external factors
some of which are mentioned in the stimulus and unexpected events, cannot be fully
accurate. There is evidence from the stimulus that André expects sales to be variable
(possible cyclical or seasonal variations) and even with all relevant future economic and
social data at his disposal, forecasts can still be widely inaccurate. For example, vinyl
record sales are expected to rise but what if another musical format is created within the
next five years? André also has considerable experience in this industry and is aware that
sales are changing rapidly. Sales forecasts may be out of date by the time the data has
been collected if they are every month or quarter. Sales forecasts in this context may be of
little value to MM in such a fast changing industry.
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Mark as 2 + 2.
[2] cannot be awarded per advantage / disadvantage if the response lacks either
explanation and/or application.
For example:
For an identification or a description of an advantage / disadvantage with or without
application [1].
For explanation of an advantage / disadvantage with no application [1].
For explanation of an advantage / disadvantage and application [2].
Candidates are expected to show some understanding of sales forecasting methods_._
3. The benefits to MM from setting up an e-commerce website will be linked to increasing
customer awareness and sales.
CD and especially vinyl sales should increase, as the e-commerce site may allow for
targeting more potential customers in different regions who are interested in vinyl
records and possibly CD. There is a greater chance of success as relying on
customers for such a retro segment to visit the physical store is rather limited.
More detailed product descriptions, customer feedback/reviews will be possible. The
e-commerce website will deepen customer relationships, especially if MM can run a
social media campaign alongside building brand and customer loyalty to the site.
The e-commerce platform will also allow MM to generate much needed advertising
revenue through increased loyalty in the future.
The costs are linked to the inevitable restructuring of the business that e-commerce will
demand and could be considered to be both short term and long term.
The e-commerce site will need to be built, managed and monitored by a new staff
member. This will drain MM’s cash reserves at a time when total revenue is falling.
Existing staff will require training or newly employed staff hired such as technology
experts to run and update the e-commerce facility and possibly create social media
support. Costs are likely to rise in the short term and again, MM is facing fall in
revenue and finance is limited.
If the e-commerce site is to be fully functional then new distribution channels around
delivery of vinyl records and newly released CDs that are both growing in sales to the
customer will need to be identified, researched and set up. This will also take time and
André will have to find additional resources. The stimulus indicates that finance is limited.
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An e-commerce website will add a new layer of complexity to MM’s operations and
logistics and MM has not got the right experience therefore more finance will have to be
raised for training, hiring people and so on.
Please note:
Whatever relevant costs that a candidate explains or describe needs to be applied
specifically to MM’s lack of finance / lack of experience.
Mark as 2 + 2.
Award [1] for identifying or describing the cost / benefit for MM of setting up e-commerce
and a further [1] for a development with respect to__MM. Award a maximum of [2].
[2] cannot be awarded per cost / benefit if the response lacks either explanation_and/or
application_.
For example:
For an identification or a description of a cost / benefit with or without application [1].
For explanation of a cost / benefit with no application [1].
For explanation of a cost / benefit and application [2].
4. Revenue is falling, computer games sales are rising and now André is considering the
possibility of setting up an e-commerce business website. Although MM and André have
been in the business for 25 years, external factors are changing the nature of his business
model. The two tactics are to stop selling DVDs and start increasing below-the-line
promotional spending on vinyl records.
By applying the BCG matrix, we could argue that:
DVDs are a dog (low market share and growth)
vinyl records are a problem child or question mark (low market share but potential
growth).
Removing or divesting the dog will free up shelf space in the retail store. DVD sales could
be transferred and sold via the e-commerce site so that MM is able to make some form of
contribution. More space for games is now possible. However, removing a product line
from the portfolio is a risk, as some of _MM’s_loyal customers will be unhappy.
Keeping DVDs – although a dog – may block potential new retail rivals if it creates MM’s
USP. It is also indicated in the stimulus that computer games are not MM’s core business.

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So perhaps it is worth keeping the core product for a little longer until MM is clear whether
the new product is doing well. If e-commerce is to be used, MM can potentially use a
market development strategy and find some segment in less technologically advanced
economies that are still interested in DVDs.
Increasing spending on below-the-line promotion seems like an appropriate tactic.
Although MM has not got sufficient internal sources of finance, the product is in a
question mark position with a potential to grow and be profitable. Profit that MM needs.
One, therefore, may judge this tactic as highly appropriate especially as below-the-line
promotional tactics are cheaper than above-the-line promotional tactics. Moreover,
external sources of finance can be used. André needs to use below-the-line promotion
methods to move the vinyl records to a star and hopefully a cash cow position so in the
medium term, he will be able to milk the potential cow. Short term spending versus
medium to long term benefits/ profit seems like a good tactic.
It is expected that the candidates show a clear understanding/application of below the line
methods rather than just promotion generally.
Moreover, below-the-line methods can be considerably cheaper than above the line
methods of promotion which are currently very appropriate to MM. MM can use short-
term sales promotion to encourage buying the product. Below-the-linepromotion can
complement the decision to use e-commerce. MM can generate viral marketing and or/
use social media for promotion.
Candidates should be credited for classification of the vinyl as a dog given the low growth
of the market share and for suggesting to use below-the-line promotion to extend the life
cycle or not to spend money on above-the-line promotion.
Judgment
The BCG provides some clues as to what André should consider but there are some
difficult choices to be made. Removing DVDs will allow for a greater stock of vinyl but
removing a product line and replacing it with a problem child is risky. It may be sensible in
the short term to keep the DVDs, as they will still contribute to growth. Spending more on
below-the-line promotion seems more sensible given his loyal customer base and the
future potential. If André can’t keep both options and has to choose one tactic, perhaps
the second tactic is more viable as there is more longer term potential as the market is
growing and MM will more responsive to changes in the external environment.
Accept any other relevant issue.
Accept any other relevant discussion.
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A conclusion with judgment is expected.

Accept any substantiated judgment.
A balanced response is one that covers at least two arguments for and at least two
arguments against.
As there are two tactics to discuss, a balance response is one that covers one argument
for and one argument against each option.
_Marks should be allocated according to the HL Paper 2 markbands on page 3 with
further__guidance below.
_
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue
that is one-sided, award up to a maximum of [4].
_For a lack of balance for both option award up to a maximum of [4]
_
_Award a maximum of [6] if the answer is of a standard that shows balanced analysis and
understanding throughout the response with reference to the stimulus material but there
is no judgment/conclusion.
_
_Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are
not based on analysis/explanation already given in their answer.
_
_If the candidate only considers one tactic then award [5] if the answer is balanced with a
judgment.
_
If the candidate does not use the BCG matrix then award a maximum of [4] even if the
response is fully balanced.

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