IB Business Management Past Papers and Drilling (SL/HL): Paper 1 Case Study and Paper 2 Quantitative Analysis with Answers

Question 1

It is a private limited company. (1) Shareholders have limited liability, so on liquidation they can lose only the capital they put in (1 mark). (2) Shares cannot be traded publicly and a transfer needs the agreement of the other shareholders (1 mark). Significance: limited liability separates shareholders’ personal assets from company debts, which keeps the risk of investing knowable and makes it easier to raise money from family and outside investors (1 mark).

Question 2

Two marks each (1 for the factor, 1 for the explanation). (1) Social: Hong Kong office workers have short lunch breaks and steady demand for takeaway, which supports new takeaway-led outlets (2 marks). (2) Economic: rents and the minimum wage are rising together, lifting each outlet’s fixed costs and pushing the break-even point up (2 marks). Other acceptable answers: technology (delivery platforms and e-payment), legal (food-safety and packaging rules) and environmental (single-use cutlery restrictions).

Question 3

Two marks each. (1) Shareholders against employees: shareholders want to fund a central kitchen to cut costs and scale up, while employees care about pay and hours; moving to prepared ingredients or longer opening hours raises profit but adds directly to frontline workload (2 marks). (2) Shareholders against customers: shareholders want low prices to win share, while customers also weigh food quality and health; if discounting lowers ingredient quality, lost customers drag down long-run revenue (2 marks).

Question 4

Market development (1 mark). Benefit: the menu and production process are already proven, so the existing central kitchen and brand can be reused and the extra cost of entering a new market is lower (1 mark). Risk: Shenzhen customers have different taste and price expectations and local competitors are dense, so volumes may fall short of the Hong Kong outlets (1 mark).

Question 5

Benefits: (1) Economies of scale – bulk buying and large-batch sauce production lower unit cost (1 mark). (2) Consistent quality – a standard recipe keeps every outlet’s output the same and reduces variation (1 mark). Risk: every outlet then depends on one central kitchen, so a stoppage (breakdown or a food-safety incident) cuts supply to all branches at once (1 mark).

Question 6

(a) Labour turnover = leavers in the year / employees at the start x 100 = 30 / 120 x 100 = 25% (1 mark). (b) (1) Recruitment and training costs rise: at 8,500 each, about 255,000 for the year (1 mark). (2) Fewer experienced staff makes output and service less consistent and adds to the workload of those who stay (1 mark).

Question 1

Knowledge and understanding (2 marks): market development, economies of scale, location. Application (3 marks): use the case – 9 outlets, 120 staff, capacity 320 boxes a day against an average of 256 (80.0% utilisation), revenue 48,000,000, gearing 40.0%. Analysis (3 marks): for – proven menu and process, spare capacity in Hong Kong, lower rents and wages in Shenzhen; against – different regulation and food-safety requirements, extra management capacity needed, and an April closing cash balance of -530,000, so cash is already tight. Evaluation (2 marks): standardise through the central kitchen first, test taste and price in one pilot store, and fix the cash-flow timing before committing to full expansion; otherwise expansion multiplies the cash risk.

Question 2

Knowledge and understanding (2 marks): price elasticity, contribution, price war. Application (3 marks): price 62 and variable cost 31 give a unit contribution of 31, half the price; each outlet carries 186,000 a month of fixed costs and breaks even at 6,000 boxes. Analysis (3 marks): for – where demand is elastic, a lower price lifts volume and spreads the 186,000 of fixed cost, raising total contribution while capacity of 320 boxes is not yet reached; against – lunch demand is routine and price-sensitive only up to a point, a cut reduces contribution on every box so volume must rise sharply to pay for it, and rivals matching the cut start a price war. Evaluation (2 marks): discounting is a short-term volume tactic; durable share comes from food quality, brand and the delivery experience, and from pricing discipline that protects the 31 per box.

Question 1

(a) Gross profit margin = gross profit / sales revenue x 100 = 19,200,000 / 48,000,000 x 100 = 40.0% (2 marks). (b) Profit margin = PBIT / sales revenue x 100; PBIT = 19,200,000 – 14,600,000 = 4,600,000, so 4,600,000 / 48,000,000 x 100 = 9.6% (2 marks).

Question 2

Capital employed = non-current liabilities + equity = 12,000,000 + 18,000,000 = 30,000,000. (a) ROCE = PBIT / capital employed x 100 = 4,600,000 / 30,000,000 x 100 = 15.3% (2 marks). (b) Gearing = non-current liabilities / capital employed x 100 = 12,000,000 / 30,000,000 x 100 = 40.0% (2 marks).

Question 3

Current assets = 1,200,000 + 900,000 + 4,300,000 = 6,400,000. (a) Current ratio = current assets / current liabilities = 6,400,000 / 3,200,000 = 2.00 : 1 (2 marks). (b) Acid test = (current assets – stock) / current liabilities = (6,400,000 – 1,200,000) / 3,200,000 = 1.63 : 1 (2 marks).

Question 4

(a) Unit contribution = price – variable cost = 62 – 31 = 31 (1 mark, half the price). (b) Break-even quantity = fixed costs / unit contribution = 186,000 / 31 = 6,000 boxes (2 marks). (c) Break-even revenue = 6,000 x 62 = 372,000 (1 mark).

Question 5

(a) Margin of safety = (actual sales – break-even sales) / actual sales x 100 = (7,500 – 6,000) / 7,500 x 100 = 20.0% (2 marks). (b) Target profit output = (fixed costs + target profit) / unit contribution = (186,000 + 93,000) / 31 = 9,000 boxes (2 marks).

Question 6

(a) Cumulative net inflows: 1,500,000 in year 1, 3,500,000 by year 2 and 6,000,000 by year 3, exactly the outlay, so the payback period is 3 years (3 marks). (b) ARR = ((total returns – capital cost) / years of use) / capital cost x 100 = ((8,500,000 – 6,000,000) / 4) / 6,000,000 x 100 = 10.4% (3 marks). (c) Option A expected value = 0.6 x 4,800,000 + 0.4 x (-2,300,000) = 1,960,000; Option B expected value = 0.5 x 3,000,000 + 0.5 x (-1,200,000) = 900,000. Recommend A because its expected value is higher (1,960,000 against 900,000); an expected value only weighs probability against money, though, so the firm’s ability to absorb a 2,300,000 loss and management’s attitude to risk still matter (4 marks).

Question 1

Cause (analysis, 8 marks): in April, inflows of 1,850,000 against outflows of 2,100,000 plus a 900,000 tax bill give a net outflow of 1,150,000, turning the opening 620,000 into -530,000 (4 marks). Profit and cash do not move together: profit is recognised on an accrual basis and part of the revenue may still sit in receivables, while the tax payment and supplier payments fall in the same month (4 marks). Trend (4 marks): May gives a net inflow of 70,000 and June 290,000, improving the June closing balance to -170,000: the gap is narrowing but not yet closed. Response (evaluation, 6 marks): (1) pay the tax in instalments or hold cash back in March; (2) extend supplier credit or move to consignment stock; (3) cover April with an overdraft or revolving facility, counting the interest cost; (4) speed up debtor collection and sell prepaid meal packages to bring cash in early; (5) postpone non-essential capital spending such as the central kitchen. Conclusion (2 marks): a negative balance is not a loss, but three negative months mean the timing of payments and the financing arrangements must be fixed before any large investment.

Question 2

For the loan (analysis, 8 marks): payback is 3 years and the ARR is 10.4%, above the cost of deposit money; a central kitchen cuts unit cost and stabilises quality; a loan does not dilute existing shareholders’ control and the interest is tax deductible (4 marks). Gearing at 40.0% still leaves room (4 marks). Against (analysis, 8 marks): borrowing a further 6,000,000 lifts gearing to (12,000,000 + 6,000,000) / (30,000,000 + 6,000,000) x 100 = 50.0%, raising both the interest burden and repayment risk (4 marks); with April closing cash at -530,000, servicing the loan tightens liquidity further, and if volumes miss the forecast the realised return falls below 10.4% (4 marks). Other sources (2 marks): equity from the shareholders (dilutive but no repayment), equipment leasing, a government SME loan guarantee scheme, or phasing the investment out of retained profit. Conclusion (2 marks): if cash stays negative from April to June, repair liquidity first, then borrow in stages or bring in shareholder funds, sizing the loan on the volume forecast.