Test [130 marks]

Patras Furniture (PF)

Patras Furniture (PF) manufactures chairs. PF uses batch production.

Currently, PF sells 200 chairs per month. Each chair sells at an average price of
€100. Below are the forecasted fixed and variable costs for 2019.
Table 1: Fixed costs

Table 2: Variable costs per chair

1a. Define the term batch production. [2 marks]

1b. Calculate the break-even level of output for PF for 2019 (show all your [2 marks]
working).

1c. Construct a fully labelled break-even chart, to scale, for PF for 2019. [4 marks]
1d. Calculate the forecasted profit if PF sells 2400 chairs in 2019 (show all [2 marks]
your working).
 Copper Health (CH)
Copper Health (CH) was the market leader in the production of anti-venom*
vaccines to treat poisonous snake bites. CH’s mission – influenced heavily by
corporate social responsibility (CSR) – is to put customers first and profits second
in the treatment of snake bites.
Despite 100 000 deaths worldwide each year from snake bites and 400 000
serious injuries, CH recently announced that it will no longer produce anti-venom
vaccines. Several large Mexican, Brazilian and Indian pharmaceutical companies
have entered the market selling anti-venom vaccines at a much lower price than
CH.
A spokesperson for CH said: “We will remain a private limited company where
corporate social responsibility (CSR) remains an important driving force for our
mission. Our medical research is only financed from retained profit. When the
lower-priced competition arrived, our sales and profits of anti-venom vaccines
decreased significantly. Treating snakebites no longer makes financial sense.
Instead, the technology used to produce anti-venom vaccines will be used to
research and develop (R&D) other life-saving vaccines”.
A non-governmental organization (NGO) has demanded action. “CH is the largest
manufacturer of anti-venom vaccines in the world. Although CH’s competitors are
increasing their production of anti-venom vaccines they will not be able to
produce enough to satisfy demand for the next two years. There will be a major
shortage. This will result in many life-threatening injuries and deaths.”
The non-governmental organization (NGO) has urged CH to seek new sources of
finance to continue the production of the anti-venom vaccine.
[Source: © International Baccalaureate Organization 2019]
* anti-venom: a medication made from antibodies that is used to treat venomous
bites and stings

2a. Define the term retained profit. [2 marks]

2b. Explain one advantage and one disadvantage for CH of having a [4 marks]
mission statement.

2c. Explain two possible external sources of finance CH could use to [4 marks]
continue production of anti-venom vaccines.
2d. Discuss CH’s decision to stop producing anti-venom vaccines. [10 marks]

Piper Industrial (PI)

Piper Industrial (PI) manufactures pipe. The company is highly profitable and its
corporate tax rate is 20 %. PI is forecasting major capital expenditure for 2019.
Table 1: Selected forecast financial information for the year ending 31
December 2019
 Table 2: Annual cash flow forecast for the year ending 31 December
2019

3a. Define the term capital expenditure. [2 marks]

3b. (b) Using Table 1, calculate for PI: [4 marks]

(i) gross profit (X);
(ii) tax (Y).

(c) Using Table 1 and your calculations in (i) and (ii), construct a profit and loss
account for PI.
3c. Using Table 2, calculate the net cash flow (Z) for PI for 2019 (show all [2 marks]
your working).
3d. Explain the difference between profit and cash flow. [2 marks]

Dana’s Handbags (DH)

Dana’s Handbags (DH ) is a small manufacturer of women’s handbags. DH sells
directly to large retail chains in Europe. The company is privately owned and has
fifteen shareholders.
Table 1: Selected financial data for DH for 2016 and 2017 (figures in
$000s)

Beginning in 2017, DH adopted a programme of corporate social responsibility

(CSR) by:
donating money to charities
encouraging employees to do three paid hours per week of community service
during work hours
using only biodegradable materials in its handbags.
This programme was expensive.
DH’s management thought that a programme of corporate social responsibility
(CSR) would strengthen DH’s brand. During the first year of the corporate social
responsibility (CSR) programme, employee morale improved and DH received
favourable media attention.
However, at the annual general meeting in January 2018, financial results from
2017 revealed that sales growth had not improved. Several influential
 shareholders complained about the high cost of the corporate social responsibility
(CSR) programme. Other shareholders suggested that DH should develop
consumer awareness that it is a socially responsible company.

4a. Identify two features of a private limited company. [2 marks]

4b. Calculate the net profit margins for DH for 2016 and 2017. [2 marks]
4c. Calculate net current assets (working capital) for DH for 2016 and 2017. [2 marks]

4d. Explain one method of above-the-line promotion and one method of [4 marks]
below-the-line promotion that DH could use to raise consumer
awareness that it is a socially responsible company.
4e. Discuss DH’s decision to develop a policy of corporate social [10 marks]
responsibility (CSR).
 Papel
Papel manufactures and sells paper bags. It pays cash for 80 % of its raw
materials but, to remain competitive, it must sell on credit to all customers. Many
debtors are not paying on time and creditors (suppliers) are increasing. The board
of directors is concerned about Papel’s liquidity position.
The finance manager has provided information from Papel’s accounts.
Table 1: Selected information from Papel’s accounts at 31 October 2018

5a. Define the term debtors. [2 marks]

5b. Using information from Table 1 construct a fully labelled balance sheet [5 marks]
for Papel for the end of October 2018.
5c. Using information from Table 1 calculate the current ratio for Papel for [1 mark]
the end of October 2018.

5d. Explain one possible strategy, other than elimination of credit sales, [2 marks]
for Papel to improve its liquidity position.
 Visionary Toys (VT)
Visionary Toys (VT) produces highly innovative toys for children. VT began
operation in January 2017 and its unique selling point/proposition (USP) is
producing toy parts with a 3D printer. The financial director presented financial
information for VT at the end of 2017. He was concerned about VT’s liquidity.
Table 1: Revenue and expense information for the year 2017 and balance
sheet items at 31 December 2017

[Source: © International Baccalaureate Organization 2018]

6a. Define the term unique selling point/proposition (USP ). [2 marks]

6b. Construct a fully labelled balance sheet for VT for the end of 2017. [5 marks]

6c. Calculate the acid test (quick) ratio for VT for 2018. [1 mark]

6d. Explain one way VT could improve its liquidity. [2 marks]

 Grunsburg Textiles (GT )
Grunsburg Textiles (GT ) is a textile company founded by the paternalistic leader
Henrik Steiner. As the company grew, it became very committed to corporate
social responsibility (CSR). “Our aims,” GT says on its website, “include making
profits, providing safe and secure employment, contributing to society through
investment in environmentally friendly production practices and supporting ethical
causes”. Many people believe that GT’s success is tied to its reputation for taking
care of its employees and for its commitment to CSR.
In 2015, GT purchased €44 million in new environmentally friendly equipment. It
financed the purchase with a bank loan. GT originally forecasted that the new
equipment would generate €8 million in annual net cash flow. Instead, the actual
increase in GT’s annual net cash flow from the new equipment was only €6
million. The Chief Financial Officer (CFO), Elaine, warned Henrik that unless net
cash flow increased significantly, the average rate of return (ARR) would be
significantly lower than originally forecasted.
GT is struggling to make the loan payments and to have sufficient working capital.
Elaine determined that one way to shorten the working capital cycle is debt
factoring. However, when she approached several (debt) factors, she was
discouraged by their proposed discount rates.
Elaine knows that the situation is worse than she had warned. If the economy
were to weaken and revenue to decline, she believes that the company could go
out of business. Proposals for a solution include cutting back on GT’s commitment
to its employees and CSR practices.

7a. State any two stages of the working capital cycle. [2 marks]
7b. Calculate for GT: [2 marks]
the payback period for the €44 million investment in new equipment based on the
forecasted increase in net cash flow (show all your working).

7c. Calculate for GT: [2 marks]

the average rate of return (ARR) based on an annual increase in net cash flow of
€6000 and assuming an asset life of the new equipment of eight years ( show all
your working).
7d. With reference to GT, explain one advantage and one disadvantage of [4 marks]
debt factoring.
7e. Examine Elaine’s proposals to cut back on GT’s commitment to its [10 marks]
employees and CSR practices.
 Paul’s idea for 3D printing takes Utopia into a secondary sector activity that
contrasts with its usual tertiary sector activities. In order to produce a sufficient
number of souvenirs, Utopia would need to buy ten 3D printers at $1000 each.
There would be material costs and significant operating costs, as well as time and
additional labour. Paul has produced a net cash flow forecast for the project (Table
1) assuming a five year life for the printers. He likes the idea that each souvenir
produced could be of a unique design and personalized. Some of the materials
would be from recycled plastics obtained from waste at the resort. Recycling
would reduce variable costs and it would be good for the resort’s environment and
for Utopia’s caring image.
Liza does not like the idea of 3D printing. She is concerned that the souvenirs may
damage Utopia’s exclusive brand. She can see difficulties with recruiting someone
with both the necessary IT skills and the ability to make decisions about which
types of souvenirs to produce. She is particularly concerned about the impact on
Utopia’s current suppliers of souvenirs. She thinks that 3D printing is more suited
to larger organizations.
John believes that the 3D printing technology will bring other benefits to his
businesses. He can imagine decorations and other useful items being produced
for the resort and its offices.
Table 1: Net cash flow for the 3D printing project

8a. Define the term variable cost. [2 marks]

8b. With reference to Utopia, explain the differences between secondary [4 marks]
sector activities and tertiary sector activities.
8c. Using the information above, calculate the payback period and the [4 marks]
average rate of return (ARR) for the 3D printing project (show all your
working).
8d. Using information from the case study, additional information above [10 marks]
and your results from part (c), recommend whether Utopia should
proceed with the 3D printing project.
 Anubis
Tom operates Anubis as a sole trader, selling cell/mobile phone cases on the
internet. The market is increasingly competitive. The retail price of phone cases is
predicted to fall in the second quarter of 2018. Employees at Anubis will receive a
3% rise in wages starting from 1 April 2018.
Tom has forecasted the following monthly cash outflows for January through
March 2018:
• Heating and lighting: $4000.
• Wages: $50 000.
• Packaging: $15 000.
• Delivery charges: 5 % of sales revenue.
• Cost of goods sold: $220 000.
Additional information:
• Opening balance on 1 January 2018: $8000.
• Sales revenue: $300 000 each month.
• Rent of $2000 paid quarterly: first payment in January 2018.
• Receipt of a tax refund in February 2018: $3000.

9a. Outline two appropriate external short-term sources of finance for [2 marks]
Anubis other than loans from family and friends.
9b. Using the information above, prepare a fully labelled cash-flow forecast [5 marks]
for Anubis from January to March 2018.
 9c. Comment on the predicted cash flow for Anubis for 2018. [3 marks]

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