# Study Notes: Business Management HL Paper 2 (May 2024) --- ## Section A ### 1. Features of a Cooperative - **Definition**: A cooperative is a type of organization owned and run by its members, who share a common interest. - **Key Features**: - Members have **limited liability**. - **Democratic management**: Equal voting rights for all members. - **Surplus distribution**: Profits are shared among members unless reinvested. - **Separate legal existence**: Independent of its members. - Membership is **open and voluntary**. - **Continuity**: The organization persists even if a member leaves or dies. - **No maximum membership**. Remember, cooperatives are for-profit social enterprises, but their primary goal is to serve their members. --- ### 2. Straight-Line Depreciation - **Formula**: $$ \text{Depreciation Expense} = \frac{\text{Historic Value} - \text{Residual Value}}{\text{Useful Life (years)}} $$ - **Example**: - Historic Value = $100,000$ - Residual Value = $30,000$ - Useful Life = 10 years $$ \text{Depreciation Expense} = \frac{100,000 - 30,000}{10} = 7,000 $$ **Answer**: $7,000 per year. Always include the currency sign in your final answer to avoid losing marks! --- ### 3. Break-Even Analysis #### (i) **Target Profit Output** - **Formula**: $$ \text{Output} = \frac{\text{Fixed Costs} + \text{Target Profit}}{\text{Contribution per Unit}} $$ - **Example**: - Fixed Costs = $70,000$ - Target Profit = $47,000$ - Contribution per Unit = $40 - 30 = 10$ $$ \text{Output} = \frac{70,000 + 47,000}{10} = 11,700 \text{ units} $$ #### (ii) **Target Price** - **Formula**: $$ \text{Price} = \frac{\text{Target Profit} + \text{Fixed Costs} + (\text{Variable Cost} \times \text{Quantity})}{\text{Quantity}} $$ - **Example**: - Target Profit = $47,000$ - Fixed Costs = $70,000$ - Variable Cost = $30$ - Quantity = $9,750$ $$ \text{Price} = \frac{47,000 + 70,000 + (30 \times 9,750)}{9,750} = 42 $$ **Answer**: $42 per unit. --- ### 4. Price Inelastic Demand - **Definition**: When demand is price inelastic, a price increase leads to a proportionally smaller decrease in quantity demanded. - **Advantage for MC**: - MC can increase prices to $42$ (from $40$) and still sell enough socks to meet its profit target. - This is crucial since MC’s production capacity is limited to 11,000 units annually. For example, if MC raises the price to $42, it can achieve its $47,000 profit target without exceeding its production limit. Do not confuse price inelasticity with no change in demand. There will still be a decrease in quantity demanded, but it will be smaller than the price increase. --- ### 5. Patent - **Definition**: A patent is a legal right that grants the holder exclusive use of an innovation for a specific period. - **Key Points**: - Prevents others from making, using, or selling the patented product. - A form of intellectual property. - Expires after a set duration (e.g., 20 years). Patents differ from trademarks (logos/slogans) and copyrights (artistic works). --- ### 6. Investment Appraisal #### (i) **Payback Period** - **Definition**: The time it takes for an investment to recover its initial cost. - **Example**: - Initial Investment = $3,000,000$ - Cumulative Cash Flow at Year 3 = $-150,000$ - Year 4 Cash Flow = $1,150,000$ $$ \text{Payback Period} = 3 + \frac{150,000}{1,150,000} = 3.13 \text{ years (or 3 years and 49 days)} $$ #### (ii) **Average Rate of Return (ARR)** - **Formula**: $$ \text{ARR} = \frac{\text{Average Annual Return}}{\text{Initial Investment}} \times 100 $$ - **Example**: - Total Net Cash Flow = $1,000,000$ - Average Annual Return = $1,000,000 / 4 = 250,000$ - Initial Investment = $3,000,000$ $$ \text{ARR} = \frac{250,000}{3,000,000} \times 100 = 8.33\% $$ #### (iii) **Net Present Value (NPV)** - **Formula**: $$ \text{NPV} = \text{Total Present Value (TPV)} - \text{Initial Investment} $$ - **Example**: - TPV = $3.43 \, \text{million}$ - Initial Investment = $3.00 \, \text{million}$ $$ \text{NPV} = 3.43 - 3.00 = 0.43 \, \text{million} $$ Higher interest rates reduce NPV, as future cash flows are discounted more heavily. --- ### 7. Cost-Plus Pricing - **Definition**: Pricing method where a fixed amount or percentage is added to total costs to determine the selling price. - **Key Points**: - Ensures all costs (production, marketing, admin) are covered. - Example: If total costs = $100 and markup = 20%, price = $120. Do not confuse total costs with unit costs. Total costs include all expenses, not just production costs. --- ### 8. Capacity Utilization #### (i) **Formula**: $$ \text{Capacity Utilization} = \frac{\text{Actual Output}}{\text{Maximum Capacity}} \times 100 $$ - **Example**: - Actual Rooms Sold = 18 - Total Rooms Available = 120 $$ \text{Capacity Utilization} = \frac{18}{120} \times 100 = 15\% $$ #### (ii) **Revenue Variance** - **Formula**: $$ \text{Variance} = \text{Actual Revenue} - \text{Budgeted Revenue} $$ - **Example**: - Daily Variance = $150$ - Monthly Variance = $150 \times 30 = 4,500$ (Favorable). --- ## Section B ### 1. Target Market - **Definition**: A specific group of people with shared characteristics that a business aims to sell its products/services to. Target markets are often defined by demographics, geography, or behavior. --- ### 2. External Recruitment #### **Advantages**: - Access to a larger pool of candidates. - Brings fresh ideas and perspectives. - Can fill skill gaps (e.g., experienced pilots for AV). #### **Disadvantages**: - Higher costs (e.g., agency fees). - Slower process compared to internal recruitment. - May demotivate existing employees. For AV, external recruitment could help find experienced pilots to train first officers, but it may worsen union conflicts. --- ### 3. Customer Loyalty Program #### **Advantages**: - Retains customers in a competitive market. - Collects valuable customer data for marketing. #### **Disadvantages**: - High implementation costs (e.g., hiring data analysts). - Risk of poor execution damaging the brand. AV already has strong customer loyalty, so the cost-benefit of a loyalty program must be carefully evaluated. --- ### 4. Joint Venture Decision #### **Advantages**: - Increases market share (combined 23%). - Access to FL’s resources (modern aircraft, skilled staff). - Economies of scale and cost reductions. #### **Disadvantages**: - Risk of brand damage due to FL’s poor customer service. - Cultural and managerial clashes. AV must weigh the financial benefits against the potential harm to its reputation and employee morale. --- ### 5. Conflict Resolution #### **Approaches**: 1. **Collective Bargaining**: - Open dialogue with employees to negotiate terms. - Could address the 15% vs. 6% wage gap. 2. **Arbitration**: - Involves a neutral third party to mediate disputes. - Useful if direct negotiations fail. For AS, resolving conflicts before the busy summer period is critical to maintaining operations and securing future contracts. Ignoring employee concerns (e.g., feeling undervalued) can escalate conflicts and harm productivity. --- ### Key Takeaways - Always show all calculations and include units/signs in final answers. - Use context-specific examples to strengthen explanations. - Balance advantages and disadvantages in evaluation questions. - Highlight connections between financial, operational, and strategic factors.