Cambridge O Level

BUSINESS STUDIES 7115/22

*9420386326*

Paper 2 Case Study May/June 2020

1 hour 30 minutes

You must answer on the question paper.

You will need: Insert (enclosed)

INSTRUCTIONS
• Answer all questions.
• Use a black or dark blue pen. You may use an HB pencil for any diagrams or graphs.
• Write your name, centre number and candidate number in the boxes at the top of the page.
• Write your answer to each question in the space provided.
• Do not use an erasable pen or correction fluid.
• Do not write on any bar codes.
• You may use a calculator.

INFORMATION
• The total mark for this paper is 80.
• The number of marks for each question or part question is shown in brackets [ ].
• The insert contains the case study.

This document has 12 pages. Blank pages are indicated.

06_7115_22_2020_1.3
© UCLES 2020 [Turn over
 2

1 (a) Explain one benefit and one problem for ES of taking over other businesses.

lower competition from similar businesses

Benefit: .............................................................................................................................

...........................................................................................................................................

as indicated ES is taking over similar firms, it will limit number of options for
Explanation: ......................................................................................................................
customers which will allow to charge a high price for improved profitability and customers
...........................................................................................................................................
still have to buy as they don't have too many options available
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................
duplication of staff members
Problem: ...........................................................................................................................

...........................................................................................................................................

taking over another firm from same industry and stage of production would
Explanation: ......................................................................................................................
mean that similar department and management positions would result in redundancy and
...........................................................................................................................................
possible industrial action from workers and staff of ES would still feel insecure as
...........................................................................................................................................
they might be replaced by staff of overtaken country
...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [8]
problems can be:
possible diseconomies of scale
duplication of staff members
financing related problems

ABC Company: FGH Company:

Gross Profit: 100-50M = 50M Gross Profit: 400M-160M = 240M

G.P Margin: (50m/100m)*100 = 50% G.P Margin: (240M/400M)*100 = 60%

Net Profit: 50M-40M = 10M Net Profit: 240M-210M = 30M

N.P Margin: (10M/100M)*100 = 10% N.P Margin: (30M/400M)*100 = 7.5%

© UCLES 2020 06_7115_22_2020_1.3

 3

(b) Consider the financial information in Appendix 1. Which company should ES take over? Justify
your answer using appropriate ratios.

G.P margin is healthy along with Net Profit. ROCE of 20% indicates that
ABC Company: .................................................................................................................
ABC manages to earn 20 cents per dollar invested. Current ratio of 2 indicates that
...........................................................................................................................................
current assets are double in value of current liabilities and this healthy state of liquidity
...........................................................................................................................................
is also endorsed by acid test ratio of 1 which means that even without stock ABC can pay
...........................................................................................................................................

off it's current liabilities.

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................
has healthy G.P margin but N.P margin drops to a single digit return.
FGH Company: .................................................................................................................
current ratio is 3 which might be due to over liquidity that is too many resources tied up in
...........................................................................................................................................
current assets. this is also indicated through acid test ratio of 1.5 which means that even
...........................................................................................................................................
without stock, current assets are 50% more so there might be too many debtors and idle
...........................................................................................................................................

cash etc. FGH is managing to earn 25 cents per dollar invested

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................
in terms of absolute value FJH is earning 20M dollars more as compared
Recommendation: ............................................................................................................
to ABC even with a lower profitability. Revenue is 4 times higher than ABC means spread
...........................................................................................................................................
of risk over larger number of customers. ROCE is 5% more showing better efficiency for
...........................................................................................................................................
utilizing capital. even though takeover price for FGH might be high being a larger company
...........................................................................................................................................

and those additional funds might be difficult to fund when ES already has to arrange 10 M
...........................................................................................................................................
for new technology but after taking over FGH there seems to be room for further
...........................................................................................................................................
improvement like adjusting liquidity to a more desirable level and controlling expenses so
...........................................................................................................................................
that gap between 60% of G.P margin and 7.5% of N.P margin is reduced and then profit
........................................................................................................................................... [12]
will be further enhanced so i recommend taking over FGH.

© UCLES 2020 06_7115_22_2020_1.3 [Turn over

 4

2 (a) Explain four ways a business plan can be useful.

encouraging research - business plan contains information about the product and
Way 1: ...............................................................................................................................
the gap in market and why consumers would buy the product. to get this information and
...........................................................................................................................................
include it in the business plan business would need to do market research
...........................................................................................................................................

...........................................................................................................................................

Way 2: presentation to potential investors - business plan consists market research which
...............................................................................................................................
can persuade investors to invest. they may think there is potential in business after being
...........................................................................................................................................
presented with the business plan which would include information about the product and
...........................................................................................................................................
possible growth
...........................................................................................................................................

Way 3: presentation to banks for loans - business plan includes financial forecasts like
...............................................................................................................................
cash flow forecasts and expected sales and profit which can be used to persuade banks or
...........................................................................................................................................
lenders to give loans.
...........................................................................................................................................

...........................................................................................................................................

reference document for employees - employees may refer to business plan if they
Way 4: ...............................................................................................................................
joined after the business has expanded or grown. they may check what the initial idea of
...........................................................................................................................................
the business was and what the course of action was at the beginning.
...........................................................................................................................................

........................................................................................................................................... [8]

© UCLES 2020 06_7115_22_2020_1.3

 5

(b) ES has been considering the following three methods of promotion for its products in export
markets. Which method should ES choose? Justify your answer.

• Advertise on national television

• Advertise on ES website
• Display its products in shopping malls

Exports are associated with larger volumes of trade as

Advertise on national television:........................................................................................
compared to domestic trade so advertising on national tv would ensure that those large
...........................................................................................................................................
volumes of exports have demand from all over the targeted country by showing what the ES
...........................................................................................................................................

scooters look like and their features etc. Demand for ES scooters would be coming from
...........................................................................................................................................
the whole country and scooter sales will not be confined to few areas of the country. But
...........................................................................................................................................
buying media for national tv can be costly
...........................................................................................................................................
Frequent update of information is possible. Secondly, all the
Advertise on ES website:...................................................................................................
relevant links like placing a purchase order for ES scooters can be added. However, only
...........................................................................................................................................
those people would be able to get the information who would be able to access ES websites
...........................................................................................................................................
So it might not approach too many new customers.
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

ES scooters can be displayed in stalls at popular

Display its products in shopping malls:..............................................................................
shopping malls at the destination country such places tend to have high customer influx so
...........................................................................................................................................
there will be a lot of product exposure but a shopping mall attracts customers for different
...........................................................................................................................................
types of products so there might not be many people looking for a scooter
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

I recommend advertising on national TV as it would have more public

Recommendation:.............................................................................................................
exposure as compared to website or shopping mall displays. Secondly. there is more room
...........................................................................................................................................
for persuasion because of audio and visual content for presenting ES scooters in an attractive
...........................................................................................................................................
way and highlighting its features. When this ad is being run during prime time then customer
...........................................................................................................................................

might be attentive and attracted towards it.

...........................................................................................................................................

........................................................................................................................................... [12]

© UCLES 2020 06_7115_22_2020_1.3 [Turn over

 6

3 (a) Explain two benefits to ES of higher productivity.

lower cost of production

Benefit 1: ..........................................................................................................................

...........................................................................................................................................

higher productivity would mean ES would be able to produce more scooters

Explanation:.......................................................................................................................
with less number of labor so its wage expense would be low which would allow to charge a
...........................................................................................................................................
lower price for pushing sales of ES scooters. this would be significant when inflation rate
...........................................................................................................................................
is high in country Z
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................
quicker delivery to market
Benefit 2: ..........................................................................................................................

...........................................................................................................................................

when scooters will be manufactured in less time then production deadlines

Explanation: ......................................................................................................................

would be met and scooters will be delivered to the market before competitors and this can
...........................................................................................................................................
attract customers who are not loyal to any particular brand and are willing to buy whatever
...........................................................................................................................................
comes first with an acceptable quality so ES will be able to enhance from it's 30% market
...........................................................................................................................................
share
...........................................................................................................................................

........................................................................................................................................... [8]

© UCLES 2020 06_7115_22_2020_1.3

 7

(b) Consider three methods of motivation ES could use for its production workers. Which is the
best method for ES to choose? Justify your answer.

Method 1: ..........................................................................................................................
ES can use profit sharing schemes in which part of the profit can be distributed

amongst employees. On one hand this would acknowledge their efforts towards ES success
...........................................................................................................................................
secondly it would motivate them to push profits higher. However, it might reduce dividents
...........................................................................................................................................
for shareholders
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

staff training. manufacturing related technology keeps on evolving like using CAD
Method 2: ..........................................................................................................................
and CAM for designing and producing scooters so workers' skills will be enhanced but they
...........................................................................................................................................
might leave for other companies after getting the training.
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

As part of fringe benefits employees can be offered discount on ES scooters

Method 3: ..........................................................................................................................
when they are buying for themselves or their family members so they will associate
...........................................................................................................................................
themselves more with ES scooters but many might not be interested if workers already
...........................................................................................................................................
have their own transport or use public transport.
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

I recommend staff training to motivate ES workers this way the workers' skills
Conclusion: .......................................................................................................................
will increase as well as increase their involvement during the job which might help them
...........................................................................................................................................
not find the work boring. Moreover, this might reduce errors in the production and will
...........................................................................................................................................
increase overall productivity of workers . Standardization in process will also be present.
...........................................................................................................................................
*worker motivation will increase output which will help increase international exports of ES
...........................................................................................................................................

........................................................................................................................................... [12]

© UCLES 2020 06_7115_22_2020_1.3 [Turn over

 8

4 (a) Explain how the following four legal controls may affect ES.

• Control over misleading promotion

• Control over faulty products
• Control over location decisions
• Control over pollution

ES might not be able to exaggerate features and performance of

Misleading promotion:.......................................................................................................
its scooters but that would make customer expectations more realistic
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

Faulty products: ES will have to implement stronger quality assurance standards and will
................................................................................................................
have to honor its warranties which will push the costs up but this might also reduce waste
...........................................................................................................................................
if control is coming through quality assurance instead of rejection
...........................................................................................................................................

...........................................................................................................................................
ES might have to shift away from population or areas of natural beauty. they
Location: ...........................................................................................................................
might have to update its delivery trucks according to environmental standards. this would
...........................................................................................................................................
save them from any action from environmental protection groups
...........................................................................................................................................

...........................................................................................................................................

ES might have to obtain pollution permits which costs fees. they might also have
Pollution:............................................................................................................................
to redesign their scooters to reduce carbon emission but this way it will not get any bad
...........................................................................................................................................
media publicity and consumer boycotts.
...........................................................................................................................................

........................................................................................................................................... [8]

© UCLES 2020 06_7115_22_2020_1.3

 9

(b) Consider the effect on ES of the following two economic changes in country Z. Which change
is likely to have the biggest effect on ES’s profit? Justify your answer.

• Increasing unemployment
• Increasing inflation

unemployed people are that part of the population which

Increasing unemployment: ...............................................................................................
is unable to find work so when their number rises skilled workers become easily available
...........................................................................................................................................
and wage rate tends to drop. union power also becomes weaker but this might also mean
...........................................................................................................................................
lower sales for ES as rising unemployment also causes falling incomes.
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

inflation refers to persistent rise in general price level over a period of

Increasing inflation: ...........................................................................................................
time so workers demand higher wages and consumers with lower real income might delay
...........................................................................................................................................
purchases of scooters this can also raise cost of raw material but if ES raises its prices at
...........................................................................................................................................
a higher rate than inflation rate than real profit might rise
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

ES scooters can be considered a necessity for autonomous mobility so even

Conclusion: .......................................................................................................................
if unemployment rises people will still buy scooters so they can go to other areas for jobs
...........................................................................................................................................
or search different areas for jobs. inflation might have more damaging effect as ES is
...........................................................................................................................................
entering in international market and in international trade importing country can have many
...........................................................................................................................................
options available.
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [12]

© UCLES 2020 06_7115_22_2020_1.3

 10

BLANK PAGE

© UCLES 2020 06_7115_22_2020_1.3

 11

BLANK PAGE

© UCLES 2020 06_7115_22_2020_1.3

 12

BLANK PAGE

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable
effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will
be pleased to make amends at the earliest possible opportunity.

To avoid the issue of disclosure of answer-related information to candidates, all copyright acknowledgements are reproduced online in the Cambridge Assessment
International Education Copyright Acknowledgements Booklet. This is produced for each series of examinations and is freely available to download at
www.cambridgeinternational.org after the live examination series.

Cambridge Assessment International Education is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of the University of
Cambridge Local Examinations Syndicate (UCLES), which itself is a department of the University of Cambridge.

© UCLES 2020 06_7115_22_2020_1.3