Outsourcing [42 marks]

Dales
Dales is a public limited hotel chain operating in a highly competitive tourism
market. Dales is positioned as a high-price and high-quality chain. The majority of
its staff are on permanent contracts, but wage rates at Dales are below the
average for the hotel industry. Consequently, staff turnover is high. Recruitment is
difficult due to the number of hotels in the areas where Dales hotels are located
and the wages paid.
In 2010, in order to remain competitive, Dales outsourced the cleaning of hotel
rooms to Wire.
Outsourcing reduced the cost of cleaning rooms for Dales from 5 % of total
revenue per room to 2 %. Net profit after tax and interest increased and share
prices rose by 10 %.
Initially, Wire paid cleaners at Dales a low wage of:
• $6 per hour for 8 hours, 5 days per week.
• Cleaners cleaned, on average, 13 rooms per day.
In 2016, Wire introduced a piece rate system:
• $2 is paid per room cleaned.
• Cleaners have a target of 20 rooms per day, 5 days per week.
In recent years, newspaper reports highlighting poor pay and working conditions
have damaged Dales’s brand image. Recent customer feedback has also
highlighted concerns about food quality, room cleanliness and poor customer
service at Dales hotels. Room bookings fell during the same period. Profits in 2016
decreased from $24 m to $4 m.
The current contract with Wire is up for renewal. Dales is considering insourcing.

1a. Outline two common steps taken by a business in recruitment. [2 marks]

 Markscheme
Common steps taken by a business in the process of recruitment include:
• identifying position
• evaluating the requirements for the position
• developing a job description
• determining recruitment plan
• determining search committee
• advertizing position
• reviewing applicants and developing a list to interview
• conducting interviews
• selecting the candidate that best fits the description
• offering position and negotiating terms.

Accept any other relevant step in the process of recruitment.

Award [1] for each step identified up to a maximum of [2].

1b. Recommend if Dales should stop outsourcing the cleaning of hotel [10 marks]
rooms.

Markscheme
If Dales stops outsourcing its cleaners then costs will rise. Outsourcing did cut
costs per room from 5 % of room revenues to 2 % – this is likely to be reversed
if they stop outsourcing, unless of course they operate the same system as
used by Wire: a piece rate system. Costs could, in the short run, increase –
Dales will now be responsible for training and recruitment costs, which are
unavoidable. These costs could be significant, especially since in 2016 Dales’s
profits decreased from $24 m to $4 m. This increase in costs could cause
them to make a loss at least in the short term.
However, stopping outsourcing will not deal with Dales’s other problems –
wage rates at Dales are below the average for the hotel industry.
Consequently, staff turnover is high. Recruitment is difficult due to the number
of hotels in the area and the wages paid.
Cessation of outsourcing of cleaners will have no impact on these issues.
Hotel guests may find that their rooms are cleaned to a higher standard if
Dales returns to having cleaners only clean 13 rooms per day rather than 20.
However, if Dales sticks with the piece rate system adopted by Wire then
nothing will really change and poorly cleaned rooms may continue to be an
issue.
Hotel guests are critical not just about room cleanliness but also about food
quality and poor customer service across the hotel. Cleaner rooms may help
reduce the fall in room bookings but unless other concerns such as food
quality and customer service are challenged then insourcing of cleaners may
do little to arrest the decline in bookings.
Certainly, it is a step in the right direction, but Dales’s problems appear
deeper than just poorly cleaned rooms and unless these are dealt with the
future looks grim.
Dales operates in a highly competitive market and unless it offers wages on
par with rival hotels then staff turnover will remain high. Continued high
labour turnover will not help it establish better customer care and may be a
significant factor in the poor quality of food sold in the hotel. Dales is
positioned as a high-price and high-quality hotel – guests that pay high prices
expect good food, polite staff and a clean room.

In order to reach the top bands of the markscheme candidates must

demonstrate that insourcing will only solve one of Dales’s problems and must
discuss the importance of the other factors in contributing to their falling room
occupancy rates.

Accept any other relevant evaluation.

The table below should be followed (along with the markbands
"Paper 2 markbands for May 2016 forward").
These mark awards in the table below should be viewed as maximums. That
is, just because a candidate has one argument for outsourcing and one
argument against does not mean that they will automatically get a 4. One
strong argument for one side and merely a weak or nominal argument for the
other side might result in a 3.

Marks should be allocated according to the Paper 2 markbands for May 2016
forward.
 Jill Anderson
Jill Anderson operates a restaurant. Although Jill’s meals are viewed as being
excellent quality, sales are slowing. Jill is considering replacing existing meals with
gluten-free meals. The following financial and forecast information is for the
month of May 2018. Jill’s restaurant can only produce either existing or gluten-
free meals.
Table 1: Existing meals

Table 2: Estimated costs and price if Jill produces the gluten-free meals

A local gluten-free manufacturer, which is not part of Jill’s existing supply chain,
has offered to supply already prepared gluten-free meals at $8 per meal. Jill is
unsure whether to make or buy the gluten-free meals.
[Source: © International Baccalaureate Organization 2018]

2a. Define the term supply chain. [2 marks]

Markscheme
The term supply chain refers to a system, a process of organising people,
activities, information and resources to move a product or service from
supplier to customers/end users.
Award [1] if the definition is only partial or considers supply chain as the same
as distribution channel.
Award [2] for a definition similar to the one above, which looks as supply
chain as the whole mechanism of production from raw material purchase to
final delivery.

2b. Calculate: [2 marks]

the total contribution of existing meals sold per month (show all your working).
 Markscheme
The contribution per unit of existing meals = $8 − $5 = $3
Number of meals sold = 800
Total contribution of existing meals sold per month = 800 × $3 = $2400
Award [2] for a correct final answer of $2400 with full working.
Award [1] for a correct answer without working.
Do not credit when only contribution per unit is presented as a final answer.

2c. Calculate: [1 mark]

the total profit or loss on existing meals for May 2018 (show all your working).

Markscheme
TR − TC = profit
$8 × 800 − [$2400 + $5 × 800]
$6400 − [$2400 + 4000]
$6400 − $6400 = 0
Accept any other method of working.
Candidates are not expected to set out their answer in this manner.
Award [1] for a correct answer with working. Candidates do not need to state
that Jill is breaking even. (As the question asks for working)

2d. Calculate: [2 marks]

the forecast profit or loss if Jill decides to make and sell gluten-free meals (show
all your working).
 Markscheme
NOTE FOR 2024 EXAMS ONWARD: Break even or Total Contribution
calculation is expected with forecast profit. There is no requirement
to produce a forecasted profit and loss account.
Contribution = $14 − $10 = $4 per meal
Total contribution = 1200 × $4 = $4800
Total forecast profit = 4800 − (2400 + 400 extra fixed cost for gluten meals)
Total forecast profit = $2000
OR
Profit = TR − TC
Profit = (14 × 1200) − (2800 + (1200 × 10))
Forecast profit = 16800 − 14 800
Forecast profit = $2000
Award [1] if there is one error in calculation, eg forgetting to add the extra
fixed cost component, or the correct answer is given but there is no working.
Award [2] for both the correct answer and clear and suitable working.

2e. Calculate: [1 mark]

the contribution per unit of a gluten-free meal if Jill decides to buy-in the gluten-
free meals (show all your working).

Markscheme
The contribution per meal if Jill decides to buy-in = $14 − $8 = $6
Award [1] for the correct answer only with working shown.

2f. Using your answer from (b) (iii) and (iv), explain whether Jill should buy- [2 marks]
in or make the gluten-free meals herself.
Markscheme
Buys in:
1200 × $14 − [2400 + 1200 × $8]
$16800 − [2400 + 9600]
$16800 − $12000
4800 profit
Which is $2800 higher than in (iii) - the cost to make with profit of $2000
Candidates do not have to repeat all of the working above if presented in the
previous answers especially in (b)(iii).
Or:
Buys in:
12000 × $6 − 2400 (using contribution method)
$16800 − [2400 + 9600] $7200 − $2400= $4800 profit
$16800 − $12000
$4800 profit
Which is $2800 higher than the profit of $2000 if she makes them herself in
part (iii).
Accept any other method.
Given the nature of the question regarding reference to (b)(iii) and (iv) it is
expected that the candidates incorporate references to the change in
contribution and or profit
Award [1] for just using the extra contribution to support but without
reference to/ or calculation of profit before and after.
Award [1] for a response that mentions some relevant qualitative issues with
reference to or comparison with the option to make.
Award [2] for a correct numerical answer with some references to the exact
figures of profit before and after.
Do not credit a response that just says that Jill should accept the offer without
any calculation or reference to profit or contribution when buying.
Please note:
Some candidate just referred to a fall in fixed cost- not to contribution or profit.
Do not award.
Do not credit a response that does not demonstrate some attempt to calculate
the option of buying or refer to profit after buying.
Allow OFR
 Top Star (TS)
Top Star (TS) manufactures sports footwear. Its products are sold through retail
outlets and online. Sales of TS’ footwear in retail outlets are falling. However,
because e-commerce is growing rapidly, online sales are increasing. In 2018, TS’
total domestic sales were $5 000 000 and total domestic market sales for the
same time period were $50 000 000.
TS must consider several challenges:
Some businesses in the sports footwear industry are finding that selling online
leads to many problems and higher costs
TS’ website is not user friendly. Customer complaints about the website and
ordering problems are increasing
TS’ presence in international markets is weak and its product range is limited.
The directors of TS want to develop a new line of running shoes but the
company has insufficient finance for research, development and creating brand
awareness.
The directors think that TS should follow an external growth strategy. Two options
are being considered:
Option 1: Some directors propose a merger with a footwear manufacturer, the
multinational company All Champion, which would allow TS to be more
competitive
Option 2: Other directors propose a merger with a footwear retailer that has a
strong presence in domestic and international markets.
The finance manager believes that merging with All Champion could hurt TS’
reputation. TS’ factories may have to close, which the local population may resent.

3a. Describe one feature of a multinational company (MNC). [2 marks]

Markscheme
MNCs operate in more than one country. Their headquarters are located in
one country (home country) while operations are carried out in a number of
other countries (host countries).
Because of their international operations, they usually have large physical
and financial assets and turnover.
MNCs are often large-sized and exercise a great degree of economic
dominance.
MNCs may control production activity with large foreign direct investment in
more than one developed and developing countries.
Award [1] for each feature stated and award an additional [1] for a
description up to a maximum of [2].
For a statement like “A multinational company operates in two or more
countries” but with no further description, award [1].

3b. Calculate TS’ market share in 2018 (show all your working). [2 marks]
 Markscheme
Market share % = (firm’s sales /total market sales) × 100
5 000 000
50 000 000
× 100 = 10 %

Award [1] for the correct answer and [1] for correct working.
If no workings are shown, but the final answer is correct, award a maximum of
[1].

3c. Explain two disadvantages and one advantage to TS of selling its [6 marks]
products online.
 Markscheme
PLEASE NOTE: E-commerce is not included in the syllabus for 2024
exams onward. Related parts of this multi-part question may be
used.
Like other businesses in the industry, TS may find selling online increasingly
problematic due to the associated costs. Customer complaints about TS’
website and ordering problems are already increasing. Costs of dealing with
customer complaints, technical issues and delivery problems may increase
and reduce profit.
TS’ brand image may be eroded due to its inefficient way of dealing with
online sales. Its unfriendly website and increasing customer complaints are
probably eroding its brand image and market share. If TS wants to increase
international presence and expand its market, it should improve its current
online sales system.
On the other hand, TS’ sales and profits can increase by taking advantage of
e-commerce’s rapid growth. It can also take advantage of a potential market
opportunity left by the competing businesses in the industry that are
experiencing problems with online sales.
TS’ international presence is weak; selling online can help to create brand
awareness in international markets and reach a worldwide audience with
relatively low costs.
Accept any other relevant explanation.
Mark as 2 + 2 + 2.
Award [1] for each correct advantage/disadvantage identified and [1] for a
relevant explanation with application to TS. Award up to a maximum of [2] per
advantage/disadvantage explained .
[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].

3d. With reference to TS, evaluate the two merger options. [10 marks]

Markscheme
Refer to Paper 2 markbands for 2016 forward, available under the "Your tests"
tab > supplemental materials.
Merging with All Champion:
Top Star is a manufacturer. Prior to either Option 1 or Option 2, TS had no
brick-and-mortar retail outlets. The merger with the footwear manufacturer All
Champion (AC) will produce gains in economies of scale, and will give TS the
possibility of growing.
As a multinational company, AC has access to more and cheaper resources
such as finance. Additional finance will allow for research and development of
new products. TS will be able to develop the new line of running shoes and
expand its product portfolio.
Merging with AC will also allow for rationalization of resources, such as
concentrating output on one site and concentrating managerial and technical
capacities. For instance, TS will have access to larger IT and marketing
departments to improve its website and deal with online sales more efficiently.
A merger with AC eliminates a strong competitor in the market. The two
companies might have different strengths and experiences and they,
therefore, could fit well together. The new merged company will probably be
stronger and could therefore increase its competitive power in the market.
AC´s market share (only 10 %) will increase.
On the other hand , a merger with AC may have a number of drawbacks. In a
merger process, the smaller company, such as TS, could be cannibalized by
the larger one. TS’ culture may be dissolved within AC’s way of doing things.
There are also high chances that some of AC’s factories will be closed, causing
discontent within the local community. The finance manager is right to be
suspicious about this merger. TS’ reputation may be hurt due to the
possibilities of closing factories and sales may fall.
Merging with a footwear retailer:
If TS merges with a footwear retailer with a strong presence in domestic and
international markets, it will secure an outlet for its products. TS will be able to
increase its domestic market share of 10 % and additionally access the
international markets, using the experience, knowledge and expertise of
the footwear retailer. TS will keep the manufacturing process and then
factories will not close. In addition, the risks of cannibalization of this option
are low.
However, this merger may not exclude a strong competitor such as AC.
Production economies of scale will not be gained, as the footwear retailer has
no experience in the footwear manufacturing process.
Overall, merging with AC will give Top Star the competitive edge needed to
grow and develop its product portfolio. On the other hand, merging with a
footwear retailer also has some evident advantages, but it seems that
merging with AC looks like a stronger choice.
It is expected that candidates provide a conclusion with a substantiated
judgment.
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 merger option, award a
maximum of [5].
A balanced response is one that provides at least one argument for and one
argument against each merger 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 the answer.

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