Analysing Published Accounts (A Level) (Cambridge (CIE) A Level Business): Exam Questions

Charlie’s Chocolates (CC)

CC is a large public limited company that manufactures a wide range of chocolate bars. Production takes place in low wage countries so that costs can be kept low. CC has suffered recently from poor publicity due to the high levels of sugar used in the production of its chocolate. A national newspaper has recently published an article about how CC exploits employees in low wage countries. The Marketing Director, Alan, is aware of recent trends showing that consumers are becoming more ethical in their buying decisions. He thinks this might explain why sales decreased by 10% last year.

He has asked to meet with the Managing Director, Ikram, to discuss a major change towards more ethical production methods. This could mean re-locating production back to the home country. This will increase costs and involve the recruitment of additional employees. In response to recent Government guidelines to improve health, Alan wants to decrease the amount of sugar used in the chocolate bars.

Alan is also thinking about the financial accounts for this year that he received this morning from Ikram (see Table 1 and Table 2).

Table 1 – Extract from Income Statement

Table 2 – Extract from Statement of Financial Position

With sales declining from last year, Alan has to think carefully about the next steps for marketing. He knows that the product range is of good quality – the problem is the poor image of the company. For example, he is aware that a local consumer group is trying to organise a demonstration outside one of CC’s factories in the next few weeks.

Motorcycle Components (MC)

MC is a large public limited company that produces a range of components used by motorcycle manufacturers. MC’s mission statement is ‘to be the world leader in delivering quality motorcycle components to our customers’.

The motorcycle component industry is very competitive and MC’s customers expect high quality and a short lead time. MC operates a Just in Time (JIT) inventory control system. MC’s good relationships with its suppliers ensure that JIT operates efficiently. The production workers at MC are highly skilled and the business benefits from a low labour turnover.

Liquidity management is very important in the motorcycle component industry. The industry average for the acid test ratio is 1. A summary of some key data for MC has been prepared by the Finance Director, as shown in Table 2.1.

Table 2.1: Summary financial data as at 30 April 2022 ($ million)

The Operations Director, Jay, is proposing new capital expenditure of $4 million. Jay thinks that automation of the production process will have significant financial benefits for MC. He wishes to gain approval from the Board of Directors to implement a process innovation project. Jay believes that, with good communication and the involvement of employees, he can effectively manage the project.

Refer to Table 2.

Table 2: Extracts from TK’s financial data 2021

Hannah’s Handbags (HH)

Hannah started HH six years ago. HH operates in a niche market providing unique bags. The bags are made using job production. As demand grew for the bags, Hannah took on a partner, her brother Kwom. They both agreed to keep the name ‘Hannah’s Handbags’ as it is an established, reputable and widely recognised brand.

HH operates from a small workshop and showroom. Customers are encouraged to visit the showroom to discuss design and materials with either Hannah or Kwom.

HH employs four highly skilled specialist production staff. Table 2.1 shows an extract from the latest income statement.

Table 2.1: Extract of financial data for HH (year ended 30 October 2019

A new product

Hannah and Kwom would like to expand the business by producing a limited number of batch produced bags to sell online. Hannah has noticed other bag producers do this successfully. The new market has many more competitors, with 15 large businesses and many small ones. The bags would have to be priced competitively. Kwom estimates that this new venture would require additional finance of $350000. HH would also require a specialist IT provider to set up a website and a marketing agency to run a viral marketing campaign.

Solaris Energy Solutions (SES)

SES was founded in 2009 in country T by engineer and entrepreneur Marco Santos. Using $200,000 of personal savings and a $300,000 bank loan, Marco set up the business designing and installing solar panels for residential customers. The bank loan was fully repaid by 2013.

Timeline of SES's strategy for growth

Developing a new strategic direction

The domestic solar panel market in country T is becoming increasingly competitive. Several large multinational companies (MNCs) have entered the market in recent years, competing aggressively on price. Marco believes SES must change direction to secure its long-term future.

Two strategic options are being considered:

• Option A: Expand internationally into country U, where government incentives have created rapid growth in solar energy demand.

• Option B: Diversify within country T into electric vehicle (EV) charging infrastructure — a market that is growing rapidly as EV adoption increases.

SES's Finance Director has warned that the company's financial position has weakened and that any new strategy must be carefully costed and phased. Marco would like advice on which strategic direction SES should pursue.

Appendix 1: The renewable energy market in country T (2016)

• The government of country T has committed to generating 50% of its electricity from renewable sources by 2030.

• Solar energy is the fastest-growing renewable energy source in country T, with installations rising by 22% per year.

• Growing public awareness of climate change is driving strong demand from residential and commercial customers.

• Government subsidies for residential solar installations are generous but are scheduled to be reduced from 2021.

• Competition for government contracts is intense; however, profit margins on public sector contracts are higher than on private sector work.

• MNCs from Europe and Asia are beginning to establish operations in country T, benefiting from economies of scale and established brand recognition.

Appendix 2: HR Director's report following SES's acquisition of EcoGrid (2018)

EcoGrid was a family-run business of 45 employees. It had a flat organisational structure, a culture of autonomy and flexible working, and a strong reputation for technical innovation in energy storage systems.

SES operates with a more hierarchical management structure. Following the acquisition, SES standardised HR practices across both companies. EcoGrid employees were moved from flexible contracts to fixed-hours annualised contracts. A third of EcoGrid's specialist engineers chose to leave within twelve months.

Recruiting qualified energy storage engineers in country T is difficult. Training new engineers to the required standard takes an average of 18 months. Productivity in the EcoGrid division has fallen significantly since the acquisition. Several planned product development projects have been delayed.

Appendix 3: SES AI energy management software (2020)

• Software is integrated into all new SES solar systems and is compatible with EcoGrid storage units.

• Optimises energy use in real time, reducing customer energy bills by an estimated 15–20%.

• Revenue model: customers pay an annual subscription fee of $120 per year.

• 12,000 customers are currently subscribed to the platform; subscription revenue is growing at 8% per year.

• Development cost: $2.5m, funded entirely from SES's retained profit.

• The platform is widely regarded within the industry as technically advanced, but requires ongoing investment to maintain and update.

Appendix 4: Analysis of SES's financial accounts between 2018 and 2022