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

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.

Rehana Recycles (RR)

Rehana is very environmentally aware. One year ago, Rehana identified a business opportunity to reuse waste products and set up Rehana Recycles (RR) as a sole trader.

A local company sells bottled drinks and reuses the empty glass bottles that are returned by customers. It cannot reuse any damaged bottles, so they are dumped as waste. Rehana asked this company if she could have the damaged glass bottles. The company agreed she could have them at no cost.

RR melts down the glass and makes unique vases and other glassware products. RR’s mission statement is ‘Make waste beautiful’. Rehana markets her products as ‘Lovely for the planet, lovely for you’. The business has a strong local brand image. Rehana has recently invested in marketing which focuses on her unique selling point of recycling waste.

To help satisfy demand, Rehana recently employed two local artists who are also very environmentally aware. They are skilled in making handmade glass jewellery. RR currently makes handmade products using job production. Rehana has a democratic leadership style.

Rehana has produced some financial data shown in Table 1.1.

Table 1.1 Financial data

As demand has grown, Rehana needs to increase her output. Rehana has identified two ways of increasing output. She could either:

• keep using job production and employ more artists to create unique glassware products using the RR brand, or

• change to batch production and make a larger number of standardised glassware using the RR brand.

Quality Furniture (QF) QF is a public limited company in country S. It manufactures furniture for cafés. The number of cafés in country S has increased by more than 50% over the last 5 years. This has meant that QF has been able to expand and achieve internal economies of scale. However, the growth of the café market has attracted new firms supplying café furniture and increased competition for QF.

An extract from QF’s income statement is shown in Table 1.1

Table 1.1: Extract from QF’s income statement for 2020

Although QF has been successful so far, Javid, the Managing Director, has identified two problem areas: inventory and human resources.

Inventory

QF’s inventory includes raw materials, work in progress and finished tables and chairs. QF buys 80% of its materials from country T and there is a long delivery lead time. This means that QF holds a high level of buffer inventory which has a high value.

Human resources

QF’s production employees are unhappy that they have not received any benefit from the company’s expansion. Profit has doubled over the past three years but employees have not received any pay increases or bonuses. The employees have all been trained by QF and have specialist skills which had ensured that customer expectations were met. However, customers are starting to complain about a fall in the quality of the furniture, which could be the result of the low morale of the employees. Some highly trained employees have left QF to work for competitor firms.

Snappy Box (SB)

SB is owned by Ralph who is a sole trader. The business prints photographs. Ralph has one shop on the main street of city D. Customers bring their saved digital photographs into the shop and these are printed on high-quality paper.

SB uses a large printing machine that can print on almost any size of paper to produce different sized photograph prints. The process is very capital-intensive and most customers request a batch of photographs to be printed.

SB is the only shop in city D that prints photographs. However, recently a number of online competitors have started to offer low-priced photograph prints to customers. Ralph has noticed that his sales have decreased significantly because of this competition. Ralph estimates the demand for his photograph prints has a price elasticity of demand of –4.

SB already has a low profit margin and Ralph is struggling to compete with the online retailers. However, Ralph has an idea to introduce job production into his shop. He could stop printing photographs and instead focus on framing individual photographs for customers. These frames will be made for any sized photograph or picture and can be made from a variety of materials chosen by the customer.

Ralph will need specialised equipment to allow him to make the frames. The equipment would cost $10000. He has identified two possible sources of finance for this equipment.

The first possible source of finance is for Ralph to lease the equipment from the company that produces it. The lease would be for five years at a fixed cost of $400 per month.

The second possible source of finance is for Ralph to sell the photograph printing machine for at least $10000, to purchase the equipment to make frames.

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.

UPlane Components (UC)

UC is a private limited company providing engine parts for commercial aircraft. It uses batch production in factory A and flow production in factory B. As part of UC’s commitment to corporate social responsibility (CSR), it provides a training scheme for the long-term unemployed, based in factory A.

UC’s products are sold to aircraft engine manufacturers. Demand for aircraft engines has increased by 45% over recent years. The aircraft engine manufacturers want inventory just when needed and are demanding a reduction in prices.

In 2017, UC opened factory B which is 5km away from factory A. Factory B has a high level of automation, resulting in low unit costs for the parts produced there. Production is capital intensive. UC has a plan to automate factory A. The production workers are not happy about this proposal and have asked for more details. The workers’ representatives have asked for a meeting with the human resource manager.

In December 2019 a fault was discovered in one of the engine components supplied by UC and produced in factory A. UC had to recall 2000 parts at a cost of $200000. This has had an impact on part of its triple bottom line and UC is unlikely to meet its targets. Table 1.1 shows some financial data for UC.

Table 1.1: Financial data for UC

Amjit, the human resource manager, believes that the fault was caused by the negligence of Jack, one of the production supervisors. Jack claims that he was made to work overtime to try and meet production targets. This caused him to become tired and make a mistake in one batch of parts. Amjit wants to dismiss Jack.

Electric Cars (EC)

EC is a public limited company producing electric cars. Market research suggests that electric cars are in the early stage of the product life cycle. The demand for electric cars is likely to increase substantially in the next 10 years. EC is based in country X, where it is one of three electric car manufacturers. However, other manufacturers could start to produce electric cars if the forecast market growth is correct.

EC’s promotion has only been aimed at high income groups. The government of country X recently announced that it will support the use of electric cars. This will help EC to achieve its objective to increase sales volume by 50% over the next two years.

One year ago, EC invested $10m in new production facilities. The investment was funded by a long-term bank loan. Interest payments on the bank loan have reduced EC’s profit margin from 9% to 4%. EC will need to cut unit costs through increased efficiency.

EC initially launched its cars using a price skimming strategy but sales growth has been slow. If EC can achieve a 50% growth in sales over the next two years, it will be in a strong financial position. This means it will be able to spend more on the development of a larger product portfolio of electric cars.

Jancie, the Finance Director, has produced forecasts for EC’s financial data over the next two years, as shown in Table 2.1.

Table 2.1: Extract from EC’s forecast financial data

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

Horizon Hotels Group (HHG)

HHG was established in country R in 2005 by businessman Ethan Cross. Starting with a single boutique hotel, HHG has grown into a chain of 18 hotels across country R and neighbouring countries.

Timeline of HHG's strategy for growth

Developing a new strategy for 2024 and beyond

As HHG recovers from the pandemic, Ethan must decide how to grow the business sustainably. Two strategic options are under consideration:

• Option A: Expand the HHG franchise network further, targeting independent hotel operators in new countries to grow the brand internationally with limited capital investment.

• Option B: Invest significantly in technology and digital services — including smart room technology, AI-driven personalisation, and an enhanced loyalty programme — to deepen the customer experience and increase repeat bookings.

HHG's Finance Director has cautioned that while the business has recovered, gearing remains high and the balance sheet needs strengthening before major new commitments are made.

Appendix 1: The boutique hotel market in country R (2015)

• Demand for independent boutique hotels growing as travellers seek authentic local experiences over international chains.

• Review platforms (e.g. TripAdvisor) increasingly influence customer choices — online reputation is critical.

• Shortage of skilled hospitality workers in country R; staff training is a significant competitive differentiator.

• Growth in short-term rental platforms (e.g. Airbnb) is creating new competition for independent hotels.

• Franchising is an increasingly common growth model in the hospitality industry.

Appendix 2: Strategic analysis following the CSH acquisition (2017)

Comfort Stay Hotels (CSH) operated in the budget segment of the market, targeting price-conscious travellers. HHG operates in the premium boutique segment.

HHG management found it difficult to improve CSH's service standards while maintaining competitive pricing. CSH staff were on minimum wage with high labour turnover; HHG had built its reputation on high staff retention and customer-facing quality. Attempts to integrate CSH into HHG's brand culture created friction and low morale in the CSH teams.

The $15m acquisition significantly increased HHG's gearing. Revenue from CSH properties was lower than forecast in the two years following the acquisition.

Appendix 3: HHG customer loyalty app (2021)

• Developed during the pandemic using $500,000 from HHG's cash reserves.

• Tracks customer preferences and enables personalised room features, local activity recommendations, and pre-arrival communication.

• Currently has 35,000 active users.

• Customer retention rate improved from 28% before the app to 41% following its launch.

• The app has been particularly effective with repeat business travellers, who account for 38% of HHG's bookings.

Appendix 4: Analysis of HHG's financial accounts 2018–2023