2025 IB DP Business management Practice Paper with Answers

### Part (a)
**Buffer stock** is the minimum inventory level that a business maintains as a safety net to prevent stockouts resulting from sudden surges in demand or delays in deliveries from suppliers.

### Part (b)
**(i) Reorder level calculation:**
$$\text{Reorder level} = (\text{Lead time} \times \text{Daily usage}) + \text{Buffer stock}$$
$$\text{Reorder level} = (6 \text{ days} \times 50 \text{ kg/day}) + 200 \text{ kg}$$
$$\text{Reorder level} = 300 \text{ kg} + 200 \text{ kg} = 500 \text{ kg}$$

**(ii) Maximum stock level calculation:**
$$\text{Maximum stock level} = \text{Buffer stock} + \text{Reorder quantity}$$
$$\text{Maximum stock level} = 200 \text{ kg} + 800 \text{ kg} = 1,000 \text{ kg}$$

### Part (c)
**Advantage:**
* **Protection against stockouts:** Holding a high buffer stock ensures that ACR can continue operations even if there is a sudden delay in shipments of coffee beans from abroad, preventing lost sales and preserving relationships with boutique cafs.

**Disadvantage:**
* **High storage/holding costs:** Premium coffee beans require proper temperature and humidity control to maintain freshness. Holding large quantities increases warehousing costs, risk of spoilage/depreciation, and ties up working capital that could be used elsewhere in the business.

**Part (a) [2 marks]**
* **2 marks:** Clear and accurate definition of buffer stock, referencing its role as a safety net against unexpected demand or supply delays.
* **1 mark:** A partial or vague definition (e.g., "extra stock kept in reserve").

**Part (b) [4 marks]**
* **(i) [2 marks]**
* **2 marks:** Correct answer with working shown: \( (6 \times 50) + 200 = 500 \text{ kg} \).
* **1 mark:** Correct method used but a mathematical error occurred, OR correct answer of 500 kg given without showing units or working.
* **(ii) [2 marks]**
* **2 marks:** Correct answer with working shown: \( 200 + 800 = 1,000 \text{ kg} \).
* **1 mark:** Correct method used but a mathematical error occurred, OR correct answer of 1,000 kg given without units or working.

**Part (c) [4 marks]**
* **Advantage [2 marks]:**
* **1 mark:** Identifies an advantage (e.g., prevents stockouts / reliable supply).
* **1 mark:** Applied to ACR's context (e.g., ensuring coffee roasting continues smoothly and boutique cafs remain supplied).
* **Disadvantage [2 marks]:**
* **1 mark:** Identifies a disadvantage (e.g., high storage cost / cash flow tied up).
* **1 mark:** Applied to ACR's context (e.g., coffee beans degrading or high cost of temperature-controlled storage).

### Part (a)
$$\text{Contribution per unit} = \text{Selling price} - \text{Variable cost}$$
$$\text{Contribution per unit} = \$25 - \$15 = \$10$$

$$\text{Break-even output} = \frac{\text{Total Fixed Costs}}{\text{Contribution per unit}}$$
$$\text{Break-even output} = \frac{\$18,000}{\$10} = 1,800 \text{ bottles per month}$$

### Part (b)
**(i) Margin of safety in units:**
$$\text{Margin of Safety} = \text{Current Output} - \text{Break-even Output}$$
$$\text{Margin of Safety} = 2,500 - 1,800 = 700 \text{ bottles}$$

**(ii) Margin of safety as a percentage:**
$$\text{Margin of Safety \%} = \left( \frac{\text{Margin of Safety in units}}{\text{Current Output}} \right) \times 100$$
$$\text{Margin of Safety \%} = \left( \frac{700}{2,500} \right) \times 100 = 28\%$$

### Part (c)
$$\text{Total Contribution} = \text{Quantity} \times \text{Contribution per unit}$$
$$\text{Total Contribution} = 3,000 \times \$10 = \$30,000$$
$$\text{Profit} = \text{Total Contribution} - \text{Fixed Costs}$$
$$\text{Profit} = \$30,000 - \$18,000 = \$12,000$$

Alternatively:
$$\text{Total Revenue} = 3,000 \times \$25 = \$75,000$$
$$\text{Total Costs} = \$18,000 + (3,000 \times \$15) = \$18,000 + \$45,000 = \$63,000$$
$$\text{Profit} = \$75,000 - \$63,000 = \$12,000$$

### Part (d)
One major limitation of break-even analysis is that it **assumes selling prices and variable costs per unit remain constant** across all levels of output.
In reality:
* EcoBottle Ltd may need to offer bulk discounts to large retailers, which would lower the average selling price and change the break-even point.
* Variable costs might decrease due to purchasing economies of scale for raw bamboo at higher output levels.

**Part (a) [2 marks]**
* **2 marks:** Correct answer with working shown (1,800 bottles).
* **1 mark:** Correct formula or process, but mathematical error, OR correct final answer of 1,800 without working/units.

**Part (b) [3 marks]**
* **(i) [2 marks]**
* **2 marks:** Correct margin of safety in units with working (700 bottles).
* **1 mark:** Incorrect calculations but correct methodology, OR 700 without units.
* **(ii) [1 mark]**
* **1 mark:** Correct percentage calculation (28%) based on their part (b)(i) answer (apply Own Figure Rule - OFR).

**Part (c) [2 marks]**
* **2 marks:** Correct profit calculation with working ($12,000).
* **1 mark:** Correct process but numerical error, OR correct profit of $12,000 without showing calculations.

**Part (d) [3 marks]**
* **1 mark:** States a valid limitation of break-even analysis (e.g., static model, constant selling price, or variable cost).
* **2 marks:** Explains the limitation conceptually.
* **3 marks:** Clearly applies the limitation to EcoBottle Ltd (e.g., mentions bulk bamboo purchases or wholesale discounts on biodegradable bottles).

### Part (a)
$$\text{Average number of employees} = \frac{\text{Employees at start of year} + \text{Employees at end of year}}{2}$$
$$\text{Average number of employees} = \frac{80 + 84}{2} = 82 \text{ engineers}$$

### Part (b)
$$\text{Labor turnover rate} = \left( \frac{\text{Number of employees leaving during year}}{\text{Average number of employees during year}} \right) \times 100$$
$$\text{Labor turnover rate} = \left( \frac{16}{82} \right) \times 100 \approx 19.51\% \text{ (or } 19.5\% \text{)}$$

### Part (c)
Daniel Pink’s theory states that modern knowledge workers (such as software engineers) are motivated by three intrinsic drivers rather than extrinsic rewards:

1. **Autonomy:** TechStart can give engineers self-direction over when they work (flexible hours), how they work (choosing their programming methods), and what they work on. For instance, implementing "20% time" where engineers work on their own self-selected development projects can significantly boost motivation.
2. **Mastery:** TechStart can provide opportunities for engineers to improve their technical capabilities and software skills. Offering access to advanced coding workshops, hackathons, or learning platforms satisfies their natural desire to get better at their craft.
3. **Purpose:** Software developers are often demotivated when they do not understand the "why" behind their work. TechStart can share how their applications directly benefit users or help resolve meaningful global challenges, linking daily coding work to a grander mission, which increases engagement and reduces the desire to leave.

**Part (a) [2 marks]**
* **2 marks:** Correct average calculated with working shown (82 engineers).
* **1 mark:** Correct formula shown but a mathematical slip occurred, OR the correct answer 82 is written with no working.

**Part (b) [2 marks]**
* **2 marks:** Correct labor turnover rate (approx. 19.51% or 19.5%) with working shown. (OFR applies if the average from part (a) was incorrect).
* **1 mark:** Correct method used but a mathematical slip occurred, OR the correct answer is written without the percentage symbol or working.

**Part (c) [6 marks]**
For each of the three dimensions of Pink's Drive theory (Autonomy, Mastery, Purpose):
* **2 marks:** Accurate description of the dimension and how TechStart can apply it directly to motivate software engineers.
* **1 mark:** A basic theoretical definition of the dimension with weak or no application to a software development environment.

### Part (a)
**Capacity utilization** is a measure of the extent to which a firm’s maximum potential output is being reached. It is expressed as a percentage of total capacity and calculated as:
\(\text{Capacity Utilization} = \left( \frac{\text{Actual Output}}{\text{Maximum Productive Capacity}} \right) \times 100\).

### Part (b)(i)
* \(\text{Current Capacity Utilization} = \left( \frac{1,020}{1,200} \right) \times 100 = 85\%\)

### Part (b)(ii)
To make a financially sound make-or-buy decision, only relevant (avoidable) costs of making internally should be compared to the cost of purchasing. Shared company allocated overheads ($20,000) will continue to exist even if production is outsourced, so they are ignored.

* **Cost to Make 1,000 units internally:**
* Direct Materials: $50,000
* Direct Labour: $30,000
* Variable Overheads: $10,000
* Specific Avoidable Fixed Costs: $15,000
* **Total relevant cost to make** = $50,000 + $30,000 + $10,000 + $15,000 = $105,000 (or $105 per unit).

* **Cost to Buy 1,000 units externally:**
* 1,000 units \(\times\) $110 = $110,000.

* **Financial Difference:**
* $110,000 (Buy) - $105,000 (Make) = $5,000.

* **Decision:**
* It is **$5,000 cheaper to make** the battery packs internally. Therefore, from a purely financial perspective, VG should continue to **make** the battery packs.

### Part (c)
Two non-financial factors VG should consider:
1. **Quality Control and Reliability:** Battery packs are a critical component of electric cargo bikes. If outsourced, VG loses direct control over the quality of materials and assembly. Poor external quality control could lead to defective products, damaging VG's brand reputation. Additionally, if the supplier suffers delivery delays, VG's entire final assembly line could stall.
2. **Intellectual Property and Proprietary Technology:** Electric bike battery design may involve proprietary technology or specialized setups that give VG a competitive advantage. Outsourcing to an external supplier risks intellectual property leakage, especially if the supplier works with VG's competitors.

### Part (d)
**Option 1: Outsourcing (Arguments For and Against)**
* *Pros*: Freeing up factory space and assembly labor allows VG to streamline final assembly, potentially boosting production of bikes beyond 1,020 to meet the sudden surge in demand. It simplifies the internal operational structure.
* *Cons*: As calculated, outsourcing battery production is more expensive by $5,000 per 1,000 units. It also risks quality issues, delivery bottlenecks, and potential job redundancies in the battery production unit, which could further damage remaining employee morale and increase resistance.

**Option 2: Herzberg's Motivator-Hygiene Theory (Arguments For and Against)**
* *Pros*: Addresses the root cause of the current 15% capacity shortfall (85% utilization). By improving hygiene factors (e.g., wages, better working conditions, clearer communication channels), VG can reduce dissatisfaction and absenteeism. By introducing motivators (e.g., job enrichment, giving assembly workers ownership over complete modules, performance recognition), VG can increase productivity and quality organically.
* *Cons*: Implementing job redesign and raising basic wages is highly complex, expensive, and takes significant time to yield results. It will not solve the immediate, short-term bottleneck of meeting the current spike in customer demand.

**Evaluation / Conclusion**
VG is facing both an immediate capacity shortfall and long-term structural motivation issues. In the short term, outsourcing might seem appealing to clear bottlenecks, but its higher financial costs and the risk of further demotivating workers due to job insecurity make it risky. Implementing Herzberg’s model is the more sustainable long-term solution because it targets the underlying human resource inefficiencies. A balanced strategy would be to maintain battery production in-house (as it is cheaper) but immediately begin addressing hygiene factors (wage structure and management communication) to unlock the remaining 15% of unused capacity internally, before scaling up physical expansion.

### Part (a) [2 marks]
* **1 mark**: For an incomplete or vague definition of capacity utilization.
* **2 marks**: For a clear definition showing understanding of actual output relative to maximum possible output over a period of time, including formula or reference to percentage.

### Part (b)(i) [2 marks]
* **1 mark**: For correct formula or working but incorrect calculation.
* **2 marks**: For correct calculation (85%) with clear working.

### Part (b)(ii) [2 marks]
* **1 mark**: For correct calculation of both totals (Make = $105,000; Buy = $110,000) OR correct financial difference ($5,000) but no clear decision stated, or inclusion of non-relevant overheads ($20,000) leading to incorrect decision.
* **2 marks**: For correct relevant cost calculations, identifying the correct financial difference of $5,000, and explicitly stating the decision to **make**.

### Part (c) [4 marks]
For each of the two factors:
* **1 mark**: Identify a relevant non-financial factor (e.g., quality control, supplier reliability, IP protection, impact on staff morale).
* **1 mark**: Appropriate application to VG (e.g., referencing battery performance, cargo bike delivery schedules, or assembly-line worker reactions).

### Part (d) [10 marks]
* **1–2 marks**: Very basic discussion showing limited understanding of outsourcing or Herzberg's theory. No balance or application to the case study.
* **3–4 marks**: Explains either outsourcing or Herzberg's theory, with some application to VG. Mainly descriptive, lacking balanced discussion.
* **5–6 marks**: A balanced discussion of both options, but lacks depth in theoretical application (e.g., does not clearly distinguish between hygiene factors and motivators) or lacks a clear, justified conclusion.
* **7–8 marks**: A balanced, well-applied discussion of both options, showing good understanding of make-or-buy trade-offs and Herzberg's framework. Includes an evaluation/conclusion, though it may lack some critical depth.
* **9–10 marks**: Excellent balanced analysis. Accurately applies Business Management terminology (hygiene vs. motivators, relevant costs, capacity constraints). The final recommendation is highly strategic, well-substantiated, and weighs short-term needs against long-term operational sustainability.