Decision Tree [94 marks]

1a. [2 marks]
Aroma Corporation (AC)
Aroma Corporation (AC) is a mass-market cosmetics company that produces soaps.
Concerned about falling market share and profit, AC conducted new market research.
The senior management team is considering two strategic options.
• Option 1: research and develop new environmentally friendly soaps
• Option 2: buy new machinery to produce more of the current products
The probabilities, forecast costs and revenues of each option are given below:

Describe one method (source) of secondary market research that AC could have used.
1b.
Aroma Corporation (AC)
Aroma Corporation (AC) is a mass-market cosmetics company that produces soaps.
Concerned about falling market share and profit, AC conducted new market research.
The senior management team is considering two strategic options.
• Option 1: research and develop new environmentally friendly soaps
• Option 2: buy new machinery to produce more of the current products
The probabilities, forecast costs and revenues of each option are given below:
[N/A]
1c. [6 marks]
Construct a fully labelled decision tree, calculate the predicted outcome for each option and
identify the best option for AC (show all your working).
1d. [2 marks]
Explain one limitation of using a decision tree as a planning tool for AC.
2a. [2 marks]
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]
Define the term supply chain.
2b. [2 marks]
Calculate:
the total contribution of existing meals sold per month (show all your working).
2c. [1 mark]
Calculate:
the total profit or loss on existing meals for May 2018 (show all your working).
2d. [2 marks]
Calculate:
the forecast profit or loss if Jill decides to make and sell gluten-free meals (show all your
working).
2e. [1 mark]
Calculate:
the contribution per unit of a gluten-free meal if Jill decides to buy-in the gluten-free meals
(show all your working).
2f. [2 marks]
Using your answer from (b) (iii) and (iv), explain whether Jill should buy-in or make the
gluten-free meals herself.
3a. [2 marks]
The Indian manufacturer has made a test batch of 100 IBAT lenses and these are being
checked by Falit.
Didi has further investigated costs and Emma has conducted market research to identify
potential customers. Didi is concerned at how many IBATs Medimatters would need to sell
for the venture to be worthwhile. He forecasts the following:
• Fixed costs: $9000 per month.
• Variable costs: $50 per IBAT.
• Sales price: $80 per IBAT.
Ahmed considered his role as leader.
• He has consulted widely on a draft business plan and has discussed and agreed the
mission and vision statements because he wants to involve everyone.
• The group are all very enthusiastic about IBAT, although some are anxious about the
risks involved and have asked for more guidance.
• He spends a lot of time keeping everyone informed of project developments in
addition to coordinating all of their efforts.
• Emma has many ideas about expanding into new markets, however, Didi does not
agree and has argued with Emma.
• He is prepared to make urgent decisions himself. For example, without consultation he
decided that Medimatters should become a private limited company.
Define the term vision statement.
Refer to case study: Medimatters
3b. [2 marks]
Calculate the forecasted break-even quantity per month for the IBAT (show all your
working).
Refer to case study: Medimatters
3c. [2 marks]
Calculate the forecasted monthly profit or loss if Medimatters sells 400 IBATs per month
(show all your working).
Refer to case study: Medimatters
3d. [4 marks]
Explain two relevant secondary market research methods (sources) that Emma could have
used to identify potential customers.
Refer to case study: Medimatters
3e. [10 marks]
“Ahmed considered his role as leader.” Recommend an appropriate leadership style for
Ahmed.
Refer to case study: Medimatters
4a. [2 marks]
Café Lucchini (CL)
Fabi Lucchini will open the only café, selling hot and cold drinks only, in her small village.
The economy is weak so the local government will pay 50 % of the rent for the premises in
which CL will operate.
Fabi has forecasted the following figures for the first six months of operation, beginning on
1 July 2016:

An option is to install cooking facilities and serve meals to increase CL’s sales revenue. Fabi
estimates that she could sell 40 meals per day at an average variable cost of $5 and at an
average sales price of $10. Serving meals would increase her fixed costs by $3000 per
month.
Define the term fixed cost.
4b. [2 marks]
Calculate the break-even quantity of meals that CL must sell to pay for the increase in fixed
costs of $3000 to provide these meals (show all your working).
4c. [6 marks]
Using the information in the table only, prepare a monthly cash flow forecast, for CL, for
the first six months of operation.
5a. [2 marks]
Parder
Parder manufactures ride-on (riding) lawnmowers.
Selected forecast financial data for the ride-on lawnmowers, for 2016:

Define the term variable costs.

5b. [2 marks]
Calculate for Parder, for 2016, the break-even level of output (show all your working).
5c. [4 marks]
Construct a fully labelled break-even chart, to scale, for Parder, for 2016.
5d. [2 marks]
Calculate the profit or loss if 700 ride-on lawnmowers are sold in 2016 (show all your
working).
6a. [4 marks]
EcoCycle
Dan Perdue is a sole trader who sells bicycles. His unique selling point (USP) is bicycles that
are made from recycled materials using environmentally friendly processes. Dan’s
customers are willing to pay high prices for these types of bicycles, and they have a price
inelastic demand. Currently Dan purchases the bicycles from GreenRide, a local
manufacturer. GreenRide bicycles are well made, rarely have defects, and are well known to
environmentally conscious cyclists. The income elasticity of demand for Dan’s bicycles is
greater than one.

The economy is forecasted to grow in the upcoming years. To take advantage of the growth
potential, Dan is considering forming a partnership with David Brown, a skilled mechanic
who knows how to manufacture bicycles. Both Dan and David would be equal partners and
split the profits. The partnership will begin on 1 January 2016 and would trade under a
newly created brand, EcoCycle. Recycled materials and environmentally friendly processes
would be used to manufacture all the EcoCycle bicycles.

Dan, however, conducted primary market research which indicated that respondents were
only willing to pay a much lower price for the untested, unknown brand EcoCycle.
Describe one advantage and one disadvantage, for Dan, of using primary market research.
6b. [2 marks]
Using Table 1, calculate for Dan, for 2015, the break-even number of bicycles (show all
your working).
6c. [2 marks]
Using Table 1, calculate for Dan, for 2015, the total profit (show all your working).
6d. [2 marks]
Explain one benefit for Dan of the income elasticity of demand for his bicycles being
greater than one.
6e. [2 marks]
Using Table 2, for the new EcoCycle bicycles, for 2016, calculate the price that Dan must
charge to earn a target profit of $20 000 (with sales of 200 EcoCycle bicycles) (show all your
working).
6f. [2 marks]
Using Table 2, for the new EcoCycle bicycles, for 2016, using your answer to part d(i), and
assuming that Dan reduces this price by 5 %, calculate the number of bicycles EcoCycle
must sell to still have a target profit of $20 000.
6g. [4 marks]
Explain two reasons why branding of the new EcoCycle bicycles will be important.
6h. [6 marks]
Examine Dan’s decision to create a partnership with David to manufacture and sell
EcoCycle bicycles.
7a. [2 marks]
Sassy
Sassy, a partnership between fashion designers, produces clothes for teenagers. Capacity
utilization is very high.
The partners are considering some strategic changes. After conducting research, they
presented three options and outlined the costs and expected revenue. They also predicted
that the economy would either improve or stay the same. The probability of the economy
staying the same is 0.3.
The options, costs and expected revenue are given below:
Table 1: Information relating to the three strategic options for change
Describe one disadvantage for an organization of operating at high capacity utilization.
7b. [6 marks]
Construct a fully labelled decision tree and identify the best option for Sassy (show all your
working).
7c. [2 marks]
Explain one limitation for Sassy of using a decision tree as a planning tool.

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