Magical Mirrors (MM) MM manufactures a range of mirrors using flow production. MM benefits from economies of scale. Ben and Mary, the owners of MM, changed the legal structure of the business two years ago from a partnership to a private limited company. They are the only shareholders of MM and have recently increased their investment in the company. There are long lead times from MM's suppliers so MM maintains a high buffer inventory. This ensures that production can continue if there are any problems with deliveries. However, Ben is worried about the impact of high buffer inventories on MM's finances (see Table 1). Table 1: Key financial data as at 31 May 2017 ($m) Inventory 10 Trade receivables 5 Trade payables 5 Overdraft 5 MM has two major human resource problems: MM's labour turnover has been increasing and the number of people applying for jobs at MM is decreasing. MM currently pays high salaries to managers and high hourly rates to other employees. Mary has completed a survey of all MM's employees. The survey showed the following results. • 45% of all employees stated that they had low motivation. The percentage was higher amongst employees who work in the production process. 25% of all employees stated that the development of their skills was poor.

Mark scheme

Marking points from the official mark scheme (May/June 2017). The mark or mark type is shown in brackets.

1. [2] A correct definition
2. [1] A partial, vague or unfocused definition
3. [0] No creditable content
4. As a firm produces more the average cost falls [2] A correct definition
5. Unit costs decrease due to an increase in size [1] Partial
6. More output leads to a fall in costs [1] No link to decreasing average/unit costs
7. The savings a firm gets as it grows bigger [1] Partial idea of increase in output
8. Lower costs because the firm is established [0] No creditable content
9. [3] Example or some other way of showing good understanding, i.e. risky to hold too much/too little, link to liquidity, types of inventory (raw materials, in progress and finished) etc.
10. [3] An explanation of buffer, i.e. surplus, lowest amount etc.
11. [3] An explanation of inventory, i.e. stock, supplies to produce, etc.
12. Raw materials that are kept in event of a problem with supply or an increase in demand for its products. For example MM might have a buffer stock of mirrors in case they have an increase in customers. [3] Understanding of buffer and inventory and an example.
13. Stock that can be used in case there is a sudden increase in customers. The business will not want too much buffer inventory because it ties up money. [3] Understanding of buffer and inventory and good understanding shown.
14. Surplus stock to make sure the business does not run out [2] An understanding of both inventory and buffer.
15. The inventory a form will keep to make sure it does not run out. [1] Tautology with 'inventory' but an idea of buffer.
16. [3] Correct calculation of MM's acid-test ratio (with or without working)
17. [2] Correct formula and correct calculation of CL
18. [1] Correct formula or correct calculation of CL
19. [0] No creditable content
20. 15/10 = 1.5 [2] Correct calculation of ratio based on an incorrect formula (OFR) – only one mistake
21. 15/5 = 3 [1] Incorrect formula and incorrect calculation of CL, but figures used correctly (OFR) – two mistakes
22. 1.5 [0] An incorrect answer with no working
23. 3 [0] An incorrect answer with no working
24. [3] Explanation of a way to improve liquidity in context
25. [2] Identification of a way to improve liquidity
26. [1] Knowledge of liquidity
27. [0] No creditable content
28. Way to improve liquidity: Increase cash (e.g. by holding less inventory, fixed assets etc.)
29. Possible context: MM holds $10 m of inventory – high buffer inventories / MM is a manufacturer so probably has machines etc. to manufacture mirrors / Has an overdraft so will need more than $5 m to have positive cash
30. Way to improve liquidity: Increase current assets (e.g. increase trade receivables/debtors)
31. Possible context: Trade receivables (debtors) is $5 m / MM is a manufacturer (secondary) so may gain other benefits from increasing debtor turnover/period
32. Way to improve liquidity: Decrease current liabilities (e.g. decrease trade payables, overdraft, short term loans etc.)
33. Possible context: Trade payables is $5 m, same as trade receivables - could be better to have lower payables than receivables / Long lead time may make reducing payables difficult / Could reduce overdraft through same ways as increasing cash. / Convert $5 m overdraft into longer term debt.
34. Possible advantages: Gain limited liability
35. Context for limited liability: Ben and Mary were in a partnership before and so had higher risk should MM fail that they would lose not only their investment but would be personally liable for the debts of MM
36. Context for limited liability: Ben and Mary doubled their investment
37. Possible advantages: Gain continuity
38. Context for continuity: In case Ben or Mary die
39. Possible advantages: Gain separate legal identity
40. Context for separate legal identity: In case the business gets sued
41. Possible disadvantages: Loss of control
42. Context for loss of control: Ben and Mary have owned and run the business for such a long time (however they are the only shareholders so unlikely to be an issue)
43. Possible disadvantages: Cost of conversion
44. Context for cost of conversion: Unlikely to be high but MM has poor liquidity – was this the cause?
45. Possible disadvantages: Preparation and availability of accounts
46. Context for accounts: Cost – link to liquidity
47. Context for accounts: Competitors will be able to access the accounts
48. Training and development: Survey shows this was rated poor by 25% of all employees. This is high. Therefore MM should ensure that employees have appropriate training to develop their skills and improve their morale. This may also help with opportunities for promotion.
49. Team working: Morale is lower for employees involved in the production process and this may link to the flow production methods. Therefore team work may improve this as employees can work together and improve their sense of involvement.
50. Fringe benefits and perks: Although MM pay well, they could look at their perks and fringe benefits such as holiday periods as this may be a reason.
51. Empowerment and participation: Doing some focus groups with employees and/or creating worker representatives may enable MM to better understand the issues and therefore resolve them.
52. Problem: Increasing labour turnover; Possible solution: Increase wages – link to retention; Example of analysis: Already high. Increased costs.
53. Problem: Increasing labour turnover; Possible solution: Use non-monetary motivation (e.g. holidays, perks, fringe benefits etc.); Example of analysis: Could increase costs – may be an alternative to higher wages.
54. Problem: Increasing labour turnover; Possible solution: Increase training/skills development; Example of analysis: Increased costs - could be wasted if staff leave.
55. Problem: Increasing labour turnover; Possible solution: Better/more advertising; Example of analysis: Increased costs - what is the cause of the fall? Demographics, word of mouth etc.
56. Problem: Decreasing applications; Possible solution: Increase wages; Example of analysis: Already high. Increased costs.
57. Problem: Decreasing applications; Possible solution: Increase training/skills development; Example of analysis: Could improve word of mouth – may attract younger applicants, but increased costs.
58. Problem: High management and labour costs; Possible solution: Reduce wages; Example of analysis: Decrease motivation and increase labour turnover further.
59. Problem: High management and labour costs; Possible solution: Change payment system (i.e. piece rate, retention bonus etc.); Example of analysis: May not increase costs (could fall) and may increase retention, but may demotivate some workers.
60. Problem: High management and labour costs; Possible solution: Increase capital/reduce labour; Example of analysis: Needs investment - already using flow production - could reduce quality, may further reduce motivation.
61. Problem: Low motivation – lower in production workers; Possible solution: Improve hygiene factors (poorer in production); Example of analysis: Are conditions poor? If so can it be improved without increasing costs?
62. Problem: Low motivation – lower in production workers; Possible solution: Teamwork/cell production; Example of analysis: May conflict with flow production.
63. Problem: Low motivation – lower in production workers; Possible solution: Increase training/skill development; Example of analysis: Increased costs but could improve quality and retention.
64. Problem: Poor skills development; Possible solution: Increase training/skill development; Example of analysis: Increased costs but could improve quality and retention.
65. Problem: Poor skills development; Possible solution: Increase capital/reduce labour; Example of analysis: Needs investment – already using flow production – could reduce quality, may further reduce motivation.
66. Problem: Poorly trained/skilled workers; Possible solution: Increase training/skill development; Example of analysis: Increased costs but could improve quality and retention.
67. Problem: Poorly trained/skilled workers; Possible solution: Increase capital/reduce labour; Example of analysis: Needs investment – already using flow production - could reduce quality, may further reduce motivation.