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) | Trade receivables | 26 | |:------------------|:---| | Cash | 19 | | Inventory | 1 | | Trade payables | 30 | | Other current liabilities | 20 | 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.

Mark scheme

Marking points from the official mark scheme (May/June 2022). 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. A correct definition should cover the following:
5. The period between the start of a process and the completion of that process such as the time period between placing an order and receiving the goods.
6. Must have both starting and finishing a process for two marks. Vague statements such as the time a process takes only 1 mark.
7. Exemplar: The amount of time taken between the placing an order and delivery [2] both starting and finishing an order process
8. Exemplar: The time taken to receive inventory from when it was ordered [2] Time between order and delivery identified
9. Exemplar: Time between delivery and reorder of supplies [2] (BOD) This is not lead time, this is backwards
10. Exemplar: The time it takes for an order to be delivered [1] Order time not identified
11. Exemplar: How long it takes to get an order [1] BOD finish time
12. Exemplar: The amount of stock a business keeps as a buffer [0] Wrong definitions
13. [3] Award one mark for each point of explanation.
14. [1] C Example or some other way of showing good understanding – e.g. communicates to stakeholders what the business stands for/ helps establish aims and objectives
15. [1] B One mark for understanding of the concept of aims and values (mission)
16. [1] A One mark for understanding that it defines a company or organisation's reason for being (statement)
17. [0] No creditable content
18. Note: C mark can only be awarded if A and B marks have already been awarded
19. Exemplar: A vague and general phrase that transmits what the business is about and motivates workers [3] Describes what it is (vague), what it is for (transmits values) and a benefit (motivates)
20. Exemplar: A phrase that represents the business core objectives and motivates employees [3] All points met
21. Exemplar: A phrase that represents the business core objectives [2] A and B only
22. Exemplar: A document that tells stakeholders the business values [2] A and B
23. Exemplar: A statement that motivates employees [1] A only - C not awarded
24. Exemplar: The aims and objectives of a business [1] Part of a mission statement – limited understanding
25. [4] Correct answer (with or without formula)
26. [3] Attempt using correct figures
27. [2] Correct formula and calculation of current assets or current liabilities OR Correct calculation of current assets and current liabilities
28. [1] Correct formula
29. [0] No creditable content
30. current assets – inventory / current liabilities (1)
31. Current Assets = 26 + 19 + 1 = 46
32. 46 – 1 = 45
33. Current Liabilities = 30 + 20 = 50 (2)
34. 45 / 50
35. = 1 : 0.9 (accept 0.9) or 9:10
36. Common incorrect answers
37. 45/50 [3] This is a fraction, ratio/calculation not completed
38. 45:50 [3] Has not been simplified
39. 46/50 = .92 [3] Correct current ratio - OFR
40. 46/50 [2] Correct calculation of current assets and current liabilities
41. Level 2 (APP) [2] Explanation of one use of the acid test ratio in context
42. Level 1 (K) [1] Identification of one use of the acid test ratio
43. Level 0 [0] No creditable content
44. Content is likely to come from:
45. • Measure of liquidity to see if it can cover short term debts without selling inventory
46. • Check the risk of illiquidity
47. • To gain finance/investment
48. Context is likely to come from:
49. • At 0.9 it is below the industry average
50. • Any relevant data from Table 2.1
51. • Investment of $4m
52. Exemplar: 0.9:1 is less than industry average and can signify liquidity problems [2] Context and content
53. Exemplar: To see if it can cover short term debts without selling inventory [1] No context
54. Exemplar: Measures liquidity [1] No context
55. Exemplar: Check the risk of illiquidity [1] No context
56. Exemplar: Ratio calculation only [0] No usefulness
57. ARA
58. Level 2 [4] Understanding of two benefits of JIT in context [4] Developed analysis of two benefits of JIT in context
59. Level 2 [3] Understanding of one benefit of JIT in context [3] Developed analysis of one benefit of JIT in context
60. Level 1 [2] Knowledge of two benefits of JIT [2] Limited analysis of two benefits of JIT
61. Level 1 [1] Knowledge of one benefit of JIT [1] Limited analysis of one benefit of JIT
62. Level 0 [0] No creditable content
63. Generic benefits may include:
64. • Reduces waste and overstocking
65. • Improves financial efficiencies / reduces capital invested in stock
66. • Reduces storage costs
67. • Reduces risk of obsolescence
68. Application may include:
69. • Large plc with B2B model
70. • Mission statement is 'to be the world leader in delivering quality motorcycle components to our customers'
71. • Motorcycle component industry is very competitive and MC's customers expect high-quality and a short lead time
72. • Good relationships with its suppliers ensure that JIT operates efficiently.
73. • Liquidity management is very important
74. • Industry average for the acid test ratio is 1
75. • automation of the production process
76. Analysis of benefits may include:
77. • Reduction in fixed costs as warehouse/storage not required to store raw materials - which improves profit
78. • Storage space no longer needed and could be used to expand production
79. • Decrease in labour costs as fewer people required in warehouse as no need to receive, store, then move inventory to production – increases profit
80. • Reduction in costs should mean increased profit – which could be used towards funding expansion
81. • Improved cash flow as only order inventory as needed to fulfil customer orders – more money for expansion
82. ARA
83. A justified judgement on the importance of the impact [7]
84. A judgement on the importance of the impact [6]
85. An evaluation statement of the given arguments of an impact in context [5]
86. Understanding of two effects of process innovation in context [4] Developed analysis of two effects of process innovation [4]
87. Understanding of one effect of process innovation in context [3] Developed analysis of one effect of process innovation in context [3]
88. Knowledge of two effects of process innovation [2] Limited analysis of two effects of process innovation [2]
89. Knowledge of one effects of process innovation [1] Limited analysis of one effect of process innovation [1]
90. * Two effects can come from one impact
91. Note: Use of a process innovation (i.e. Capital expenditure is acceptable for Application without explicit reference to process innovation)
92. Knowledge of effects/impacts of process innovation
93. • Increases/expands competitive advantage
94. • Develops performance by decreasing costs
95. • Enhances quality
96. • Makes the best use of competencies, skills and/or knowledge
97. • Builds a culture of continuous learning
98. Application is likely to come from:
99. • Large plc with B2B model
100. • Mission statement is 'to be the world leader in delivering quality motorcycle components to our customers'
101. • Motorcycle component industry is very competitive and MC's customers expect high quality and a short lead time
102. • Good relationships with its suppliers ensure that JIT operates efficiently
103. • Liquidity management is very important
104. • automation of the production process
105. Analysis likely to come from: Impact should focus on MC and could be: positive
106. • Creates shorter lead times – which may increase orders due to high expectations
107. • Matches high customer quality expectations – increases sales revenue
108. • Links to mission statement (increased quality) – better dividends/marketing opportunity
109. • Reduced costs – eases cash flow pressures/acid test
110. • Increased market share as the industry and suppliers are competitive – better brand image
111. negative
112. • Image/reputational damage e.g. if redundancies happen – poor publicity
113. • Results in redundancies - increases costs
114. • Negative impact on morale – lower productivity
115. • Cost of automation – reduces profits/dividends
116. Other
117. • Process innovation may improve efficiency however this could result in redundancies – reducing the need for some employees – may be seen as not socially responsible (damage to image, want to be world leaders) and lead to lower sales - reduced revenue and profit
118. • Impact on employees and morale – fear of redundancies, change, could affect quality of work and conflict with the mission statement
119. • The industry and suppliers are competitive, so process innovation will reduce cost pressures and assist MC in being price competitive, however, other firms may also introduce new processes so less of an impact on MC
120. • Lower costs could allow MC to become more price competitive, increasing revenue (if PED is elastic), leading to higher profit and increasing share value, but other firms could retaliate and start a price war resulting in losses for MC
121. Evaluation is likely to come from:
122. • An evaluation of the possible impact on MC of introducing process innovation
123. • A judgement in the outcomes of process innovation
124. • An evaluation on the level of argument
125. • What the judgement/evaluation may depend on: cost, reputation, customer reaction, supplier ability to deliver quantities of inventory, sources of finance, shareholder expectations
126. Exemplar K: Decreases costs [APP: Helps ATR of 0.9:1] [AN: Which improves shareholder value] [DEV: So the $4mn cap ex will be approved] [EVAL: The impact is likely to be positive As the investment into new machinery will improve lead time and quality]
127. Exemplar K: Increases redundancies [APP: From $4mn capital expenditure into automation] [AN: Increases reputational damage] [DEV: Which could be used by competitors negative advertising] [EVAL: Which is likely more important to business customers than a reputation for laying off staff]