FGH is a private limited company. FGH has a tall hierarchical organisational structure. It is a book retailer which plans to take over one of its competitors for $800m. If the takeover happens, FGH would have 6500 bookshops across 20 countries. FGH's Managing Director said: 'We expect to reduce total costs by $300m each year after the takeover. We will stop all off-the-job training of employees.' The Managing Director thinks FGH would benefit from becoming a public limited company but some of the other directors cannot decide if this is a good idea.

Mark scheme

Marking points from the official mark scheme (May/June 2019). The mark or mark type is shown in brackets.

1. [2] Clear understanding [2]: Trained away from the work place by specialist trainers; Some understanding [1] : Trained away from the work place
2. [2] Clear understanding [2]: Sum of (total) fixed cost plus (total) variable costs; Sum of (total) direct and (total) indirect costs; Some understanding [1]: All the costs of the business.
3. [4] Knowledge [2 × 1] - award 1 mark for each advantage identified; Application [2 × 1] - award 1 mark for each explanation in context; Points might include: Many opportunities for promotion [k] in the 20 countries [app]; Managers have narrower span of control OR fewer people to supervise [k] so have more time to focus on the takeover [app]; Clear chain of command/ know their manager [k] in the book store [app]; Clear line of communication [k]
4. [6] Knowledge [2 × 1] - award 1 mark for each relevant advantage / disadvantage; Application [2 × 1] – award 1 mark for each relevant reference made to this business; Analysis [2 × 1] - award 1 mark for each relevant explanation; Relevant points might include: Advantages: Better access to capital [k] i.e. raising share capital from existing and new investors [an] to pay for the takeover [app]; Can give a company a more prestigious profile OR status [k] so more likely to be offered credit OR better interest rates as seen as lower risk [an] to raise capital to open more bookshops [app]; Shares tradeable on the stock exchange [k]; Disadvantages: Cannot control who buys the shares [k] so easier to be taken over [an] by other book retailers [app]; Shareholder may expect dividends to be paid [k]; Accounts published [k] allowing competitors to be able to see all their results [an] so the business FGH wants to take over might reject its offer [app]; Legal formalities need to be followed [k]; Divorce of ownership and control [k]; Do not award limited liability or separate legal identity as already has this as a private limited company.
5. [6] Knowledge [1] – award 1 mark for identification of relevant issue(s); Application [1] – award 1 mark for a relevant reference made to this business; Analysis [2] – award up to 2 marks for relevant development of point(s); Evaluation [2] – justified decision made as to whether FGH should take over the other business; Points might include: Does not spread risk [k] as still in book retailing [app] so falling demand for books will reduce FGH's sales [an]; Benefit from economies of scale [k] as would have 6500 shops [app] helping to reduce average costs [an]; Increase its market share [k] by removing a competitor [app]; Can they afford to pay the cost of purchase [k] of $800m [app]; Reduced total costs [k] means repayment of $800m [app] within 2.66 years OR 2 years 8 months [an]; Risk of diseconomies of scale [k] as communication errors may arise [an] across 20 countries [app]; Different management styles [k] may reduce productivity [an] across all the shops [app]; Cost savings may not happen [k]; Note: Cost of takeover $800m, saving $300m therefore payback will be by 2 years 8 months. (2.66 years); Note: accept examples of appropriate economies of scale [k]