Unit 4 Sample Answers

Essential Business Studies for Cambridge IGCSE® and O Level

Sample Answers to Practice questions

Unit 4 Operations management

Section 1: Short-answer questions

1. Likely objectives of the production department will include meeting volume production targets,
meeting quality standards, keeping to cost budgets, reducing the level of wastage in the
production process and similar. Objectives should be measurable, so for instance actual
production to reach 98% of target production.
Understanding of objectives plus examples [4]

2. The inputs are food products such as beef, chicken, bread, potatoes. Other ingredients will be
added. The production process involves the selecting and mixing of ingredients and the cooking
of the products. The output is the finished burger or other similar products.
Identification of inputs/production process/output [3]

3. Productivity is a measure of the effective use of resource inputs in a productive process. It is

calculated by the ratio of quantity of output/quantity of inputs. Anything that improves this
ratio is a productivity gain. So in a clothing factory this could be achieved by installing machines
that cut out/ sew garments faster (more clothes produced per day) / improved layout of
resources in the factory so that workers can get access their resources faster / change the
production process so that flow methods are used.
Two examples plus explanations [4]

4. Measure of labour productivity is number of shirts produced/number of workers. 500 shirts/200

workers = 2.5 shirts per employee per hour.
Mark for formulae/mark for substituting in the correct values /mark for correct answer [3]

5. Batch production is when a number of similar products is produced in a set. Flow production
involves passing products down a line of production. The production process is repetitive. So the
differences between batch and flow production are that flow is associated with large quantities;
identical products are made using a uniform process; production methods usually involve a clear
division of labour; production is often automated or similar. Batches are groups of products
produced together, such as cupcakes in a tin and, once completed, production changes to
something else, for instance a different flavour.
Identification of two differences plus explanation [4]
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6. A characteristic of flow production is that production is large scale volumes of identical

products. A feature of job production is that products are often made in response to the needs
of an individual customer. So a factory line that produces the same model of car with
modifications to meet individual customer orders combines both processes to a degree. In
practice, the cars are very similar but the modifications are often quite superficial such as
different colour trim or fog lights.
Identification of two reasons [same model but some differences] [2] / Identification of two
features of flow and job methods [2] / Linkage of the ideas in an explanation [2] [6]

7. An economy of scale is a financial advantage associated with production on a large scale. In the
case of a jeans manufacturer, these advantages are likely to be associated with bulk buying of
material from suppliers (lower unit purchase costs due to negotiated discounts), and the use of
highly specialised machines for cutting garments which reduce the time needed to produce a
garment. (Cost of such a machine is not justified if output levels are low.) Other similar examples
possible, such as marketing costs spread over a larger number of garments.
Two examples plus explanation [4]

8. Technology in this context includes any system/application that makes customer ordering and
meeting of orders faster/more accurate. It can also include cooking processes. Typically fast
food restaurants use ‘touch screen’ customer ordering and/or similar used by employees.
Cooking methods include automated timing and processes.
Identification of twoexamples of technology plus explanation [4]

9. Defects means the goods produced do not meet the required standard and they have to be
thrown away or reworked. In bread-making, this might be a walnut bread loaf without any
walnuts! Overproduction means producing more than the customers demand. In the context of
bread manufacturing, products have a short shelf-life because the product goes stale. This
means that overproduction leads to bread being thrown away. Waiting implies inefficiency in a
system when different parts of the process are not working entirely in unison. In bread-making,
this might imply that loaves cannot be baked immediately because the capacity of the ovens is
not large enough to cope. This is a problem because the whole production process is slowed
down.
Three examples plus explanation [6]

10. Just-in-time cuts down on costs because it reduces the amount of goods and materials that a
business holds in stock. In the above examples, producing products to the wrong specifications
means holding stocks of unsaleable products. Overproduction is eliminated in a just-in-time
system because products are only made as and when needed: speed of production matches
customer orders. Likewise, waiting in a system is eliminated because processes are brought into
harmony. Thus, just-in-time reduces all the wastes in the process.
Link of just-in-time principles to waste identified [3 examples] plus explanations as to how it
deals with the problem [6]
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11. Kaizen is a process of continuous improvement. Employees are asked to contribute to this
process by identifying areas where potential improvements could be made and to recommend
methods of implementation. Thus employees do not simply do their formal job as per their job
description; they are also ‘consultants’ and problem solvers.
Identification of the nature of kaizen characteristics plus link to employee’s job [4]

12. Quality control implies the checking of finished products to make sure they reach specified
standards. Quality assurance attempts to stop faults occurring in the first place, by checking
throughout the process. Thus two main differences are that quality control corrects faults that
have occurred, while quality assurance prevents faults from occurring.
Identification of two differences plus explanations [4]

13. Quality assurance aims to ensure that products match up to the required standards. There might
have been a compromise between quality and cost. Perhaps making the best quality would be
too expensive and customers might not be able to afford them .Acceptable products meet
customer needs at prices that are affordable. The aim of quality assurance is to ensure that
specified product qualities are met.
Identifying the difference between best and acceptable and link with quality assurance [2] /
explanation and analysis [2] [4]

14. Total quality management means that all employees seek to improve the quality of what they
do at all times. If this is achieved quality of the end ‘product’ will improve. At the same time
costs will be reduced because sub-standard products are not produced or are reworked or
thrown away. All three outcomes push up costs.
Identification of issues [2] plus analysis [4]

15. A variable cost is one that changes as the level of production changes. A fixed cost is unrelated
to the level of output and hence does not change. Some labour costs are variable because
employees are paid on a piece-rate basis. However, the salaries of management or supervisors
are agreed at the start of the year and do not vary as production levels change. So some labour
costs (wages) are variable while other labour costs (salaries) are fixed.
Understanding of variable and fixed costs [2] / application to labour costs [2] [4]

16. For a fish canning plant, the factors affecting their location decision will include – nearness to
fishing port,/cost of local labour / transport costs to markets / availability of government
financial assistance / ease of planning permission/ cost and availability of land.
For a firm of lawyers the factors might include – amount of local competition / nearness to
potential customers / rent of offices.
Mark per valid point made [6]

Section 2: Longer-answer questions

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Daisy Fresh Cleaning

1. The main method of production used by the business is batch production. A ‘group’ of clothes is
serviced at a specified time. Elements of job methods are also used as the items are pressed
individually and hence are ‘one offs’, and so are delicate items which are treated separately.

Two methods plus explanation [4]

2. The quality of Flora’s service can be judged by the number of items of clothing that are sent
back to be cleaned or pressed again. If this figure is low then her service must be of acceptable
standard. Also her ability to ‘clean’ the clothes in a given time is a measure of the quality of her
service. If she returns all clothes within the stated 12 hour ‘promise’, then her service is hitting
its quality target. It would also be possible to measure the quality of her service by looking at
the number of regular customers the business has. This figure is a good indicator of customer
satisfaction which in turn reflects the perceived quality of the service offered.
Two ways plus explanation [4]

3. Fixed costs might include the insurance of the vehicle that she uses to collect the clothes, and
the interest costs of any loans she has used to purchase the industrial machines she owns. These
costs are fixed because they do not change as the volume of work she does changes. The
variable costs would include the fuel costs of the vehicle and the washing powder used in each
wash.
Two examples of fixed costs plus explanation as to why these costs are fixed [3] plus same for
variable costs [3] [6]

4. Factors Flora needs to consider in looking for new premises are

 the cost of the rent (fixed costs)
 the distance the premises are from her customers (cost of transport plus ability to meet the
12 hour return target)
 size – premises must be large enough to house the number of industrial machines she
intends to use (business intends to expand)
Three factors each explained in context [6]

5. The advantage of a break even chart is that it allows the business to predict the number of
‘units’ sold if all costs are to be covered (to break even). It also allows the business to forecast
the level of profit at different output levels. In this case, the units are ‘groups’ of clothes
cleaned. The disadvantage of the chart is that it is based on certain assumptions which may not
hold in practice. For example, the price charged for her services will vary depending on whether
the wash involves delicate fabrics. Break even charts assume that all ‘units’ are sold at the same
price, so the chart is of use in forecasting whether a service is likely to be profitable but it is only
a rough guide. It is therefore of limited value.
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However, premises in different locations might have different fixed costs. This means that the
break-even will be different at the various locations, so the method might be useful in assessing
how profits might differ in various locations. Thus the method will allow Flora to recognise that
different locations have different costs and this is an important element in location decision
making.

2 marks to be awarded for stating advantages and limitations / 2 further marks for explaining
them in context / 2 marks for evaluation of the concept [6]

Amrita’s fair trade spices

1. The term ‘fixed costs’ means those costs incurred by the existence of the business that are
unaffected by the number of packs of spices the business ‘produces’. The total of Amrita’s fixed
costs per month is $1700.
Explanation of term [1] calculation [2] [3]

2. Variable costs are those costs that are directly incurred by the process of producing a package of
spices. The total of the variable costs per pack is $4.5.
Explanation of term [1] plus calculation [2] [3]

3. By paying a fair trade price to the supplier, Amrita is ensuring that the grower will continue in
production (because they make an ‘acceptable’ profit) and hence she will always have a source
of supply of herbs necessary for her spice business. A disadvantage of paying the fair trade price
is that it increases the variable cost per packet of spices and this makes Amrita’s business less
competitive.
Advantage plus explanation in context [3] Same for disadvantage [3] [6]

4. Break-even is 309 packets per month i.e. F.C/unit contribution = $1700/$5.5. [6]

5. The margin of safety is difference between break-even output and actual output. So , on
average, 800 -309 packs = 491 units. Profit will be the number sold above break even x
contribution, so 491 X $5.5 = $2700.50 [6]

The market research call centre

1. Productivity is calculated by dividing the output of ‘products’ by the inputs of resources used.
Productivity of his staff might be measured by the number of calls made per employee per day
and by the number of reports written by the staff per day /per week.
Two measures of productivity plus explanation in context [4]

2. If the staff are frequently absent, the number of calls made per day by the centre will fall. This
too is a productivity measure and hence his business’s productivity will be low. New staff may
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need to be trained and initially might be ‘slow’ at their job. Hence their ‘output’ may also be
low. This too reduces productivity of the call centre.
Two reasons plus explanation [4]

3. The factors he needs to consider before relocating the call centre to India include the availability
of suitably skilled labour including language skills/ the wage rates in India for that type of
labour / the overhead costs associated with the move.
Identification of factors plus explanation in context [4]

4. The idea that the move to India will save ‘money on land and labour costs’ rests on certain
assumptions. The case tells us that wage costs in the UK are rising rapidly and that land is
expensive. If hourly wage rates in India are lower and he employs the same number of workers
then the wage costs would fall. This assumes that no extra training costs are needed and
recruitment costs are not taken into account. Likewise if land costs such as rent are lower in
India then such a move would also cut costs. So the view that it would save money has some
validity. However land and labour costs are not the only costs that need to be considered. The
whole relocation will cause disruption to the business and this will cost the business money.
Also the variable cost per call made by the centre may rise and this too will increase costs.
However on balance it is probably true that such a move would prove to be cost effective.
Analysis of issues plus evaluation [6]

5. The customers of Jim’s business are companies that need the information produced by the call
centre. They are interested in perhaps three things – the cost of each report / the speed of
production of the reports / the accuracy of the findings of the report. The move to India may
affect these three factors but not necessarily harm them. It might be cheaper for each report to
be produced especially if labour costs are lower and productivity rises. The speed of production
of the reports should not be affected by the location of the call centre. The only possible adverse
effect would be if the accuracy of the research was reduced because Indian staff might find it
more difficult to get UK customers to respond to their research calls. Thus Jim’s customers could
benefit from the move but on balance are not likely to be affected much either way.
[It would be possible to argue more positively either for or against the move]
Analysis of issues plus evaluation/justified conclusion [6]