IB BUSINESS MANAGEMENT HL, Paper 2, November, 2005, TZ0, Solved Past Paper

Comfort is a private limited company that specializes in selling garden furniture. The company is owned by four members of the Rodriguez family and operates ten stores across the country. Known for its quality and service, Comfort is highly profitable and aims to expand its market share by 10% over the next two years. The garden furniture market is growing, but competition is increasing, making it crucial for Comfort to choose the right growth strategy. Dan Rodriguez, the Finance Director, is tasked with deciding between two growth options: setting up a franchising operation or going public by floating 49% of the company on the stock market. Despite its profitability, Comfort lacks the internal capital needed to finance its desired growth.

Stay in Touch is a prominent national company known for its good reputation in manufacturing and marketing mobile phones. To enhance its competitiveness in both international and domestic markets, the management is considering outsourcing the production of mobile phones to Speedy, a specialized manufacturing company located in a developing country. Speedy is currently operating below full capacity and is looking for more business opportunities. By contracting out production, Stay in Touch aims to focus more on research and development and marketing activities. The company has set a target profit of $\mathrm{\$}15$ million.

Currently, Stay in Touch produces 1 million units annually, with variable costs of $\mathrm{\$}10$ per unit and total fixed costs of $\mathrm{\$}5$ million. Each mobile phone is sold for $\mathrm{\$}25$ per unit. If production is outsourced, Stay in Touch will save $\mathrm{\$}5$ million in fixed costs. Speedy will charge $\mathrm{\$}13$ per phone for manufacturing.

Speedy’s current production level is 10 million units per year, which is 2 million units below their full capacity. Their variable production costs are $\mathrm{\$}12$ per unit, with fixed costs of $\mathrm{\$}60$ million. They sell phones to other companies at $\mathrm{\$}20$ per unit.

The following questions require you to perform calculations and make evaluations based on the provided information.