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9609 · 1.4.2

Objectives and business decisions — practice questions

Practice and worked examples for 9609 Objectives and business decisions. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A fashion retailer states its CSR objective is to use only sustainable cotton, but profits fell 15% last year. The CEO is considering switching back to cheaper, conventional cotton to restore profitability. Analyse this decision in the context of conflicting objectives.

Show solution outline

CSR Objective vs. Profit Objective: The core conflict is between the long-run objective of building an ethical brand (CSR) and the short-run objective of profit maximisation (or profit restoration).

Analysis of Switching Back:

  • Argument for: Switching back would immediately reduce variable costs, likely increasing the gross profit margin and overall profitability. This would please shareholders and ease cash flow pressures.
  • Argument against: This decision would mean abandoning a key CSR objective. It could lead to significant brand damage, alienate eco-conscious customers, and result in negative publicity. The long-term loss of customer loyalty and brand value could be far more damaging than the short-term profit gain.

Potential Trade-offs and Alternatives:

  • Satisficing: Instead of a full reversal, the retailer could use a blend of sustainable and conventional cotton, balancing cost and CSR.
  • Marketing: Communicate the value of sustainable cotton more effectively to justify a price premium, potentially improving revenue.
  • Efficiency: Seek cost savings in other areas of the business (e.g., logistics, overheads) to fund the higher cost of sustainable cotton.

Recommendation: Reversing the decision completely is a high-risk strategy that could permanently damage the brand. A better approach would be to explore alternatives that balance the conflicting objectives, such as adjusting the product mix or focusing on operational efficiencies to offset the higher material costs. This demonstrates a commitment to CSR while acknowledging financial realities.

Worked example 2

A company, 'GadgetCo', has a primary objective to increase its market share from 10% to at least 12%. A secondary objective is to not let annual profit fall below $1.5 million. The total market is 2 million units annually. GadgetCo currently sells 200,000 units at $50 each, with a variable cost of $25 per unit and annual fixed costs of $3 million. Analyse two options:

  • Option A: Cut the price by 10%, which is forecast to increase sales volume by 20%.
  • Option B: Launch a $500,000 marketing campaign, forecast to increase sales volume by 15%.

Recommend which option GadgetCo should choose.

Show solution outline

Step 1: Calculate Current Position

  • Current Profit:
    • Revenue = 200,000 units * 50=50 = 10,000,000
    • Total Cost = (200,000 * 25)+25) + 3,000,000 = 8,000,0008,000,000
    • Profit = 10,000,000−10,000,000 - 8,000,000 = 2,000,0002,000,000

Step 2: Analyse Option A (Price Reduction)

  • New Market Share:
    • New Volume = 200,000 * 1.20 = 240,000 units
    • Market Share = (240,000 / 2,000,000) * 100 = 12%
  • New Profit:
    • New Price = 50∗0.90=50 * 0.90 = 45
    • New Revenue = 240,000 * 45=45 = 10,800,000
    • New Total Cost = (240,000 * 25)+25) + 3,000,000 = 9,000,0009,000,000
    • Profit = 10,800,000−10,800,000 - 9,000,000 = **1,800,000∗∗1,800,000**

Step 3: Analyse Option B (Marketing Campaign)

  • New Market Share:
    • New Volume = 200,000 * 1.15 = 230,000 units
    • Market Share = (230,000 / 2,000,000) * 100 = 11.5%
  • New Profit:
    • New Revenue = 230,000 * 50=50 = 11,500,000
    • New Total Cost = (230,000 * 25)+(25) + (3,000,000 + 500,000)=500,000) = 9,250,000
    • Profit = 11,500,000−11,500,000 - 9,250,000 = **2,250,000∗∗2,250,000**

Step 4: Recommendation

  • Evaluation against Objectives:
    • Option A: Achieves market share target (12%) and profit target (1.8m>1.8m > 1.5m).
    • Option B: Fails market share target (11.5% < 12%) but achieves profit target (2.25m>2.25m > 1.5m) and is more profitable than Option A.
  • Conclusion: Based on the stated primary objective, Option A should be chosen as it is the only one that meets the 12% market share goal. This decision accepts a lower profit (1.8mvs1.8m vs 2.25m) as a trade-off for achieving the strategic growth objective. If the objectives were equally weighted or profit was primary, Option B would be superior.
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