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Case BAM Business Management for the IB Diploma Coursebook
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IB business management, 2.4 Motivation
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Unit 1, Business management, IB diploma, SL
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Business management higher level exam testSection A
Answer one question from this section.
1. EcoCycle
Dan Perdue is a sole trader who sells bicycles. His unique selling point (USP) is bicycles that are
made from recycled materials using environmentally friendly processes. Dan’s customers are
willing to pay high prices for these types of bicycles, and they have a price inelastic demand.
Currently Dan purchases the bicycles from GreenRide, a local manufacturer. GreenRide bicycles
are well made, rarely have defects, and are well known to environmentally conscious cyclists.
The income elasticity of demand for Dan’s bicycles is greater than one.
Table 1: financial data for Dan’s bicycles, for 2015:
Number of bicycles 130
sold
Sales price per bicycle $1000
Variable costs per $650
bicycle
Fixed costs per year $42
000
The economy is forecasted to grow in the upcoming years. To take advantage of the growth
potential, Dan is considering forming a partnership with David Brown, a skilled mechanic who
knows how to manufacture bicycles. Both Dan and David would be equal partners and split
the profits. The partnership will begin on 1 January 2016 and would trade under a newly created
brand, EcoCycle. Recycled materials and environmentally friendly processes would be used to
manufacture all the EcoCycle bicycles.
Table 2: forecasted financial data, for EcoCycle bicycles, for 2016:
Number of EcoCycle bicycles sold 200
Variable costs per EcoCycle $300
bicycle
Fixed costs per year $65
000
Dan, however, conducted primary market research which indicated that respondents were only
willing to pay a much lower price for the untested, unknown brand EcoCycle.
(This question continues on the following page)
, (Question 1 continued)
(a) Describe one advantage and one disadvantage, for Dan, of using primary market
research. [4]
(b) Using Table 1, calculate for Dan, for 2015:
(i) the break-even number of bicycles (show all your working); [2]
(ii) the total profit (show all your working). [2]
(c) Explain one benefit for Dan of the income elasticity of demand for his bicycles being
greater than one. [2]
(d) Using Table 2, for the new EcoCycle bicycles, for 2016:
(i) calculate the price that Dan must charge to earn a target profit of $20 000 (with
sales of 200 EcoCycle bicycles) (show all your working); [2]
(ii) using your answer to part (i), and assuming that Dan reduces this price by 5
%, calculate the number of bicycles EcoCycle must sell to still have a target
profit
of $20 000. [3]
(e) Explain two reasons why branding of the new EcoCycle bicycles will be important. [4]
(f) Examine Dan’s decision to create a partnership with David to manufacture and sell
EcoCycle bicycles. [6]
Turn over
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