IB DP Business Management: Location – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

These questions cover section 5.4 (Location) of Unit 5 in the IB Business management guide, first assessment 2024, at SL and HL. Learn the content from the study guide and the revision notes. Other links: the course hub, the printable checklist and the free 10-minute diagnostics. Money is in dollars. Every business is invented.

Questions

1. Define the term offshoring. [2]

2. Distinguish between outsourcing and offshoring. [3]

3. State two factors a manufacturer may consider when choosing where to locate production. [2]

4. Kelmara Textiles will make 90,000 garments a year at one site. It is comparing two sites. At site P, fixed costs are 600,000 a year, variable costs are 8.20 per garment and delivery to customers is 0.90 per garment. At site Q, fixed costs are 450,000 a year, variable costs are 7.10 per garment and delivery is 2.30 per garment.

(a) Calculate the total annual cost at each site. [4] (b) Calculate the cost per garment at each site, to two decimal places. [2] (c) Explain one reason why Kelmara might choose the site with the higher cost. [2]

5. Explain one way in which insourcing could benefit a business. [3]

6. Calderwyn Print makes 40,000 display units a year at home at a cost of 52.00 each. It is considering offshoring. The overseas plant would produce at 36.00 per unit. Shipping is 6.50 per unit, import duty is 12% of the production cost and extra stock holding adds 1.10 per unit.

(a) Calculate the landed cost per unit of offshore production. [3] (b) Calculate the annual saving from offshoring. [2] (c) The overseas currency strengthens, so the production cost rises by 15% to 41.40, with duty still 12% of production cost. Calculate the annual effect on Calderwyn compared with producing at home. [3]

7. Isenholt Components assembles parts in its own workshop. In-house fixed costs are 360,000 a year and variable costs are 5.20 per part. A subcontractor offers to assemble at 7.40 per part.

(a) Calculate the annual cost of each option at 140,000 parts. [3] (b) Calculate the output at which the two options cost the same, to the nearest part. [2] (c) Explain why Isenholt should not decide using cost alone. [3]

8. Explain one ethical issue that may arise when a business offshores production. [3]

9. Analyse the effect of reshoring on two stakeholders of a business. [4]

10. Ridgemoor Furniture sells 20,000 desks a year. It makes them overseas at a landed cost of 49 each. Home production would cost 62 each. Overseas delivery takes 14 weeks and home production would take 3 weeks. Of the overseas desks, 9% are returned, against an expected 3% from home production, and each return costs 30 to handle. Ridgemoor is considering reshoring.

(a) Calculate the net extra annual cost of reshoring after allowing for return handling. [3] (b) Evaluate whether Ridgemoor should reshore. [7]

11. Oldencroft Dairy pays a contractor 0.46 per litre to bottle 2,500,000 litres of milk a year. It could bottle in-house with fixed costs of 520,000 a year and variable costs of 0.21 per litre. In a poor year, volume could fall to 1,800,000 litres. Recommend whether Oldencroft should insource bottling. [6]

Answers

1. Moving production, or part of production, to another country [1], whether to the business’s own plant or to an overseas contractor [1]. [2] Examiner insight: Credit for a definition rests on a change of country; saying only “cheaper production” describes a motive, not the term.

2. Outsourcing means paying an outside firm to do the work [1]. Offshoring means doing the work in another country [1]. They can occur separately: a firm can use a local contractor (outsourcing, not offshoring) or open its own overseas plant (offshoring, not outsourcing) [1]. [3] Examiner insight: A distinction needs both terms addressed. Defining only one, or writing that they are “the same but abroad”, leaves the contrast incomplete.

3. Any two from: labor costs and skills; cost of land or rent; closeness to customers; closeness to suppliers; transport links; tax and government incentives; political stability. First valid factor [1]; second valid factor [1]. [2] Examiner insight: Two distinct factors are needed. Answers that give “labor cost” and “wages” are one factor stated twice.

4. (a) Site P: 90,000 x (8.20 + 0.90) = 90,000 x 9.10 = 819,000 [1]; add fixed costs: 1,419,000 [1]. Site Q: 90,000 x (7.10 + 2.30) = 90,000 x 9.40 = 846,000 [1]; add fixed costs: 1,296,000 [1]. [4] (b) P: 1,419,000 / 90,000 = 15.77 [1]. Q: 1,296,000 / 90,000 = 14.40 [1]. [2] (c) Site Q’s higher delivery cost suggests it is further from customers, so site P might be chosen for faster delivery [1] and a quicker response to changes in demand, which could protect sales worth more than the 123,000 a year cost difference [1]. [2] Examiner insight: Show the cost per unit before multiplying and keep fixed costs separate from the per-unit costs; mixing them is the usual way to lose accuracy on this kind of calculation.

5. Insourcing can give the business greater control over quality [1]. Because the work is done in its own plant, it can inspect and correct problems directly rather than through a contract [1]. This can reduce defects and returns and protect the brand [1]. [3] Examiner insight: A benefit must be explained as a chain (cause, effect, result). A bare list such as “control, quality, cost” is unlikely to earn the later steps.

6. (a) Duty = 0.12 x 36.00 = 4.32 [1]. Landed cost = 36.00 + 6.50 + 4.32 + 1.10 [1] = 47.92 per unit [1]. [3] (b) Saving per unit = 52.00 - 47.92 = 4.08 [1]. Annual saving = 40,000 x 4.08 = 163,200 [1]. [2] (c) New duty = 0.12 x 41.40 = 4.968 and landed cost = 41.40 + 6.50 + 4.968 + 1.10 = 53.968 [1]. Compared with 52.00 the extra cost is 1.968 per unit [1]. Annual effect = 40,000 x 1.968 = 78,720 worse than producing at home [1]. [3] Examiner insight: Leave out no cost in a landed-cost total, and avoid rounding to two decimal places before multiplying by output; rounding early shifts the final answer.

7. (a) In-house: 360,000 + 140,000 x 5.20 = 360,000 + 728,000 [1] = 1,088,000 [1]. Subcontractor: 140,000 x 7.40 = 1,036,000 [1]. [3] (b) 360,000 + 5.20q = 7.40q, so 2.20q = 360,000 [1]; q = 163,636.4, so 163,636 parts [1]. [2] (c) At 140,000 parts the output is close to the point where the costs are equal, so a small rise in demand would make in-house production cheaper [1]. Expected demand is therefore important, not just today’s cost [1]. Non-financial factors also matter, such as the control over quality and delivery dates that a subcontractor gives up [1]. [3] Examiner insight: Where a question asks why cost alone is not enough, name a specific non-cost factor and link it to the business; a general “other factors matter” is unlikely to gain credit.

8. An ethical issue is poor working conditions or low pay at the overseas site [1]. A business may choose the location because wages are low, and the supplier may not meet fair standards [1]. This can harm the brand and the trust of customers and other stakeholders if it becomes public [1]. [3] Examiner insight: Name the issue, then show why it is ethical for this decision. Describing only the financial effect of bad publicity addresses reputation, not the ethical point.

9. Home employees: reshoring may create jobs and secure income for the community [1], though the business may need to recruit and train staff [1]. Customers: delivery should be faster [1], but higher home costs could lead to higher prices [1]. (Other valid stakeholders include overseas workers, owners and suppliers.) [4] Examiner insight: Each stakeholder needs an effect that follows from reshoring. A two-word label with no effect is a naming point only.

10. (a) Extra production cost = (62 - 49) x 20,000 = 260,000 [1]. Return handling: overseas 9% x 20,000 x 30 = 54,000; home 3% x 20,000 x 30 = 18,000, a saving of 36,000 [1]. Net extra cost = 260,000 - 36,000 = 224,000 a year (11.20 per desk) [1]. [3] (b) For reshoring: delivery in 3 weeks instead of 14 means less stock held in transit and a faster response to demand [1]. Lower returns save 36,000 a year and suggest better quality [1]. A home-made label may help the brand [1]. Against: unit cost rises by 13, a net 224,000 a year (about 11.20 per desk) [1], and a one-off cost to set up home production is likely [1]. The decision depends on whether faster delivery and quality are worth more than 224,000 a year, which turns on how much sales and price could rise [1]. Judgement: reshoring is justified only if the business can show it will raise sales or price by enough to cover the cost. If not, a better option may be to improve quality control overseas [1]. [7] Examiner insight: An evaluate answer is stronger when it weighs both sides using the figures and ends with a conclusion that names what the decision depends on.

11. Outsourced cost = 0.46 x 2,500,000 = 1,150,000 [1]. In-house cost = 520,000 + 0.21 x 2,500,000 = 1,045,000, so insourcing saves 105,000 [1]. The costs are equal at 520,000 / (0.46 - 0.21) = 2,080,000 litres [1]. In a poor year (1,800,000 litres), the contractor costs 828,000 and in-house costs 898,000, so insourcing would cost 70,000 more [1]. Insourcing also gives control over quality, but it fixes costs and so adds risk if demand falls [1]. Recommendation: insource if volumes stay above 2,080,000 litres and the business values control, but the saving is modest, so if poor years are likely, keep the contract [1]. [6] Examiner insight: A recommendation should use the figures and name the condition under which it would change; a recommendation with no figures cannot show the reasoning.

Where marks are usually lost

• Confusing the definitions of offshoring and outsourcing.
• Listing location factors without applying them to the business in the stem.
• Leaving out shipping, duty or stock holding when calculating landed cost.
• Adding fixed costs per unit instead of once in a total cost comparison.
• Rounding too early in multi-step calculations.
• Giving advantages only, in a question that asks you to evaluate.
• Naming a stakeholder without stating how the decision affects it.
• Ending an evaluation with a repeat of the points and no judgement.
• Forgetting that outsourcing and insourcing can be national as well as international.

Next steps

• Re-read the revision notes and the study guide.
• Return to the course hub and tick off the printable checklist.
• Try the free 10-minute diagnostics.
• Book a free trial class.

Frequently asked questions

What is the difference between outsourcing and offshoring? Outsourcing (subcontracting) is about who does the work: an outside firm carries out part or all of production. Offshoring is about where the work is done: production moves to another country. A move can be both at once.

What are common mistakes on location questions in IB Business Management? Students often confuse the definitions of offshoring and outsourcing, list location factors without applying them to the business, and leave out shipping, duty or stock holding when calculating landed cost. Giving only advantages in an evaluate question, or ending without a judgement, also loses marks.

Can outsourcing be national as well as international? Yes. Section 5.4 of the IB Business management guide treats outsourcing, offshoring, insourcing and reshoring as ways of reorganizing production nationally and internationally, so subcontracting to a firm in the same country is still outsourcing.

How should you compare in-house production with outsourcing in a calculation? Add the in-house fixed costs once to the variable cost of the output, rather than adding fixed cost per unit, and compare the total with the contractor’s total charge. Avoid rounding too early in multi-step calculations.

Official syllabus

IB Business management guide, first assessment 2024, International Baccalaureate Organization. Section 5.4 Location, within Unit 5: Operations management.