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TABLE OF CONTENT
Table of content ...................................................................................................................................................... 2
1.1: Create a plan for the collection of primary and secondary data for a given business problem ...................... 3
1.2: Present the survey methodology and sampling frame used............................................................................ 8
1.3: Design a questionnaire for a given business problem ................................................................................... 16
2.1: Create information for decision making by summarising data using representative values ......................... 23
2.2: Analyse the results to draw valid conclusions in a business context ............................................................. 24
2.3: Analyse data using measures of dispersion to inform a given business scenario .......................................... 27
2.4: Explain how quartiles, percentiles and the correlation coefficient used to draw useful conclusions in a
business context .................................................................................................................................................... 36
3.1: Produce graphs using spreadsheets and draw valid conclusions based on the information derived ........... 41
3.2: Create trend lines in spreadsheets graphs to assist in forecasting for specified business information ........ 44
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3.3: Prepare business presentation using suitable software and techniques to disseminate information
effectively .............................................................................................................................................................. 47
4.2: Prepare a project plan for an activity and determine the critical path .......................................................... 62
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1.1: CREATE A PLAN FOR THE COLLECTION OF PRIMARY AND SECONDARY DATA FOR A
GIVEN BUSINESS PROBLEM
BUSINESS CHALLENGES FACED BY TESCO IN AMERICA
Data may be described as facts, figures, information and measurements (BPP, 2013). The author argues that
data may be used in a statistical survey in either primary or secondary data. This method is only necessary
when a researcher cannot find the data needed in secondary sources or when data extracted from the
secondary sources are not reliable or correct. In this task, a business problem of Tesco superstore is established
to assist in planning for the collection of primary and secondary data.
Extract from Tesco fall in profit in the US market (www.tesco.com)
Tesco profits fall as supermarket pulls out of United States
Tescos annual profits have fallen for the first time in almost 20 years, as the UKs biggest supermarket
confirmed it was pulling out of the US. Tesco is exiting the US chain of 199 fresh and Easy shops, which have
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There was also a huge write down in the value of Tescos UK property portfolio. The companys statutory pre-
tax profits fell 51% to 1.96bn, but post-tax including the cost of the US exit were just 12bn down 95.7%.
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However, Tesco argued that sales at UK stores in the past three months, excluding fuel and VAT sales tax, rose
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0.5% a slowdown from growth of 1.8% in the six weeks to January 5 when the company hailed strong
Christmas trading.
The world third largest supermarket group which reported a stock profit warning in January last year has been
restructuring under chief executive Philip Clarke. As well as the US withdrawal, Tesco is exiting Japan and said it
would take a more measured approach to our growth in China. Mr. Clarke said the announcements made
today are natural consequences of the strategic changes we first began over a year ago and which include
today. With profound and rapid change in the way consumers live their lives, our objectives is to be the best
multichannel retailer for customers.
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A 804m write down in the UK property portfolio comes after a review in which Tesco identified more than 100
sites bought mainly during the property boom more than five years ago which the company no longer plan to
develop. Tesco is shifting its focus away from out of town stores. And many of the properties will not be
needed. Mr. Clarke said, the large stores we have are great, but we wont need many more of them because
growth in future will be multichannel (a combination of big stores, local convenience stores and online).
For the year, total UK sales rose 1.8% to just over 48bn, with UK trading profit falling by 8.3% to 2.27bn.
Tesco said its online grocery division has had another strong year with sales growing ahead of the market by
12.8% to 2.3bn.
Mr. Clarke told BBC that Tescos profits had been hit because of the amount of money the company is investing
to improving its operations. Tesco had hired thousands of staff in the UK and revamped stores. He said we feel
Tesco in the UK can be better for customers. That is what they want and that is what we are beginning to
deliver. He said that the US exit plans were well advanced with interest from potential buyers for all or parts of
the business. It would take about three months before the sales process was concluded. Mr. Clarke said.
Ajah Bhalla, professor of global innovation management at Cass Business School, said that the root of Tescos
US problems was a failure to understand that the US retail landscape is different from the UK. The drive to
become even-bigger, while offering lower prices, had worked for years, but made it difficult for Tesco to
change course when needed he said. The falling star of Tesco in the US is a harsh reminder that scale is not the
recipe for sustainable value creation. For years Tesco managers paid attention to perfecting the mix of supplier
driven cost deficiencies with low prices.
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While Tesco paid attention to making its US venture work, the UK retail market evolved quickly. Customers
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service and quality gained the upper hand over low pricing and Waitrose and Sainsburys emerged as the
preferable destination for the growing middle class segment. Tescos exit from the US is a reminder for
managers of the dangers of going blindly for scale and cost leaders, the wheels of which are difficult to reverse
if you need to change course to becoming a retailer known for first class customer experience Professor Bhalla
said.
Tasks
Sources
Steps to Accomplish
Schedule
Interview
Observation
Physical presence
(Participant observation)
to record the observation
of the phenomenon, the
researcher has to observe
what is happening to
record observation.
Same above
Focus group
Same above
scales
Same above
Questionnaires
By post, email or
electronic online as well
as pilot test.
Same above
Previous research
Same above
Internet
Same above
Books/magazines
Same above
Define objective of
research question
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Secondary Data
Collection.
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Define objective of
research question
Undergo an in-depth
examination of a number
of cases
Same above
MAKING A PLAN FOR THE COLLECTION OF PRIMARY AND SECONDARY DATA TO ADDRESS
TESCO'S PROBLEM IN AMERICA
Focus group may also be organized by bringing people together to discuss the problem (for example fall in sales
in the US market) see focus group above
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Likert scale questionnaire may also be used as a primary survey of collecting data on the issue of fall in sales by
Tesco in the US market.
For secondary data collection, Tesco may explore previous literature on successful supermarket operations in
the US in the last three to five years.
Learners may use the approach and get a case of business problem and use the plan above to fit in the data
collection process.
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Tasks
Sources
Steps to Accomplish
Schedule
Interview
Observation
Obersavation in
competitors stores (e.g.-
Same above
Define objective of
research question
Walmart)
Secondary Data
Collection.
Focus group
Same above
Questionnaires
An structurerd
questionnaire to (general
people, potential
customers in the local
area, existing customers).
To be sent via post,
email, online, face to
face.
Same above
Research paper
Read dissertation/
coursework/ research
paper on consumber
behaviour and US culture.
Same above
Case studies
Same above
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research question
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A sampling frame is a set of information used to identify a sample population for statistical treatment. A
sampling frame includes a numerical identifier for each individual, plus other identifying information
about characteristics of the individuals, to aid in analysis and allow for division into further frames for more indepth analysis.
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given population, the data required for survey research are collected from people and are therefore subjective,
and finally, survey research uses a selected portion of the population from which the findings may be
SURVEY PROCESS
Levy and Lemeshow (1999) in Glasow (2005) suggest that survey design involves two steps. A sampling plan has
to be developed, because the sampling plan is the methodology that will be used to select the sample from the
population. Glasow (2005) posit that the sampling plan helps to describe the approach that will be used to
select the sample, how adequate sample size will be determined, and the choice of media through which the
survey will be administered. Moreover, these survey media include telephone, face to face interviews as well
as mailed surveys using either postal or electronic mail (Salant and Dillman, 1994 in Glasow, 2005).
Secondly, the procedures for collecting population estimates from the sample data and for estimating the
reliability of those population estimates must be established (Glasow, 2005). This process includes
identification of the desired response rate and the preferred level of accuracy for the survey (Salant & Dillman,
1994 in Glasow, 2005).
According to Glasow (2005), survey design procedures need inputs from the people that will use the survey
data as well as the researchers that will conduct the survey investigation. Further, the author argues that the
data users should identify the variables to be measured, the estimates required, the reliability and validity
needed to ensure the usefulness of the estimates, and any resource limitations that may exist pertaining to the
conduct of the survey (Levy & Lemeshow, 1999 in Glasow, 2005).
sampling (Blumberg, 2011). Quinlan (2010) argue that the probability sampling is when the sample selected
from the population is a representative of the entire population. This is because the researcher using the
probability sampling wants to claim that the findings of the research carried out with the sample are
generalizable to the entire population of the study. Probability sampling includes simple random sampling,
stratified sampling, systematic sampling and cluster sampling (Quinlan, 2010; Blumberg, 2011).
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Simple Random sampling: This sample involves selecting a sample at random from a sample frame. For
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example, Quinlan (2010) posit that the examination of a class population of 30 students as the sample frame
begins with the collating of all the names of the students in the class, and tear each name and place in a bag or
box and then select one name at a time from the box. This process is called a simple random sampling.
Systematic sampling: This sampling technique involves the idea of selecting items at regular intervals from the
sample frame (Quinlan, 2010). For example, Quinlan argues that suppose a person working in a housing estate
trying to establish a brand of washing powder to use in each house. The sampling frame is made up of all the
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houses in the housing estate. Given that there are 500 houses in the estate and first random sample and then
every third house or every fifth house or whatever interval until the sample is complete. The completed sample
is the number of houses included in the study known as systematic sampling.
Stratified sampling: This sampling tool is chosen based on some known characteristics of the population that
will have impact on the research (Quinlan, 2010). According to Quinlan, using stratified sampling, the
researcher divides or stratifies the sample selected using characteristics that he/she knows will have an impact
on the study.
Cluster sampling: This sampling is when the people or unit that make up the population of the study are found
in groups or clusters. In this process, sampling is conducted by randomly selecting a sample of the clusters to
study rather than randomly selecting from the population to study. This is efficient especially geographically
spread population (Quinlan, 2010).
Non probability sampling is when the sample is selected to represent the population, but cannot be a
representative of a population because this sampling is on the capacity of a relatively small number of cases
(Quinlan, 2010). The non probability sampling could be judgmental sampling, quota sampling, snowball
sampling, and convenience sampling.
Judgmental/Purposive sampling: In this sampling, the researcher makes judgment or decides about who to
include in the research (Quinlan, 2010). Quinlan posits that the criterion for inclusion in the study is the
capacity of the participants to inform the study. Each person or unit chosen to be included has a contribution
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to make to the study. Further, people chosen to be included in the sample would be key informants on the
topic under investigation.
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Quota sampling: In this tool, the researcher a sample of participants for the study using different quota
criteria. For example, Mary needed 100 participants in her survey. The population of the study was a
population of students and staff from the college. She decided that there will be four quotas. The first quota
was made up of 25 female students, the second quota was made up of 25 male students, the third quota was
made up of 25 female members of staff, and the fourth was made up of 25 male members of staff. In the
process, Mary used quota sampling technique (Quinlan, 2010).
Convenience sampling: In this case, the researcher engages those participants in the research whom it is
easiest to include. For example, Quinlan (2010) suggest that people in the newsagents, people in the
supermarket etc. In this case, the researcher knows the number of people included in the sample then
continues to engage people on the research until the sample is filled.
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Snowball sampling: In this non probability sampling technique, the researcher finds one participants in the
research, investigates the research with the participants, and then ask the participants ton recommend the
next participant (Quinlan, 2010). Participant must fit the inclusion criteria for the research study. The
researcher goes through the procedure with the second participant and when finished, asks the participants to
recommend another participant to be included in the research. The researcher continues in this manner until
the sample is complete (Quinlan, 2010).
Sample selection: This depends on the population size, its homogeneity, the sample media and its costs of use,
and the degree of precision required (Salant and Dillman, 1994 in Glasow, 2005). In addition, Salant and
Dillman suggests that the people selected to participate in the sample must be selected at random, they must
equal or independent chance of being selected. Further, the prerequisite to sample selection is to define the
target population as narrowly as possible (Salant & Dillman, 1994).
Sample size: Sample size is determine by five factors which include desired degree of precision, statistical
power required, ability of the researcher to gain access to the study subjects, degree to which the population
can be stratified, and selection of the relevant units of analysis (Glasow, 2005)
Degree of precision: Postulated effect exists in the sample. For example, Glasow (2005) posit that the effect
exist in the alternative hypothesis. The null hypothesis claims that this effect does not exist. According to Slant
and Dillman (1994), the sample must be large to yield a desired level of precision. Two measures of precision
are considered. The significance level is the amount of type 1 error that the researcher will allow in the study.
This type 1 error occurs when the null hypothesis is rejected when it is in fact true. The second measure is the
confidence interval. The researcher has to create a confidence interval for example 95 percent confident that
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the corresponding statistic for the population falls within the specified range of the sample statistic.
Statistical Power: The probability that the researcher rejects the null hypothesis given that the alternative
hypothesis is true (Attewell & Rule, 1991 in Glasow, 2005) the author argues that where the null hypothesis is
erroneously accepted and the alternate hypothesis is true, a type 11 error is said to exist.
Effect size as a determinant of Power: This helps to evaluate the overall importance of the result.
Choice of survey media: This is to determine the availability of resources (Salant and Dillman, 1994). For
example, Salant and Dillman, suggest that written surveys require minimum resources (staff, time and cost)
and are best suited to eliciting confidential information. Written survey encourages minimal interviewer and
respondent measurement errors. Written survey is distributed via postal or electronic mail, as well as hand
delivery.
Verbal survey: This includes telephone, face to face interviews. The face to face interview is a particularly
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flexible tool that can capture verbal inflexion, gestures and other body language (Glasow, 2005). However, the
face to face are used where the true population is not known or when respondents are unable or unlikely to
respond to written surveys (Salant & Dillman, 1994). Verbal surveys are subject to measurement error when
untrained interviewers are used (Slant and Dillman, 1994 in Glasow, 2005). This method is also resource
intensive in terms of staff, facilities and time. Findings from face to face interviews are difficult to summarise
and incorporate in data analyses (Isaac & Michael, 1997 in Glasow, 2005).
Additional consideration: The researcher should avoid questions that involve double negatives and long
questions that lose the respondents in the reading (Glasow, 2005). Glasow suggests that undefined
abbreviations, acronyms, and jargon should not be used. In a similar study, Salant and Dillman (1994)
maintained that the tone of the survey questions should avoid biased wording that evokes an emotional
response. Rating scale should be balanced to provide an equal number of positive and negative response
options (Salant & Dillman, 1994).
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Biased Wording: Questions that include predisposition of either for or against a particular perspective (Salant
and Dillman, 1994). These questions may be leading or include assumptions that may not be true.
Biased context: The placement of questions in a particular order so that the respondent is already thinking
along certain lines on the basis of previous questions (Browne & Keeley, 1998 in Glasow, 2005).
Open ended: This allows the respondents to answer questions in their own words. Open ended questions also
allow the researcher to explore ideas that would not otherwise be aired and are useful where additional
insights are sought (Salant and Dillman, 1994). These questions are also helpful where the researcher is less
familiar with the subject area and cannot offer specific response options. Further, salant and Dillman note that
open ended questions provide greater thought and contemplation on the part of the respondent therefore
create more time to answer (Glasow, 2005). The results from open ended questions are often more difficult to
analyze.
Close ended: This requires the respondent to choose from among a given set of responses (Mclntyre,
1999).These types of questions are easiest for respondents answer and the researcher to analyse the data.
Survey Execution
The third phase of the survey methodology is execution. According to Salant & Dillman, (1994), the importance
of maintaining the confidentiality of individual responses, and reporting survey is only in the aggregate values.
Another ethical consideration is recognizing that survey participation is a voluntary event that requires the
researcher to encourage participation without undue pressure (Salant & Dillman, 1994 in Glasow, 2005).
Levy and Lemeshow (1999) argue that pre-test must first be carried out to test both the instrument and the
survey procedures before the actual survey. Surveys may be evaluated in two ways. First, survey questions van
be evaluated using focus group discussions, cognitive interviews
understand the questions and how they formulate their responses, and pilot tests of survey under field
conditions (Fowler, 1995). Second, response to surveys can be analyzed to reveal expected relationships among
the answers given, and to ensure consistency of respondent characteristics across questions.
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Isaac and Michael (1997) averred the use of automated data collection tools to facilitate data tabulation and
manipulation. Lucas (1991) suggests that use of nonparametric statistics where small sample sizes are involved.
Note: Using the Tesco fall in sales in the US market, the survey methodology discussed above may be explored
Sample Frames almost always are not exact representations of the target
population
A subset of the Sample Frame sample units are selected for sampling: the sample
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Sample Frame overcoverage and sample site field access problems addressed by
including an Oversample.
Sampled Population is a conceptual population that is a subset of intersection the Target
Population and the Sample Frame
It excludes portion of the Target Population within the Sample Frame that could not be
sampled (conceptually) due to access problems, lost samples, or other reasons a sample
could not be collected
It doesn't include part of the Sample Frame that is determined to not be elements of the
Target Population
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A simple random sampling that will involve selecting a sample at random from a sample frame see discussion
on random sampling above
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A Judgmental/Purposive sampling may be considered to make: judgment or decides about who to include in
the research. See discussion on purposive sampling above
Tesco may also consider the survey media in terms of the resources (staff, cost)
Tesco may consider the closed and open ended format of questions in the questionnaire.
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In execution of the survey, Tesco may consider that the exercise should be voluntary
Target Population
Sample size
Sampling method
Existing clients
1%
Potential customers
Experts
at other competitors
5 top experts
Employees
12
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includes should the questions be asked? Is the question of proper scope and coverage? Can the respondents
adequately answer this questions as asked? Will the respondents willingly answer the questions as asked?
Deciding what to ask: There are three potential information: Information the researcher is interested in
(dependent variables), information that might explain the dependent variables (independent variables), and
other factors related to both dependent and independent variables which may distort the results and have to
be adjusted (confounding variables).
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Wording of individual questions: the way questions are phrased are very significant in research project, there
are some general rules for constructing good questions in a questionnaire.
A: Use short and simple sentences: Short, simple sentences are less confusing and ambiguous than long,
complex ones. As a rule of thumb, most sentences should be one or two clauses. Sentences with more than
three clauses should be rephrased.
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B: Ask for only one piece of information at a time: Only ask for one piece of information at a time
C: Avoid negatives if possible:
students whether they agree with the statement small group teaching should be cancelled the questions
should be rephrased as small group teaching should continue double negatives should be avoided.
D: Ask precise questions: Questions may be ambiguous because a word may have different meaning. For
example, if students are asked to rate their interest in medicine this term might mean general medicine as
opposed to general surgery.
E: Ensure that the respondents have necessary knowledge: The researcher must make sure that the
respondents should have some knowledge to the topic. For example, the survey of university lecturers on
recent changes in higher education, the questions Do you agree with the recommendations in the Dearing
report on higher education? Not only does the researcher ask for several pieces of information at the same
time as there are several recommendations in the report. The question also assumes that all lecturers know
about the relevant recommendations.
F: Level of details: It is very important for the researcher to ask for the exact level of details required. It is good
to avoid unnecessary details.
G: Sensitive issues: It is often difficult to collect truthful answers to sensitive questions. For example, have you
ever copied other students answers in a degree exam? Is likely to provide either no responses or negative
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responses.
Format for responses: The responses may be open or closed format. In an open ended question, the
respondents may formulate their own answers. In closed format, respondents are forced to choose between
several given options. Quinlan (2011) and Blumberg et al. (2011) argues that it is good to make use of the two
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formats.
Length of questionnaire: There are no universal agreements about the optimal length of questionnaires. It may
depend on the type of respondents. Blumberg et al (2011) suggest that short simple questionnaires usually
attract higher response rates than long complex ones.
Arranging the questions: Quinlan (2011) posit that the orders of the questions are important. According to
Quinlan, some general rules include: from general to particular, from easy to difficult, from factual to abstract,
start with closed format questions, start with questions relevant to the main subject and do not start with
demographic and personal questions.
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Introduction, personalized letter and ending: It seems a good idea to have either a personalized covering
letter or at least an introduction explaining briefly the purpose of the study, the importance of the
respondents participation, who is responsible for the study and a statement guaranteeing confidentiality i t is
also good to thank the respondent at the end of the questionnaire.
How to administer the questionnaires: Blumberg et al. (2011) and Quinlan (2011) argue that there are several
ways of administering questionnaires. Self administered or read out by interviewers. The authors suggest that
self administered questionnaires may be sent out by post, email or electronic online. Interview administered
questionnaires may be by telephone or face to face.
Advantages of self administered questionnaires
responses. For example, the extract below from a sample questionnaire and Learners should know that the
questionnaire has been designed to allow for simple responses.
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(Likely example of Tesco Questionnaire)
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Please answer as many questions as applicable ticking the relevant boxes. All answers will treated as
anonymous.
Questions
Answers
Yes/No
Do you approve or disapprove of the recent fall in Tesco profit in the US market?
Approve
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Disapprove
Do you agree to the recent exit of Tesco superstore in the US market?
As there been any organizational audit before launching into the US market?
Do you agree with Tesco strategic decision to exit the US market?
What factors are important to your business success? (Please tick Yes or No)
A: Tesco possess good Managerial skills
B: Have Organizational culture & reputation
C: Seek new market opportunities and act to meet the emerging demand
D: Focus on our line of business, rather than spread our efforts on several different lines of
business
E Take calculated risk
f: Encourage employee skill development to improve on the business
G; Need to introduce new leadership approach
In your opinion, what are the main constraints on the growth of Tesco business?
(Please tick Yes or No)
A: High rent and rates
B: Inadequate information on America landscape
C: Insufficient demand for product
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I: Management difficulties
K: Tax burden
R: Other (please specify)
Do the exit strategy the best option for Tesco in the America market (Please tick Yes or No)
If No, should Mr. Clarke be removed from his job
Do you agree that competing in America market with the right strategy will boost sales?
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Do you have the professionals handling key positions like marketing, accounting/finance in your
organization? (Please tick Yes or No)
If exit strategy was the last option, what was the motivation behind it?
Shareholder pressure
Chief Executive Decision.
Competitive pressure
Concern for other risk
Any suggestions on what you think can be done to improve the sales figure of Tesco in America if
they are remain?...........................................................................................................................
..
..
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For how long has Tesco been in operation especially in America (Please tick as appropriate)
Less than five (5) years
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Between 5 and 10 years
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How often does Tesco hold management meeting? (Please circle as appropriate)
None at all, occasionally, weekly, irregular on situation demand
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Has Tesco ever held a management retreat or strategy session? (Please tick Yes or No)
Do you agree that Tesco have to engage more on the best strategic planning techniques that
would drive upward their sales? (Please tick Yes or No) If Yes, what strategic planning technique is
preferable considering the market and competition
Author (2013)
Thank you very much for your time and help
Please return completed questionnaires in the stamped addressed envelope provided
Closed-ended questions
Name: Dichotomous
Description: Question offering two choices
Example: Did you watch television at all yesterday?
Yes / No
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Name: Multiple
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Name: Likert scale
Description: Statement with which respondent shows the amount of agreement / disagreement
Example: Assessment by course-work is easier than assessment by examination
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Strongly agree
Agree
Disagree
Strongly disagree
Double Decker
Crunchie
Wispa
Mars Bar
Creme Egg
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Name: Numeric
Description: Respondent specifies a particular value (can include decimal places)
Example: How far (to the nearest kilometre) did you travel today to reach this supermarket?
________km
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70/200 = 0.35
0.35 multiply by 360 = 126
Direct labor
30/200 = 0.15
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Other costs
10/200 = 0.05
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0.05 multiply by 360 = 18
50/250 = 0.2
0.2 multiply by 360 = 72
Direct labor
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125/250 = 0.5
0.5 multiply by 360 = 180
Production overhead
50/250 = 0.2
0.2 multiply by 360 = 72
Other costs
25/250 = 0.1
Factory B
Components
Degree
Degree
Direct materials
35
126
20
72
Direct labor
15
54
50
180
Production overhead
45
162
20
72
Other costs
18
10
36
100
360
100
360
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Factory A
360/200 = 1.8
Factory B
360/250 = 1.44
Factory A
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Factory B
Components
Degree
Degree
Direct materials
35
126
20
72
Direct labour
15
54
50
180
Production overhead
45
162
20
72
Other costs
18
10
36
100
360
100
360
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N
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10
29
10
45
20
28
35
20
10
22
23
30
45
40
39
24
19
25
24
33
37
18
17
42
41
45
27
23
26
25
25
27
32
21
23
29
34
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Find the mean, median, mode, variance and standard deviation of the results of the student scores using a class
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size of 6
Draw a simple bar chart to represent the student scores
Illustration 2: The financial position of Edward Internet Caf for the last seven years shows the income and
expenditure up to 2007 accounting year
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Details
Year 1
Year 2
Year 3
Year4
Year 5
Year6
Year 7
Cash income
1,200
1,500
1,600
1,400
1,350
1,200
1,100
Cash expanses
1,000
1,100
1,125
1,050
1,000
1,050
1,250
Cash
200
400
475
350
350
150
-150
surplus/Deficit
Where X = Mean
E = Summation
X = Variables
N = Number of variables
Therefore X = 2+5+3+6+4+3
S
O
N
6
X
= 23/6 = 3.8 or 4
C
O
L
L
E
G
E
E = Summation
F= frequency
X = Variables
Classes
2 - 7
8 - 13
14 - 19
20 - 25
26 - 31
32 - 37
38 - 43
F (frequency)
3
3
3
12
7
5
4
X (Mid Point)
4.5
10.5
16.5
22.5
28.5
34.5
40.5
FX
13.5
31.5
49.5
270
199.5
172.5
162
44 - 49
3
40
46.5
139.5
1038
= EFX
EF
1038
40
25.95 or 26
A +
Classes
Efu
Ef
F (Frequency)
X (Mid Point)
U (Coding)
FU
2 - 7
4.5
-3
-9
8 - 13
10.5
-2
-6
14 - 19
16.5
-1
-3
20 - 25
12
22.5
26 - 31
28.5
32 - 37
34.5
10
38 - 43
40.5
12
44 - 49
46.5
12
E
L
S
O
N
C
O
L
L
E
G
E
40
23
A +
22.5
22.5 +
22.5 +
E fu
Ef
23
40
0.575
0.575 * 6
22.5 + 3.45
X = 25.95 or 26
N
E
L
Median: the medium of a distribution with a discrete random variable depends on whether the number of
terms in the distribution is even or odd. BPP (2013) argue that when the number of terms is odd, then the
median is the value of the term in the middle.
S
Using the group data of the student scores
O
N
Median = L1 +
N/2 - E f1
Fm
Where L1 is lower class boundary of the median class
N/2 is the number of frequency divided by 2
Ef1 is the cumulative frequency before the median class
C
O
L
L
E
G
E
Classes
F (frequency)
Cf (Cumulative frequency)
2 - 7
8 - 13
14 - 19
20 - 25
12
21
26 - 31
28
32 - 37
33
38 - 43
44 - 49
40
E
L
S
40
O
N
C
O
L
L
E
G
E
Median = 20 +
40/2 9
12
Median = 20 +
20 - 9
12
Median = 20 +
11
12
Median = 20 +
0.92 * 6
Median = 20 + 5.52
Median = 25.52 or 26
Mode: The mode of a distribution with a discrete random variable is the value of the term that occurs the most
often (BPP, 2013
Using the group data of the students scores
Mode = L1 +
D
D1 + D2
N
E
L
D is the frequency of the modal class
S
O
N
C
O
L
L
E
G
E
Classes
F (frequency)
2 - 7
8 - 13
14 - 19
20 - 25
12
26 - 31
32 - 37
38 - 43
44 - 49
40
Mode = 20 +
12
3 + 7
Mode = 20 +
12
10
E
L
S
O
Mode = 20 +
C
O
L
L
E
G
E
Mode
Mode
= 20 +
= 20 + 7.2
Mode = 27.2
1.2
1.2 * 6
E fu2
N
E fu
N
Classes
F (Frequency)
X (Mid Point)
U (Coding)
FU
FU2
2 - 7
4.5
-3
-9
27
8 - 13
10.5
-2
-6
12
14 - 19
16.5
-1
-3
20 - 25
12
22.5
26 - 31
28.5
32 - 37
34.5
10
20
38 - 43
40.5
12
36
44 - 49
46.5
12
48
L
S
O
N
C
O
L
L
E
G
E
40
23
153
40
SD = 6
153
40
SD = 6
3.825
23
40
SD = 6
3.825 - 1.15
SD = 6
2.675
0.575
0.575 * 2
N
E
L
S
SD
SD = 9.82
C
O
L
L
E
G
E
6 * 1.636
9.82 2
Variance
96.4
153
nExy
nEx2 - Ex 2
Ex Ey
n E y2 - Ey 2
X is unit of variables
E
Y is unit of variables
L
S
O
Illustration
Eden college unit of goods and the unit cost incurred are as follows
C
O
L
L
E
G
E
Unit of Produced
Total costs
40
45
50
65
70
70
80
X (unit of goods)
Y (total cost)
xy
X2
Y2
40
40
1600
45
90
2025
50
150
2500
65
260
16
4225
70
350
25
4900
70
420
36
4900
80
560
49
6400
28
420
1870
140
26550
N
E
L
S
O
N
C
O
L
L
E
G
E
7 1870 7 140 28 2
28 * 420
7 26550 -
420 2
R = 7 * 1870 -
28 * 420
7 * 140 - 28 * 28
R =
13090 - 11760
980 - 784
R =
185850 - 176400
1330
196 * 9450
R =
1330
185220
R =
1330
E
1360.9
L
S
R =
0.97
Having calculated the value of r, it is important to interpret the result. The r of 0.97 indicates a high a degree of
positive correlation between the unit of goods produced and the total costs. BPP (2013) argue that in general,
the closer that r is to +1 or -1 the higher of degree of correlation.
Coefficient determination
The coefficient of determination is the square of the correlation coefficient. It is denoted as r2
C
O
L
L
E
G
E
R2 =
0.97 2
= 0.94
Percentile
Percentile can be captured by stating that the pth percentile of a distribution is a number such that
approximately p percent (p%) of the values in the distribution are equal to or less than that number. So if 28 is
th
th
the 80 percentile of a larger batch of numbers, 80 of those numbers are less than or equal to 28.
A percentile can be calculated as (a) calculated directly for values that actually exist in the distribution (b)
interpolated for values that do not exist (but which the learner may want to use to plot specific graph)o
calculate percentiles, sort the data so that xi is the smallest value, and xn is the largest with n = total number of
observation.
xi is the pth percentile of the data set where
pi = 100 1 0.5
n
Illustration 1
(Original data)
5
14
(Sorted data)
Xi
1
3
5
I
1
2
3
Pi: Calculate, using equation (I) as shown below
7
4
9
5
9
6
14
7
E
L
P1 = 100(1-0.5) / 7 = 7.1
P2 = 100(2-0.5) /7 = 21.4
P3 = 100(3-0.5) /7 = 35.7
P4 = 100(4-0.5) /7 = 50
P5 = 100(5-0.5) /7 = 64.3
P6 = 100(6-0.5) /7 = 78.6
P7 = 100(7-0.5) /7 = 92.9
Filling in the final row
C
O
L
L
E
G
E
Xi
14
pi
7.1
21.4
35.7
50.0
64.3
78.6
92.9
th
To take a single example, 7 is the 50 percentile of the distribution, and about half of the values in the
distribution are equal to or less than 7.
Quartile
Quartiles are the values that divide a list of numbers into quarters. They are often used in sales and survey data
to divide population into groups. For example, quartiles may be used to find the top 25 percent of incomes in a
population. For example lets have 5, 8, 4, 4, 6, 3, 8
First put the numbers in order and cut the list into four equal parts. The quartiles are the cuts.
For example: Numbers in good order as 3, 4, 4, 5, 6, 8, 8
Cut the numbers into quarters
3, 4, 4, 5, 6, 8, 8. The first 4 after 3 is lower quartile, the 5 is the middle quartile and the 8 before the last 8 is
the upper quartile. (Qi 4, Q2 5 and Q3, 8)
Quartile (array, quart)
N
E
L
Array: Array or cell range of numeric values for which you want the quartile value
Quart: Indicate which value to return
S
if Quart Equals
Quartiles Returns
Minimum Value
Maximum value
O
N
C
O
L
L
E
G
E
th
th
th
3.1: PRODUCE GRAPHS USING SPREADSHEETS AND DRAW VALID CONCLUSIONS BASED
ON THE INFORMATION DERIVED
Data is represented through graphs which are pictorial representation of the data (BPP, 2013). According to
BPP, the graphs commonly used are the bar charts, pie chart, histogram, frequency polygon, as well as line
graphs. The general rule to keep in mind in drawing graph include be simple and not too clustered, show data
without showing the data message, clearly show any trend or differences in the data and be accurate in a visual
sense
F (frequency)
14
12
10
8
6
N
F (frequency)
02-Jul Aug-13 14 19
20 25
26 31
32 37
38 43
44 49
O
Source: Author (2013)
N
The bar chart above explains the frequencies of the scores of students in the marketing principle text. The
students that scores between 20 to 25 had the highest bar, while students that scores 7 to 19 had the least
scores in the marketing principle text.
C
O
L
L
E
G
E
Cash income
Cash expenses
Cash surplus/(deficit)
LINE CHART
Year 1
1200
1000
200
Year 2
1500
1100
400
Year 3
1600
1125
475
Year 4
1400
1050
350
Year 5
1350
1000
350
Year 6
1200
1050
150
Year 7
1100
1250
-150
1800
1600
1400
1200
1000
Cash income
800
Cash expenses
600
Cash surplus/(deficity)
400
200
0
-200
-400
Source; Author (2013)
N
E
L
S
O
N
has gone up in the first three years and then it started falling from the fourth year onwards and it has
recovered since that period.
The above chart although shows a trend, but it does not outline the reasons for the decline. We do not have
any data regarding income from banks therefore with certainity we cannot make any assumption whether the
drop in cash income was compensated by the bank income.
continuously increasing. This might force the organisation to borrow cash to meet the higher cash expenses
need. This would required from year 7 onwards, unless the organisation received a healthy cash balance from
the previous years.
1800
1600
1400
1200
1000
Cash income
800
Cash expenses
600
Cash surplus/(deficity)
400
200
0
-200
-400
N
E
L
S
O
N
C
O
L
L
E
G
E
Years
Output/labour hour
Number of employees
unit
2004
30
1.00
100
2005
24
1.08
103
2006
26
1.20
96
2007
22
1.15
102
2008
21
1.18
103
2009
17
1.25
98
(A)
(B)
(C)
N
E
L
S
O
N
Years
Sales Units
2000
390
2001
380
2002
460
2003
450
2004
470
2005
440
2006
500
N
E
L
S
O
N
C
O
L
L
E
G
E
410
The average relates to the middle year of the period 2001. See the moving averages of the whole data below
Year
Sales
2000
390
2001
380
1,230
410
2002
460
1,290
430
2003
450
1,380
460
2004
470
1,360
453
2005
440
1,410
470
2006
500
E
L
S
O
N
800
Moving average of 3
year sales
600
C
O
L
L
E
G
E
400
200
0
1
Structure outline: Ensure to make notes that show the selected main points and how the point link together.
BPP (2013) argue that the outline include introduction, supporting evidence, examples and illustrations, notes
of when and what visual aids are required.
Prioritize the areas of importance and accept the key points and discard the unwanted ideas.
PowerPoint presentation
A PowerPoint presentation is a selection of slides, handout speakers notes and the outline
Slides: These are the pages of the presentation and may contain text, images, graphs and sounds (BPP, 2013)
Handouts: These are smaller version of the slides with 2, 3, or 6 slides on an A4 page
Speakers note: The presenter can present these notes alongside the presentation
C
O
L
L
E
G
E
Outline: This shows the title and main text of the whole presentation and not images.
Slides business presentation
In preparing slides for business presentation using PowerPoint software start with the a title slide
The presenter has to identify himself and the aim of the presentation
Plan for uniformity: This include the following
A: Use the same background for all the slide (same color, same design)
B: Consider using one of the software templates in order to help organize the information
Prepare the slides: Choose words carefully and aim for the following
A: no more than seven word per line
B: no more than seven total lines
No more than 7*7 = 49 words per slide
Use visual elements when appropriate (charts, graphs, pictures, clip art and lists)
I: use only one dominant visual per slide
Ii: keep it simple
Be sure to document borrowed images (use footnotes if appropriate, get written permission for public
N
presentation)
Proofread carefully
S
Ii: double check proper name spellings
O
N
C
O
L
L
E
G
E
A good business plan presentation may work as a strong method in drawing target audience
Ensure that the presentation is not more than twenty five minutes long
Analyze the audience
I: Find out who the audiences are and what they want to know about the company
Ii: The presentation is to attract the audience in order for them to grant a loan or invest in the business
Iii: Ensure that the presentation is in accordance with the requirements of the audience
Iv: Get sense of what impress the audience
Get Organized
I: Draw up an outline of the important points that may impress the investors
Ii: Organize the presentation materials in the same order as it is done in the business plan
Use of visual aid
I: It is a very good idea to add visual aid to the presentation
Ii: Visual will assist to get the attention of the audience and provide a good account of the business
Iii: It will add creativity to the presentation
Keep it simple and succinct
N
I: Show everything that may attract the audience, it must be in easy language
E
Review the presentation
L
S
I: Review the presentation several times. Cut out lengthy sentences and make sure that the sentences have
flow and continuity
O
N
Ii: Use bullet points and avoid adding more than five or six points in one slide
Practice
The presenter or the company should practice; this is because a good business presentation is borne out
continuous practice
C
O
L
L
E
G
E
DO YOU SAVE?
DO YOU INVEST?
N
E
L
S
Saving
Short-term.
Postpones spending.
Has safety precautions.
Investing
Long-term.
Exchanges money for something with the future
expectation of receiving a profit.
Has risk factors.
C
O
L
L
E
G
E
Slide 3 Paycheque
Lesson Reference: Money Management, Activity 1 Handout 1
N
E
L
S
SAVING
Short-term.
Postpones spending.
Has safety precautions.
INVESTING
Long-term.
Exchanges money for something with the future
expectation of receiving a profit.
Has risk factors.
C
O
L
L
E
G
E
N
E
L
S
PLACES TO INVEST
C
O
L
L
E
G
E
Stocks
Bonds
Mutual Funds
Retirement Plans/RRSPs
Real Estate
Collectibles/Valuables
Slide 3 - Places to Invest
Lesson Reference: Money Management, Activity 4 Overhead 3
Formal report command different style of writing, the writing style has to be professional and formal language
should be used. The reason for the report must be clear to both the writer and the person requesting the
report. However, it is the obligation on the person writing the report to clearly communicate information in an
L
S
O
N
Title
C
O
L
L
E
G
E
Terms of reference
Introduction
Main body
Conclusions
Summaries finding
Recommendations
Signature
Of writer
Executive summary
The present report sets to examine results of an investigation commissioned by the Board on 5 July 2013. We
were asked to consider the present applicability of the companys policy manual and to prepare changes
th
A: The policy section on computer use should be amended. It deals with safe storage of disks which is no longer
applicable as data is now stored on a server. Also it does not set out the company email policy.
B: The Companys equal opportunities policy needs to be included
C: The coding list in the manual is now very out of date. A number of new cost centers and profit centers have
been set up in the last ten years and the codes for these are not noted in the manual.
D: There is no mention of the provision of the Data Protection Act as they relate to the company
Conclusion
We discovered upon interviewing staff that very little use is made of the policy manual. When it has been
amended as above, it can be brought back to use, and we recommend that this should be done as soon as
possible.
Signed: S. McFadden Computer World Ltd
N
E
L
S
O
N
C
O
L
L
E
G
E
Area
Tools
Project Management
Programme
Evaluation
and
Review
E
L
O
N
Statistics
C
O
L
L
E
G
E
Marketing
Organisation Behaviour
Economics
C: Goods received note: When the supplier delivered the goods, goods received note accompany the delivery
indicating what goods have been delivered. According to BPP (2010), the receiving department will do the
I: Check what goods have been delivered in terms of quantity, quality,, the supplier and the purchase order
number
Ii: Check the delivery not to ascertain that it agrees with the physical goods in terms of quantity and description
Iii: Check the purchase order copy to see that the goods that have been delivered are as ordered
Iv: Prepare a good received note
Iii: Purchase invoice
C
O
L
L
E
G
E
This document is received from the supplier. The purchasing department attaches the good received not and
purchase order with the supplier invoice and sent to account department to arrange payment.
Iv: Valuation of closing stock and material issue
BPP (2010) suggest that if materials are purchased exactly as required for production the cost of a particular
stock could be attributed to a specific production cost. Most often, materials are purchased in large quantities
at different prices and issued to production in small quantity. In order to establish cost of production, the cost
accountant has to identify material cost for each issue of stock from production department. According to BPP
(2010), the methods to use to put a value to materials issued from stores are FIFO, LIFO and Weighted Average
Cost.
FIFO: This represents first in first out. With FIFO materials issued from stores are valued on the assumption that
the earliest units of the stock item received into stores are the first to be issued.
LIFO: This represents last in first out. With LIFO materials issued from stores are valued on the assumption that
the latest units of stock items received into stores are the first to be used.
Weighted Average Cost: With weighted average cost, all items in stock are valued at a weighted average price,
and issues from stores are valued at that price. A new weighted average price is calculated whenever there is a
new issue of the stock item into store.
Illustration:
In November, 1000 tonnes of stock item 1234 were purchased in three lots
N
E
L
S
O
N
C
O
L
L
E
G
E
3 November
11 November
21 November
During the same period four materials requisition were completed for 200 tonnes each on 5, 14, 22, and 27
November.
First in first out (FIFO)
Receipt/Issue
Date
Quantity
Price
3 Nov
400
60
5
(200)
60
11
300
70
14
(200)
60
21
300
80
22
(200)
70
27
(200)
70
30 Nov (bal)
200
80
Source: BPP (2010) Adapted by Author (2013)
Last in first out
Date
3 Nov
5
11
14
21
22
Receipt/ Issue
Quantity
Price
400
60
(200)
60
300
70
(200)
70
300
80
(200)
80
Item 1234
Value
60
24000
400
(12000)
(200)
21000
(12000)
(200)
24000
(14000)
(15000)
16000
Value
24000
(12000)
21000
(14000)
24000
(16000)
Item 1234
60
70
80
300
300
(200)
(100)
(100)
70
80
400
(200)
300
(200)
300
(200)
27
(200)
70
(15000)
(100)
30 Nov (bal)
200
80
12000
200
Source: BPP (2010) Adapted by Author (2013)
Weighted Average Cost
Receipt/ Issue
Weighted Average Price
Date
Quantity
Price
Value
Issue Price
3 Nov
400
60
24000
60
5
(200)
(12000)
60
200
12000
60
11
300
70
21000
Balance
500
33000
66
14
(200)
(13200)
66
300
19800
66
21
300
80
24000
Balance
22
27
600
(200)
(200)
30 Nov (bal)
200
BPP (2010) Adapted by Author (2013)
43800
(14600)
(14600)
73
73
73
14600
73
(100)
Organization decides to hold back Stocks in order to increase sales and profit. According to BPP (2010), when
organization decides to hold back stock several products may be offered, customers demand may be satisfied
and production is not delayed waiting for new delivery of materials. Moreover, holding stock may be
expensive; the objective of stock policy should be to minimize the total annual cost associated with stock.
O
N
Holding stock: Holding cost include interest on capital, the cost of storage space and equipment, administration
cost and losses from depreciation, and stealing. Holding cost can be reduced by keeping stock levels to a
minimum.
Ordering cost: This cost is incurred every time stock is purchased from supplier. Order cost include the buyer
time contacting the supplier, and the storekeepers time spent in checking the goods received. Order cost can
be reduced by placing orders only at infrequent time.
Economic order quantity: This is the order quantity for a stock item that will minimize the combined cost of
stock ordering plus stock holding over a given period of time. The economic order quantity is calculated on the
C
O
L
L
E
G
E
Q/2 = Ch
Ordering cost
D/Q = Co
EOQ
2*Co*D
Ch
Illustration:
Eddy Enterprise is a retailer of beer barrels. The company has an annual demand of 36750 barrels. The barrels
cost 12 each. Fresh suppliers can be obtained immediately, but ordering costs and the cost of carriage inwards
are 200 per order. The annual cost of holding one barrels in stock is estimated to ne 1, 20
EOQ =
2*Co* D
Ch
N
E
L
EOQ =
2 * 200 * 36750
1,20
EOQ =
14700000
1.20
EOQ =
12250000
EOQ =
3500 Barrels
S
O
N
C
O
L
L
E
G
E
Q/2 * Ch + D/Q * Co
2100 + 2100
4200
4 days
5 days
7 days
Maximum usage
Minimum usage
Re-order quantity
5400 units
L
S
Re-order level
C
O
L
L
E
G
E
3500 - (400 * 5)
3500 - 2000
1500
Maximum stock level
Re-order level + Re-order quantity (minimum usage * minimum lead time)
3500 + 5400 - (300 * 4)
8900 - 1200 = 7,700
4.2: PREPARE A PROJECT PLAN FOR AN ACTIVITY AND DETERMINE THE CRITICAL PATH
A project is an undertaking that as a beginning and an expected end that is carried out to meet organizational
goals or individual goals (BPP, 2013) within cost, schedule as well as quality objective. BPP (2013) argue that
the characteristics of a project include specific start time and expected end, a defied objectives, it contain cost,
and schedule to produce goods. In addition, the objectives of a project encompass quality, budget and
timescale
Features of project management
A project management is designed to an expected end as such it contain certain features
Team building: Project is executed by a group of people that has to communicate among themselves to achieve
the organizational objectives.
Expected problem in managing the project has to be resolve before the commencement of the project
N
If the project attracts different people with different interest it will cause problem
L
S
O
N
Analyze the project: At this point, the project is broken down into different activities and how the parts are
able to relate to each other (BPP, 2013).
Estimate the time and cost of each activity: The amount of time each activity will take in the completion of the
project is estimated in line with associated cost
Draw a network: The sequence of the activities is drawn in a diagrammatic form called the network diagram
Locate the critical path: The critical path is a chain of events that determines how long the several project will
take. Any delay in the critical path of the project will surely cause an overall delay in the completion of the
project at the expected time (ACCA, 2004; BPP, 2013).
C
O
L
L
E
G
E
Schedule the project: Determine the chain of events that leads to the most effective cost schedule.
Monitor and control: There should be careful attention to the schedule and consider any other progress chart
that has been drawn in order to monitor actual progress in line of planned achievement.
Revise the plan: The plan may need to be amended in order to take account of problems that happens during
the progress of the project.
Resource histogram: This is a project data where resources requirements, usage and availability and shown in a
histogram. BPP (2013) posit that this is only a simple bar that explains the number and mix of employees over
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the duration of the project. Moreover, this histogram is implored to control and manage the human resources
requirement of the project.
Critical Path Analysis: This is sometimes called Network Analysis. It is a tool used to plan activities so that a job
can be completed in the shortest time. The critical path analysis breaks a job into a number of tasks and looks
at the dependency of them (BPP, 2013). This is usually explored in the manufacturing and construction
companies,
According to BPP (2013), the network consists of two elements such as activity and the node. The activity
requires time and or resources, they are drawn as arrows from left to right and the length of the arrow is not
important. Further, the author argued that the node represents the start and the end of an activity, the node is
represented by circles and every network must start and end with a node.
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12
13
Using the same illustration, if the firm wants to apply for planning permission activity AA take 14 weeks
A
12
B
N
AA
E
14
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The right side of the circle are used to hold additional information
Note: The main reason for drawing a network is to identify the critical activities. To achieve this, the learner has
to calculate earliest time at which any given activity can start. Use the following formula to calculate it
EST = EST of previous activity + Duration of previous activity
Calculation of earliest start time: The information is placed in the top right hand quarter of the node. The first
node will always have an EST of zero
The earliest start time goes in the top right hand quarter of the node as zero as shown above. Using the
example previously, the EST for each activity would be calculated as follow
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+ 12
12
+ 3
15
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Finding the EST and simultaneous activities: When there are simultaneous activities there may be more than
one value for the EST
Illustration
A
12
+ 12
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2
+
AA
+
14
14
3
=
17
Since Activity B is dependent on both Activities A and AA, it cannot start until both are complete. Therefore the
highest figure must be taken. This means that the EST is 14 weeks
Identify the critical activities and the latest finishing time
Formula LFT = LFT at end of following activity Duration of following activity
The LFT goes in bottom right hand quarter of node
1
0
00
Using the first illustration, the LFT for each activity would be calculated as
A
1
2
=
12
12
3
=
15
12
15
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The earliest and the latest t me the project cam finish is 15 weeks. The EST and LFT of the last node are always
the same.
The float: The spare time is referred to as the float. Any activity without spare time is critical.
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A free float is the amount of spare time available for an activity without delaying the next activity. The total
float is the amount of spare time available for an activity without delaying the whole project.
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B
2
14
AA
0
0
3
14
17
17
14
Activity
Duration
EST
LFT
(Weeks)
Free
Total
Float
Float
12
14
AA
14
14
14
17
In the table above, Activity A can be delayed 2 weeks without delaying Activity B.
Activity A can be delayed 2 weeks without delaying the whole project
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Activity AA and B are critical because any delay will hold up the project
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Identifying the critical path: The critical path identifies the activities that have no float and this critical path in
the diagram above indicates the LFT of node 1 to node 2 of LFT and node 2 to node 3 . the node on the critical
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Illustration
A project involves the immediate purchase of an item of plant costing 110000. It would generate annual cash
flows of 24400 for five years, starting in year 1. The plant purchased would have a scrap value of 10000 for
five years, when the project terminates. Depreciation is on straight line basis.
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Calculate ROCE
Average annual depreciation
(110000 - 10000)/ 5
100000/5
20000
24400 - 20000
=
ROCE
4400
ROCE
4400 * 100
110000
ROCE
0.04 * 100 = 4%
Disadvantages
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It fails to take account of the expected life of the project as well as the timing of the cash flows and
There is no definite investment signal, because the decision to invest and not remains subjective.
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project. It is based on expected cash flows from the project, not accounting profit.
Reasons for payback period
Two reasons are involved in payback period. BPP (2013) posit that when two alternative capital investment
projects are compared, management decision is to accept one of the project and not both. As such, preference
is given to the project that can pay back quickly (ACCA, 2004).
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Management decision is to ensure that no project is undertaken unless a projected is expected to pay back in a
shorter time (BPP, 2013).
Calculating payback period
When the cash flows are constant in the expected life of the project, the formula approach is used.
Payback period
initial capital
Years
Cash flows
2,000,000
1 - 7
500,000
2,000,000
500,000
PBP
4 years
Decision: The project can pay back the initial capital investment in just 4 years
When the cash flows are not constant, the tabular method is used
Illustration
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Cash flows
(1,900)
300
500
600
800
500
Cash flows
Cumulative
Cash flows
(1,900)
(1,900)
300
300
500
800
600
1,400
800
500
Decision: The project can pay back in just 3 years and 8 months
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Advantages
Disadvantage
There is no objective measure as to what length of time should be set at the minimum payback period
value is higher than the cost. It is negative when the present value is less than the cost of the project (ACCA,
2004; BPP, 2013).
Illustration
Edward plc is considering a capital investment in new equipment. The estimated cash flows are as follows
Years
Cash flows
(240,000)
80,000
120,000
70,000
40,000
20,000
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Years
Cash flows
Discount factor 9%
Present Value
(240,000)
1,00
(240,000)
80,000
0.917
73,360
120,000
0.842
101,040
70,000
0.772
54,040
40,000
0.708
28,320
20,000
0.650
13,000
269760
Cost of project
240,000
29760
Decision: The project is worthwhile because the present value is higher than the cost of the project.
Internal rate of return (IRR)
As discussed before, the net present value NPV of discounted cash flow, the present values PV are calculated
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by discounting cash flows of a given cost of capital and the difference between the present value and the cost
of project is the net present value (ACCA, 2004; BPP, 2013). The internal rate of return hereafter IRR is to
calculate the exact discounting cash flow (DCF) rate of return that the project is expected to achieve. This is
the cost of capital at which the NPV is zero. BPP argues that it is a trial and error process to get to zero NPV.
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The expected rate of return IRR is higher than the target rate of return, and then the project is financially worth
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undertaking. Since the trial and error process in determining the IRR is a long time and waste of space, the
formula approach is necessary.
IRR
LR
+ NPV+
Combined NPVs
(HR - LR)
Years
Cash flows
(50,000)
18,000
25,000
20,000
10,000
Use the NPV that is calculated to estimate the IRR of the project
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Recommend, on financial ground alone, whether this project should go ahead
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Years
Cash flows
Present value
(50,000)
1.00
(50,000)
18,000
0.870
15,660
25,000
0.756
18,900
20,000
0.658
13, 160
10,000
0.572
5,720
Present value
53,440
Cost of project
50,000
3,440
Years
Cash flows
Present value
(50,000)
1.00
(50,000)
18,000
0.833
14,994
25,000
0.694
17,350
20,000
0.579
11,580
10,000
0.482
4,820
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Present value
48,714
Cost of project
50,000
(1,256)
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Decision: On the NPV account the NPV with a cost of capital of 15% as a positive NPV so it is worth undertaken.
Internal rate of return
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IRR =
15
IRR =
15
3,440
4,696
IRR
15
0,732 * 5
3,440
(20 - 15)
3,440 + 1,256
(5)
IRR
15
IRR
3.66
18.7%
Recommendation
The project is expected to earn a DCF return in excess of the target rate of 17%, so on financial ground it is a
worthwhile investment. The company can invest in the project
Summary measures of project performance, such as the NPV, IRR or AIRR, are used to indicate the overall
performance of a project under economic evaluation:
either an NPV or an IRR (or AIRR) is an essential result, to be included in the Project Appraisal
Report;
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as a minimum, to be acceptable a project should have an NPV greater than zero or an IRR (or
AIRR) greater than the discount rate, which is conventionally 12% for Bank-funded transport
projects;
the NPV or IRR (or AIRR) measure should also be used to compare alternative solutions, for
example alternative routes for road and rail links, and different locations for ports and
interchanges of all types;
sometimes it can pay, in economic terms, to postpone the implementation of a project to a
later date, the NPV can be used to test whether the timing of investment is optimal.
REFERENCES
th
Browne, M.N., & Keeley, S.M., (1998). Asking the right questions: A guide to critical thinking 5 ed. Upper
Saddle River, N.J Prentice Hall
BPP, (2013) Business Decision Making, Business Essentials; Supporting Pearson BTEC Higher Nationals and
Foundation Degrees Published by BPP learning Media.
BPP, (2010) Business Decision Making, Business Essentials; Supporting Pearson BTEC Higher Nationals and
Foundation Degrees Published by BPP learning Media.
Isaac, S., & Michael, W.B., (1997) Handbook in research and evaluation: A collection of principles, methods, and
strategies useful in the planning, design, and evaluation of studies in education and the behavioural sciences.
rd
Kraemer, K.L., (1991). Introduction. Paper presented at the information Systems Research Challenge: Survey
Research Methods.
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Kennerley, M., & Mason, S., (2008). The Use of Information in Decision Making: Literature Review for the Audit
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McLntyre, L. J., (1999). The practical skeptic: Core concepts in sociology. Mountain View VA: Mayfield
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Publishing.
Quinlan, C., (2010) Business Research Methods, Cengage learning. Publication UK.