Fiveable
💼AP Business with Personal Finance
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💼AP Business with Personal Finance

FRQ 4 – Business Decision
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Unit 4: Management and Strategy
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This mapping reflects College Board's exam structure - each FRQ type tests specific skills that are taught in particular units.

Practice FRQ 1 of 161/16

4. You have been retained as a consultant to help the business described in the scenario decide between two alternative courses of action.

Crescent Culinary is a medium-sized manufacturer of premium carbon-steel cookware based in Portland, Oregon. For the past 15 years, Crescent has sourced its raw carbon-steel sheets exclusively from a local supplier, Oregon Steelworks. Crescent has built a strong brand reputation based on the exceptional durability and quality of its pans. However, over the last two years, rising domestic labor costs have forced Oregon Steelworks to increase its prices by 20%. As a result, Crescent’s profit margins have shrunk significantly, making it difficult to compete with rival cookware brands that offer similar products at lower price points. Crescent’s management team is evaluating its supply chain strategy and has narrowed the decision to two options.

Oregon Steelworks Proposal — Stay with Current Supplier: The first option is to renew the contract with Oregon Steelworks. This local supplier guarantees a 99% defect-free rate and offers a short lead time of just two weeks from order to delivery. Because of the close proximity, Crescent can order materials in small batches, which keeps inventory storage costs low. However, the high price of the steel means Crescent will have to accept lower profit margins or raise the retail price of its cookware.

GlobalMetals Proposal — Switch to New Supplier: The second option is to switch to GlobalMetals, a large overseas steel manufacturer. GlobalMetals offers carbon-steel sheets at a significantly lower price, which would immediately restore Crescent’s historical profit margins. However, the overseas shipping process requires an eight-week lead time and larger minimum order quantities, meaning Crescent would need to lease additional warehouse space to store the extra inventory. Furthermore, GlobalMetals has an estimated defect rate of 4%, which could occasionally impact production efficiency.

Financial Analysis: Crescent’s management has prepared financial projections for each supply chain option. The projections indicate an annual return on investment (ROI) of 12% if the company stays with the Oregon Steelworks proposal, compared to an 18% ROI for the GlobalMetals proposal. The annual material cost would be $1,200,000 with Oregon Steelworks, whereas it would drop to $850,000 with GlobalMetals. Crescent currently has no cash set aside for supplier transitions; therefore, to switch to GlobalMetals, the company would need to raise $150,000 in additional financial capital via a short-term loan to cover one-time international tooling and initial bulk-shipping setup costs. Staying with Oregon Steelworks requires $0 in additional financial capital.

A.

Crescent Culinary is affected by internal, market, and external factors that have an impact on its ability to achieve its goals.

i.

Describe an internal, a market, or an external factor indicated in the scenario that affects Crescent Culinary.

ii.

Explain how the factor you selected in part A (i) creates an opportunity or a problem for Crescent Culinary.

Figure 1. Financial Summary by Proposal

Table 1
B.

There are several financial and nonfinancial criteria shown in Figure 1 and the scenario that can be used to compare the Oregon Steelworks and GlobalMetals proposals.

i.

Using projected annual return on investment as a criterion, describe a difference or similarity between the two courses of action. Include specific evidence related to each course of action in your response.

ii.

Using one additional financial criterion relevant to the decision, describe a difference or similarity between the two courses of action. Include specific evidence related to each course of action in your response.

iii.

Using one nonfinancial criterion relevant to the decision, describe a difference or similarity between the two courses of action. Include specific evidence related to each course of action in your response.

C.

Recommend a course of action for Crescent Culinary.

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FRQ Directions
Free Response Question Practice

This practice environment simulates the AP AP Business with Personal Finance Free Response Questions section. Here are some guidelines:

  • Read each question carefullybefore responding. Pay attention to command verbs like "identify," "explain," "analyze," or "evaluate."
  • Use the timer to practice time management. You can pause, restart, or hide the timer as needed.
  • Mark for Review if you want to come back to a question later.
  • Your responses are saved automatically as you type. You can also use the drawing tool for questions that require diagrams or graphs.
  • Use the toolbar for formatting options like bold, italic, subscript, and superscript.
  • Navigate between questions using the Previous and Next buttons at the bottom of the screen.

Tip: Answer all parts of each question. Partial credit is often available, so even if you are unsure, provide what you know.