Business Studies 0450/22 February/March 2025: question paper and mark scheme

Mark scheme

1(a) Explain four reasons why new businesses are at a greater risk of failing 8 than existing businesses. Award 1 mark for each relevant reason (max 4). Award a maximum of 1 additional mark for each explanation. There are no application marks available for this question. Relevant reasons might include: • Lacks finance – liquidity/cash flow problems • Poor planning – lack of experience / may not have a business plan • May lack management knowledge – lacks efficiency / not competitive / higher costs • Inadequate research – no effective market research / not identified customer needs • Lack of demand / poor quality product – cannot pay for costs from sales revenue • Difficulties entering a new market – does not have brand loyalty / there is high competition in the market • Difficulty competing with larger established firms in the market – as cannot benefit from economies of scale • Overexpansion – tries to grow too quickly at the start • Unable to respond quickly enough to changes in the external influences – for example not responding to increase in online sales For example: Lacks finance (1) may not have sufficient liquidity to pay current liabilities (1). 1(b) Consider the following two types of business organisation that Charly 12 could choose for her new business. Which type of business organisation should Charly choose? Justify your answer. • Sole trader • Private limited company Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of the two types of business organisation. 3 Well-justified recommendation. 9–12 Candidates discussing the two types of business organisation in detail, in context and with a well- justified recommendation, including why the alternative type of business organisation was rejected, should be rewarded with the top marks in the band. Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one type of business organisation. 2 5–8 Judgement with some justification/some evaluation of choice made. Candidates discussing one or more type of business organisation in detail and applying it to the case should be rewarded with the topmarks in the band. Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the types of business organisation with little/no explanation. 1 1–4 Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining the two types of business organisation in context should be rewarded with the top marks in the band. 0 No creditable response 0 1(b) Relevant points might include: Advantages Disadvantages Sole trader • Owner is in complete • Unlimited liability / control / makes all no limited liability – the decisions – likes which means all her being her own boss personal with no one to tell possessions are at her what to do – risk – not just the prefers making all $10 000 she plans to the business invest in the business decisions instead of • There is no-one to having to consult share others – such as responsibilities with which colour of or discuss business rugs to produce decisions – • Does not have to everything for the share profits – as sole trader to decide there is only one • Responsibility of the owner – keeps all owner – this can be the returns from her stressful, and she own hard work may be more likely • It is easy to set-up – to make mistakes as there are few legal • No continuity – if requirements – something happens reducing the costs of to Charly because setting up, such as she is ‘the business’ accountancy costs it will end – unlike a • Freedom to choose company where the her own working shares allow it to hours or holidays – carry on as it has a when she worked for separate legal the other business, identity she would have to • Lack of capital / work the hours difficult to raise stated in her finance – as only the employment contract $10 000 investment – which she would from Charly and have done when she borrowing $20 000 worked for the rug from the bank is manufacturer available to the • Complete privacy – business – may she does not have to make it more difficult share any financial to expand in the details with anyone future else – apart from the • May need to work tax office, as she will long hours / difficult still have to pay tax to take holidays / increased workload 1(b) Advantages Disadvantages Private limited • Charly and the • Accounts are not company business are a private – competitors separate legal producing rugs may identity – provides access the accounts continuity if • Cannot sell shares something happens to the public / cannot to Charly – company be sold on the stock can be sued instead exchange – not easy of Charly to transfer shares so • Charly can sell may make it more shares to family and difficult for Charly to friends to raise sell shares to family capital for the new and friends business – larger • Legal formalities amounts of capital setting up the rug may be raised than if company – has to a sole trader complete paperwork • Limited liability – will to register the not lose personal company which possessions if takes time and business fails – and money – may take she is aware that more time for Charly as a new business than setting up as a is at a greater risk sole trader of failing • Legal formalities to • Cannot be taken operate the over without the company – needs to consent of the have accounts shareholders if there audited and are more registered with the shareholders in the government takes business time and increases costs for CR 1(b) Recommendation Justification might include: • Charly should set up as sole trader because she will have complete control of which rugs to produce and will be able to keep all the profits from her hard work without having to share them with shareholders, as she may have to give dividends to shareholders if she formed a private limited company. She should not become a private limited company as this would mean that competitors may be able to see some of her accounts and she could not keep her financial data private, which she could if she was a sole trader. She will also have to pay to have her accounts audited each year which will increase costs. • Charly should set up as a private limited company because she will have the protection of limited liability which means if CR goes bankrupt, she will not lose her personal possessions, as she would if she was a sole trader, only the $10 000 she plans to invest in the business at the start.

Mark scheme

2(a) Explain two functions of management for Charly when she is operating 8 her new business. Award 1 mark for each function (max 2). Award a maximum of 3 additional marks for each explanation of the function of management – one of which must be applied to this context. Functions might include: • Planning – setting aims and targets for the business – will give a sense of direction with common targets to work towards • Organising – arranges the tasks for the employees – as a manager cannot do all the tasks and will need to delegate • Coordinating – bringing together the different departments/parts in the business – so tasks are carried out efficiently • Commanding – instructs the employees on how to carry out their tasks – gives guidance as required • Controlling – makes sure the employees produce the expected output each week – and that all aims are achieved For example: Planning (1) – setting aims and targets for the employees (1) so they remain efficient and produce the correct number of rugs (app). This will mean that CR will be able to meet orders and satisfy customer demand (1). Application could include: rugs; worked for a large rug manufacturer for 10 years; luxury product; forecast demand is 20 rugs per week; 2 possible locations for the new factory; needs to produce a cash flow forecast; store inventories of raw materials / finished products; 4 or 8 employees; new factory. 2(b) Using Appendix 2 and other information, consider the following two 12 possible locations for CR’s new factory. Which location should Charly choose? Justify your answer. • Location A • Location B Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of the two locations. 3 9–12 Well-justified recommendation. Candidates discussing the two locations in detail, in context and with a well-justified recommendation, including why the alternative location was rejected, should be rewarded with the top marks in the band. Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one location. 2 5–8 Judgement with some justification/some evaluation of choice made. Candidates discussing one or more locations in detail and applying them to the case should be rewarded with the top marks in the band. Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the locations with little/no explanation. 1 1–4 Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining the two locations in context should be rewarded with the top marks in the band. 0 No Creditable Response 0 2(b) Relevant points might include: Location A: • Rent and other costs are much lower at $400 per week – helping to reduce total costs to $1000 per week – may mean CR can charge a lower price for each rug – may be more competitive • Total costs may be less than half Location B even though output is half at 40 rugs per week – may not need to borrow $20 000 bank loan reducing interest payments in the future – less likely to have a cash flow problem • Total costs for Location A are $1000 whereas total costs for Location B are $2200 • Average cost per rug for Location A if operating at maximum output is $50 but rises to $62.50 if there is disruption to output – a lower increase of $12.50 than Location B which is $18.33 more for each rug produced • If there are power cuts, then they can only produce 16 rugs a week – demand is likely to be 20 – so they could be letting customers down and gain a poor reputation Location B: • Can produce double the output at 40 rugs each week – increases revenue if all the rugs are sold • Has 5% more impact on output if there are power cuts than Location A – reducing the number of rugs for sale to 30 – reducing possible revenue • Total costs are more than twice as much at $2200 per week – may lead to higher prices • Average cost to produce each rug is $55 if no power cuts but it rises to $73.33 if 25% output lost due to power cuts – this is a much higher increase than for Location A • Sales in the future could increase to 40 rugs per week so will be easier to meet this demand without needing to move to a larger factory or open another factory 2(b) Recommendation Justification might include: • Charly should choose Location A as the total costs each week are less than half that for Location B and this will help CR get started without needing to borrow all $20 000 from the bank. A smaller bank loan will reduce interest payments and make it less likely that CR fails. Location B has higher average costs which may result in a higher price for the rugs making them less likely to sell. • Charly should choose Location B as it is twice as large as Location A and can produce double the output at 40 rugs each week so in the long term when CR has become well known Charly can meet demand without needing to move to a larger factory.

Mark scheme

3(a) Explain one advantage and one disadvantage to CR of holding 8 inventory. Award 1 mark for each reason (max 2). Award a maximum of 3 additional marks for each explanation of the reason why holding inventory is important – one of which must be applied to this context. Reasons might include: Advantages: • Demand can easily be met from the inventory of finished products – this means customers are less likely to be disappointed by deliveries being late – and recommend the business to their friends • To ensure unexpected increases in demand can be met – this will avoid losing customers to competitors – keeping customers satisfied / maintaining a good reputation • Without inventory if CR opens its own shop there will be no products for customers to view – and they will not be able to see the excellent quality of the products – therefore may be less likely to make a purchase • May allow a wider variety of different products to be sold • Allows quick replacement of faulty goods Disadvantages: • Ties up cash – if too many raw materials are held then the cost may have been paid by Charly – but no revenue will have been received leading to a possible cash-flow problem • Too much inventory increases risk of products going out-of-date / being stolen / being damaged – the colour or pattern on rugs could go out of fashion – leading to lower sales / increased cost of storage • May take up too much storage space For example: To ensure unexpected increases in demand can be met (1) this will avoid losing customers to competitors (1) and will keep customers satisfied and keep buying from CR (1) when they want a new rug for their home (app). Application could include: rugs; sell through wholesalers / sell online / sell through own shops; luxury product; forecast demand is 20 rugs per week; store inventories of raw materials / finished products; new factory. 3(b) Consider the advantages and disadvantages of the following three ways 12 CR could use to sell its products. Which way should Charly choose? Justify your answer. • Selling through CR’s own shop • Selling online • Selling to a wholesaler Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more ways. 3 9–12 Well-justified recommendation. Candidates discussing all three ways in detail, in context and with a well-justified recommendation, including why the alternative ways are rejected, should be rewarded with the top marks in the band. Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one way. 2 5–8 Judgement with some justification/some evaluation of choice made. Candidates discussing in detail two or more ways and applying them to the case should be rewarded with the topmarks in the band. Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the ways with little/no explanation. 1 1–4 Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining the three ways in context should be rewarded with the top marks in the band. 0 No creditable response 0 3(b) Relevant points might include: Advantages Disadvantages Selling through • Sells directly to • May have high costs CR’s own shop customers of operating the (compared to shop – needs to sell wholesaler) – can many rugs to cover control how the these costs or will luxury rugs are have lower profit / displayed for make a loss customers • May not attract • CR keeps more of many customers if the profit margin – only CR rugs are than it would if sold sold – customers through a wholesaler may be attracted to – may be able to shops where a reduce the price – to greater variety of be more competitive colours and • May have more patterns of rugs are knowledgeable sales displayed staff who can give • Needs a higher better advice to amount of working customers – may be capital as has to more likely to buy a cover the inventory CR rug held in the shop • May need to borrow more than $20 000 as this is an additional expense for setting up the factory 3(b) Advantages Disadvantages Selling online • Can sell to a wider • Customers cannot market – as not see the colours and restricted to a single patterns before they location – may lead buy – may be put off to higher sales making the purchase • Keeps the profit leading to lower margin of the sales wholesalers – and • Can be very no need to set up expensive to own shops so lower post/deliver the rugs costs out to customers – • The website may be high delivery costs used to advertise the may be paid by CR luxury rugs – – possibly reducing reducing marketing profit margin costs • Cost of setting up • Payment made and maintaining the immediately website compared to a • Returns of rugs that wholesaler – may do not meet improve cash flow if customer revenue received expectations can be before the rug is expensive to made process – and may be damaged so needs repair or be scrapped – increased costs to CR • Warehouse space required to hold inventory before it is sent out to customers – increasing storage costs 3(b) Advantages Disadvantages Selling to a • Wholesaler buys in • Wholesaler will wholesaler bulk – CR sells a expect a discount of large volume of rugs the bulk purchase – in one delivery – CR receives a lower reducing delivery price for its rugs costs • Price charged to • Wholesaler will sell customer for rugs the rugs to a wider may be higher than number of retailers – if sold through CR’s reaching a much own shop – as larger market than retailers will need to the market for just add on their profit one shop margin as well as • Wholesaler may wholesaler profit provide advice on margin which colours and • Wholesaler may sell patterns are selling rugs from well – makes it competitors making easier for CR to it more difficult for produce products CR rugs to stand that meet customers’ out and be tastes and fashions purchased by retailers • Much less control over the advice given and presentation of the rugs to customers – may lead to lower sales 3(b) Recommendation Justification might include: • CR should sell through its own shop as advice on the quality of the luxury rugs and how they should be cared for can be communicated effectively to the customers. This should improve the reputation of CR’s rugs and make it more likely that customers become loyal. Selling online may be very expensive in terms of maintaining the website and sales may be low if customers prefer to see the rug before buying. A wholesaler may lead to the price of rugs being too high and less competitive as they will be sold on to retailers and their profit margin will be added on to the final price paid by customers. • CR should sell its rugs online as this will be cheaper than setting up its own shop and even though there will be costs to monitor the website and process orders it will be a lot cheaper than operating its own shop. • CR should sell through a wholesaler as it will buy in bulk making transport and marketing much easier and cheaper. The wholesaler will then sell on to many retailers across country P leading to CR’s rugs being sold to a much wider market.

Mark scheme

4(a) Explain two cash inflows and two cash outflows that are likely to be 8 included in CR’s cash flow forecast for its first year of trading. Award 1 mark for each cash inflow/outflow (max 2 inflows/2 max outflows). Award a maximum of 1 additional mark for each cash inflow/outflow which must be applied to this context. Relevant cash inflows: • Cash sales – from the sale of rugs • Credit sales – if trade credit is given to wholesalers • Money borrowed from external source – as Charly is to take out a bank loan for $20 000 • Money invested by owner – $10 000 will be put in by Charly to start up the business Relevant cash outflows: • Wages – to the 4 or 8 employees • Rent – of the new factory • Electricity/power – $200 or $400 depending on the location chosen • Interest payments – to the bank for an overdraft if taken out (or for the bank loan of £20 000) • Raw materials For example: Cash from the sale of products (1) in this case it will be from the sale of rugs (app). Application might include: rugs; bank loan for $20 000; sell through wholesalers / sell online / sell through own shops; own investment of $10 000; luxury product; forecast demand is 20 rugs per week; interest rates increase from 4% to 7%; figures from Appendix 2; new factory. 4(b) Using Appendix 3 and other information, consider the effects on CR of 12 the decrease in taxes and the increase in interest rates in country P. Which change is likely to have the greatest effect on CR’s profit in its first year? Justify your answer. Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of both changes. 3 9–12 Well-justified conclusion. Candidates discussing both changes in detail, in context and with a well-justified conclusion, including why the alternative change is rejected, should be rewarded with the top marks in the band. Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one change. 2 5–8 Judgement with some justification/some evaluation of choices made. Candidates discussing both changes in detail and applying them to the case should be rewarded with the top marks in the band. Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the changes with little/no explanation. 1 1–4 Simple judgement with limited justification/limited evaluation of choices made. Candidates outlining both changes in context should be rewarded with the top marks in the band. 0 No creditable response. 0 4(b) Relevant points might include: Decrease in taxes • Reduction in tax on people’s income by 5% – leading to higher income available for spending by consumers – may lead to more spending by consumers on luxury rugs – increasing CR’s sales and revenue • A decrease in tax on profits by 2% may leave more for investment at the end of the first year – more retained profit and more investment into the new factory in its second year • Decrease in tax on spending – may lead to price of rugs being lower – decrease prices in shops – increases demand and sales • May reduce grants to businesses – if a decrease in government spending because of lower tax revenue Increase in • Increase the interest costs of the new bank loan interest rates – Charly may be less likely to invest in the rug making factory – may buy less new equipment – higher interest rates increase expenses • Increases the cost if overdraft needed – increases interest payments – higher costs is likely to result in a lower profit • May reduce the available income consumers can spend – if they have a mortgage or loan to repay – higher repayments – may decrease demand for rugs • Decreased demand for luxury rugs – as increase in interest rates may lead to lower economic growth in country P – leading to higher unemployment and lower incomes for consumers – lower revenue for CR 4(b) Conclusion Justification could include: • A decrease in taxes will have the biggest effect on CR’s profit as consumers will have more income after tax to spend. Therefore, revenue from the sale of rugs may increase, and if costs do not also increase, then profit will increase. The increase in interest rates will only affect CR’s profit if the bank loan of $20 000 is definitely taken out. • An increase in interest rates will have the biggest effect on CR’s profit as lower taxes may not affect demand for luxury rugs because only high-income people will purchase luxury rugs. An increase in interest rates may discourage Charly from building a larger factory and she may choose to start-up on a smaller scale at location A. This will lower the output from the factory and is likely to decrease future profit from the lower sales of rugs.