Business Studies 0450/22 May/June 2021: question paper and mark scheme

Mark scheme

1(a) Explain two advantages and two disadvantages of setting up a 8 business as a private limited company. Award 1 mark for each relevant advantage/disadvantage (maximum of two advantages / two disadvantages). Award a maximum of one additional mark for each explanation of the advantage/disadvantage of setting up a private limited company. Relevant answers might include: Advantages • Raise capital from the sale of shares – may raise more capital than if a sole trader / partnership • Limited liability – will not lose personal possessions if business fails • Separate legal identity – company can be sued instead of the owners • Continuity • Cannot be taken over without the consent of the shareholders Disadvantages • Cannot sell shares to the public / cannot be sold on the stock exchange – as can only be sold to family and friends so restricts the capital that can be raised from share issue • Legal formalities setting up the company – have to complete paperwork to register the company which takes time and money • Accounts / financial statements are available for the public to see • Not easy to transfer shares – as must have the approval of the other shareholders • Financial statements need to be audited each year – increase in annual expenses For example: Capital can be raised from the sale of shares (1) and this may provide more finance than if just owners’ savings are used if a sole trader. (1) 1(b) Consider the following three factors that affect the location of TT’s 12 shop. Which of the locations in Appendix 1 should Tandeep choose? Justify your answer. • Customers in the area • Rent • Types of shops nearby Level Description Marks 3 Sound application of knowledge and understanding 9–12 of relevant business concepts using appropriate terminology. Detailed discussion of two or more factors. Well-justified conclusion. Candidates discussing the three factors in detail, in context and with a well-justified conclusion including why the alternative factors were rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding 5–8 of relevant business concepts using appropriate terminology. Detailed discussion of at least one factor. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more factors in detail and applying it to the case should be rewarded with the top marks in the band. 1 Limited application of knowledge and understanding 1–4 of relevant business concepts. Limited ability to discuss the factors with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining the three factors in context should be rewarded with the top marks in the band. 0 No creditable response. 0 1(b) Relevant points might include: Customers • High footfall in the shopping mall in location A in the area makes high sales more likely • What types of shoppers are there – high or low- income shoppers? • If high-income customers in the mall then target market uses the mall and higher number of sales of nursery items likely in location A • Location B seems to have lower-income customers and may not be the target market for toys sales • Do families visit the area – if so, then higher sales of toys are more likely Rent • If high rent as in location A then this increases fixed costs – may lead to prices being higher – lower sales • But if sales of toys are high then the rent per item sold will be low – may not have much effect on prices • Rent is low in location B giving lower costs – but there may not be sufficient customers in the area to provide higher revenue to make the profit higher in this location Types of • As there are several other toy shops in location A shops then may lead to lower sales due to competition nearby • However, several competitors in the area may lead to more customers coming to the mall to look for toys – may be a well-known area for toys and attract more customers • If banks and children’s playground are in the area in location A then this may attract more customers to the mall leading to higher sales Conclusion • The number of shoppers in the area is most important and so Location A is the best one to choose. Without the area being busy and attracting a high number of shoppers the toy shop will not have many customers. Low rent at location B is less important because high revenue from toy sales will more than compensate for the higher rent in location A. Other shops nearby are also less important as customers come to the shop specifically to buy toys irrespective of the other shops in the area so this will not affect the choice between location A and B • The rent is low in location B and this should be chosen for the new toy shop. It will be more affordable for a new business that will be short of funds and will keep the expenses low during the time it gets established and well-known by customers.

Mark scheme

2(a) Explain one likely advantage and one likely disadvantage for Tandeep 8 if he decides to import the pushchairs (strollers) he sells. Award 1 mark for each relevant advantage/disadvantage (max of 2). Award a maximum of 3 additional marks for each explanation of the advantage/disadvantage for Tandeep if he decides to import the pushchairs he sells – one of which must be applied to this context. Relevant advantages might include: • Have a wider range of pushchairs in the shop / better quality – meet the needs of more customers – sell more pushchairs – higher revenue • Fill a gap in the market for foreign branded products – satisfy those customer needs – higher-income customers may prefer these brands • May be purchased at lower cost price – lower selling price in the shop – increase demand/sales • These pushchairs may not be manufactured locally Relevant disadvantages might include: • May have to pay higher prices if tariffs are imposed – raises the cost of inventory for TT – may lead to higher prices in the shop • May have quotas that limit the quantity imported – restricts the supply/availability of products in the shop – may lead to higher prices as a result of the shortages • Increased costs of finding foreign suppliers – have to contact many suppliers in other countries to order inventory – takes Tandeep time to do this when he could be doing other tasks • Increased delivery time – as the inventory has further to travel than if produced in country Z – may delay goods ordered by customers • Imported pushchairs may not meet the same standards as locally produced pushchairs – may lead to pushchairs breaking – leading to a poor reputation for TT – lose customers to competitors • Possibly more damaged goods – higher costs as have to replace damaged goods – reduces profit • Risk of exchange rate fluctuations affecting cost price of inventories – lower exchange rate will lead to higher import costs For example: This may mean Tandeep will have a wider range of pushchairs in the shop (1) and this may appeal to high income customers who are their target market (app) meaning Tandeep will have higher sales (1). Meeting these customer needs should ensure the business makes a profit and is successful in the future (1). Application might include: toys, nursery, toy shop, toy manufacturer, shop manager, 5 sales assistants, administration tasks; higher income groups, babies, accessories. ‘Pushchairs (strollers)’ is included in the question and therefore cannot be rewarded as application. 2(b) Refer to Appendix 2 and other information. Consider the advantages 12 and disadvantages of TT purchasing toy cars either from a wholesaler or manufacturer. Which channel of distribution should TT choose? Justify your answer. Level Description Marks 3 Sound application of knowledge and understanding 9–12 of relevant business concepts using appropriate terminology. Detailed discussion of both channels of distribution. Well-justified recommendation. Candidates discussing both channels of distribution in detail, in context and with a well-justified recommendation including why the alternative channel was rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding 5–8 of relevant business concepts using appropriate terminology. Detailed discussion of at least one channel of distribution. Judgement with some justification / some evaluation of choices made. Candidates discussing of at least one channel of distribution in detail and applying it to the case should be rewarded with the top marks in the band. 1 Limited application of knowledge and understanding 1–4 of relevant business concepts. Limited ability to discuss channels of distribution with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining both channels of distribution in context should be rewarded with the top marks in the band. 0 No creditable response. 0 2(b) Relevant points might include: Advantages Disadvantages Wholesaler in • Can buy toy cars in • Higher cost price country Z smaller quantities of $15 each as of 10 units wholesaler mark-up • Reduced need for added to the price storage – reduced of each toy car – warehouse/storage may have to charge costs a higher price than • Less working capital competitors – lower tied up in inventory sales • Quicker to respond • Full range of toy to changing cars may not be customer demand available • Provides advice on • No direct link to toy which toy cars sell manufacturers – well less advice / after sales service Manufacturer in • Cheaper cost price • Must buy in larger country Z at $5 each – so quantities of at lower costs least 1000 units • Long time period for • May not have the trade credit given storage space at 3 months – so • Longer delivery may improve cash time of 4 weeks flow position • May not be able to respond to customer demand quickly Recommendation • Buy from the wholesaler as this means that a large order of 1000 units does not have to be made if he bought from the manufacturer. TT may not be able to sell such a large quantity of a particular toy car. Hence this does not tie up working capital in inventory which does not sell quickly. Also, the wholesaler can give advice on which toy cars are selling well making it more likely that the TT shop will satisfy customer demand. • Buy from manufacturer as the unit cost is only $5 which is $10 cheaper and so Tandeep can keep down the price of toy cars sold in his shop leading to much higher sales.

Mark scheme

3(a) Explain two reasons why the cash-flow forecast in Appendix 3 is 8 important to TT. Award 1 mark for each relevant reason (maximum 2). Award a maximum of 3 additional marks for each explanation of the reason why the cash-flow forecast is important to TT – one of which must be applied to this context. Relevant reasons might include: • To see if there is a cash flow problem / liquidity problem – if so, he needs to organise an overdraft – the cash-flow forecast will help support Tandeep persuading the bank to give an overdraft / bank loan. (Other ways of solving a cash flow problem might be given, e.g. apply for trade credit) • To see if there is sufficient cash / working capital to pay day-to-day costs – so, TT can pay expenses – without the need for additional working capital • Whether the company is holding too much cash – perhaps there may be better uses of the cash – that may yield a greater return on the capital • May help with decisions/planning about when to purchase assets/equipment/inventory • Help to sell shares to new investors • Can be used to compare financial performance, against actual performance over time (e.g. sales) • Can be used to help apply for a bank loan For example: Tandeep may use the cash-flow forecast to take to the bank to support the application for an overdraft (1) as in the first month of trading he will need to borrow $200 to keep trading (app). This will allow TT to make a successful start even though Tandeep does not have sufficient funds to start with (1) but TT will quickly be able to pay the overdraft back in the following month (1). Application might include: toys, nursery, toy shop, toy manufacturer, shop manager, 5 sales assistants, administration tasks, information from Appendix 3 cash-flow forecast. 3(b) Consider how a job description, job specification and the shortlist of 12 candidates will be helpful in the recruitment process for TT. Which is the most important stage to ensure Tandeep recruits the best person to be a manager at TT? Justify your answer. Level Description Marks 3 Sound application of knowledge and understanding 9–12 of relevant business concepts using appropriate terminology. Detailed discussion of two or more stages of the recruitment process. Well-justified conclusion. Candidates discussing all three stages in detail, in context and with a well-justified conclusion including why the other stages were less important should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding 5–8 of relevant business concepts using appropriate terminology. Detailed discussion of at least one stage. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more stages in detail and applying it to the case should be rewarded with the top marks in the band. 1 Limited application of knowledge and understanding 1–4 of relevant business concepts. Limited ability to discuss these stages with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining all three stages in context should be rewarded with the top marks in the band. 0 No creditable response. 0 3(b) Relevant points might include: Job • Outlines the duties of the job – sets out clearly what description the toy shop manager will be expected to do – more likely to get suitable applicants as they will know what is required of them and if they will be able to carry out the necessary tasks • Makes it clear what the applicant should be able to do – if they cannot do these tasks necessary to manage the toy shop then they should not apply for the job • Helps to ensure only suitable people apply for the job as they are clear about the roles and responsibilities of the position Job • Makes it clear what qualifications, experience and specification skills are required for the job • Makes it easier for Tandeep to decide between candidates as to who may be most suitable for the manager of the toy shop – as qualifications, skills, personal qualities and experience are listed • Easier for candidates to see if they could do the job and therefore decide whether to apply for the job – people without the necessary qualifications should not apply – less time is wasted reading through applications that are not suitable • Easier when shortlisting applicants for interview to select the most suitable people Shortlisting • Selects the most suitable applicants to interview so less time wasted with unsuitable people for the job of manager of the toy shop • May use references to help shortlist applicants to remove unsuitable people even though the application form may make the person seem most suitable Conclusion • A job description makes it clear what the job requires and therefore it is easier for Tandeep to know what tasks in the toy shop he wants the applicant to be able to do. It is no good shortlisting unsuitable applicants and the job specification only lists skills and qualifications but does not give details of the job of manager of the toy shop. Therefore, a job description is the most important • A job specification is most important as it makes it clear what qualifications, experience and skills are required to be the manager of the toy shop. Without this an unsuitable person may be recruited and someone without the necessary experience could not do the job • Without shortlisting Tandeep could waste a lot of time interviewing unsuitable applicants for the job of manager when they may not know anything about toy shops

Mark scheme

4(a) Explain four reasons why the level of inventory is important to TT. 8 Award 1 mark for each relevant reason (maximum of four reasons). Award a maximum of 1 additional mark for each applied explanation of the reason why the level of inventory is important to TT. Relevant reasons might include: • To earn revenue from sales – of nursery equipment • To ensure demand can be met to avoid losing customers – for pushchairs/strollers • Without inventory there are no products for customers to see – so no toys will be sold • To meet unexpected increases in demand – for products aimed at babies up to teenagers/toys are often fashionable and children will not want to wait • Ties up cash unnecessarily – if too much inventory of toys cars is held • Too much inventory increases risk of out of date / theft / damage – for nursery furniture • May take up too much storage space – in the toy shop • May allow a variety of different products to be sold • Too little inventory could damage the reputation of the business • To avoid losing customers to competitors • To avoid running out of certain items of inventory in the shop • Long delivery / lead time – because some toy manufactures take 4 weeks for delivery • Allows quick replacement of faulty goods • Too high inventory may indicate a product not selling well For example: To ensure demand can be met to avoid losing customers (1) for pushchairs/strollers (app). Application could include: toys, nursery, toy shop, toy manufacturer, shop manager, 5 sales assistants, administration tasks, pushchairs/strollers, nursery furniture, well known brands of toys, target market is higher income groups, products aimed for all ages of children from babies to teenagers, meeting demand is seen as important, start-up business, accessories. 4(b) Consider how the following three legal controls will affect TT. Which 12 legal control will have the greatest effect on TT? Justify your answer. • No misleading promotion • All goods must be safe for the consumer • Restrictions on the type of packaging allowed Level Description Marks 3 Sound application of knowledge and understanding 9–12 of relevant business concepts using appropriate terminology. Detailed discussion of two or more legal controls. Well-justified conclusion. Candidates discussing all three legal controls in detail, in context and with a well-justified conclusion including why the alternative legal controls were rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding 5–8 of relevant business concepts using appropriate terminology. Detailed discussion of at least one legal control. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more legal controls in detail and applying them to the case should be rewarded with the top marks in the band. 1 Limited application of knowledge and understanding 1–4 of relevant business concepts. Limited ability to discuss legal controls with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining all three legal controls in context should be rewarded with the top marks in the band. 0 No creditable response. 0 4(b) Relevant points might include: No • Toys cannot be described as performing a particular misleading function and then not being able to do this, for promotion example a toy car advertised as being suitable for up to a certain weight of child when the toy car is not strong enough to hold that weight • Price cannot be advertised as being reduced when it has not been previously sold at the higher price – so any price reductions at the toy shop must be genuine reductions – or TT could be sued/fined • Toys cannot be advertised as suitable for babies when the toy has small parts that could choke a baby and are therefore unsuitable – may limit some of the claims made in TT advertisements – need to make sure any claims about toys are correct – takes time and effort to check up on facts from toy manufacturers • May increase costs if have to change current advert/promotion All goods • Toys sold must be safe for children as if a child is must be injured whilst playing with a toy sold by TT then could safe for the be sued for damages – increases costs / TT will gain a consumer poor reputation with consumers – lose sales • If a toy car easily breaks, then TT will incur higher costs of having to replace the toy car – then return these to the manufacturer • May need to find new supplier – higher unit costs / time taken to find new supplier Restrictions • Higher cost for toy manufacturers – may be passed on the type on to TT as higher cost price – higher price to of customers – reduced demand – lower sales/revenue packaging • Toys may be more easily damaged if less packaging allowed used – increased cost for TT of replacement toys • Toys may be less attractive if there is no attractive packaging used – lower sales for TT / TT may need to change to other types of toys 4(b) Conclusion • As TT is a toy shop it will need to make sure its advertising of toys is not misleading because it may gain a bad reputation if claims about the toys it sells are not true, so this is the most important legal control for TT. It can easily make sure it does not advertise lower price sales when the prices have not been reduced. Packaging is likely to be provided by the toy manufacturer and so is unlikely to affect TT. As TT sells branded goods then these are all likely to have been tested and are safe for children. • Toys being safe will have the greatest effect on TT if this legal control is not followed as TT could be sued for damages and this will raise its costs and result in a bad reputation leading to lower sales at the toy shop. • Restrictions on the type of packaging will have the greatest effect on TT as the toy manufacturer may have to increase its prices to TT and therefore TT may need to raise its prices leading to lower demand and revenue.