Business Studies 0450/22 October/November 2021: question paper and mark scheme

Mark scheme

1(a) Explain two reasons why PPE may remain small. 8 Award 1 mark for a suitable reason (maximum of 2 marks). Award a maximum of 3 additional marks for each explanation of why PPE may remain small – one of which must be applied to this context. Suitable reasons might include: • The product is specialised – produced using job production / not suitable to be produced on a large scale – customer preference would be lost / designed to needs of customer • Market size - doesn’t have a large market / sales are low - output therefore on a small scale • Owner’s objectives / owner’s preference / owner wants the business to remain small – to keep a work life balance • Easier to manage / control - may not want the stress / does not have the personal skills to manage a larger business - keeps closer links with employees and customers • Lack of finance / fewer finance options for a sole trader For example: The product is specialised and not produced on a large scale (1) as each piece of playground equipment is made to order (app) so cannot be mass-produced. (1) Therefore, the business is likely to remain small as it will produce a limited number of pieces of play equipment when they are ordered. (1) Application could include: wooden playground equipment; children’s playgrounds; sole trader; job production; individually designed playground equipment; 3 skilled workers; crowd-funding; cost-plus pricing; fully tested to meet legal safety standards; parents want to have playground equipment at home; wants to spend time with her children; 2 children; high-quality equipment. 1(b) Consider the advantages and disadvantages of two suitable types of 12 business organisation for PPE. Which do you think is the best one if PPE grows? Justify your answer. Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of both types of business organisation. Well-justified conclusion. Candidates discussing both 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. 2 Sound application of knowledge and understanding of 5–8 relevant business concepts using appropriate terminology. Detailed discussion of at least one type of business organisation. Judgement with some justification / some evaluation of choices made. Candidates discussing at least one type of business organisation 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 of 1–4 relevant business concepts. Limited ability to discuss the types of business organisation with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining both 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 • Few legal regulations • No one else to • Kaari will be her own discuss business boss and she wants decisions with the business to • Does not have limited remain small liability • Freedom to choose • Lacks capital to own hours/holidays expand and needs etc. $20 000 for new • Close contact with equipment retailers and • No one to help if she government is ill – so no one to tell customers the 3 workers what to • Keeps all the profits do • Financial information • No continuity kept private Partnership • More capital to invest • Does not have limited and will need $20 000 liability for new equipment • Partners can disagree • Responsibility of • No continuity running the business • No legal formalities is now shared and • Share profit Kaari is performing all the management roles which may be difficult for her • Losses will be shared • Each partner may have different skills • Share risks Private limited • Limited liability • Legal formalities to company • Shares can be sold to set up and run raise capital – may • Finances may not be not need to borrow private the $20 000 for new • Can only sell shares equipment to family and friends – • Can control who buys limits amount of shares capital that can be raised 1(b) Recommendation • Sole trader as individually designed playground equipment has a limited market and therefore Kaari is likely to keep the business small. She can be her own boss and keep all the profit without having to share with any other owners unlike a partnership. A limited company takes more time and expense to set up and certain legal formalities will need to be followed to run the business which Kaari may not want to follow. • Partnership as Kaari is carrying out all the management roles and this may be too much for just one person. So, she prefers to add another person who has different skills to help her manage the business as it grows. • A larger business may build up more debts and therefore Kaari might want the benefit of limited liability to protect her personal assets and ensure her family of two children are secure.

Mark scheme

2(a) Explain two advantages and two disadvantages of using job production. 8 Award 1 mark for an advantage/disadvantage (maximum of four marks). Award a maximum of 1 additional mark for each explanation of the advantage/disadvantage of using job production. Advantages might include: • Suitable for individually designed products / specialised products or services - will meet the exact requirements of the customer • The workers may have more varied tasks - labour force more flexible and can move between tasks when required • Higher employee motivation from more interesting work - lower labour turnover • A high price can often be charged - due to possibly high-quality goods Disadvantages might include: • Often requires skilled labour – higher wages • Usually labour intensive – higher unit costs • Takes longer to make the product - may delay the delivery of finished items to customers making them unhappy • If errors are made, they are expensive to repair - increased costs • Small quantities of specific raw materials are required – raises variable costs • Small output (relative to batch or flow) – raises unit costs / lack of economies of scale For example: The workers have more varied tasks (1) which makes their jobs more interesting and they are less likely to leave to find another job. (1) There are no application marks on this question. 2(b) Consider the advantages and disadvantages to PPE of using the 12 following three sources of finance to obtain new machinery. Which source should PPE choose? Justify your answer. • Crowd-funding • Bank loan • Leasing Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of two or more sources. Well-justified recommendation. Candidates discussing all three sources in detail, in context and with a well-justified recommendation including why the alternative sources were rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding of 5–8 relevant business concepts using appropriate terminology. Detailed discussion of at least one source. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more sources 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 of 1–4 relevant business concepts. Limited ability to discuss the sources with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining all three sources 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 Crowd-funding • No initial fees are • Platform charges a payable to the crowd- percentage fee if funding platform finance raised • Allow the reaction of • If total amount of the public to be tested $20 000 is not raised, before launching new then all money paid playground will have to be equipment returned • Used by • It publicises the idea entrepreneurs when and this may allow other sources have competitors to steal turned them down the idea for new • Not a debt so does playground not have to be repaid equipment / no interest to pay Bank loan • Time to repay – the • Interest payable $20 000 • As PPE is a sole • Can organise whole trader the rate of amount in a single interest is likely to be transaction high • Quick to arrange • Security/collateral may be required • May need to produce business plan/documents Leasing • Does not have to find • Repayments may be the large amount of higher than if the capital of $20 000 asset was purchased • Maintenance paid for straight away – over by leasing company time it may be the most expensive way • Equipment to make playground toys may have to be returned at the end of the lease 2(b) Recommendation • Crowd-funding may have to be chosen if the other sources are not available to such a small sole trader business. Kaari may have no other option. Interest on the bank loan may be high making it expensive to repay and leasing will not allow PPE to keep the asset at the end of the lease and it can be a more expensive way to obtain the asset. • Bank loan is the best source of finance to use. It is repayable over several years which can make it easier to make repayments each month as revenue from the sale of playground equipment comes into the business. • As the business is a sole trader then Kaari is not able to make a large outlay of cash so choosing leasing is the best option as this just requires a repayment each month. Also, maintenance does not have to be paid by Kaari keeping these costs down.

Mark scheme

3(a) Explain one cost and one benefit for PPE of developing a new product. 8 Award one mark for a cost/benefit (maximum of 2 marks). Award a maximum of 3 additional marks for each explanation of the cost/benefit of developing new products – one of which must be applied to this context. Costs might include: • Costs of carrying out market research - to research the target market - to identify the size of the potential sales • Costs of product development / producing trial products - produce prototype - cost of materials and components for trial products / time- consuming • Risk of failure of the business if the product is unsuccessful – due to lack of sales giving no revenue • May damage image of the business and other brands if product is unsuccessful Benefits might include: • Unique Selling Point [USP] may give business a competitive advantage – consumers may think the business produces up-to-date products – making them more popular than competitors that are seen as old fashioned • The business will have a more diversified range of products – spreads risk – reduces chances of business failure if one product fails • May attract more customers – increase sales • Business may expand into new markets - increases sales • Business may expand in existing markets For example: There may be high costs of carrying out market research (1) to find out what customers want from a new product. (1) This is needed when developing a new piece of playground equipment (app) to ensure it will be attractive to children and therefore be more likely to sell. (1) Application could include: wooden playground equipment; children’s playgrounds; sole trader; job production; individually designed playground equipment; 3 skilled workers; cost-plus pricing; fully tested to meet legal safety standards; parents want to have playground equipment at home; many competitors; no other similar products in the market. 3(b) Consider the following three pricing methods PPE could use when 12 launching its new product. Which pricing method should it use? Justify your answer. • Cost-plus • Penetration • Skimming Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of two or more methods. Well-justified recommendation. Candidates discussing all three methods in detail, in context and with a well-justified recommendation including why the alternative methods were rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding of 5–8 relevant business concepts using appropriate terminology. Detailed discussion of at least one method. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more methods 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 of 1–4 relevant business concepts. Limited ability to discuss the methods with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining three methods 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 Cost-plus • Easy to apply to • The costs of individually producing the new produced product may be high playground and so the price of equipment the final product may • Can have different be too high to be mark-up in different competitive – loses markets customers – as there • Each product makes are many a profit for the competitors business • Profit will only be made if sufficient playground toys are sold to break-even • May not give the brand image of the high-quality product • Time is taken to research and calculate cost prices • No incentive to reduce costs Penetration • Low price attracts • Low price will mean pricing customers and low profit per unit increases sales of • Customer may expect playground prices to remain low equipment and therefore not • Helps to ensure a purchase the toys successful launch into when the price is a new market raised at a later date • Quickly builds market • Consumer may think share low price is due to low-quality product 3(b) Advantages Disadvantages Skimming • Customer may think • High price may put off the playground potential customers equipment is of high • The high price and quality possible high profit • High research and per item of development costs playground will quickly be equipment may recovered encourage • The product is new competitors to quickly and unique on the enter the market market, then high taking away its prices may be paid by advantage of being customers leading to first with the new high profits before product competitors produce a similar product Recommendation • Cost-plus pricing as the product is new so there are no other competitors to compare prices and at least this ensures that a profit is made per unit sold. Price skimming may be too high an initial price and therefore there would be low sales and penetration pricing may not result in any profit if too low. • As the product is new then penetration pricing might be the best one to choose to get the playground equipment established in the market. There are other playground products being sold and so it will get this product well known. • Skimming because Kaari wants to create an image of high quality for the new playground toy and this is emphasised in the advertisement in Appendix 1.

Mark scheme

4(a) Explain four functions of management carried out by Kaari. 8 Award one mark for each function named (maximum of 4 marks). Award a maximum of 1 additional mark for each explanation in context of the function of management that may be carried out by Kaari. Functions might include: • Planning - setting aims for the business such as sales targets of increasing output of 3 large items of playground equipment per week • Organising - Kaari organises the tasks for the 3 employees • Coordinating – the tasks for the job production • Commanding - Kaari instructs the employees on how to manufacture the new unique product • Controlling - Kaari controls the employees so that 15 small items of playground equipment for home use is produced each week. For example: Organising (1) the employees to manufacture the playground equipment (app) Application could include: wooden playground equipment; children’s playgrounds; 3 large/15 small items of playground equipment; high-quality equipment; sole trader; job production; individually designed playground equipment; 3 skilled workers; cost-plus pricing; fully tested to meet legal safety standards; playground equipment for home use. 4(b) Using Appendix 2 and other information, consider whether PPE should 12 produce only large items of playground equipment or produce only small items of playground equipment. Justify your answer using suitable calculations. Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of both options. Well-justified conclusion. Candidates discussing both options in detail, in context and with a well-justified conclusion including why the alternative option was rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding of 5–8 relevant business concepts using appropriate terminology. Detailed discussion of at least one option. Judgement with some justification / some evaluation of choices made. Candidates discussing both options 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 of 1–4 relevant business concepts. Limited ability to discuss the options with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining both options in context should be rewarded with the top marks in the band. 0 No creditable response. 0 4(b) Relevant points might include: Produce • Revenue per week $1000 × 3 = $3000 (L1) only large • Cost per week $500 × 3 = $1500 (L1) items of • (Gross) profit $3000 – $1500 = $1500 (L2) playground • (G)PM = 50% (L2) equipment – Government increased spending on children’s playgrounds – increased demand for PPE equipment – increases PPE sales of large item products • Government spending $10m improving children’s playgrounds at $5000 each = 2000 playgrounds – this requires a large increase in output for PPE • (Gross) profit margin on small items of equipment is higher at 75% instead of 50% • Profit is lower for small items and therefore more profit made if only sold large items • PPE equipment in playgrounds may increase sales to retailers as well as government spending – as improved reputation • PPE may have to increase production facilities to meet increased demand • The Government may spend on competitors’ products – may affect PPE in a negative way if more competitors’ products appear in playgrounds • May only be a one-off purchase Produce • Revenue per week $100 × 15 = $1500 (L1) only small • Cost per week $25 × 15 = $375 (L1) items of • (Gross) profit $1500 – $375 = $1125 (L2) playground • (G)PM = 75% (L2) equipment • Smaller profit than large items but market is growing • Growing trend from parents to purchase small items of equipment – increased demand in the long term • Need to make an additional 5 small products each week to match the weekly profit of the large items which may require additional skilled labour Conclusion • The increases in demand from government will prompt PPE to increase sales of large items of playground equipment. Higher profit for large items of playground equipment. If PPE can expand production, then increased government spending is likely to have the greatest effect on profit even though there may be some increased expenses from the need to borrow for expansion. • Small items of playground equipment should be chosen as, even though large items have higher profit initially, the demand for small items has an increasing trend for higher sales in the future. Whereas large items only have an increase in spending for one period of time.