Question 130 marks
Question
Office Furniture Designs (OFD) Markus is an entrepreneur and is planning to set up a private limited company called OFD in four weeks’ time. OFD will be an online retailer selling office furniture directly to business customers. Products will be sent directly to customers from OFD’s warehouse. OFD’s product range will include office chairs, desks and filing cabinets. Markus will have limited start-up funds. OFD will operate in a competitive market and 5 Markus is keen to offer high-quality customer service. He also will have to think carefully about opportunity cost. As part of his business planning, Markus has prepared a cash flow forecast (see Table 1.1). Table 1.1 OFD’s cash flow forecast June – August 2023 ($ 000) June July August 10 Cash inflow Cash sales 8 12 15 Credit sales 0 15 24 Total inflow 8 27 39 Cash outflow 15 Supplies 25 32 34 Utilities 3 3 4 Rent 15 15 15 Salaries 10 11 11 Operating expenses 5 7 8 20 Total outflow 58 68 72 Net cash flow (50) (41) Opening balance 10 (40) Closing balance (40) (81) Markus plans to offer all customers one month trade credit. However, as OFD is a new 25 business, suppliers may insist on payment on delivery. Markus is currently researching sources of finance to improve OFD’s cash flow. OFD will need five employees who will work in the warehouse and three customer service assistants. Markus plans to offer two weeks of induction training to all employees. (a) (i) Identify one quality an entrepreneur needs for success. [1] (ii) Explain the term opportunity cost. [3] (b) (i) Refer to Table 1.1. Calculate the forecast closing balance for August 2023. [3] (ii) Explain one factor that will influence Markus’ choice of a source of finance. [3] (c) Analyse two benefits to OFD of offering induction training to all employees. [8] (d) Evaluate whether Markus needs accurate cost information before setting up OFD. [12]
Mark scheme
1(a)(i) Identify one quality an entrepreneur needs for success. 1 Indicative content Identification of a quality may include: Creativity Innovation Risk-taking Effective communicator Ability to negotiate Confidence Determination Hard-working. Accept all valid responses. 1(a)(ii) Explain the term opportunity cost. 3 AO1 Knowledge and understanding AO2 Application 1 mark 2 marks 2 marks Developed application of one relevant point to a business context. 1 mark 1 mark Knowledge of one relevant point is used to answer the Limited application of one relevant point to a business question. context. 0 marks 0 marks No creditable response. No creditable response. Indicative content AO1 Knowledge and understanding Knowledge of opportunity cost may include: Opportunity cost is the benefits forgone/lost of the next best alternative/when a decision is made. What is lost when a decision is made. AO2 Application Limited application applies knowledge of opportunity cost to a choice/decision OR to the lost benefit. Developed application + applies knowledge of opportunity cost to a choice/decision AND to the lost benefit. Application can be made to Markus/OFD or any other scenario/context/business/person. Accept all valid responses. 1(a)(ii) Exemplar and annotations Mark Rationale The next best alternative that has been given up . 3 An answer which starts with the knowledge and then For example, if Markus chooses to spend money on applies it to Markus. customer services and not marketing then the opportunity cost would have been the loss of the marketing benefits . The next best thing forgone when making a decision 3 Again, knowledge first, followed by application to a . A business could choose to buy some desks , but decision (choose to buy some desks) and to the lost they would miss out on being able to buy chairs . benefit (not being able to buy chairs). If a business has £100 and they choose to buy 3 A different way of answering the question. There is inventory instead of fuel , then the opportunity cost is application of both elements of opportunity cost (the the lost benefit of the fuel because it has been lost choice and the lost benefit) as well as clear knowledge . of the concept by the end of the response. The next best opportunity forgone . For example, 2 Clear knowledge. Some application of a choice, but not when you choose to buy a chocolate bar . the lost benefit. What you miss out on when a decision is made . 1 Not a perfect definition, but enough to award the knowledge mark. No attempt to apply. It is about choices that have to be made by a business, 0 No knowledge of opportunity cost. Too vague. for example choosing to buy a new piece of machinery. 1(b)(i) Refer to Table 1.1. Calculate the forecast closing balance for August 2023. 3 Indicative content Formula to find closing balance = Net cashflow for month + Opening balance (1) Knowledge that closing balance of one month is the opening balance of the next month (written explanation or demonstration by completing the cash flow forecast) (1) June July August Cash sales 8 12 15 Credit sales 0 15 24 Total cash inflows 8 27 39 Supplies 25 32 34 Utilities 3 3 4 Rent 15 15 15 Salaries/wages 10 11 11 Operating expenses 5 7 8 Total cash outflows 58 68 72 Net cash flow (50) (41) (33) Opening balance 10 (40) (81) Closing balance (40) (81) (114) 1(b)(i) Final answer for X = (114) (1) Answer = ($114 000) or –114 000 allow –114 (3) OFR applies Allow 2 marks for $114 000 or 114 000 or 114 Marks 3 marks Correct answer (including minus) Working and $ do not matter. (114 000) or –114 000 allow –114 and (114) Allow brackets or minus sign to denote a negative number. Must be three to denote the three marks. 2 marks Two of the following: To award two marks, there must be: Correct formula Two and a Correct calculation of Net Cash Flow (33) or -33 OR Correct identification of opening balance (81) or -81 One , one and one OR An incorrect answer with one mistake allowing OFR for final stage. OR $114 000 or 114 000 or 114 (no minus) 1 mark One of the following: To award one mark, there must be: Correct formula One and two Correct calculation of Net Cash Flow (–33) Correct identification of opening balance (–81) 0 marks No creditable content. To award zero marks, there must be: One 1(b)(ii) Explain one factor that will influence Markus’ choice of a source of finance. 3 AO1 Knowledge and understanding AO2 Application 1 mark 2 marks 2 marks Developed application of one relevant point to a business context. 1 mark 1 mark Knowledge of one relevant point is used to answer the Limited application of one relevant point to a business question. context. 0 marks 0 marks No creditable response. No creditable response. Indicative content AO1 Knowledge and understanding Knowledge of a factor that may affect the choice of source of finance : Cost of finance Flexibility Need to retain control The use/reason/amount needed Level of existing debt/cashflow. AO2 Application Limited application , applies knowledge to Markus/OFD once. Developed application + applies knowledge to Markus/OFD twice. Application of a factor may include: OFD is a new business OFD will be a private limited company Markus will have limited start-up funds OFD will operate in a highly competitive market Data from Table 1.1 1(b)(ii) Answer from Q1b(i) (OFR applies) OFD will offer customers one month trade credit OFD’s suppliers may insist on payment on delivery (immediate payment). Accept all valid responses. Exemplar and annotations Mark Rationale A factor would be flexibility , because OFD needs 3 Flexibility is a reasonable factor, explained in the $40 000 in June but this increases to $114 000 by specific context of OFD/Markus by using the data in August . Table 1.1. Markus may want to keep control of OFD , so he 3 Keeping control is and there are two specific pieces would not want to sell any of the shares of the new of context based on this so two . private limited company . OFD is a new business and Markus has limited 3 Although the appears first, it cannot be awarded start-up funds so the most important factor is how until the has been found. However, there is obvious much debt he already has . , so you can go back and award the . Markus chose trade credit so that he can have 2 The fact that Markus chose trade credit is irrelevant, inventory which is vital to a new business . however the use of the source of finance is . The context of new business linked to this is reasonable , but only one point of application. How much it costs because the more it costs the 1 Knowledge of a factor. The rest of the answer is not worse his cashflow will get. If the cashflow is poor, he applying it to the context, so (Not Answering may build up debts and the business might ultimately Question). fail. Markus has chosen trade credit, which may mean he 0 Although there is some relevant context, there is no can improve his cashflow in June by reducing the knowledge of a factor, so no marks can be awarded. outgoings by $25 000. This means that the closing balance will only be ($15 000) and mean that he may only need a small overdraft . 1(c) Analyse two benefits to OFD of offering induction training to all employees. 8 Level AO1 Knowledge and AO2 Application AO3 Analysis understanding 2 marks 4 marks 2 marks 2 3–4 marks Developed analysis Developed analysis that identifies connections between causes, impacts and/or consequences of two points. Developed analysis that identifies connections between causes, impacts and/or consequences of one point. 1 1–2 marks 1–2 marks 1–2 marks Knowledge of two relevant Application of two relevant Limited analysis points is used to answer the points to a business context. Limited analysis that identifies question. Application of one relevant connections between causes, Knowledge of one relevant point to a business context. impacts and/or consequences point is used to answer the of two points. question. Limited analysis that identifies connections between causes, impacts and/or consequences of one point. 0 0 marks 0 marks 0 marks No creditable response. No creditable response. No creditable response. Annotate the first benefit in the left-hand margin and the second benefit in the right-hand margin. 1(c) Indicative content AO1 Knowledge and understanding Knowledge of the benefits of induction training (max 2 s), may include: Understanding workplace issues Knowing who you are working with; organisational structure Information about basic terms and conditions, e.g. holiday entitlement Information about the goods/services sold, e.g. desks and office chairs IT training to help new employee use the IT system Basic customer service training/expectations How to ensure that the products are fit for purpose AO2 Application Max one for application in the first benefit and max one for application in the second benefit, including; OFD is a new business (do not reward repetition of the question) Entrepreneur Private limited company Opening in four weeks’ time Business took several months to set up Limited start-up funds Eight employees; five employees in warehouse, three in customer service All employees are new / undergo induction together Two-week induction training Competitive service High-quality customer service Operate in a warehouse (but does not manufacture furniture) Sell direct to customers (online retailer). 1(c) AO3 Analysis Limited analysis – candidate shows one link in the chain of analysis. Developed analysis candidate shows two or more links in the chain of analysis or a two-sided analysis. All of the five employees are new and undergo induction together. It will help to ‘build’ the new team by helping them get to know each other so they will start to work productively quicker. As it is a new business, the employees can agree the processes/procedures to operate and solve any potential issues before opening. Markus is keen to offer a high-quality customer service. The induction training is an ideal time to embed a high-quality culture throughout the business. The employees will become familiar with the technology used to operate the online retail business. The training will motivate the employees as they will feel valued by their new employer which will encourage them to work hard. The employees will settle in quicker as a result of the induction training, reducing labour turnover. This will save recruitment costs as Markus will not have to replace employees. Accept all valid responses. Exemplar and annotations AO1 Knowledge AO2 Application AO3 Analysis The workers will understand the health by spending two weeks on the The employees are less likely to have and safety rules induction training. an accident which could reduce the productivity of OFD which may mean that the business is more likely to survive its first year of trading . It will improve teamwork of the three customer service which may mean that the customers assistants get better customer service, feel loyal to the business and repeat purchase . 1(d) Evaluate whether Markus needs accurate cost information before setting up OFD. 12 Level AO1 Knowledge and AO2 Application AO3 Analysis AO4 Evaluation understanding 2 marks 2 marks 6 marks 2 marks 3 5–6 marks Developed evaluation in context A developed judgement/conclusion is made in the business context. Developed evaluative comments which balance some key arguments in the business context. 2 2 marks 2 marks 2 marks 3–4 marks Developed knowledge of Developed application Developed analysis Developed evaluation relevant key term(s) of relevant point(s) to the that identifies connections A developed and/or factor(s) is used to business context. between causes, impacts judgement/conclusion answer the question. and/or consequences. is made. Developed evaluative comments which balance some key arguments. 1(d) Level AO1 Knowledge and AO2 Application AO3 Analysis AO4 Evaluation understanding 2 marks 2 marks 6 marks 2 marks 1 1 mark 1 mark 1 mark 1–2 marks Limited knowledge Limited application Limited analysis Limited evaluation of relevant key term(s) of relevant point(s) to the that identifies connections A judgement/ and/or factor(s) is used to business context. between causes, impacts conclusion is made answer the question. and/or consequences. with limited supporting comment/ evidence. An attempt is made to balance the arguments. 0 0 marks 0 marks 0 marks 0 marks No creditable response. No creditable response. No creditable response. No creditable response. Indicative content AO1 Knowledge and understanding Knowledge of cost information (max 2 s), including: Costs are the amounts a business incurs when producing products and services. Cost information data may be required to set up and operate the business, including pricing. Cost information allows a business to calculate profit, profit margins, break-even etc. There are many different types of costs: fixed, variable, direct and indirect. A business may not have actual cost information – only estimates. AO2 Application Limited application applies knowledge of cost information to OFD once. Developed application + applies knowledge of cost information to OFD twice. OFD is a new business / opening in four weeks Use of data from Table 1.1 OFD will operate in a competitive market Limited start-up funds 1(d) Five warehouse employees Three customer service assistants AO3 Analysis Limited analysis – candidate shows one link in the chain of analysis. Developed analysis – candidate shows two or more links in the chain of analysis. Cost information is used to create financial forecasts. If the data is inaccurate, Markus’ predictions will be incorrect and may lead to him overspending and getting into debt. Cost information supports the cashflow forecast which will be used for decision making. Inaccurate information will lead to poor decision making, e.g. pricing of products or applying for finance. It is challenging to predict everything that could happen, especially for a new business. Unexpected events could have major implications for costs. Cost information will be used to make profit predictions and monitor/improve business performance. AO4 Evaluation Annotate evaluative judgements in the left-hand margin and evaluative comments in the right-hand margin. Limited evaluation - unsupported judgement and/or a weak attempt at evaluative comment Developed evaluation – supported judgement and/or reasonable evaluative comment Developed evaluation in context - supported judgement in context and/or reasonable evaluative comment in context. Relative importance of cost information – are other issues more important, e.g. potential customer demand, marketing, qualities/skills of the entrepreneur setting up the business Accuracy depends on the Markus’ market research and business knowledge/experience. Significant events may occur that could impact the accuracy of the cost information, e.g. global pandemic Is this the first business that Markus has set up/run? The impact of inaccurate cost predictions may be reduced by higher-than-expected income. The more time spent on cost predictions, the more likely they are to be accurate. However, is the benefit of accurate cost information worth the opportunity cost of the time spent? A judgement that other factors are more important than cost information. Accept all valid responses. 1(d) Exemplar and annotations Markus needs accurate cost information so that he can accurately price his products . This is particularly important as OFD is operating in a competitive market . With accurate cost information, Markus can make sure the price includes an adequate profit margin and is not too high which could put off the business customers and reduce sales which could lead to OFD not making any profit . Therefore, Markus is highly unlikely to get his pricing strategy correct without accurate cost information and pricing is likely to be the most important aspect in this highly competitive market . However, this depends on whether Markus can obtain accurate cost information . The data can only be an estimate as OFD is a new business, and he might be better to just copy the cost and price information of one of his competitors and save the time involved in calculating accurate costs for OFD . AO1 – 2 marks AO2 – 2 marks AO3 – 2 marks AO4 – 6 marks TOTAL – 12 marks