Question 130 marks
Question
Solar Farms (SF) SF is a private limited company that develops and maintains large-scale solar farms in country X. SF operates as a capital intensive business. Bob is an entrepreneur and the majority shareholder of SF. He invested into SF’s first solar farm. SF took out high-interest bank loans to cover initial cash flow problems and provide working capital. SF used internal (organic) growth over the next 10 years. 5 SF rents fields from farmers. Its main capital expenditure is solar panels, which are installed on the rented fields. The solar panels generate electricity, which SF sells to energy providers. Solar panel technology is constantly improving. SF operates five solar farms in country X. A team of seven engineers maintain all of SF’s solar farms. 10 Table 1.1 shows SF’s budgeted and actual data for 2024. Table 1.1 SF’s annual budgeted and actual data for 2024 Budget Actual ($m) ($m) Revenue 5 4 15 Total costs 3 3.75 Profit 2 0.25 Bob has identified that SF can increase its revenue by using batteries to store electricity generated by the solar panels. This electricity can then be sold at peak times for premium prices. This will require significant investment into battery technology. 20 Bob wants to retain control of SF but is concerned about the investment required for further growth. In 2024 the cost of renting new farmland and purchasing solar panels increased significantly. ZB is a multinational battery manufacturer that is keen to start a joint venture with SF. If the joint venture goes ahead, ZB will insist that SF uses ZB batteries in all future solar farms. 25 (a) (i) Identify one quality an entrepreneur needs for success. [1] (ii) Explain the term working capital. [3] (b) (i) Refer to Table 1.1. Calculate the profit variance for SF in 2024. State whether the variance is favourable or adverse. [3] (ii) Explain one drawback to SF of using budgets. [3] (c) Analyse two limitations to SF of operating as a capital intensive business. [8] (d) Evaluate whether a joint venture is the most appropriate way for SF to grow. [12]
Mark scheme
1(a)(i) Identify one quality an entrepreneur needs for success. 1 Indicative content Identification of a quality may include: • Ambitious / inner drive • Risk taker • Confident • Inquisitive • Adaptability / flexible • Resilience / persistence / determination • Innovative / creative • Communication • Leadership • Decision making • Builds trust If more than one answer is given, only mark the first, reading from top left to bottom right. Accept all valid responses. 1(a)(ii) Explain the term working capital. 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 working capital will include (max 1 mark): • Current assets minus current liabilities • Money / cash / funds / finance (to run the business) • Ability to run the business • Day-to-day / general operations / current / short-term / immediate / trading 1(a)(ii) AO2 Application Limited application applies knowledge of working capital to a business context. Developed application + applies knowledge of working capital to a business context. • Examples of short-term financial commitments, e.g. stock, salaries, utilities, suppliers, debts, financial obligations, bills etc. • Reference to current ratio and/or acid test ratio (ideals of 2:1 or 1:1) • Benefit of maintaining sufficient working capital, e.g. survival, avoid liquidation • Ways to improve working capital, e.g. use of a bank overdraft • Managing trade receivables, e.g. stopping/reducing trade credit to customers, debt factoring • Managing trade payables, e.g. taking/prolonging trade credit from suppliers • Example from a business concept Accept all valid responses. Exemplar and annotations Mark Rationale The ability to pay short-term financial obligations such as 3 An answer which starts with the knowledge high interest on bank loans and avoid liquidation and then applies it to SF (case mentions high-interest bank loans). Avoid liquidation (survival) is the second application. Cash needed to fund the day-to-day operations such 3 Again, knowledge first, followed by as paying staff salaries . application to business operations (day to day) and includes an example (salaries). Current assets minus current liabilities to measure the 2 Knowledge and explanation for one ability to pay day-to-day bills application mark. It is a measure of the cash needed to operate . 1 Not a perfect definition, but enough to award the knowledge mark. No attempt to apply. The capital the business needs to work. 0 No knowledge of working capital. Tautological. 1(b)(i) Refer to Table 1.1. Calculate the profit variance for SF in 2024. State whether the variance is favourable or adverse. 3 Indicative content Profit variance = actual profit–budgeted profit (1 mark – formula only) Profit variance = 250 000–2 000 000 (1 mark – use of correct figures in formula) Profit variance = ($) 1 750 000 adverse variance (1 mark – correct answer (must include adverse)) Answer = ($) 1 750 000 adverse variance / 1.75 m adverse variance (3 marks – correct answer no working or $ needed) must include adverse OFR applies 1(b)(i) Exemplar and annotations Marks 3 marks Correct answer (3) Working and $ and m do not matter. ($)1 750 000 adverse or ($)1.75 m adverse Ignore + or - • Must be three to denote the three marks. 2 marks EITHER To award two marks, there must be • Correct formula AND • Two and a • Correct identification of figures OR OR • One , one and one • An incorrect answer with one mistake allowing OFR for final stage. Must have the correct variance stated for the answer given. OR • A correct variance (1.75 m) with no adverse (or incorrectly states favourable) 1 mark One of the following: To award one mark, there must be: • Correct formula • One and two • Correct identification of figures in an incorrect formula 0 marks No creditable content. To award zero marks, there must be • One 1(b)(ii) Explain one drawback to SF of using budgets. 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 drawback of budgets (max. 1 mark), including: • Only as good as the figures used • Do not take into account actual market conditions / external factors • Ignores qualitative factors • Can be manipulated to show desired rather than realistic outcomes / bias • Time consuming to research / predict data • Can hinder flexibility / innovation • Less accurate in unstable times / long-term predictions • Risk of internal conflict / managers competing for resources 1(b)(ii) AO2 Application Explanation of a drawback of budgets (max 1 mark), including: • Only as good as the figures used–inaccurate data may lead to poor decision making • Do not take into account actual market conditions–competitiveness • Ignores qualitative factors–such as new managers/leaders/competitors • Can be manipulated to show desired rather than realistic outcomes – biased • Time consuming to research / predict data–opportunity cost of lost time which could be spent on more profitable tasks • Can hinder flexibility–missed opportunities to increase market share / differentiate • Less accurate in unstable times / long-term predictions–more suited to the short-term • Risk of internal conflict / managers competing for resources–hindering teamworking Context applied to SF (max 1 mark), including: • Private limited company • Capital intensive business • Bob is majority shareholder of SF • Used internal (organic) growth • The use of high interest loans to cover initial cashflow problems • Rents fields from farmers • Cost of maintenance team / 7 engineers salaries • Data from Table 1.1 • Can increase revenue by using batteries to store electricity generated by solar panels • Can sell electricity at peak times for premium prices • Needs investment into battery technology • Bob wants to retain control of SF • Cost of renting new farmland and purchasing solar panels increased significantly in 2024 • ZB is a multinational battery manufacturer • ZB wants to start a joint venture with SF • ZB will insist that SF uses ZB batteries in all future solar farms if joint venture goes ahead Accept all valid responses. 1(b)(ii) Exemplar and annotations Mark Rationale A drawback is that the use of a budget is only as good as the 3 Accurate of data is a reasonable figures used , which could lead to inappropriate decisions drawback, explained in the specific regarding SF’s five solar farms . context of SF by using data from the context. Budgeted figures are less accurate in the long-term , as 3 Reduction in accuracy over the long conditions are more likely to change which could affect SF’s plans term which could affect the to form a joint venture . business’s plans . This answer is then applied to SF for three marks in total. Future opportunities may be missed as budgets may hinder 3 Although the appears first, it cannot flexibility such as using batteries to store electricity . be awarded until the has been found. However, there is obvious , so you can go back and award the . The budget ignores qualitative factors such as new 2 Ignoring qualitative factors is . The competitors who may affect future sales . answer includes a relevant example which is used to explain the drawback , but only one mark as no application to SF’s context. It is time consuming to forecast data to produce the budget . 1 Time consuming is a relevant drawback for , but it hasn’t been explained. SF has taken out high-interest bank loans to cover initial cash flow 0 Although there is some relevant context, problems and so needs to use budgets . there is no knowledge of a drawback to SF of using budgets, so no marks can be awarded. 1(c) Analyse two limitations to SF of operating as a capital-intensive business. 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 • Application of two Limited analysis relevant points is relevant points to a • Limited analysis that identifies connections used to answer the business context. between causes, impacts and/or consequences of question. • Application of one two points. • Knowledge of one relevant point to a • Limited analysis that identifies connections relevant point is business context. used to answer the between causes, impacts and/or consequences of question. one point. 0 0 marks 0 marks 0 marks No creditable response. No creditable response. No creditable response. Limitation 1 in the left-hand side column, Limitation 2 in the right-hand side column 1(c) Indicative content AO1 Knowledge and understanding Knowledge of limitations of investing into capital intensive operations (max 2 s), including: • High cost / expensive • Cost of financing • High maintenance costs • The need for skilled workers for maintenance • Need to train workers to use / maintain the capital equipment • The quick pace of technological change • Obsolescence of equipment • Reliance on machines that might break-down • Reduced employee motivation due to repetitive work • Lack of flexibility AO2 Application Max one for application in the first limitation and max one for application in the second limitation Application of the limitation of investing into capital intensive operations for SF (max 2 s), including: • Private limited company • Bob is majority shareholder of SF • Used internal (organic) growth • The use of high interest loans to cover initial cashflow problems • Rents fields from farmers • Cost of maintenance team / 7 engineers salaries • Data from Table 1.1 • Can increase revenue by using batteries to store electricity generated by solar panels • Can sell electricity at peak times for premium prices • Needs investment into battery technology • Bob wants to retain control of SF • Cost of renting new farmland and purchasing solar panels increased significantly in 2024 • ZB is a multinational battery manufacturer • ZB wants to start a joint venture with SF • ZB will insist that SF uses ZB batteries in all future solar farms if joint venture goes ahead 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. Limitations • High fixed costs–[the 25% increase in solar panels] may require unplanned sources of possibly expensive finance–may reduce capital for future investment • Cost of financing the equipment–high interest payments will increase expenses–reducing profits • High maintenance costs–increase cash outflows–threaten liquidity/survival • Need for skilled maintenance staff –[7 engineers] may require above average wages to travel across country X–add to fixed costs and reduce profitability • Solar panels may be inefficient in 10 years compared to newest products–higher costs of operation in comparison to competition – make SF less competitive • Need to train workers to use the machinery / capital equipment–cost of training–reduced profits • The quick pace of technological change–need to purchase upgraded machinery to maintain competitiveness–high cost • Obsolescence of equipment–competitors may have newer equipment giving them a competitive advantage–reduced market share • Reliance on machines that might break down–disruption / delays to production–dissatisfied customers • Reduced employee motivation due to repetitive work–reducing efficiency–reducing profitability • Lack of flexibility–production stopped whilst machines are reset to produce different products–inefficiency Accept all valid responses. Exemplar and annotations AO1 Knowledge AO2 Application AO3 Analysis The high costs of initial investment Which could hinder Bob’s wish to As decisions will need to be shared as retain control part of the joint venture but it is a way of generating the additional finance needed . Obsolescence of fixed assets Which could lead to profit reducing to May lead to increased costs each below $0.25 m year to update the fixed assets and make SF less profitable . 1(d) Evaluate whether a joint venture is the most appropriate way for SF to grow. 12 Level AO1 Knowledge AO2 Application AO3 Analysis AO4 Evaluation and 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 Developed Developed analysis Developed evaluation knowledge of application of that identifies • A developed judgement/conclusion relevant key term(s) relevant point(s) to connections is made. and/or factor(s) is the business between causes, • Developed evaluative comments used to answer the context. impacts and/or which balance some key arguments. question. consequences. 1 1 mark 1 mark 1 mark 1–2 marks Limited knowledge Limited application Limited analysis Limited evaluation of relevant key of relevant point(s) that identifies • A judgement/conclusion is made term(s) and/or to the business connections with limited supporting factor(s) is used to context. between causes, comment/evidence. answer the question. impacts and/or • An attempt is made to balance the consequences. arguments. 0 0 marks 0 marks 0 marks 0 marks No creditable No creditable No creditable No creditable response. response. response. response. 1(d) Indicative content AO1 Knowledge and understanding Knowledge of joint ventures (max 2 s), may include: • Two (or more) parties • Work towards a shared task/objective • Maintain distinct identities • Can be equity or non-equity based • Shared profits/losses/responsibilities • Pool resources/skills/experience/capabilities AO2 Application Limited application applies knowledge of growth to SF once Developed application + applies knowledge of growth to SF twice. • Private limited company • Capital intensive business • Bob is majority shareholder of SF • Used internal (organic) growth • The use of high interest loans to cover initial cashflow problems • Rents fields from farmers • Cost of maintenance team / 7 engineers salaries • Data from Table 1.1 • Can increase revenue by using batteries to store electricity generated by solar panels • Can sell electricity at peak times for premium prices • Needs investment into battery technology • Bob wants to retain control of SF • Cost of renting new farmland and purchasing solar panels increased significantly in 2024 • ZB is a multinational battery manufacturer • ZB will insist that SF uses ZB batteries in all future solar farms if joint venture goes ahead 1(d) 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. Is appropriate • Pool resources/skills/experience/capabilities–increased efficiency–improving overall profitability • Fast growth–generates more finance–less risk/cost of borrowing / interest • Maintain distinct identities–maintain brand/business name and reputation–support future growth Is not appropriate • Share profit/losses–lower profit than if worked on project alone–reduced funds for future growth • Loss of control of operations–may have to change aims and objectives–affecting decision making • Condition of joint venture if that SF uses ZB batteries–may not be the most appropriate type of battery–increase long term costs / decrease long term profit potential AO4 Evaluation Limited evaluation – an unsupported judgement and/or weak attempt at an 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 control–are other issues more important, e.g. market share, economies of scale, specific industry/technology experience, ability to source batteries by SF • Choice depends on SF/Bob’s long-term goals. Does he want to remain in sole control, does Bob want a partner to share the workload/risk. • Comparison with other ways to grow, e.g. merger. • The impact of external influences • Choice of partner • A judgement on whether a joint venture is the most appropriate way for SF to grow Accept all valid responses. 1(d) Exemplars for awarding evaluation L1 (limited supporting L2 (developed supporting L3 (developed supporting evidence) evidence) evidence with context) A joint venture is the best way for SF A joint venture is the best way for SF A joint venture is the best way for SF to grow. to grow. It will help Bob to quickly to grow. It will help Bob to quickly generate the extra capital needed to generate the extra capital needed to buy the battery technology. buy the battery technology, and increase profitability by selling electricity at peak times for premium prices. A joint venture is not the best way for A joint venture is not the best way for A joint venture is not the best way for SF to grow. SF to grow. Bob will lose the ability to SF to grow. Bob will lose the ability to make the key decisions. make the key decisions. Bob can retain control of SF as he wishes.