Cambridge A Level Business (for first examination in 2016) 9609 — 2020 May/June Paper 2 · Variant 1

1 UFilters (UF) UF is a public limited company selling to an industrial market. It manufactures air conditioning units. UF produces two sizes of air conditioning units, medium and large. Most of its air conditioning units are sold for use in warehouses and computer server rooms. The units are expensive compared to competitors but UF believes its units are of a higher quality. Market research suggests that there is a growing demand for small air conditioning 5 units to be placed in offices. To produce a new size of unit would require spending $180 000 to purchase new machinery. UF relies on customer recommendations for new orders. However, some customers have been dissatisfied with the service received. UF has received several complaints, including: • engineers turning up late or not at all 10 • poor communication from UF • little choice in the size of units supplied • appointment times are not always convenient and can be difficult to change. Sylvie, the Marketing Director of UF, is concerned about the sales data (Table 1.1) as sales have fallen 10% on the previous year. 15 Table 1.1: Selected sales data for UF, 2019 Unit size Price ($) Unit sales Medium 900 3500 Large 2000 800 Sylvie is considering two options to increase sales (see Table 1.2). 20 Table 1.2: Options to increase sales Option 1 • Competitors’ prices are 8% lower on Reduce the price of the units by 10% average. • The estimated price elasticity of demand is –0.8. 25 Option 2 • Sales staff are currently paid a monthly Implement a performance related pay salary. scheme (PRP) • To introduce a PRP scheme the monthly salary would be reduced by 10%. • Targets would be set and if sales staff met 30 the targets then they would receive PRP increasing their monthly salary by 15%. (a) (i) Define the term ‘industrial market’ (line 1). [2] (ii) Explain the term ‘price elasticity of demand’ (line 24). [3] (b) (i) Refer to Table 1.1. Calculate the total revenue received by UF in 2019. [3] (ii) Explain one source of finance available to UF for purchasing new machinery. [3] (c) Recommend which of the two options in Table 1.2 UF should choose to increase sales. Justify your recommendation. [11] (d) Analyse two ways, other than the two options in Table 1.2, UF can improve customer relations. [8]

Mark scheme: Question Answer Marks 1(a)(i) Define the term ‘industrial market’ (line 1). 2 Knowledge and Application Marks A correct definition 2 A partial, vague or unfocused definition 1 No creditable content 0 Answers could include: Consists of businesses that sell to other businesses (B2B). One business is the consumer and another business the supplier. Examples. 1(a)(ii) Explain the term ‘price elasticity of demand’ (line 24). 3 Knowledge and Application Marks Good explanation 2–3 Partial explanation/understanding 1 No creditable content 0 Answers could include: Measures the responsiveness of demand to a change in the price of a product. Can be elastic or inelastic. Formula or worked example. 1(b)(i) Refer to Table 1.1. Calculate the total revenue received by UF in 2019. 3 Correct answer. (3 marks) Right method but mistakes. (2 marks) Attempt (e.g. formula or identifies data). (1 mark) Answer $3 150 000 + $1 600 000 = $4 750 000 ($ not required) Formula TR = P × Q (1) Working $900 × 3500 = $3 150 000 (1) $2000 × 800 = $1 600 000 (1) 1(b)(ii) Explain one source of finance available to UF for purchasing new machinery. 3 Level Knowledge and Application Marks APAP Explanation of a source of finance in context 3 AP Identification of source of finance in context 2 K Identification of a source of finance 1 0 No creditable content 0 Context and content is likely to come from: • Any source of finance either external or internal for 1 mark but most likely share capital, leasing, bank loan, hire purchase Context likely to reflect UF is a plc so share capital or, because finance is required for a long-term asset – machinery - bank loan rather than overdraft, or leasing or hire purchase. 1(c) Recommend which of the two options in Table 1.2 UF should choose to 11 increase sales. Justify your recommendation. Knowledge and Analysis and Evaluation Marks Marks Application (4 marks) (7 marks) Justified evaluation based on 7 arguments in context Developed evaluation based on 6 arguments in context An evaluative statement based 5 on arguments in context Shows understanding of the 4 Arguments (two sided) based 4 impact of each option on on of each option in context sales in context Shows understanding of the 3 Argument (one sided) based on 3 impact of one option on the advantages or sales in context disadvantages of one option in context Identifies two ways to 2 One piece of limited analysis of 2 increase sales the impact of two options on sales Identifies one way to 1 One piece of limited analysis of 1 increase sales one way to increase sales No creditable content 0 Context/content: Option 1 – reduce price • Customers might be happy as they complained about high prices, but will quality be compromised? • Price-inelastic demand will reduce revenue. If costs stay the same profits will fall so lower dividends for shareholders, possible redundancies if revenue falls. More price-competitive so could take business away from other firms but competitors may also reduce price and start a price war. Option 2 – PRP • Customer complaints about service so training would help address this issue but could be expensive. • Employees unhappy if monthly salary reduced but may be motivated to improve performance with PRP which would give them an increase of 15% in their monthly pay, but would targets be realistic? • If employees may resent the training or be unhappy with pay scheme so they may look for jobs with competitors taking their skills, experience and knowledge elsewhere. • Costs of training and PRP scheme will increase costs so decrease profits and potentially reduced dividends for shareholders. 1(d) Analyse two ways, other than the two options in Table 1.2, UF can improve 8 customer relations. Knowledge and Analysis Level Marks Marks Application (4 marks) (4 marks) 2 Shows understanding of 4 Developed analysis of two 4 two methods to improve methods to improve customer relationships customer relationships in in context context Shows understanding of 3 Developed analysis of one 3 one method to improve method to improve customer relationships customer relationships in in context context 1 Shows knowledge of 2 Limited analysis of two 2 two methods to improve methods to improve customer relationships customer relationships Shows knowledge of 1 Limited analysis of one 1 one method to improve method to improve customer relationships customer relationships No creditable content 0 Could choose any two of the 4Cs: Cost, Convenience, Communication, Customer solution Contextual analysis likely to come from: • Business to business so must be convenient to market and size appropriate to premises. • Are just two sizes appropriate for all premises? Maybe need another size? New product? • Responding to customer complaints on the website.

More questions on Sources of finance

2 Hannah’s Handbags (HH) Hannah started HH six years ago. HH operates in a niche market providing unique bags. The bags are made using job production. As demand grew for the bags, Hannah took on a partner, her brother Kwom. They both agreed to keep the name ‘Hannah’s Handbags’ as it is an established, reputable and widely recognised brand. HH operates from a small workshop and showroom. Customers are encouraged to visit the 5 showroom to discuss design and materials with either Hannah or Kwom. HH employs four highly skilled specialist production staff. Table 2.1 shows an extract from the latest income statement. Table 2.1: Extract of financial data for HH (year ended 30 October 2019) $000 10 Revenue 980 Cost of sales 588 Expenses 245 A new product Hannah and Kwom would like to expand the business by producing a limited number 15 of batch produced bags to sell online. Hannah has noticed other bag producers do this successfully. The new market has many more competitors, with 15 large businesses and many small ones. The bags would have to be priced competitively. Kwom estimates that this new venture would require additional finance of $350 000. HH would also require a specialist IT provider to set up a website and a marketing agency to run a viral marketing 20 campaign. (a) (i) Define the term ‘income statement’ (line 8). [2] (ii) Explain the term ‘viral marketing’ (line 20). [3] (b) (i) Refer to Table 2.1. Calculate the gross profit margin. [3] (ii) Explain one reason why HH needs accurate cost data. [3] (c) Analyse one advantage and one disadvantage to HH of using job production. [8] (d) Evaluate the likely success of the marketing mix for the new product. [11]

Mark scheme: 2(a)(i) Define the term ‘income statement’ (line 8). 2 Knowledge and Application Marks A correct definition 2 A partial, vague or unfocused definition 1 No creditable content 0 A financial statement that reports the revenue, cost of sales, gross profit, operating profit etc. For full marks there should be some reference to revenue, cost of sales and profit. 2(a)(ii) Explain the term ‘viral marketing’ (line 20). 3 Knowledge and Application Marks Good explanation 2–3 Partial explanation/understanding 1 No creditable content 0 Promoting a product using social networks. The name refers to how consumers spread information about a product to other people in their social networks. The basis of viral marketing is in the spread of information by word-of-mouth, nowadays mostly using internet-based applications such as email, social networking sites, web forums etc. Relatively low cost. 2(b)(i) Refer to table 2.1. Calculate the gross profit margin. 3 Correct answer. (3 marks) Right method but mistakes. (2 marks) Attempt (e.g. formula or identifies data). (1 mark) Answer = 392 000 / 980 000 X 100 = 40% 392 000/980 000 = 0.4 (2) 980 000 – 588 000 = 392 000 (1) Revenue – cost of sales / revenue × 100 (1) 2(b)(ii) Explain one reason why HH needs accurate cost data. 3 Level Knowledge and Application Marks APAP Explains a benefit of accurate cost data to HH 3 AP Identifies a benefit of accurate cost data to HH 2 K Identifies a benefit of accurate cost data 1 0 No creditable content 0 Context and content is likely to come from: • Set a price that provides a profit • Set objectives • Effective management of the business Context may include: • Provide partners with financial information • Expensive product so need an accurate budget • Inform expansion of the business / set up website • Inform finance / budget for viral marketing campaign • Ensure business can pay suppliers for expensive materials • Ensure business can pay wages of production workers • High (40%) gross profit margin 2(c) Analyse one advantage and one disadvantage to HH of using job production. 8 Knowledge and Analysis Level Marks Marks Application (4 marks) (4 marks) Shows understanding of Developed analysis of one one advantage and one advantage and one 4 4 disadvantage of using disadvantage of using job job production in context production in context 2 Shows understanding of Developed analysis of one one advantage or one advantage and one 3 3 disadvantage of using disadvantage of using job job production in context production Shows knowledge of one Limited analysis of one advantage and one advantage and one 2 2 disadvantage of using disadvantage of using job job production production 1 Shows knowledge of one Limited analysis of one advantage or one advantage or one 1 1 disadvantage of using disadvantage of using job job production production No creditable content 0 Contextual advantages likely to come from: • Luxury nature of the handbags • Custom made designs – unique and made to customer specifications • Flexible and possible to make changes during production if customer requires • Hannah and Kwom can easily supervise and inspect the work • Employee satisfaction – only 4 employees who can work as a team • High gross profit margin of 40% • The impact on HH reputation and brand as able to produce high quality products • Success of the method in encouraging HH to expand Contextual disadvantages likely to come from: • High unit costs compared to other production methods which might not be suitable for the new online range of bags • Need highly skilled labour especially as a premium / high quality product • Can take a long time to produce – 6 weeks, batch or flow would be quicker and more suitable for the new range 2(d) Evaluate the likely success of the marketing mix for the new product. 11 Knowledge and Analysis and Evaluation Marks Marks Application (4 marks) (7 marks) Justified judgement of the 7 marketing mix in context Developed evaluation of the 6 marketing mix in context Evaluation of the marketing 5 mix in context Shows understanding of Developed analysis of more more than one element of than one element of the 4 4 the marketing mix in marketing mix in context context Shows understanding of Developed analysis of one one element of the 3 element of the marketing mix 3 marketing mix in context in context Shows understanding of Limited analysis of more than more than one element of 2 one element of the marketing 2 the marketing mix mix Shows understanding of Limited analysis of one one element of the 1 element of the marketing mix 1 marketing mix No creditable content 0 Context/content: • Applies elements of the 4Ps • Price - likely to be lower than current range as targeting a potentially larger online market and not custom made. Launch of a new product so possibly penetration pricing. • Product - which designs to choose? Will materials be of same quality as custom made? Flow or batch production more suitable for new range so staff training in new processes required. Likely to need new premises as a building in the garden is not likely to be suitable for mass production. • Promotion - via a viral marketing campaign, likely to be expensive as business intends to use a marketing agency. How effective and what budget? • Place - online distribution but what about selling to shops as well? It could be another way of promoting as well as distributing.

More questions on Costs