Cambridge A Level Business (for first examination in 2016) 9609 — 2022 May/June Paper 2 · Variant 1

1 Priya’s Bookshop (PB) Priya lives in town R which is situated in beautiful countryside with nice walks nearby. Many tourists visit town R. The town’s council would like town R to become branded as a ‘booktown’, a town with many bookshops selling new and used books. The council announced a new financial scheme offering grants to attract entrepreneurs willing to open a bookshop. 5 Priya applied for a grant to start up Priya’s Bookshop (PB). Part of her grant application included a cash flow forecast, shown in Table 1.1. Table 1.1: Cash flow forecast, first three months of trading ($000) Month 1 Month 2 Month 3 Cash in: 10 Owner’s capital 15 0 0 Grant 20 0 0 Revenue 4 6 11 Cash out: Initial set up costs 20 0 0 15 Utilities (power, water etc) 0 0 2 Employee costs 1 1 3 Purchases 6 3 4 Marketing 10 5 4 Opening balance 0 2 –1 20 Closing balance 2 –1 X Priya’s grant application was successful and she opened PB well aware of the need for both cash and profit. Priya now wants to raise awareness of PB in town R. Priya did some market research and decided to use market segmentation. This will help her to decide on the promotional 25 methods she could use for her bookshop. See Table 1.2. Table 1.2: Age and gender of residents in town R Percentage of residents Percentage of age group Age group (years) in age group who are female 0–15 19% 50% 30 16–64 63% 55% 65+ 18% 60% (a) (i) Define the term ‘market segmentation’ (line 25). [2] (ii) Explain the difference between cash and profit (line 23). [3] (b) (i) Refer to Table 1.1. Calculate PB’s forecast closing balance in month 3 (X). [2] (ii) Analyse two benefits to Priya of producing a cash flow forecast. [8] (c) Explain two entrepreneurial qualities that Priya has shown. [4] (d) Recommend suitable promotional methods that Priya could use to raise awareness of PB in town R. Justify your recommendation. [11]

Mark scheme: Question Answer Marks 1(a)(i) Define the term ‘market segmentation’ (line 25). 2 Knowledge Marks A correct definition 2 A partial, vague or unfocused definition 1 No creditable content 0 Note: Do not accept ‘segment’ as a ‘split’ term A correct definition should cover the following:  splits a market into different groups  segmentation could be by age/gender/geographic/demographic or each group has similar characteristics Exemplar Rationale Marks Looks at different groups e.g. Both elements covered 2 by sales value/volume Splits a market into groups, Both elements covered 2 each of which has similar characteristics Splits a market into groups An understanding of 1 segmentation (no expansion) Splits a market by sales Only one element of the flow 1 value identified Segments a market Tautology 0 ARA 1(a)(ii) Explain the difference between cash and profit (line 23). 3 Award one mark for each point of explanation. Point Explanation Marks C* Cash is the revenue a business has after sales 3 while profit is revenue minus expenses B Profit is revenue minus expenses 1 A Cash is the physical flow of money in and out of a 1 business Note: The difference does not need to have clear definitions – implied knowledge is acceptable when in the context of a difference Content could come from:  Cash is the physical flow of money in and out of a business  Cash is the capital used to pay for day-to-day costs  Cash is an example of revenue, ignoring any expenses  Profit is revenue minus expenditure  Profit is the difference between revenue and costs  Profit is calculated at the end of a trading period  Profit is shown on the Income Statement Exemplar Rationale Marks Cash is the revenue a Shows a difference 3 business has after sales while profit is revenue minus expenses Cash is more liquid than Shows a clear difference 3 profits Cash is a current asset, but These are not definitions but 3 profit is on the Income there is a clear difference Statement They appear on different A clear difference 3 accounting statements Cash is the revenue a Both elements correct but a 2 business has after sale. Profit difference not shown is revenue minus expenses Splits a market into groups An understanding of 1 segmentation (no expansion) ARA 1(b)(i) Refer to Table 1.1. Calculate PB’s forecast closing balance in month 3 2 (X). Rationale Marks Correct answer (with or without working or $) 2 Correct formula/identifies correct figures 1 No credible content 0 Content Closing balance = opening balance + inflows – outflows (1) Opening balance –1000 add inflows 11 000 minus outflows 13 000 (1) X = – $3000 (accept –3000, (3000) or –3) (2) Common incorrect answers (2000) No marks no working 3000 No marks No working –1000+11000 1 mark for calculation –13000 = 3000 11000 – 13000 1 mark one mistake (not used opening = –2000 balance) OFR for last stage 1000 + 11000 0 mark Incorrect opening balance and – 13000 = incorrect answer 3000 1(b)(ii) Analyse two benefits to Priya of producing a cash flow forecast. 8 Level Knowledge and Marks Analysis Marks Application (4 marks) (4 marks) 2b Shows 4 Developed 4 understanding of analysis of two two benefits in benefits in context context 2a Shows 4 Developed 3 understanding of analysis of one one benefit in benefit in context context 1 Shows 2 Limited analysis 2 knowledge of two of two benefits benefits Shows 1 Limited analysis 1 knowledge of one of one benefit benefit 0 No creditable content Note: As the business has started trading, using the CFF either before or after starting trading is acceptable. Knowledge of benefits may include:  Anticipate potential shortfalls in cash  Keep track of payments  Understand the impact of future plans  Manage surplus cash  Track whether revenue/spending is on target Application may include:  Buying and selling new and used books  Priya applied for a council grant for entrepreneurs willing to open a bookshop; grant application included a CFF  Any information from Table 1.1  Used to decide promotional methods 1(b)(ii) Analysis of benefits may include:  PB is a new business and having a cash flow forecast will have helped/will help her to receive the grant – which allowed for initial survival  Allows/ed Priya to plan ahead and manage the budget more effectively e.g. the deficit in the first few months – to avoid overdraft fees in months 2 and 3  Many small businesses fail due to a lack of cash flow, so this allows/ed Priya to arrange an overdraft for months 2 and 3  Allows Priya to manage cash flow, e.g. the deficit in months 2 and 3 could be overcome through reductions in cash outflows e.g. marketing. ARA 1(c) Explain two entrepreneurial qualities that Priya has shown. 4 Point Explanation Marks App+App Two entrepreneurial qualities explained in context 4 App One entrepreneurial quality explained in context 3 K+K Two entrepreneurial qualities identified 2 K One entrepreneurial quality identified 1 Content and context could come from:  Motivated – wants to start her own bookshop  self-disciplined – financial discipline by creating a cash flow forecast  risk-taking – has invested $15K of own capital  creative – making appropriate marketing materials for 0 to 15-year-olds  leadership – will manage up to 3 employees  confident – starting own bookshop by risking $15K of own capital  initiative – has applied for a $20K grant Exemplar Mark Rationale She applied for a $20K grant which 4 Two applied shows initiative and is motivated to start qualities explained her own bookshop Priya showed initiative by researching 3 Applied quality and applying for a $20K grant explained Initiative and leadership 2 Two entrepreneurial qualities identified Initiative is taking an opportunity 2 Two generic available to you and risk taking is taking qualities explained a decision which could have negative consequences Initiative is taking an opportunity 1 Generic quality available to you explained 1(d) Recommend suitable promotional methods that Priya could use to 11 raise awareness of PB in town R. Justify your recommendation. Knowledge and Marks Analysis and Marks Application (4 marks) Evaluation (7 marks) Justified judgement(s) 7 that follows on from a discussion based on two promotional methods relevant to PB Recommendation(s) 6 that follows on from a balanced argument relevant to PB A simple 5 recommendation based on a balanced argument relevant to PB Shows knowledge of 4 A balanced argument 4 two promotional based on analysis of methods in context two promotional methods with context Shows knowledge of 4 Argument based on 3 one promotional analysis of one method in context promotional method with context Shows knowledge of 2 Limited analysis of two 2 two promotional promotional methods methods Shows knowledge of 1 Limited analysis of one 1 one promotional promotional method method No creditable content Knowledge may include:  Above and/or below the line promotion with some explanation  BTL examples: direct mail, in-store offers, direct selling, social media, trade shows, catalogues, sponsorship, branding and merchandising and targeted search engine marketing  ATL: examples: radio, television, billboards, magazine and newspapers 1(d) Application may include:  New bookshop  Likely to be lots of competition in ‘booktown’  Any financial information from table 1.1  Using market segmentation  Any market research information from table 1.2 Analysis may include:  BTL is cheaper than ATL and as PB is new and cashflow is restricted/poor – may not be able to survive/pay bills – In-store offers; can offer 15% discount on books which would lead to increased revenue – increased profit  ATL hits a mass audience – but too expensive – Local radio; can advertise to target audience of 16–64 which increases sales of books – raises profile/brand awareness  High competition means tourists are likely to impulse buy based on price so in-store and personal selling – may be useful to provide purchasing incentives so more sales Evaluation may include:  A recommendation for Priya based on arguments in context as to which promotional methods Priya could use  A judgement over which method is/are most suitable  An evaluation on the level of argument  What the judgement/evaluation may depend on: target audience, type of book, price sensitivity, advertising elasticity, competition K APP AN DEV EVAL in store To Which As Priya should use offers persuade increases customers both instore offers tourists to sales may be and social media buy price As social media sensitive can help drive due to traffic and in store competition offers can convert browsers. Social To As it is a To build PB However, it media showcase cheap brand depends on book method and profile whether Priya’s signings easily target audience is updated likely to social media and how diligent she is in updating her profile.

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2 Motorcycle Components (MC) MC is a large public limited company that produces a range of components used by motorcycle manufacturers. MC’s mission statement is ‘to be the world leader in delivering quality motorcycle components to our customers’. The motorcycle component industry is very competitive and MC’s customers expect high quality and a short lead time. MC operates a Just in Time (JIT) inventory control system. 5 MC’s good relationships with its suppliers ensure that JIT operates efficiently. The production workers at MC are highly skilled and the business benefits from a low labour turnover. Liquidity management is very important in the motorcycle component industry. The industry average for the acid test ratio is 1. A summary of some key data for MC has been prepared 10 by the Finance Director, as shown in Table 2.1. Table 2.1: Summary financial data as at 30 April 2022 ($ million) Trade receivables 26 Cash 19 Inventory 1 15 Trade payables 30 Other current liabilities 20 The Operations Director, Jay, is proposing new capital expenditure of $4 million. Jay thinks that automation of the production process will have significant financial benefits for MC. He wishes to gain approval from the Board of Directors to implement a process innovation 20 project. Jay believes that, with good communication and the involvement of employees, he can effectively manage the project. (a) (i) Define the term ‘lead time’ (line 5). [2] (ii) Explain the term ‘mission statement’ (line 2). [3] (b) (i) Refer to Table 2.1. Calculate MC’s acid test ratio. [4] (ii) Explain one reason why the acid test ratio is useful to MC’s Finance Director. [2] (c) Analyse two benefits to MC of Just in Time (JIT) inventory control. [8] (d) Evaluate the possible impact on MC from introducing process innovation. [11]

Mark scheme: 2(a)(i) Define the term ‘lead time’ (line 5). 2 Knowledge Marks A correct definition 2 A partial, vague or unfocused definition 1 No creditable content 0 A correct definition should cover the following: The period between the start of a process and the completion of that process such as the time period between placing an order and receiving the goods. Must have both starting and finishing a process for two marks. Vague statements such as the time a process takes only 1 mark. Exemplar Rationale Marks The amount of time taken both starting and finishing an 2 between the placing an order order process and delivery The time taken to receive Time between order and 2 inventory from when it was delivery identified ordered Time between delivery and This is not lead time, this is 2 (BOD) reorder of supplies backwards The time it takes for an order Order time not identified 1 to be delivered How long it takes to get an BOD finish time 1 order The amount of stock a Wrong definitions 0 business keeps as a buffer 2(a)(ii) Explain the term ‘mission statement’ (line 2). 3 Award one mark for each point of explanation. Point Knowledge Marks C Example or some other way of showing good 1 understanding – e.g. communicates to stakeholders what the business stands for/ helps establish aims and objectives B One mark for understanding of the concept of 1 aims and values (mission) A One mark for understanding that it defines a 1 company or organisation’s reason for being (statement) No creditable content 0 Note: C mark can only be awarded if A and B marks have already been awarded Exemplar Rationale Marks A vague and general phrase Describes what it is (vague), 3 that transmits what the what it is for (transmits business is about and values) and a benefit motivates workers (motivates) A phrase that represents the All points met 3 business core objectives and motivates employees A phrase that represents the A and B only 2 business core objectives A document that tells A and B 2 stakeholders the business values A statement that motivates A only – C not awarded 1 employees The aims and objectives of a Part of a mission statement – 1 business limited understanding 2(b)(i) Refer to Table 2.1. Calculate MC’s acid test ratio. 4 Rationale Marks Correct answer (with or without formula) 4 Attempt using correct figures 3 Correct formula and calculation of current assets or current 2 liabilities OR Correct calculation of current assets and current liabilities Correct formula 1 No creditable content 0 current assets – inventory (1) current liabilities Current Assets = 26 + 19 + 1 = 46 46 – 1 = 45 Current Liabilities = 30 + 20 = 50 (2) 45 50 = 1 : 0.9 (accept 0.9) or 9:10 Common incorrect answers 45/50 3 marks This is a fraction, ratio/calculation not completed 45:50 3 marks Has not been simplified 46/50 = .92 3 marks Correct current ratio – OFR 46/50 2 marks Correct calculation of current assets and current liabilities 2(b)(ii) Explain one reason why the acid test ratio is useful to MC’s Finance 2 Director. Level Knowledge and Application Marks 2 (APP) Explanation of one use of the acid test ratio in 2 context 1 (K) Identification of one use of the acid test ratio 1 0 No creditable content 0 Content is likely to come from:  Measure of liquidity to see if it can cover short term debts without selling inventory  Check the risk of illiquidity  To gain finance/investment Context is likely to come from:  At 0.9 it is below the industry average  Any relevant data from Table 2.1  Investment of $4m Exemplar Rationale Marks 0.9:1 is less than industry Context and content 2 average and can signify liquidity problems To see if it can cover short No context 1 term debts without selling inventory Measures liquidity No context 1 Check the risk of illiquidity No context 1 Ratio calculation only No usefulness 0 ARA 2(c) Analyse two benefits to MC of Just in Time (JIT) inventory control. 8 Level Knowledge and Marks Analysis Marks application 2 Understanding of 4 Developed 4 two benefits of analysis of two JIT in context benefits of JIT in context Understanding of 3 Developed 3 one benefit of JIT analysis of one in context benefit of JIT in context 1 Knowledge of 2 Limited analysis 2 two benefits of of two benefits of JIT JIT Knowledge of 1 Limited analysis 1 one benefit of JIT of one benefit of JIT 0 No creditable content Generic benefits may include:  Reduces waste and overstocking  Improves financial efficiencies / reduces capital invested in stock  Reduces storage costs  Reduces risk of obsolescence Application may include:  Large plc with B2B model  Mission statement is ‘to be the world leader in delivering quality motorcycle components to our customers’  Motorcycle component industry is very competitive and MC’s customers expect high-quality and a short lead time  Good relationships with its suppliers ensure that JIT operates efficiently.  Liquidity management is very important  Industry average for the acid test ratio is 1  automation of the production process 2(c) Analysis of benefits may include:  Reduction in fixed costs as warehouse/storage not required to store raw materials – which improves profit  Storage space no longer needed and could be used to expand production  Decrease in labour costs as fewer people required in warehouse as no need to receive, store, then move inventory to production – increases profit  Reduction in costs should mean increased profit – which could be used towards funding expansion  Improved cash flow as only order inventory as needed to fulfil customer orders – more money for expansion ARA 2(d) Evaluate the possible impact on MC from introducing process 11 innovation. Knowledge and Marks Analysis and Marks Application (4 marks) Evaluation (7 marks) A justified judgement 7 on the importance of the impact A judgement on the 6 importance of the impact An evaluation 5 statement of the given arguments of an impact in context Understanding of two 4 Developed analysis of 4 effects of process two effects of process innovation in context (*) innovation Understanding of one 3 Developed analysis of 3 effect of process one effect of process innovation in context innovation in context Knowledge of two 2 Limited analysis of two 2 effects of process effects of process innovation innovation Knowledge of one 1 Limited analysis of one 1 effects of process effect of process innovation innovation * Two effects can come from one impact Note: Use of a process innovation (i.e. Capital expenditure is acceptable for Application without explicit reference to process innovation) Knowledge of effects/impacts of process innovation  Increases/expands competitive advantage  Develops performance by decreasing costs  Enhances quality  Makes the best use of competencies, skills and/or knowledge  Builds a culture of continuous learning 2(d) Application is likely to come from:  Large plc with B2B model  Mission statement is ‘to be the world leader in delivering quality motorcycle components to our customers’  Motorcycle component industry is very competitive and MC’s customers expect high quality and a short lead time  Good relationships with its suppliers ensure that JIT operates efficiently  Liquidity management is very important  automation of the production process Analysis likely to come from: Impact should focus on MC and could be: positive  Creates shorter lead times – which may increase orders due to high expectations  Matches high customer quality expectations – increases sales revenue  Links to mission statement (increased quality) – better dividends/marketing opportunity  Reduced costs – eases cash flow pressures/acid test  Increased market share as the industry and suppliers are competitive – better brand image negative  Image/reputational damage e.g. if redundancies happen – poor publicity  Results in redundancies – increases costs  Negative impact on morale – lower productivity  Cost of automation – reduces profits/dividends Other  Process innovation may improve efficiency however this could result in redundancies – reducing the need for some employees – may be seen as not socially responsible (damage to image, want to be world leaders) and lead to lower sales - reduced revenue and profit  Impact on employees and morale – fear of redundancies, change, could affect quality of work and conflict with the mission statement  The industry and suppliers are competitive, so process innovation will reduce cost pressures and assist MC in being price competitive, however, other firms may also introduce new processes so less of an impact on MC  Lower costs could allow MC to become more price competitive, increasing revenue (if PED is elastic), leading to higher profit and increasing share value, but other firms could retaliate and start a price war resulting in losses for MC Evaluation is likely to come from:  An evaluation of the possible impact on MC of introducing process innovation  A judgement in the outcomes of process innovation  An evaluation on the level of argument  What the judgement/evaluation may depend on: cost, reputation, customer reaction, supplier ability to deliver quantities of inventory, sources of finance, shareholder expectations 2(d) K APP AN DEV EVAL Decreases Helps ATR Which So the The impact is costs of 0.9:1 improves $4mn cap likely to be shareholder ex will be positive value approved As the Increases From $4mn Increases Which could investment into redundancies capital reputational be used by new machinery expenditure damage competitors will improve into negative lead time and automation advertising quality Which is likely more important to business customers than a reputation for laying off staff

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