Cambridge IGCSE Business Studies (9-1) 0986 — 2019 Oct/Nov Paper 2 · Variant 1

1 (a) Identify and explain one benefit and one cost to MF of developing the new product. Benefit: ............................................................................................................................. ........................................................................................................................................... Explanation: ...................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Cost: ................................................................................................................................. ........................................................................................................................................... Explanation: ...................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [8] (b) Consider how the following three elements of the marketing mix could help to make the new product successful. Which do you think is the most important element for the success of the new product? Justify your answer. Price: ................................................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Place: ................................................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Promotion: ........................................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Conclusion: ....................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [12]

Mark scheme: Question Answer Marks 1(a) Identify and explain one benefit and one cost to MF of developing the 8 new product. Knowledge [2 × 1] – award one mark for each relevant benefit/cost Analysis [2 × 1] – award one mark for a relevant explanation for each benefit/cost Application [2 × 2] – award two application marks for each benefit/cost Answers are likely to include: Benefit: • Provides a USP • Allows diversification/spreads risk • Allows the business to expand into new markets/attracts new customers/accommodates changing customer needs • Allows the business to expand into existing markets/increases market share/improved competitive advantage • Increase revenue/increased sales Cost: • Costs of carrying out market research/product trials • Increased production costs – new equipment/training/recruitment costs/high cost of raw materials/high cost of waste removal • Increased marketing costs – to build customer awareness • If target market wrong, the company reputation may be damaged Indicative response: Provides a USP (1) if there are no other sugar-free ice creams in the market (ap). This will allow MF to increase sales revenue of the ice cream (1). This is a new market and MF is taking advantage of the trends for healthier foods (ap). Possible application marks: Sugar free ice-cream; MF has a large market share of the food markets; large variety of food products; objectives are growth and increased market share; new automated production line required; new skilled workers need recruiting; existing workers need to be retrained. There may be other examples in context that have not been included here. 1(b) Consider how the following three elements of the marketing mix could 12 help to make the new product successful. Which do you think is the most important element for the success of the new product? Justify your answer. Relevant points might include: • Price • Penetration pricing into existing dessert market • Cost-plus pricing as need to recoup development costs • Place • Distribute through wholesalers or large supermarkets to reach a mass market • Distribute through gyms or health food outlets to reach health conscious market • Promotion • Advertise in health and fitness magazines for the health conscious consumers • TV advertising as aimed at large market • Free samples to ensure potential consumers try the new dessert Knowledge/Analysis/Evaluation – award up to 10 marks using the levels-based mark scheme below. Knowledge/Analysis/ Evaluation Level 3 At least 2 × Level 2 + 9–10 mark for well justified conclusion of which element of the marketing mix will contribute the most to the success of the new product and why the other elements will contribute less. 7–8 mark for some limited judgement shown in conclusion of which element of the marketing mix will contribute the most to the success of the new product Level 2 4–6 marks Detailed discussion of how each element of the marketing mix can contribute to the success of the new product. A clear strategy needs to be explained, e.g. pricing method named and explained as to why it would be effective Level 1 1–3 marks Outline of how each element of the marketing mix can contribute to the success of the new product. Simple statement made, e.g. reduce the price to gain more customers 1(b) Level 1 – 1 mark for each L1 statement (max of 3 marks), e.g. place can be through wholesalers and supermarkets as they can sell a lot of the products to this large market. Level 2 – 1 × L2 explanation can gain 4 marks and a further mark can be awarded for each additional L2 explanation (max 6 marks), e.g. Place can be through wholesalers and supermarkets as they can sell a lot of the products to this large market. These outlets are where the most customers will buy desserts and so it will increase the chance of the new ice-cream being seen on the shelves and then purchased (L2 + application for referring to ice-cream in the answer). Level 3 – For L3 to be awarded there needs to be at least two L2 marks awarded and then a justified conclusion of which element of the marketing mix will contribute most to the success of the new product. Award up to 2 additional marks for relevant application. Possible application marks: Sugar free ice-cream; MF has a large market share of the food markets; objectives are growth and increased market share; 10% of adults should not be eating sugary foods; 40% of adults are overweight; other food businesses are planning the introduction of low sugar food products; health conscious consumers. There may be other examples in context that have not been included here.

More questions on Marketing mix

2 (a) Identify and explain how the following two stakeholder groups of MF will be affected by the production of this new product. Employees: ....................................................................................................................... ........................................................................................................................................... Explanation: ...................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Customers: ....................................................................................................................... ........................................................................................................................................... Explanation: ...................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [8] (b) Consider how each of the following might use MF’s financial statements as shown in Appendix 1. Which user would find the information most helpful? Justify your answer. Government: ..................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Bank: ................................................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Shareholders: ................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Conclusion: ....................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [12]

Mark scheme: 2(a) Identify and explain how the following two stakeholder groups of MF 8 will be affected by the production of this new product. Knowledge [2 × 1] – award one mark for how each stakeholder group is affected Analysis [2 × 1] – award one mark for a relevant explanation of how each stakeholder group is affected Application [2 × 2] – award two application marks for how each stakeholder group is affected Answers are likely to include: Employees • increased production – output per worker increase • increased job security – more skills acquired • new production methods used – workers may not like change • more training required – feel more motivated – gain more • job satisfaction – gain higher wages Customers • more choice of products/ help to reduce weight for some consumers • may not buy the new product – as customers are unhappy with the effect on the environment • better meets the needs of some customers – makes customers feel more loyal to the company • will have to pay a higher price if customers want the new ice cream Indicative response: Increased production (1) as the new sugar free ice cream will be produced (ap). This will require further training for employees as the new equipment is different to the original equipment in the factory (1) and the new automated equipment that has been installed to produce the new ice cream will require quite different skills (ap). Possible application marks: Sugar free ice-cream; MF has a large market share of the food markets; objectives are growth and increased market share; new automated production line required; new skilled workers need recruiting; increasing trends of people being overweight in country X. There may be other examples in context that have not been included here. 2(b) Consider how each of the following might use MF’s financial statements 12 as shown in Appendix 1. Which user would find the information most helpful? Justify your answer. Relevant points might include: Government • Helps to see/calculate the amount of tax due • Increased profitability means higher tax revenue • May need to support failing business with grant or subsidy Bank • Helps establishes if MF can repay any outstanding loans – or if any further loans might be required – shows liquidity of MF – shows profitability of MF – can be used to assess risk to the bank from loans or overdraft • Improved liquidity is good as more likely to repay debts Shareholders • See whether dividends are likely to be paid – judge likely direction of share price – consider whether further investment should be made • Increased profitability should lead to increased dividends Knowledge/Analysis/Evaluation Level 3 At least 2 × Level 2 + 9–10 marks for well justified conclusion as to which user would find the information most helpful and why the other two users will find the information less helpful. 7–8 for limited conclusion as to which user of the accounts will find the information most helpful Level 2 4–6 marks Detailed discussion of how each user might find the accounts helpful. Level 1 1–3 marks Outline of how each user might find the accounts helpful. Level 1 – 1 mark for each L1 statement (max of 3 marks), e.g. the bank might want to see if MF is making a profit to see if they can repay any loans. Level 2 – 1 × L2 explanation can gain 4 marks and a further mark can be awarded for each additional L2 explanation (max 6 marks), e.g. the bank might want to see if MF is making a profit to see if it can repay any loans otherwise the bank may not have the loan repaid. This would cause problems for the bank as it would risk losing its money. Also MF might need an overdraft and the bank could also see that the overdraft is likely to be repaid after seeing that the liquidity of the business is good (L2). Level 3 – For L3 to be awarded there needs to be at least two L2 marks awarded and then a conclusion as to which user of the accounts will find the information most helpful. Award up to 2 additional marks for relevant application. Possible application marks: Sugar free ice-cream; MF is a public limited company established 30 years ago; MF has a large market share of the food markets; objectives are growth and increased market share; new automated production line required; increasing trends of people being overweight in country x; increased government costs to treat overweight people. Reference to data in Appendix 1. There may be other examples in context that have not been included here.

3 (a) Identify and explain how the following four departments of MF are likely to be affected by the development of its new product. Marketing: ......................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Human Resources (HR): .................................................................................................. ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Operations: ....................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Finance: ............................................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [8] (b) Using the information provided in Appendix 3, consider the following two options for MF’s new product. Recommend which option MF should choose to ensure the highest profit for the new product. Justify your answer. Option 1 - raise the price per carton from $5 to $7.50: ..................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Option 2 - reduce the variable cost per carton from $2.50 to $2.00: ................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Recommendation: ............................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [12]

Mark scheme: 3(a) Identify and explain how the following four departments of MF are likely 8 to be affected by the development of its new product. Award one mark for an explanation of a likely way each department will be affected (max 4) Award one mark for applying an explanation in context of how each department will be affected (max 4) Answers are likely to include: • Marketing department will have increased workload from carrying out market research/promoting the new product • HR will need to recruit additional workers/training requirements • Operations will need new automated equipment – to produce the new ice- cream • Finance will need to raise the funds necessary for the investment in the new equipment – and working capital for the purchase of new ingredients/produce financial statements, e.g. income statement Indicative response: The Marketing department will have an increased workload from carrying out market research (1). This is because the sugar-free ice cream is new and MF will not know if consumers are interested in buying it (1). Possible application marks: Sugar free ice-cream; MF has a large market share of the food markets; objectives are growth and increased market share; new automated production line required; new skilled workers need recruiting; waste produced causes pollution if thrown into local landfill; increasing trends of people being overweight in country X. There may be other examples in context that have not been included here. 3(b) Using the information provided in Appendix 3, consider the following 12 two options for MF’s new product. Recommend which option MF should choose to ensure the highest profit for the new product. Justify your answer. Relevant points might include: Level 1 Level 2 Option 1 –raise price May put off potential B/E identified at 4000 from $5.00 to $7.50 customers/demand and now fallen to 2000 may fall Profit is $15 000 at Revenue at $5 for 5000 maximum capacity (or units = $25 000 profit at alternative Fixed costs = $10 000 output) Total cost at 2000 units Margin of safety of output = $15 000 increases by 2000 Higher price will give Increased price leads impression of higher to increased gross quality product profit per unit however, May increase profit revenue might not increase if sales fall Option 2 – lower VC May be lower quality B/E identified at 4000 fall from $2.50 to $2.00 product and now 3334 (accept Found cheaper raw 3200 up to 3500) materials/found Profit is $5000 at cheaper ways to maximum capacity (or dispose of waste profit at alternative Total cost will be lower output) Fixed costs remain at Margin of safety $10 000 increases by 666 Total cost at 3334 units (accept OFR) of output = $16 668 (or $16 500) Knowledge/Analysis/ Evaluation Level 3 Only given if 2 × L2 correct break-even or profit figures 9–10 marks for well justified recommendation as to the best way to increase profit compared to other option. 7–8 marks for some limited judgement shown in recommendation as to the best way to increase profit. Level 2 4–6 marks Explanation of the effects of higher price and/or lower variable cost as a way to increase profit. Calculations of break-even or profit at relevant levels of output Level 1 1–3 marks Outline of the effects of higher price and/or lower variable cost as a way to increase profit. Basic statements related to revenue or costs figures Level 1 – 1 mark for each L1 statement (max of 3 marks), e.g. increasing the price will lead to higher profit. Level 2 – 1 × L2 explanation can gain 4 marks and a further mark can be awarded for each additional L2 explanation (max 6 marks), e.g. the new break-even output is 2000 whereas the original break-even output was 4000 (L2). Level 3 – For level 3 to be awarded there must have been 2 × L2 correct break-even or profit figures, then a well justified recommendation as to the best way to increase profit to choose compared to other option. Award up to 2 additional marks for relevant application Possible application marks: Sugar free ice-cream; MF has a large market share of the food markets; objectives are growth and increased market share; new automated production line required; new skilled workers need recruiting; increasing trends of people being overweight in country X. There may be other examples in context that have not been included here.

More questions on Costs, scale of production and break-even analysis

4 (a) Identify and explain two differences between: (i) MF and unincorporated businesses: Difference 1: .......................................................................................................... ................................................................................................................................ ................................................................................................................................ ................................................................................................................................ Difference 2: .......................................................................................................... ................................................................................................................................ ................................................................................................................................ ................................................................................................................................ ................................................................................................................................ [4] (ii) MF and public sector organisations: Difference 1: .......................................................................................................... ................................................................................................................................ ................................................................................................................................ ................................................................................................................................ Difference 2: .......................................................................................................... ................................................................................................................................ ................................................................................................................................ ................................................................................................................................ ................................................................................................................................ [4] (b) Consider the possible external costs and external benefits resulting from MF’s new product. Recommend whether the Government should encourage MF to produce this new product. Justify your answer. External costs: .................................................................................................................. ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... External benefits: .............................................................................................................. ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Recommendation: ............................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [12]

Mark scheme: 4(a)(i) Identify and explain two differences between MF and unincorporated 4 businesses: Award one mark for each difference (2 max) plus one additional mark for explaining why it is a difference in context. Answers are likely to include: • MF has limited liability • There is continuity with MF • MF has a separate legal identity • MF is able to sell shares Note: Do not accept MF is an incorporated business Indicative response: MF has limited liability whereas an unincorporated business has unlimited liability (1). This protects the shareholders of MF (1). Context is from recognising that MF is an incorporated business – shareholders; MF is a public limited company; MF is not a sole trader or partnership; MF competitors are partnership businesses 4(a)(ii) Identify and explain two differences between MF and public sector 4 organisations: Award one mark for each difference (2 max) plus one additional mark for explaining why it is a difference in context. Answers are likely to include: • MF is not owned by the government • Different objectives such as private sector aim to make profits whereas public sector aim to provide a service to the public/different pricing strategies • Investment from the shareholders whereas public sector investment by the government Note: Do not accept MF is an incorporated business Indicative response: MF has profit and increased market share as objectives whereas public sector organisations will have different objectives such as public provision of a service (1) Context is from recognising that MF is a private sector business – MF objective is to increase profit; MF objective is to increase market share; MF is in the private sector; MF may fund investment by selling shares 4(b) Consider the possible external costs and external benefits resulting 4 from MF’s new product. Recommend whether the Government should encourage MF to produce this new product. Justify your answer. Relevant points might include: External • Waste thrown into the landfill causes pollution for local costs people – farmers lose some of their land – reduces locally produced food – increased spending on buying food • High cost to the government to clean up the waste – raise taxes or reduce spending elsewhere • Environmental damage when rainforest is cut down External • Healthier population – employees have less time off work – benefits more efficient – increased output in the economy • Government spending on health provision falls – can spend money elsewhere • Recruitment of new workers will reduce unemployment in the local area Knowledge/Analysis/Evaluation – award up to 10 marks using the levels-based mark scheme below. Knowledge/Analysis/ Evaluation Level 3 At least 2 × Level 2 + 9–10 marks for well justified recommendation as to whether or not the government should encourage the production of this new product. 7–8 marks for some limited judgement shown in recommendation as to whether or not the government should encourage the production of this new product. Level 2 4–6 marks Detailed discussion of external costs and/or benefits. Level 1 1–3 marks Outline of external costs and/or benefits. 4(b) Level 1 – 1 mark for each L1 statement (max of 3 marks), e.g. waste thrown into the landfill causes pollution. Level 2 – 1 × L2 explanation can gain 4 marks and a further mark can be awarded for each additional L2 explanation (max 6 marks), e.g. waste thrown into the landfill causes pollution and the farmers will lose their land meaning less food will be produced locally. Local people will have to pay more for food and this will leave them with less income to spend on other goods and services, therefore lowering their standard of living (L2). Level 3 – For L3 to be awarded there needs to be at least two L2 marks awarded and then a recommendation as to whether or not the government should encourage the production of this new product. Award up to 2 additional marks for relevant application. Possible application marks: Sugar free ice-cream; waste produced causes pollution if thrown into the local landfill; farmers may lose their land; sugary foods cause health problems; increasing trends of people being overweight in country x; increased government costs to treat overweight people. There may be other examples in context that have not been included here.

More questions on Environmental and ethical issues