Cambridge IGCSE Business Studies (9-1) 0986 — 2021 May/June Paper 2 · Variant 1

1 (a) Explain four reasons for changes in the relative importance of the primary, secondary and tertiary sectors in a country. Reason 1: ......................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Reason 2: ......................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Reason 3:.......................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Reason 4: ......................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [8] (b) Consider the following three problems for FO as it grows through takeovers. Which problem will be the easiest for FO to overcome? Justify your answer. • More difficult to control the business • Lack of finance • Clash of business cultures More difficult to control the business: ............................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Lack of finance: ................................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Clash of business cultures: ............................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Conclusion: ....................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [12]

Mark scheme: Question Answer Marks 1(a) Explain four reasons for changes in the relative importance of the 8 primary, secondary and tertiary sectors in a country. One mark for each reason for the change (maximum of 2). Award a maximum of 1 additional mark for each explanation. Note: There are no application marks for this question. Relevant reasons might include: • Change in the primary sector – increase due to new discovery of natural resources / decreases due to depletion of natural resources • Change in the secondary sector – increase due to industrialisation / decreases due to deindustrialisation • Change in the tertiary sector – increase due to increased consumer incomes • Increase in incomes / economic growth / increase in GDP – this could lead to a change in the secondary or tertiary sector • Increase in demand for manufactured goods – increase in the size of secondary sector • Increase in tertiary sector – as consumers have higher disposable income to spend on services • Increased mechanisation / increased technology – reduces number of employees in the secondary sector • People move into the tertiary sector to provide services – as demand for services grows as a country develops e.g. tourism • Increase in exported products – more need to be manufactured in secondary sector • Reduced employment in primary sector – as now primary products produced using mechanisation / rural to urban migration • Primary products are now processed in own country – increased manufacturers / secondary sector to process the raw materials into finished products • Government policies to encourage development • Increased globalisation • Actions of environmental groups / pressure groups leading to sectoral change – primary extraction or dirty manufacturing in the secondary sector For example: Incomes have increased (1) and consumers have more purchasing power for manufactured goods increasing the importance of the secondary sector (1). 1(b) Consider the following three problems for FO as it grows through 12 takeovers. Which problem will be the easiest for FO to overcome? Justify your answer. • More difficult to control the business • Lack of finance • Clash of business cultures Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of at least two problems. Well-justified conclusion. Candidates discussing all three problems in detail, in context and with a well-justified conclusion including why the alternative problems were rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding of 5–8 relevant business concepts using appropriate terminology. Detailed discussion of at least one problem. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more problems in detail and applying it to the case should be rewarded with the top marks in the band. 1 Limited application of knowledge and understanding of 1–4 relevant business concepts. Limited ability to discuss the problems with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining all three problems in context should be rewarded with the top marks in the band. 0 No creditable response. 0 1(b) Relevant points might include: More • Increased number of employees at the three factories difficult to means managers may not be in direct contact with control the employees business • Need to employ more supervisors to control workers – (as a result increases costs as more wages to pay of growth by • May mean some workers are not supervised and may takeovers) not work efficiently – less output from each worker • Difficulty of communication with employees across the three factories Lack of • As the private limited company has grown by taking finance over other two businesses then expansion costs have (as a result been high / may be high for future takeovers of growth by • Take out loans to finance the takeovers – increased takeovers) interest payments for loans / increased costs – lower profits • Cannot sell shares to the public only family and friends as they are a private limited company – so amount raised may be limited Clash of • If the other two businesses that have been taken over business have very different cultures and ways of doing things – cultures may have clashes between staff (as a result • Employees not working effectively together as of growth by leadership styles were different at the two takeovers) companies – reduced efficiency as output per employee drops • Resistance by workers to do things differently – reduces efficiency – workers demotivated after the takeover Conclusion • Controlling the new business after the takeover is the easiest to overcome by employing new supervisors who can pass on important messages from managers to employees in the three factories. As it is only a private limited company share issue will raise only limited capital. Cultures are embedded in businesses making employees very resistant to change. • Lack of finance may be the easiest to overcome as it has been a successful business for over 20 years, and this will give confidence to banks to make loans. • The clash of cultures may be the easiest to overcome as it involves ensuring different leadership styles in the three original businesses are modified. Employee participation could be used to make everyone accept working in a new environment.

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2 (a) Explain two reasons why it is important for FO to manage all of its resources effectively when manufacturing products. Reason 1: ......................................................................................................................... ........................................................................................................................................... Explanation:....................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Reason 2: ......................................................................................................................... ........................................................................................................................................... Explanation: ...................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [8] (b) Consider the benefits and limitations of the following three methods of communication FO could use. Which method of communication would be most suitable when contacting suppliers about a late delivery? Justify your answer. • Email • Mobile (cell) phone • Letter Email: ................................................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Mobile (cell) phone: .......................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Letter: ............................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Recommendation: ............................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [12]

Mark scheme: 2(a) Explain two reasons why it is important for FO to manage all of its 8 resources effectively when manufacturing products. One mark for each reason (maximum of 2). Award a maximum of 3 additional marks for each explanation of the reason why it is important to manage resources effectively when manufacturing products – one of which must be applied to this context. Relevant reasons might include: • Better understand number of employees needed – so labour cost can be better controlled – employees are fully employed / always busy • To ensure the maximum output is produced from the least inputs – maximises efficiency – increases profit • Reduces waste / prevents over or under allocation of resources – not too much inventory ordered – reduces costs • Avoiding underproduction – equipment needs maintaining regularly – prevents a lack of output to meet demand • Avoiding overproduction – leads to increased storage required for inventory – increases costs / may mean a chaotic working environment – leading to employee demotivation or confusion • Will not run out of raw materials – not a shortage of finished product – improved consumer satisfaction • Deliveries are made on time – leads to customer satisfaction – improved reputation / repeat orders For example: If FO manages its resources effectively then it should ensure the maximum output is produced from the least inputs (1), which should keep down the unit costs (1) and maximise profit (1) from manufacturing wooden outdoor furniture. (app) Application might include wooden furniture, outdoor furniture, nails, brackets, paint, wood, local forests, tables, online ordering. 2(b) Consider the benefits and limitations of the following three methods of 12 communication FO could use. Which method of communication would be most suitable when contacting suppliers about a late delivery? Justify your answer. • Email • Mobile (cell) phone • Letter Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of two or more methods. Well-justified recommendation. Candidates discussing all three methods in detail, in context and with a well-justified recommendation including why the alternative methods were rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding of 5–8 relevant business concepts using appropriate terminology. Detailed discussion of at least one method. Judgement with some justification / some evaluation of choices made. Candidates discussing of two or more methods in detail and applying them to the case should be rewarded with the top marks in the band. 1 Limited application of knowledge and understanding of 1–4 relevant business concepts. Limited ability to discuss the methods with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining all three methods in context should be rewarded with the top marks in the band. 0 No creditable response. 0 2(b) Relevant points might include: Advantages Disadvantages Email • Can be sent quickly to • No guarantee it has been the suppliers of wood read by suppliers of • Can be sent to many nails people at once • Could have gone into • Hard copy if email junk folder printed out • May not be secure • Can be saved for • If many emails are sent, reference to later then it could be lost amongst them • Requires an internet connection Mobile • Know the message has • May take time to reach (cell) been received the correct person phone • Caller can ask questions • Time/language about the brackets differences • Feedback can be given • Can be expensive • Receiver more likely to • Time consuming if need have mobile phone on to contact many different them so easier to reach suppliers of wood • No hard copy for reference Letter • Hard copy • Slower than other two • More formal for legal methods documents • Can be more expensive • A lot of detail can be than other two methods included about the late • No guarantee the letter delivery of nails and has been received by the paint supplier of brackets Recommendation • Email best choice if the order is urgent and if a delivery of raw materials is late. FO may need to know when the order will arrive, or manufacturing of furniture may be delayed. A letter will be too slow and using a mobile phone may not get through to the correct person straight away if they are busy, hence will need to keep ringing until they can be contacted, so wasting time. • Mobile phone call may be best as it will get instant feedback about the order of wood and the questions can be asked. • Letter may be best if express delivery could be arranged about the late delivery of nails and paint. It is more formal that the other two methods and they can be sure it has been received if signed for.

3 (a) Explain how one internal source and one external source of finance could be used by FO as it expands. Internal source of finance: ................................................................................................ ........................................................................................................................................... Explanation: ...................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... External source of finance: ............................................................................................... ........................................................................................................................................... Explanation: ...................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [8] (b) Consider the advantages and disadvantages to FO of using a wholesaler, retailer or selling direct to the customer when distributing its products. Which channel of distribution should FO use? Justify your answer. Wholesaler: ....................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Retailer: ............................................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Selling direct to customer: ................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Recommendation: ............................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [12]

Mark scheme: 3(a) Explain how one internal source and one external source of finance 8 could be used by FO as it expands. One mark for each suitable method of internal/external source of finance. Award a maximum of three additional marks for each explanation of the example of internal/external source of finance one of which must be in context. Internal • Retained profit – nothing to repay / no interest to pay – keeps expenses down • Sale of existing non-current assets – these might be unused equipment and not affect existing production levels • Sale of inventories to reduce inventory levels External • Bank loan – easier to obtain due to previous business success – repayments can be spread out over several years • New share issue – existing shareholders may be willing to increase their investment due to business success – may be able to attract more family and friends for investment in new capital • Grants and subsidies from the government – funds may be available from the government to support sustainable businesses – FO would qualify for these grants – do not have to be repaid • Debentures • Crowd-funding For example: Bank loan (1) is easier to obtain due to previous business success (1) over the last 20 years (app). Repayments can be spread out over several years (1). Application might include: FO is a private limited company, FO has been operating for 20 years, FO is a sustainable business, for many years’ shareholders have reinvested profits, FO recently took over two other furniture businesses, FO plans further takeovers, FO is quite a large business. 3(b) Consider the advantages and disadvantages to FO of using a 12 wholesaler, retailer or selling direct to the customer when distributing its products. Which channel of distribution should FO use? Justify your answer. Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of two or more channels of distribution. Well-justified recommendation. Candidates discussing all three channels of distribution in detail, in context and with a well-justified recommendation including why the alternative channels of distribution were rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding of 5–8 relevant business concepts using appropriate terminology. Detailed discussion of at least one channel of distribution. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more channels of distribution in detail and applying it to the case should be rewarded with the top marks in the band. 1 Limited application of knowledge and understanding of 1–4 relevant business concepts. Limited ability to discuss channels of distribution with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining three channels of distribution in context should be rewarded with the top marks in the band. 0 No creditable response. 0 3(b) Relevant points might include: Advantages Disadvantages Wholesaler • Buys tables in large • Prices of chairs and quantities – fewer tables may be higher as deliveries needed – wholesaler needs to add reducing distribution their mark up costs • Wholesaler may not want • Saves storage space for to buy the full range of manufacturer products • Lower administration • May also sell costs as fewer orders to competitors’ products process • Longer chain of • May give advice to distribution – longer to manufacturer on what reach the customer furniture sells well • May undertake some of the marketing to retailers/customers – boost sales – reduce marketing costs for FO Retailer • Sell in large quantities of • No direct contact with tables to retailers customers of wooden • Reduced distribution furniture costs • Price is often higher – • Can promote the retailer will add their furniture – reducing mark up marketing costs for FO Direct to • Lower price of furniture • May have increased customer than if sold through other distribution costs for intermediaries tables and chairs as • Can use internet or mail selling to many order to sell products customers rather than • Have direct control over just a few with the other marketing methods • Develops a direct • Higher costs of relationship between the administration customer and the • Not all customers feel producer – easier to confident or are able to follow up with direct order online marketing to customer 3(b) Recommendation • Direct to customer should be chosen as FO sells furniture that is not bought in large quantities by customers and a higher price can be charged. Wholesalers may not convey the sustainable features of the furniture to smaller retailers so fewer sales. Retailer may take part of the profit margin reducing the profit for FO. • If FO use a wholesaler or a retailer to sell its furniture FO will need to discount the price so it will make less profit from these methods of distribution. • Customers pay a high price for furniture if sold direct to the customer so it will allow FO to make a high profit margin on each item of furniture.

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4 (a) Using the information in Appendix 2: (i) Calculate the break-even level of output per month ................................................................................................................................ ................................................................................................................................ ................................................................................................................................ [2] (ii) Calculate the margin of safety per month for tables: ................................................................................................................................ ................................................................................................................................ ................................................................................................................................ [2] (iii) Identify four limitations of using break-even analysis. Limitation 1:............................................................................................................ ................................................................................................................................ Limitation 2:............................................................................................................ ................................................................................................................................ Limitation 3:............................................................................................................ ................................................................................................................................ Limitation 4:............................................................................................................ ................................................................................................................................ [4] (b) Refer to Appendix 2 and Appendix 3 and other information. Consider the following three ways FO could use to contribute to sustainable development: • only use raw materials from sources that replace what they have used • only use packaging that can be recycled • only use electric vehicles to deliver products. Which way should FO choose to maximise profit? Justify your answer. Only use raw materials from sources that replace what they have used: ........................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Only use packaging that can be recycled: ........................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Only use electric vehicles to deliver products: ................................................................. ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... Recommendation: ............................................................................................................ ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [12]

Mark scheme: 4(a)(i) Using the information in Appendix 2: 2 Calculate the break-even level of output per month (Break-even = fixed costs/contribution per unit) Contribution (Selling price per unit $250 – Variable cost per unit $125) = $125 Fixed cost per month $10 000/ $125 (1) Break-even level of sales = 80 (1) 4(a)(ii) Calculate the margin of safety per month for tables: 2 (Margin of safety = Actual sales – break-even level of sales) Forecast sales per month 100 – 80 (1) = 20 (1) 4(a)(iii) Identify four limitations of using break-even analysis. 4 One mark for each limitation (maximum of 4). Responses could include: • Assumes no inventories • ‘Straight line’ assumptions about costs and revenue • Fixed costs are not always constant • Assumes all products are actually sold / it is only an estimate/forecast • Only focuses on break-even when there are many other factors to consider when running a business • Assumes single product • Hard to split costs between fixed and variable • May be hard to split fixed costs if produce several products 4(b) Refer to Appendix 2 and Appendix 3 and other information. Consider the 12 following three ways FO could use to contribute to sustainable development: • only use raw materials from sources that replace what they have used • only use packaging that can be recycled • only use electric vehicles to deliver products. Which way should FO choose to maximise profit? Justify your answer. Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of two or more ways. Well-justified conclusion. Candidates discussing all three in detail, in context and with a well-justified conclusion including why the alternative ways were rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding of 5–8 relevant business concepts using appropriate terminology. Detailed discussion of at least one way. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more ways in detail and applying them to the case should be rewarded with the top marks in the band. 1 Limited application of knowledge and understanding of 1–4 relevant business concepts. Limited ability to discuss the ways with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining three ways in context should be rewarded with the top marks in the band. 0 No creditable response. 0 4(b) Relevant points might include: Advantages Disadvantages Only use raw • Gives FO a good • Variable costs will materials from reputation for selling increase by 20% – sources that wooden furniture $25 per item of replace what they • Increase sales from furniture have used ethically minded • At current sales level, consumers profit would be zero • Able to charge a so would need to premium price for the increase the selling furniture price or units sold Only use • Makes product • Selling price may be packaging that packaging more 10% expensive can be recycled sustainable and is in which may lower line with sustainable sales objectives of FO • May not be suitable • Reputation increased for large items of amongst ethical furniture consumers – more • Selling price may sales increase by $25 Only use electric • Cheaper running • More expensive to vehicles to deliver costs by 5% purchase initially then products • USP for FO cheaper to run • Variable costs may • Higher capital cost fall by $6.25 for new vehicles • Costs increase in than petrol or diesel short run, but cost vehicles which savings in long run requires higher • Contributes to investment by FO reduced air pollution – meets FO’s objective of sustainability 4(b) Recommendation • Using wood from sustainable sources would enhance the image of FO and make it more attractive to ethical consumers leading to much higher sales and revenue leading to maximising profit. However, as furniture are large items then packaging will be less important. Electric vehicles will require too large a capital investment. • Recycled packaging will have the greatest effect on maximising profit as very little packaging is used for furniture and this packaging can be reused for future customers. The increase in costs is likely to be less than the 20% increase from the use of raw materials from sustainable sources. • Electric vehicles is the only option which results in a fall in variable costs – by 5% and therefore the reduction in running costs delivering its furniture to all parts of the country would be significant hence reducing total costs and maximising profit.

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