Enterprise, business growth and size — Paper 2 · IGCSE Business Studies (9-1) 0986

1 (a) Explain four characteristics that make Simon a successful entrepreneur. Characteristic 1: … … … … Characteristic 2: … … … … Characteristic 3: … … … … Characteristic 4: … … … … [8] (b) Explain the three main methods of production FJ could use to produce its products in the factory. Which method should FJ use? Justify your answer. Method 1: … … … … … … Method 2: … … … … … … Method 3: … … … … … … Recommendation: … … … … … … [12]

20 marks

Mark scheme: Question Answer Marks 1(a) Explain four characteristics that make Simon a successful 8 entrepreneur. Award 1 mark for each relevant characteristic (maximum of four): Relevant characteristics might include: • Self-confident – decision to leave full-time job 6 months ago • Creative – created new drinks to attract additional customers • Independent – willing to go with own ideas to produce new types of drinks • Hard worker – prepared to do all the work himself by making all the drinks at his home and selling them at a market stall • Risk taker – gave up a well-paid job and risked losing personal assets • Effective communicator – persuades others to buy his new drinks when he is selling them on a market stall • Optimistic – think positively about new business and wants to rapidly expand it • Innovative – creating a healthy alternative to mass produced drinks Award a maximum of one additional mark for each application of the characteristic to the context. Indicative response: Simon is a risk taker (1) as he risked giving up his well-paid job to start his own business (app). 1(b) Explain the three main methods of production FJ could use to produce 12 its products in the factory. Which method should FJ use? Justify your answer. Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more methods. 3 Well-justified recommendation. 9–12 Candidates discussing three methods in detail, in context and with well-justified recommendation including why the alternative methods were rejected should be rewarded with the top marks in the band. Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one method. 2 Judgement with some justification/some evaluation of 5–8 choice made. Candidates discussing of two or more methods in detail and applying it to the case should be rewarded with the top marks in the band. Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the methods with little/no explanation. 1 1–4 Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining three methods in context should be rewarded with the top marks in the band. 0 No creditable response. 0 1(b) Relevant points might include: Advantages Disadvantages • Suitable for one-off • Skilled labour may drinks be required – higher • Needs exact wages – higher requirements of costs customers • Costs higher as Job • Higher price charged labour intensive and for product specially ordered fruits used • Production takes longer than other two methods • Flexible way of • Can be expensive if working – can easily semi-finished drinks change to produce need moving around different drinks the factory • Still some variety for • Machines have to be workers in their jobs reset between • More variety of batches products produced – – delay in Batch consumers will have production more choice – lower productivity • Warehouse space needed for fruits and finished batches of drinks – cost of space • High output of • Can be boring for standardised drinks workers – less • Cost to make each motivated drink is low • Storage costs may • Easier for capital be high unless use intensive production JIT methods to be used • Capital costs of • May use lower setting up production Flow skilled workers as line are high machines can be • If one machine used in the breaks down, then production line the whole production • May benefit from line may have to be economies of scale halted with no fruit as may buy the 2 drinks produced types of fruit ingredients in bulk 1(b) Justification might include: • Batch will be the best as different types of healthy drinks will be produced but not in large enough quantities to make flow production viable until the business has grown significantly. Recommendation • Flow production will allow more automated machinery to be installed in the factory which will reduce unit costs than if job or batch production is used. Lower prices for the fruit drinks may then be charged leading to higher demand. Also supply to the additional market stalls can easily be met and the business can expand quickly.

This question in 0986/21 May/June 2020

1 (a) Explain one benefit and one problem for ES of taking over other businesses. Benefit: … … Explanation: … … … … … … Problem: … … Explanation: … … … … … … [8] (b) Consider the financial information in Appendix 1. Which company should ES take over? Justify your answer using appropriate ratios. ABC Company: … … … … … … … … FGH Company: … … … … … … … … Recommendation: … … … … … … … … [12]

20 marks

Mark scheme: Question Answer Marks 1(a) Explain one benefit and one problem for ES of taking over other 8 businesses. Award 1 mark for each relevant benefit/problem (maximum of two): Relevant benefits might include: • Assets already set up for use – can use existing scooter factories and skilled employees • Makes it quicker to grow – as the existing production facilities can be used to increase the output of scooters – faster than setting up own factories • Have access to ready trained/skilled staff Relevant problems might include: • High cost of buying other business – may need to sell additional shares on the stock exchange • May be difficult integrating the two companies – as the way of working may be very different in the smaller scooter businesses – and employees may not like the changes – leading to less efficiency • More difficult to control larger business – many more skilled employees in the business – possible diseconomies of scale Award a maximum of 3 additional marks for each explanation of the benefits and problems of growing by taking over other businesses – one of which must be applied to this context. For example: The cost of buying other companies is high (1) and ES will have to raise large amounts of funds to allow them to do this (1). As a public limited company (app), it could sell additional shares to raise the finance, but this may lead to the existing shareholders losing some control over the business (1). 1(b) Consider the financial information in Appendix 1. Which company 12 should ES take over? Justify your answer using appropriate ratios. Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of both companies. 3 9–12 Well-justified recommendation. Candidates discussing both companies in detail, in context and with well-justified recommendation including why the alternative company was rejected should be rewarded with the top marks in the band. Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one company. 2 5–8 Judgement with some justification/some evaluation of choice made. Candidates discussing both companies in detail and applying it to the case should be rewarded with the top marks in the band. Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss each company with little/no explanation. 1 1–4 Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining both companies in context should be rewarded with the top marks in the band. 0 No creditable response. 0 1(b) Relevant reasons might include: • Revenue $300m lower than FGH ($400m for FGH company - $100m for ABC company) • Gross profit = $50m • GPM = 50% • Profit = $10m ABC company • Profit Margin = 10% • ROCE is 5% lower than FGH but still good return on investment (25% for FGH – 20% for ABC) • Liquidity is good and shows that ABC can easily pay any short-term liabilities • Gross profit = $240m (Revenue $400m – Cost of sales $160m) • GPM = 60% • Profit = $30m • PM = 7.5% FGH company • Profit $20m higher than ABC • Current ratio is higher than ABC (ABC current ratio of 2 while FGH current ratio is 3) • Liquidity is too high and is not making good use of its current assets. There may be too much cash being held in the business. Justification might include: • ABC as profitability higher than FGH even though GPM is lower overall profitability is higher. Liquidity is also better for ABC as FGH has too high an amount of current assets to Recommendation current liabilities with a current ratio of 3. • FGH as the actual profit is higher than for ABC and GPM higher showing if improve control of expenses then profitability will be higher as well. ROCE is 25%, higher than ABC by 5%.

This question in 0986/22 May/June 2020

2 (a) Explain four ways a business plan can be useful. Way 1: … … … … Way 2: … … … … Way 3: … … … … Way 4: … … … … [8] (b) ES has been considering the following three methods of promotion for its products in export markets. Which method should ES choose? Justify your answer. • Advertise on national television • Advertise on ES website • Display its products in shopping malls Advertise on national television: … … … … … … Advertise on ES website: … … … … … … Display its products in shopping malls: … … … … … … Recommendation: … … … … … … [12]

20 marks

Mark scheme: 2(a) Explain four ways a business plan can be useful. 8 Award 1 mark for each relevant way (maximum of four ways): Relevant ways might include: • Helps gain a bank loan – shows the business is likely to be profitable and repay the loan • Organises thoughts about resources needed – identify types of workers need to recruit • Can plan and budget for resources needed- e.g. to budget for new production machinery • Financial documents will help to show expected returns – to see if it will bring the return expected by shareholders Award a maximum of 1 additional mark for each explanation of the way a business plan can be used. For example: Forecast financial documents will show potential profit to be made (1) can see if it will give a satisfactory return on the investment. (1) 2(b) ES has been considering the following three methods of promotion for 12 its products in export markets. Which method should ES choose? Justify your answer. • Advertise on national television • Advertise on ES website • Display its products in shopping malls Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more methods to promote ES’ products. 3 9–12 Well-justified recommendation. Candidates discussing the three methods in detail, in context and with well-justified recommendation including why the alternative methods were rejected should be rewarded with the top marks in the band. Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one method. 2 5–8 Judgement with some justification/some evaluation of choice made. Candidates discussing two or more methods in detail and applying it to the case should be rewarded with the top marks in the band. Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the methods to promote the products with little/no explanation. 1 1–4 Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining the three methods to promote the products in context should be rewarded with the top marks in the band. 0 No creditable response. 0 2(b) Relevant points might include: • Advert for scooters will go out to millions of people • Scooters can be shown in very favourable way • Can reach a target audience for scooters if shown during programmes likely to be watched Advertise on by these target customers e.g. sports national television programmes • Very expensive form of advertising • Younger consumers may not watch as much TV as older people so may not reach these consumers • Large amount of information can be posted • Cheap way to advertise • Can include videos of the scooters Advertise on ES • Internet searches may not highlight the website website at the start of the search list and therefore it is missed • Internet access may be limited in some countries where scooters are being exported • Provides a lot of information Display its • Can also be persuasive with scooter to look at products in and sit on shopping malls • Restricted to a relatively small number of consumers in the mall Justification might include: • National TV as the scooters will be seen by the mass market and will not be seen by many people in shopping mall displays. • Website useful for advertising when other forms of advertising have raised awareness of the scooters such as after the scooter has been Recommendation seen in a mall display. • Displays in shopping malls will be most useful as potential customers can sit on the scooters and see how comfortable they are. This may make people who have not even thought about buying a scooter consider them whereas advertisements in television and on websites may be ignored.

This question in 0986/22 May/June 2020

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]

20 marks

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.

This question in 0986/21 May/June 2021

2 (a) Explain two ways SSM can grow. Way 1: … … Explanation: … … … … … … Way 2: … … Explanation: … … … … … … [8] (b) Consider the advantages of using primary and secondary market research to gather information about the potential sales in the new market. Which is the best method for SSM to use? Justify your answer. Advantages of primary market research: … … … … … … … … Advantages of secondary market research: … … … … … … … … Recommendation: … … … … … … … … [12]

20 marks

Mark scheme: 2(a) Explain two ways SSM can grow. 8 Award 1 mark for a way (maximum of 2 marks). Award a maximum of 3 additional marks for each explanation of the way SSM can grow – one of which must be applied to this context. Relevant ways of internal growth might include: • SSM can increase the size of its own factory / build other factories / acquire assets – it could use its own funds such as retained profit – to expand production / output • Finding new markets for its products / sell to a wider market / sell overseas • Diversification • Develop new products Relevant ways of external growth might include: • Take over another business – quickly acquires the assets of the other business to increase size • Merger • Horizontal integration • Vertical integration • Conglomerate integration For example: Internal growth (1) a business could decide to expand its own factory (1) new machinery could be purchased to increase production (1). SSM plans to spend $15 million to expand in this (app). Application might include: SSM is a public limited company; set up 25 years ago; manufacturer of soap powder; 60 production employees; total of 100 employees; directors have already decided to expand the factory; will need $15 million; may take over a competitor; start selling soap powder in other countries; many existing manufacturers in other countries; benefit from economies of scale. 2(b) Consider the advantages of using primary and secondary market 12 research to gather information about the potential sales in the new market. Which is the best method for SSM to 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 both methods. Well-justified recommendation. Candidates discussing both methods in detail, in context and with a well-justified recommendation including why the alternative method was 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 one 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 both 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 Primary market • Up to date research • Relevant to the business – find out opinions / more detailed information from potential customers • Focus is on the business carrying out the research – can gather qualitative data on preferences for washing clothes • Not available to other businesses • Effective way to gather specific information as a questionnaire can focus on the information about the soap market required by SSM – making it more reliable Secondary • Usually much cheaper than primary research to market research gather information • It is often better than primary research to assess the total size of the market for products to wash clothes by using government population statistics • Quicker/easier to obtain than primary research • Can be the total soap market if using government census data • May be able to observe trends over time Recommendation • If the total size of the soap powder market is required, then secondary research methods will be the most effective. Government statistics will provide information on the total number of people in specific age groups and where they are located in the country. Primary research is unlikely to be carried out over the whole country and data will be more localised so less useful. • Primary research will be better if specific information on the needs and wants of customers habits for washing clothes is required as questions can be focused on the specific products produced by SSM or their competitors soap products.

This question in 0986/21 Oct/Nov 2021

1 (a) Explain four reasons why governments might support business start-ups. Reason 1: … … … … Reason 2: … … … … Reason 3: … … … … Reason 4: … … … … [8] (b) Consider the benefits to Yasin of the two sections of his business plan shown in Appendix 1. Which section do you think helped him most when starting up his business? Justify your answer. Market research: … … … … … … … … Resources: … … … … … … … … Conclusion: … … … … … … … … [12]

20 marks

Mark scheme: Question Answer Marks 1(a) Explain four reasons why governments might support business start- 8 ups. Award 1 mark for each relevant reason (maximum of four). Award a maximum of 1 additional mark for each explanation of the reason. There are no application marks available for this question. Relevant reasons might include:  To reduce unemployment – new businesses create jobs and therefore help to reduce unemployment in the country / fewer welfare benefits to pay  To increase competition – new businesses will provide more choice for consumers and therefore will provide more competition for existing businesses / may keep prices lower and quality higher  To provide/have a wider variety of goods and services available – so there will be a wider choice for consumers  To increase output / improve standard of living – new businesses will produce more goods and services in the economy/increase in GDP  To benefit society – new start-ups may support social enterprises and therefore provide benefits other than just creating jobs  They may grow into larger businesses in the future – successful larger businesses started small, so it is worth supporting businesses to get started  Earns taxation – the business will pay tax if profitable and this will be a source of revenue for the government which they can then use for providing public services.  To motivate/encourage entrepreneurs – government support may reduce the risk of failure For example: To reduce unemployment (1) – as new start-up businesses often need to hire employees and these people may have been unemployed (1). 1(b) Consider the benefits to Yasin of the two sections of his business plan 12 shown in Appendix 1. Which section do you think helped him most when starting up his business? 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 both sections. Well-justified conclusion. Candidates discussing both sections in detail, in context and with a well-justified conclusion including why the alternative section was 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 section. Judgement with some justification / some evaluation of choice made. Candidates discussing at least one section 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 sections with little/no explanation. Simple judgement with limited justification / limited evaluation of choice made. Candidates outlining both sections in context should be rewarded with the top marks in the band. 0 No Creditable Response 0 1(b) Relevant points might include: Market  Able to identify the market for eating bread as being research targeted at all age groups  Market research shows that starting to produce cakes is likely to be successful as 70% of respondents want to buy cakes  Use of local ingredients could be emphasised in advertising if MB changes production techniques and suppliers Resources  To be able to calculate how much start-up capital is needed by Yasin to buy the bakery equipment  It is a starting point for Yasin to make the necessary purchases to get the bakery started  helps him to more effectively plan for the opening of the bakery  Helpful to identify the costs for Yasin to set up the bakery – to see if he needs a bank loan Conclusion Justification might include:  Market research is the most important as this shows that the bakery has the demand for it to be successful. Without a demand for bread the business will fail. However, a lack of experience may mean the list is not accurate or complete and Yasin may need a lot more capital than he thinks.  Resources is the most important as this helped Yasin to plan what items of equipment are required for the bakery and how much all these items will cost. This is important for Yasin to work out how much start-up capital is required and make sure he has sufficient finance to get started successfully or arrange to raise additional finance if necessary. However, the sample was small and therefore the results may not be accurate so Yasin may make bad decisions when starting the bakery.

This question in 0986/21 May/June 2022

1 (a) Explain two ways TT could grow. Way 1: … … Explanation: … … … … … … Way 2: … … Explanation: … … … … … … [8] (b) Consider how TT might benefit from the following three economies of scale as it continues to grow. Which is likely to have the greatest effect on TT’s profit? Justify your answer. • Purchasing • Technical • Financial Purchasing: … … … … … … Technical: … … … … … … Financial: … … … … … … Conclusion: … … … … … … [12]

20 marks

Mark scheme: Question Answer Marks 1(a) Explain two ways TT could grow. 8 Award 1 mark for each relevant way (maximum of two marks). Award a maximum of 3 additional marks for each explanation of the way TT could grow – one of which must be applied to this context. Relevant reasons might include: Internal growth such as:  TT grows its existing operations – often by using retained profits from its existing business – to set up a new factory abroad producing a new toy for children up to the age of 5  Develop new products – to increase sales  Entering new markets – e.g. produce products for a different age group  Diversification External growth such as:  TT takes over another toy manufacturer – this is horizontal integration where TT takes over a competitor – TT wants to expand into country Z and could take over a toy manufacturer already located in that country  Mergers  Vertical integration – takes over a supplier or retailer  Joint ventures  Licensing For example: Internal growth (1) as TT decides to expand by opening its own new factory (1). This could be in country Z where TT plans to expand sales (app). This is a less risky way to grow than taking over another business, even though it is quite slow if it has to use its own funds (1). Application could include: manufacture toys; toys/toys for under 5’s; older children/children; expanding into new markets abroad; existing economies of scale; toy shops; cost $10m; multinational company; specialist new equipment; flow production. 1(b) Consider how TT might benefit from the following three economies of 12 scale as it continues to grow. Which is likely to have the greatest effect on TT’s profit? Justify your answer.  Purchasing  Technical  Financial Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more economies of scale. 3 Well-justified conclusion. 9–12 Candidates discussing all three economies of scale in detail, in context and with a well-justified conclusion including why the alternative economies of scale were rejected should be rewarded with the top marks in the band. Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one economy of scale. 2 5–8 Judgement with some justification / some evaluation of choice made. Candidates discussing two or more economies of scale in detail and applying them to the case should be rewarded with the top marks in the band. Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the economies of scale with little/no explanation. 1 1–4 Simple judgement with limited justification / limited evaluation of choice made. Candidates outlining all three economies of scale in context should be rewarded with the top marks in the band. 0 No creditable response. 0 1(b) Relevant points might include:  Bulk buy components – discounts/cheaper prices for bulk purchases – reduces unit costs of components/lower Purchasing average cost – may be able to lower prices – becomes more competitive – increases sales of toys – revenue increases and reduced unit costs  Specialist machines can be used – specialisation easier to implement – easier to use in flow production – Technical speeding up the production process and becoming more efficient – unit costs lower as output of toys per worker is higher  Raise capital more cheaply – lower risk of not repaying debts – banks may offer lower interest rates – lower Financial costs of borrowing for the expansion of the large business than if it was a smaller business  Purchasing economy of scale will have the greatest effect on TTs profit as it produces toys on a large scale so discounts on components will reduce unit costs by a significant amount, increasing gross profit and profit. TT has already benefited from technical economies when it purchased specialist equipment for its flow production line and therefore there may be few additional increases in efficiency and if TT uses internal sources of finance for expansion then financial economies will not benefit TT at all.  Technical economy of scale will have the greatest effect as this will enable TT to expand flow production further and more technologically advanced machines can be purchased, speeding up the production process and Conclusion increasing productivity by a high amount. There may be significant savings on unit costs, which will allow TT to be more competitive in the new market in country Z. Lower unit costs and increased revenue will probably lead to higher profit.  Financial economy of scale will have the greatest effect as TT plans to expand and will probably need to raise some of the capital by borrowing. This will keep down the costs of expanding, as $10m may need to be borrowed if TT takes over the other company or builds a factory in country Z. TT is already producing on a large scale so the increased benefits from the other economies may be limited leaving financial economies giving the biggest increase in profit.

This question in 0986/22 May/June 2022

3 (a) Explain one advantage and one disadvantage to Tokumbo of being a sole trader. Advantage: … … Explanation: … … … … … … Disadvantage: … … Explanation: … … … … … … [8] (b) Using Appendix 3 and other information, consider the three options for the future growth of SA. Which option should Tokumbo choose? Justify your answer using appropriate calculations. Option 1: … … … … … … Option 2: … … … … … … Option 3: … … … … … … Recommendation: … … … … … … … [12]

20 marks

Mark scheme: 3(a) Explain one advantage and one disadvantage to Tokumbo of being a 8 sole trader. 1 mark for each advantage/disadvantage identified (max 2). Award a maximum of 3 additional marks for explanation of each advantage/disadvantage for Tokumbo of being a sole trader – one of which must be applied to this context. Relevant advantages might include: • Owner is in complete control / makes all the decisions – likes being his own boss with no one to tell him what to do – prefers making all the business decisions instead of having to consult others – such as deciding whether to start offering other safari tours • Does not have to share profits – as there is only one owner – keeps all the returns from his own hard work – his 5 employees • It was easy to set-up – as there were few legal requirements – reduced the costs of setting up, such as accountancy costs • Freedom to choose own working hours or holidays – if worked for another business he would have to work the hours stated in his employment contract – which he would have done when he worked for a holiday company – no flexibility to change these hours if needed • Complete privacy – does not have to share any financial details with anyone else – apart from the tax office, as he will still have to pay tax Relevant disadvantages might include: • Unlimited liability / no limited liability – which means all his personal possessions are at risk – not just the capital he invested in the business • There is no-one to share responsibilities with or discuss business decisions – everything is the sole responsibility of the owner – this can be stressful, and he may be more likely to make mistakes • No continuity – if the owner dies then because the owner is the business it will end – unlike a company where the shares allow it to carry on as it has a separate legal identity • Lack of capital / difficult to raise finance – as only the funds of the sole trader or borrowing is available to the business – may make it more difficult to expand in the future • May need to work long hours / difficult to take holidays / increased workload For example: A disadvantage is that Tokumbo has unlimited liability (1) and he put his own money into the business to start it 2 years ago (app). If SA fails, he could lose all his personal possessions (1) and not just the capital he invested in SA as would happen if it was a limited company (1). Application could include: safari holidays; increase in tourists from other countries; high income tourists; luxury safari holidays; 5 employees; only been operating for 2 years; game reserve; camping / tent; wild animals; 4 safari guides; 4 safari vehicles; accommodation in local / luxury hotels; fuel. 3(b) Using Appendix 3 and other information, consider the three options for 12 the future growth of SA. Which option should Tokumbo choose? Justify your answer using appropriate calculations. Level Description Marks 3 Sound application of knowledge and understanding 9–12 of relevant business concepts using appropriate terminology. Detailed discussion of the two or more options. Well-justified recommendation. Candidates discussing all three options in detail, in context and with a well-justified recommendation including why the alternative options were rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding 5–8 of relevant business concepts using appropriate terminology. Detailed discussion of at least one option. Judgement with some justification / some evaluation of choice made. Candidates discussing two or more options in detail and applying them to the case should be rewarded with the top marks in the band. 1 Limited application of knowledge and 1–4 understanding of relevant business concepts. Limited ability to discuss the options with little / no explanation. Simple judgement with limited justification / limited evaluation of choice made. Candidates outlining all three options in context should be rewarded with the top marks in the band. 0 No creditable response. 0 3(b) Relevant points might include: Option 1 • Already familiar with these type of holidays – have existing customers that may return regularly • Existing relationship with hotels so no need to find new suppliers • Total costs of $12 000 per week are lower than Option 3 • Average cost per tourist is $1250 lower than Option 3 – but $500 higher than Option 2 • Profit per tourist is $250 • Total profit per week is $4000 • Revenue per week is $16 000 which is higher than Option 2 Option 2 • New target market and this has a growing trend for young people to demand this type of holiday • Lower total costs to provide this holiday $8000 per week – this is the lowest of the 3 Options – less likely to cause a cash flow problem as the business expands as lowest outflow of cash to pay for costs • The lowest average cost of the three options at $250 per tourist • Total profit per week is the highest at $4800 • The revenue per week is the lowest of the 3 Options at $12 800 • However SA may need to buy tents and camping equipment – high initial cost of setting up for this option whereas the other options use hotel rooms • Not familiar with the requirements of customers in this market and may have increased costs from carrying out market research into the preferences of young people 3(b) Option 3 • New target market and tourists are willing to pay a high price for a luxury safari holiday • Highest revenue of the 3 options at $24 000 per week • Highest price of $2400 per tourist can be charged – leads to higher profit per tourist per week • Average cost per tourist is the highest of the 3 Options at $2000 per week • Profit per tourist is $400 • Total profit per week is $4000 • However, costs are a lot higher than the other two options – $20 000 per week, $8000 more than Option 1 and $12 000 more than Option 2 • This is a new market for SA, and it may be difficult to find suitable luxury hotels to meet the needs of these consumers – need to establish relationship with new hotels • May need to buy more expensive vehicles which will further increase costs to serve the needs of these high-income consumers 3(b) Recommendation Justification might include: • Option 1 is the best one to choose as it is a market Tokumbo is already familiar with and he just needs to increase the number of vehicles and guides. The total cost is $12 000 per week and makes the same profit per week of $4000 as option 3 without the risk of trying to attract a new target market. Option 2 is a very different market and SA has no experience of providing these types of holidays therefore the holidays may not meet the needs of these customers and SA may not attract the forecast 32 customers a week. Option 3 should not be chosen as it has high total costs and SA is a new business of 2 years with limited capital • Option 2 is the best one to choose as it has the lowest total costs and the highest total profit per week of the 3 options. The lowest average cost may make it easier for SA to be competitive with other tourist businesses in country X and set lower prices. Also this is a growing market so this option may make it easier for continued growth of SA in the future • Option 3 is the best one to choose because it has the highest price of the 3 options at $2000 per tourist. High-income consumers are less price sensitive making it easier for SA to charge a high price for this holiday and has the highest profit per tourist of $400. This also has the highest revenue at $24 000 per week, nearly twice as much as option 2

This question in 0986/21 Oct/Nov 2022

3 (a) Explain two possible reasons why VP wants to expand. Reason 1: … … Explanation: … … … … … … Reason 2: … … Explanation: … … … … … … [8] (b) Consider the benefits and limitations of the following two ways VP can enter a new market in another country. Which way should VP choose? Justify your answer. • Joint venture • Franchising Joint venture: … … … … … … … … Franchising: … … … … … … … … Recommendation: … … … … … … … … [12]

20 marks

Mark scheme: 3(a) Explain two possible reasons why VP wants to expand. 8 One mark for each reason (max 2). Award a maximum of three additional marks for each explanation of the reason why VP wants to expand, one of which must be in context. Answers might include:  To gain higher profits for the owners – as expansion will lead to increased sales in new markets abroad – leading to increased revenue  To lower average/unit costs – gain from economies of scale – such as bulk buying of food ingredients – a discount will be received from bulk purchases  To gain a larger share of the market – may produce a stronger brand image – might result in greater customer loyalty  To gain more status and prestige for the owners – from the company being more well known in country Z – may be listed on stock exchanges in other countries  To gain access to new markets/diversification – this would reduce/spread risk For example: To gain higher profits for the owners (1) because expansion is likely to increase revenue, (1) as VP will sell its products in more markets (1). The higher profits should allow the shareholders of VP to be paid higher dividends (app). Application could include: fast food; restaurant; vegetarians; meals; food outlets across the country; diners; shareholders/public limited company; ingredients. 3(b) Consider the benefits and limitations of the following two ways VP can 12 enter a new market in another country. Which way should VP choose? Justify your answer. • Joint venture • Franchising Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of two ways. Well-justified conclusion. Candidates discussing both ways in detail, in context and with well-justified conclusion including why the alternative way is 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 one or more ways 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 ways with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining both ways 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  VP will share the  It will take time and risks and costs of effort to find the right setting up the fast- partner to join with in food chain in the venture – which another country with may delay the its partner in the expansion plans joint venture – this  There may be may help VP to management borrow less capital conflicts between to expand into the the two businesses other country – leading to  VP can gain arguments and important local inefficiency – higher knowledge about costs the market – easier  Profits will have to to focus meals on be shared – may local tastes – reduce return on increasing investment from the demand/sales/reven expansion – may ue not be agreeable to Joint venture  Less likely to the shareholders of require expensive VP market research to  The level of understand the fast- expertise may not food market – be the same in the reducing the costs partner business – of entering the new may make the market abroad return on  Lowering the risks investment unfair of entering the new  The work and market abroad - resources may not more likely to be equally shared understand local between the two customs and tastes partners in the joint – adapt fast-food venture – VP may meals to meet local have to put more demand work and resources as it is the main partner in the venture 3(b)  Saves time on  Poor quality expanding into the management may foreign market – as lead to a lowering of business operating the reputation of the fast-food VP brand – if the restaurants will franchisee in the make the foreign country investment does not maintain  Payment from standard of franchise fees for delivering fast food using the VP brand in 5 minutes - fee goes back to  Low level of control VP which may by VP Directors – increase profits – over how the making a return franchise operates Franchising from the expansion the vegetarian for low investment fast-food chain from VP  The franchisee has  Lower capital information about requirement - no the food need to raise ingredients and finance for the recipes of VP and expansion – no may use these need to sell when the franchise additional shares agreement has with possible loss of expired – could control/no bank loan develop a better required so no need version and become to pay interest rates a competitor increasing fixed costs Justification may include:  Forming a joint venture is the best way to overcome the problems of entering a new fast- food market in another country which VP is unfamiliar with as this will enable VP to understand this new market by gaining knowledge from this other business. The local business will be able to advise and guide VP on the best locations to choose and the best meals to serve to meet local demand and Conclusion successfully enter this market. Franchising should not be chosen as the franchisee may provide poor service and lead to a poor brand image of VP.  Selling a franchise to businesses in the new fast-food market in another country will reduce the investment required for VP to expand. This will make it cheaper and quicker to expand into this new market while still receiving revenue from the fees charged for the franchise.

This question in 0986/21 May/June 2023

1 (a) Explain four characteristics needed for an entrepreneur to be successful. Characteristic 1: … … … … Characteristic 2: … … … … Characteristic 3: … … … … Characteristic 4: … … … … [8] (b) Consider the advantages and disadvantages of starting up ET as either an unincorporated business or as a limited company. Which should Zane and Zaara choose? Justify your answer. Unincorporated business: … … … … … … … … Limited company: … … … … … … … … Recommendation: … … … … … … … … [12]

20 marks

Mark scheme: Question Answer Marks 1(a) Explain four characteristics needed for an entrepreneur to be 8 successful. Award 1 mark for each relevant characteristic (max 4). Award a maximum of one additional mark for each explanation of a characteristic of being a successful entrepreneur. There are no application marks available. Relevant characteristics might include:  Self-confident – strong belief in their own ability and ideas  Creative – find new and different ways to attract customers  Independent – willing to go with own ideas  Hard worker/dedicated – prepared to work long hours  Risk-taker – willing to risk losing own capital/as a sole trader or partnership willing to risk losing personal assets  Effective communicator – able to persuade others  Optimistic – think positively about new ventures and continue if there are setbacks  Innovative – able to develop new products to retain customers  Good at networking – prepared to learn from others  Self-motivated/Determined/Passionate/Driven  Results driven  Strong leadership qualities  Resilience  Experience/Knowledge/Multi-skilled For example: Self-confident (1) as the entrepreneur has a strong belief in their own ability and ideas to convince others such as banks to lend to them (1) 1(b) Consider the advantages and disadvantages of starting up ET as either 12 an unincorporated business or as a limited company. Which should Zane and Zaara choose? Justify your answer. Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of both options. 3 Well-justified recommendation. 9–12 Candidates discussing both options in detail, in context and with a well-justified conclusion including why the alternative option was rejected should be rewarded with the top marks in the band. Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one option. 2 Judgement with some justification / some evaluation of 5–8 choices made. Candidates discussing at least one option in detail and applying it to the case should be rewarded with the top marks in the band. Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the options with little/no explanation. 1 1–4 Simple judgement with limited justification / limited evaluation of choice made. Candidates outlining both options in context should be rewarded with the top marks in the band. 0 No creditable response. 0 1(b) Relevant points might include: Advantages Disadvantages  Partners are in  Unlimited liability – complete control of could lose all the business personal  Do not have to share possessions profits with  Limited sources of shareholders – may capital – if only 2 lead to higher profits partners invest in each if shared the business as Unincorporated between fewer limited to their own business owners capital  Easy to set up the  Partners are theatre and will responsible for all have few legal decisions taken by requirements to either partner if operate the business mistakes are made – – reducing effort and may lead to personal cost to set up financial losses and may be equally liable  Limited liability –  Accounts are not owners personal private – competing possessions will not theatres may be used to pay access the accounts business debts  Not easy to transfer  Owners and shares as a private business are limited company – separate legal may make it difficult identities – provides to sell shares to continuity on the family and friends death of owners  Legal formalities to Limited company  Can sell shares to set up – may take raise capital to set- more time and cost up the theatre – to than a partnership family and friends –  Legal formalities to large amounts of operate the capital may be company – needs to raised have accounts audited and registered with the government takes time and increases costs 1(b) Recommendation Justification may include:  ET should be an unincorporated business because it is easy to set up the partnership. Zane and Zaara will have complete control of the theatre and keep all the profits. There are not the legal formalities with a partnership that will increase costs that there are if ET was a private limited company.  ET should be a limited company to gain the benefits of limited liability. If anything goes wrong with the theatre, then any liability will only be for an amount invested in the business, all Zane and Zaara's personal belongings will be safe.

This question in 0986/22 May/June 2023