Costs, scale of production and break-even analysis — Paper 2 · IGCSE Business Studies (9-1) 0986

4 (a) Calculate: (i) The total cost per month of producing 100 items of furniture. … … … … [2] (ii) The average cost of 1 piece of furniture. … … … … [2] (iii) Explain how total cost and average cost will change if the output is increased to 200 items of furniture per month. … … … … … … … … [4] (b) Consider how the following three changes might affect WA. Which change is likely to have the biggest effect on WA? Justify your answer. Introduction of new cost to businesses of $50 per tonne for removing waste: … … … … … … Increase in legal minimum wage by 5%: … … … … … … Increase in tax on incomes: … … … … … … Conclusion: … … … … … … … … [12]

20 marks

Mark scheme: 4(a)(i) Calculate the total cost per month of producing 100 items of furniture. 2 Award 1 mark for correct costs and 1 mark for correct answer $10 000 + $1 200 + $800 + $4 000 (1) = $16 000 (1) Note – if answer is only $16 000 with no working then award 2 marks 4(a)(ii) Calculate the average cost of 1 piece of furniture. 2 Award 1 mark for correct figures used and 1 mark for correct answer $16 000 / 100 (1) = $160 per item of furniture (1) Note – If answer is only $160 with no working then award 2 marks 4(a)(iii) Explain how total cost and average cost will change if the output is 4 increased to 200 items of furniture per month. Award 1 mark per point: Total cost will increase due to increase in variable costs (1) – as more wood will need to be purchased (1) TC = $26 000 / increased by $10 000 (1) Average cost will fall (1) – as the fixed costs will not change (1) – which means the fixed costs are spread over a larger output. (1) AC = $130 per item of furniture / decreased by $30 (1) Total cost will increase whilst average cost will fall (1) (Apply OFR) Note – 4 marks can be awarded even if no figures are included. 4(b) Consider how the following three changes might affect WA. Which 12 change is likely to have the biggest effect on WA? Justify your answer. Relevant points might include: Introduction of new • Increased cost of removing waste – higher cost to businesses of prices – less demand for furniture – lower $50 per tonne for profit removing waste • Applies to all businesses so not less competitive – if reduce waste produced then may be more competitive Increase in legal • No effect as already paid 10% above minimum wage by 5% minimum wage • Increased wage costs – to keep pay differential – increased total cost – lower profit • Increased income – increased demand for furniture – higher sales and profit • May increase motivation if increase in wage rates for employees Increase in tax on • Lower incomes as pay after tax will be lower incomes – lower demand – lower sales of furniture • WA furniture is higher quality so may not have much effect on sales • Workers may demand higher wages to compensate for loss of disposable income Knowledge / Analysis / Evaluation Level 3 At least 2 × Level 2 + 9–10 marks for well justified conclusion as to which change will have the greatest effect on WA rather than the other two changes. 7–8 marks for limited justified conclusion as to which change will have the greatest effect on WA. Level 2 4–6 marks Discussion of the impact of the changes on WA. Level 1 1–3 marks Outline of impact of changes on WA. Level 1 – 1 mark for each L1 statement (max of 3 marks) e.g. Increased amount to pay to get rid of waste will raise costs. Level 2 – 1 × L2 explanation can gain 4 marks and a further mark can be awarded for each additional L2 explanation (max 6 marks) e.g. Increased amount to pay to get rid of waste will raise costs and WA may need to increase the price of its furniture. Higher prices may deter customers and so sales and possibly profit will fall. (L2 plus application for referring to furniture in the answer) Level 3 – For L3 to be awarded there needs to be at least two level 2 marks awarded and then a conclusion as to which change will have the biggest impact on WA. Award up to 2 additional marks for relevant application. Possible application marks: Family owned ltd company; small business; started 10 years ago; furniture; new fashionable designs each year; individually designed furniture produced using job production; selling price $200 and $250 per item; environmentally friendly business objective; reduced profit in 2018; tables / chairs; paid 10% above minimum wage; WA prices are higher than competitors. There may be other examples in context that have not been included here.

This question in 0986/22 May/June 2019

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

20 marks

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

This question in 0986/21 Oct/Nov 2019

4 (a) Explain two reasons why profit is important to FJ. Reason 1: … … Explanation: … … … … … … Reason 2: … … Explanation: … … … … … … [8] (b) Consider the two products outlined in Appendix 3. Which product should FJ produce? Justify your answer using relevant calculations. Drink A: … … … … … … … … Drink B: … … … … … … … … Recommendation: … … … … … … … … [12]

20 marks

Mark scheme: 4(a) Explain two reasons why profit is important to FJ. 8 Award 1 mark for each relevant reason (maximum of 2). Relevant reasons might include: • Return on investment • Source of retained profit for investment • Attracts business partners • Enables Simon to pay a bonus to employees Award a maximum of 3 additional marks for each explanation of why profit is important to FJ – one of which must be applied to this context. For example: As a return on his investment (1) as Simon gave up his job and risked his own money in starting FJ (app). If no profit is made, then Simon could have put his money elsewhere and gained a return on it (1) and he may decide to close down FJ and start up another business. (1) 4(b) Consider the two products outlined in Appendix 3. Which product 12 should FJ produce? Justify your answer using relevant calculations. Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of both products. 3 9–12 Well-justified recommendation. Candidates discussing both products in detail, in context and with well-justified recommendation including why the alternative product 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 product. 2 5–8 Judgement with some justification/some evaluation of choice made. Candidates discussing both products 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 product with little/no explanation. 1 1–4 Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining both products in context should be rewarded with the top marks in the band. 0 No creditable response. 0 4(b) Relevant reasons might include: • Selling price is $3.00 higher than Drink B • Targeted at higher income consumers so may be willing to pay the higher price • Revenue = $10 000 • Total cost = $8500 • Profit = $1500 per week • Gross Profit $2000 Drink A • Gross profit per drink = $1.00 • GPM = 20% • PM = 15% • Average cost = $4.25 • Highest quality with more fruits in the drink • More variety of drinks available as uses 6 different fruits • Revenue = $10 000 same as Drink A • Total cost = $5500 • Profit = $4500 per week • Gross profit = $5000 • Gross profit per drink = $1.00 • GPM = 50% • PM = 45% Drink B • Average cost = $1.10 • Only two fruits in each drink will make the drink lower quality • Highest sales - forecast demand is 3000 higher than Drink A • Break-even = 500 same as break-even for Drink A = 500 Justification might include: • Choose Drink A as although Drink B will give the highest profit of the two drinks it is the lowest quality of drink with only two fruits. As incomes increase customers may prefer the higher quality drinks and so drink A may become more popular and drink B lose sales. The sales figures are only predictions anyway and may be different. Recommendation • Drink B may be best to choose as it has the highest gross and profit margins and also makes the highest profit per week. Even though incomes are rising, and it targets lower income customers, they may still have high sales as customers may just buy more of these drinks. Also, more likely to have higher sales than Drink A which will make it easier to expand and sell the drinks after opening more fruit drink market stalls.

This question in 0986/21 May/June 2020

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]

20 marks

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.

This question in 0986/21 May/June 2021

3 (a) Explain four ways SSM could increase the motivation of its production workers. Way 1 : … … … … Way 2: … … … … Way 3 : … … … … Way 4: … … … … … [8] (b) Consider how SSM could benefit from the following three economies of scale. Which economy of scale is likely to have the greatest effect on SSM? Justify your answer. • Purchasing • Financial • Managerial Purchasing: … … … … … … Financial: … … … … … … Managerial: … … … … … … Conclusion: … … … … … … [12]

20 marks

Mark scheme: 3(a) Explain four ways SSM could increase the motivation of its production 8 workers. Award 1 mark for each way to increase motivation of production workers (maximum of 4 marks). Award one additional mark for each explanation of the way which must be applied to this context. • Introduce piece rate – as currently paid by the hour and now will be paid by the number of products produced • Increase wage rates – for all 60 operations workers • Bonuses – if increase the output of soap powder • Profit share – if SSM increase profit and pay a higher dividend • Job rotation – move from mixing raw materials to packaging soap powder to make their job more interesting • Job enrichment – as the job is said to be boring then additional tasks can be added • Opportunities for promotion – as production workers can gain promotion to supervisor of the production line • Training – production workers could have additional training in the use of machinery on the production line • Teamworking / using quality circles / workers councils / involve them in decision-making • Job enlargement • Fringe benefits • Recognition of good work / Employee of the month • Improving working conditions For example: Introduce piece rate (1) which will encourage workers to produce more soap powder as they will be paid more if they produce more products (app). Application might include: soap powder; flow production; 60 production employees; 5 workers and 1 supervisor per line; paid an hourly wage rate; complain the job is boring; production workers are unhappy; shortages of some skilled workers; reference to Appendix 1; production line; SSM makes use of specialisation; machinery is controlled by a production worker. 3(b) Consider how SSM could benefit from the following three economies of 12 scale. Which economy of scale is likely to have the greatest effect on SSM? Justify your answer. • Purchasing • Financial • Managerial 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 economies of scale. Well-justified conclusion. 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. 2 Sound application of knowledge and understanding of 5–8 relevant business concepts using appropriate terminology. Detailed discussion of at least one economy of scale. Judgement with some justification / some evaluation of choices 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. 1 Limited application of knowledge and understanding of 1–4 relevant business concepts. Limited ability to discuss economies of scale with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining three economies of scale in context should be rewarded with the top marks in the band. 0 No creditable response. 0 3(b) Relevant points might include: Purchasing • Raw materials can be purchased in bulk – discounts received for raw materials needed at stage 1 in the production process – lower unit costs Financial • Less risk as it is a larger business and a public limited company – lower interest rates charged on loans and overdrafts – lower interest costs Managerial • Can attract specialist/skilled managers – as SSM can offer more opportunities for promotion and higher pay – more effective in managing the soap powder business – increases productivity/efficiency in the business Conclusion • As the soap powder manufacturer produces on a large scale then being able to reduce the variable cost of raw materials will have the most effect on lowering unit costs in the long term. Financial will have less effect as it would still be expensive to repay the loan. Managerial will also have less effect because as the business grows it may experience diseconomies of scale which are mainly due to difficulties in managing a larger business. • Financial economies of scale will benefit SSM as it is expanding and financing $15 million for expansion will reduce the costs of interest payments – reducing expenses / fixed costs. • Increased efficiency from employing specialist managers such as a Human Resources Manager, which may lead to a significant decrease in unit costs as increased motivation leads to fewer employees leaving each year.

This question in 0986/21 Oct/Nov 2021

2 (a) Explain one benefit and one limitation to Yasin of using a break-even chart. Benefit: … … Explanation: … … … … … … Limitation: … … Explanation: … … … … … … [8] (b) Consider the following two ways MB could achieve lean production. Which is the best way for Yasin to choose? Justify your answer. • Kaizen. • Just-in-time inventory control. Kaizen: … … … … … … … … Just-in-time inventory control: … … … … … … … … Recommendation: … … … … … … … … … [12]

20 marks

Mark scheme: 2(a) Explain one benefit and one limitation to Yasin of using a break-even 8 chart. Award 1 mark for each benefit/limitation (maximum of two marks). Award a maximum of 3 additional marks for each explanation of the benefit/limitation of using the break-even chart– one of which must be applied to this context. Relevant benefits might include:  Shows break-even output – so Yasin knows how much bread he needs to sell to break even – this will allow him to plan the bakery and equipment required – to ensure at least the minimum quantity of bread is produced and sold  Shows the margin of safety – this is the amount of bread Yasin predicts will be sold above the break-even output – it provides a target for sales of bread – so that MB makes a profit  Helps in decision making – so that Yasin knows the minimum target amount of bread to produce – he can see if he needs to increase the price to break-even more quickly – or if lower ingredient costs is required by MB to make a profit  Shows the area of profit or loss – and therefore what the output needs to be to cover all costs – if the market research shown in the business plan does not indicate that sufficient sales will be made to make a profit – then Yasin may need to think again about his plans for the bakery. Relevant limitations might include:  A break-even chart assumes all the output will be sold/provides an estimate of sales – but MB may not sell all the bread in the day – some may be wasted and the costs of producing these will not be taken into account – so at a specific output the business may not make a profit but may make a loss  The break-even chart is drawn on the assumption of straight lines – but when the output is higher Yasin may be able to bulk buy ingredients – this may mean he can receive discounts so the variable cost per unit may not be constant  Fixed costs/variable costs may change – if the scale of production changes as the bakery expands – the rent or depreciation of equipment will change/ingredient costs may change  Need a separate break-even chart for each product/need a new chart if prices are changed – relevant if going to make cakes For example: The chart shows the break-even output for MB (1) so Yasin will know how many units of bread he will need to sell each month to break even (app). This will allow him to plan for the equipment required (1) so he can ensure the bakery sells the minimum amount of bread to cover all the costs and not make a loss (1). Application could include: bread; bakery; cakes; data presented in Appendix 2; fixed costs will change if either of the options in Appendix 2 go ahead. 2(b) Consider the following two ways MB could achieve lean production. 12 Which is the best way for Yasin to choose? Justify your answer.  Kaizen.  Just-in-time inventory control. Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of both ways. Well-justified recommendation. Candidates discussing both ways in detail, in context and with a well-justified recommendation including why the alternative way 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 way. Judgement with some justification / some evaluation of choice made. Candidates discussing at least one way 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 choice made. Candidates outlining both ways 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 Kaizen  Employees might be  The 2 employees able to offer may not be suggestions about willing/able to make how small continuous suggestions for changes may improve improvements the efficiency of the  The employees may bakery have reduced hours if  Helps eliminate waste efficiency is improved – time is not wasted which may make between tasks / them reluctant to help eliminating waste of  It will take time and/or space / eliminating money to reorganise wasted resources the bakery to improve  As there is less time the flow of products between the different through the different processes of baking processes bread – it can lead to  Yasin may not have increases in the skills and productivity/efficiency knowledge to do this  There should be less effectively – may work-in-progress – as have to pay someone the flow through and else to plan the layout of the bakery is bakery layout – more efficient, and increased costs for a the amount of part- small business in the finished bakery short-term products should be  There may be a limit reduced to the improvements MB can make using Kaizen 2(b) Advantages Disadvantages Just-in-time  Reduces the costs of  If there is an increase inventory control holding inventory of in demand for certain ingredients such as types of bread, then flour there may not be  Less working capital sufficient ingredients required to pay for to meet the increased inventory demand  Less storage space  Any delays in orders required – reduces being delivered may costs or makes more disrupt production effective use of the and may stop the bakery production production of some area items  Bread and cakes will  It relies on a good be fresh due to fresh relationship between ingredients – helps Yasin and his ensure customer suppliers satisfaction  Relies on Yasin  No excess ingredients making the orders purchased – so does quickly when needed not go out-of- date/does not go stale Recommendation Justification might include:  Kaizen is the most effective because it could save time between the different tasks performed in the bakery. This may speed up baking and allow more output to be produced in a shorter time period therefore increasing the output of bread and possibly increasing revenue or reducing costs as more efficient. JIT is less important as the bread is baked each day and ingredients will need to be purchased regularly anyway.  Less working capital is required for JIT, so this is the best option for a small bakery as Yasin is likely to have limited funds to run the new business. The bread is made each day so fresh ingredients are required, and this makes JIT the most suitable because a small bakery may have limited opportunities to implement Kaizen ideas.

This question in 0986/21 May/June 2022

3 (a) Explain four ways Yasin can advertise MB’s products. Way 1: … … … … Way 2: … … … … Way 3: … … … … Way 4: … … … … [8] (b) Consider the two options outlined in Appendix 2. Which option should Yasin choose? Justify your answer using appropriate calculations. Option 1: … … … … … … … … Option 2: … … … … … … … … Recommendation: … … … … … … … … [12]

20 marks

Mark scheme: 3(a) Explain four ways Yasin can advertise MB’s products. 8 Award 1 mark for each appropriate way (maximum of four). Award a maximum of 1 additional mark for each explanation in context. Relevant ways might include:  Local radio – as the bakery attracts only local people so many potential customers may hear the advert  Local newspaper/magazine – as a voucher could be included for money off bread  Posters – in the window of the bakery shop to attract customers passing by  Leaflets/fliers – can be handed out in the local town centre so that potential customers will know the location of the shop as it is new  Social media – emphasise that he uses imported ingredients  Packaging/carrier bags – emphasise the ethical image of the business  Website/online/internet – so if consumers are searching for local shops that sell bread so it can give information of the products and location of the shop  Billboards – can be placed in busy areas of the local town directing them to the bakery location  Sponsorship – local sports team may have shirts with the MB name to raise awareness of the bakery  Word-of-mouth – existing customers recommend good bread/tasty bread to their friends and family For example: Leaflets (1) can be handed out in the local town centre and to raise awareness of where the bakery shop is located (app). Application could include: bread; bakery; cakes; bakery shop; uses imported ingredients; ethical image; ingredients; fresh products; sustainable packaging; consumed by all age groups. 3(b) Consider the two options outlined in Appendix 2. Which option should 12 Yasin choose? Justify your answer using appropriate calculations. Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of both options. Well-justified recommendation. Candidates discussing both options in detail, in context and with a well-justified recommendation including why the alternative option 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 option. Judgement with some justification / some evaluation of choice 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. 1 Limited application of knowledge and understanding of 1–4 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 both 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 – small  Sales are higher by 3900 per month (L1) cupcakes  Total cost is $5000 per month (L1)  Total revenue $8000 per month (L1)  Profit per month is $ 3000, $1000 more than Option 2 (L2)  Break-even output 2000 cupcakes a month (L2)  Forecast margin of safety is 2000 per month (L2) Option 2 – large  Total revenue $6000 (L1) birthday cakes  Total cost is $4000 per month (L1)  Profit per month is $2000 (L2)  Break-even output 60 large birthday cakes a month (L2)  Forecast margin of safety is 40 per month (L2) Recommendation Justification might include:  Option 1 is the better one to choose as it has the higher profit by $1000 than Option 2 and a higher margin of safety (as a proportion of sales). Option 2 may have a higher predicted growth of sales, but this is only a forecast and may not happen. It is better to choose the more certain higher profit now than the possibility of higher sales later.  Option 2 is better than Option 1 as the gross profit margin is 8.33% higher. However, the future growth of sales is forecast to be higher and may lead to higher profits in the future.

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

2 (a) Explain one business objective for ET and one other objective that a social enterprise like Daycare might have. Business objective for ET: … … Explanation: … … … … … … Objective for a social enterprise like Daycare: … … Explanation: … … … … … … [8] (b) Using Appendix 2 and other information, consider the two options for the first performance at the theatre. Which is the best option for Zaara to choose? Justify your answer using suitable calculations. Option 1: … … … … … … … … Option 2: … … … … … … … … Recommendation: … … … … … … … … [12]

20 marks

Mark scheme: 2(a) Explain one business objective for ET and one other objective that a 8 social enterprise like Daycare might have. One mark for each objective (max of 2). Award a maximum of 3 additional marks for each explanation of the objective – one of which must be applied to this context. Relevant answers might include: Business objective for ET  Survival – to not go bankrupt in the first year of operation – to cover costs  Profit – to provide a return on investment – for the owners who risked their own money  Growth of the business – to possibly increase sales – leading to increased revenue in the future  Market share – attract a higher number of customers – possibly leading to higher revenue Other objectives for social enterprise, Daycare  Service to the community/help local people – to create jobs for people in the local area – support disadvantaged groups in society/make a profit to put back into local initiatives  Provide childcare to enable low-income parents/carers to go out to work – increase their incomes – raising their living standards  Provide education for the pre-school children of low-income families  Provides access to education that otherwise would not be provided  Improves the likelihood of these children being more successful when they do go to school/may improve their ability to earn higher incomes in the future/get a better paid job  To provide funds to reinvest back into the social enterprise – by making a profit  To break-even For example: To provide a service to the community (1) to look after the pre- school children (app) and support disadvantaged groups in the society that cannot afford to pay for these services (1) so it will allow parents/guardians to go to work and improve their family’s income (1) Application might include: pre-school children; theatre; performances; actors; pay fair wages; tourists; low-income area; 24 part-time employees; provides education for children under 5. 2(b) Using Appendix 2 and other information, consider the two options for 12 the first performance at the theatre. Which is the best option for Zaara to choose? Justify your answer using suitable calculations. Level Description Marks 3 Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of both options. Well-justified recommendation. 9–12 Candidates discussing both options in detail, in context and with a well-justified recommendation including why the alternative option is rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one option. Judgement with some justification / some evaluation of 5–8 choice 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. 1 Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the options with little/no explanation. 1–4 Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining both options 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  Fewer employees  The average wage are required to put cost is the highest – on a performance – $20 higher than reducing total Option 2 variable costs  Makes a loss of  Costs for scenery $210 for each and costumes is performance the lowest of the  Lowest revenue two options – gained for each $1000 lower than performance of the Option 1 Option 2 two options –  Total cost is the $1000 per lowest of the two performance options – at $1210 per performance  Lowest price per seat at $10 – so likely to sell all the tickets ensuring the estimated revenue is received  Has the lowest • Has the highest wage cost per number of employee of the employees per two options – at performance – 17 $10 per actor more than Option 1  Makes the highest – highest total profit per wage costs performance of the • Highest cost of the two options – at two options – Option 2 $260 per $2240 per performance performance  Has the highest  Highest price per revenue of the two person – $25 each options – at $2500 – may not sell all – $1500 higher tickets – so than Option 1 revenue may be lower than estimated at $2500 2(b) Justification may include: • ET should choose Option 1 to have in the theatre as it has the cheapest total cost at $1210 per performance. As the theatre is new it should try to keep its costs as low as possible. Option 2 has much higher costs to put on the performances and ET may not have the funds to do this. Also the price per Recommendation ticket is higher for the other option and as the theatre is located in a low-income area of Main City the theatre may not sell all 100 seats and the estimated revenue may not be received. • ET should choose Option 2 for the theatre as it makes a profit of $260 per performance when the revenue is $2500.

This question in 0986/22 May/June 2023

1 (a) Explain two reasons why setting business objectives is important to JJ. Reason 1: … … Explanation: … … … … … … Reason 2: … … Explanation: … … … … … … [8] (b) Using Appendix 1 and other information, consider the two new products JJ could produce. Which product should JJ choose? Justify your answer using break-even calculations. • Product A • Product B Product A: … … … … … … … … Product B: … … … … … … … … Recommendation: … … … … … … … … [12]

20 marks

Mark scheme: Question Answer Marks 1(a) Explain two reasons why setting business objectives is important to JJ. 8 Award 1 mark for each reason (max 2). Award a maximum of 3 additional marks for each explanation of the reason why setting business objectives is important – one of which must be applied to this context. Relevant reasons might include:  A clear target/aim/purpose/goal to work towards – guides the business in the right direction – avoids loss of focus  Decision-making will be focused on the objectives – meaning better decisions are taken – the business may be more efficient  Helps motivate employees – objectives will help focus the employees and management to increase efficiency – making it more likely to be achieved  Comparison of performance – so business managers can compare how each department has performed against their objectives - to see whether or not it has been successful  Allows measurement of success – can judge performance or progress  Helps the business to produce a plan or strategy for the business to achieve these objectives For example: To give a clear target for employees and managers to work towards (1) so they all know what is expected of them (1) when producing different items of jewellery (app). Therefore, this means the target is more likely to be achieved (1). Application could include: jewellery; set up 25 years ago; public limited company; objective to increase profit every year; to expand the business; sold directly to customers in other countries; 30% sold using ecommerce; 70% sold in jewellery shops; raw materials purchased locally; 60 full-time employees; 25 part-time employees; bracelets; rings; earrings. 1(b) Using Appendix 1 and other information, consider the two new products 12 JJ could produce. Which product should JJ choose? Justify your answer using break-even calculations.  Product A  Product B Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of both products. Well-justified recommendation. Candidates discussing both products in detail, in context and with a well-justified recommendation, including why the alternative product 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 product. Judgement with some justification/some evaluation of choice made. Candidates discussing at least one product 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 products with little/no explanation. Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining both products in context should be rewarded with the top marks in the band. 0 No creditable response. 0 1(b) Relevant points might include: Product A  The price is much lower than for Product B, leading to more sales of bracelets needed to break-even  Forecast sales are higher at 2500 per week than Product B which may make it easier to meet demand if it is high  The break-even output is 2000 units per week – which is much higher than Product B – may be more difficult to achieve  The margin of safety is much higher at 500 than Product B making it a safer product to produce assuming all output is sold  The variable cost is lower by $15 than for each ring Product B  The price of rings is much higher than bracelets by $70  Break-even is 625 rings per week  The margin of safety is 125 per week if forecast sales are accurate – which is much lower than for Product A at 500 per week – increasing risk of not covering costs if sales are lower than forecast  The profit is much lower for Product B if all forecast sales are made – at $10 000 rather than $12 500 for Product A  Forecast sales each week is much lower at 750 rings, 1750 fewer items to produce each week  May be easier to promote and sell fewer items each week making it easier to achieve maximum sales Recommendation  JJ should choose to produce Product A, bracelets, as the margin of safety is higher than for Product B and may be less risk of not breaking-even if not all the forecast sales are made each week. Rings are more expensive to produce and if not sold then the variable cost of each ring is $40 so more will have been spent on variable cost per product than producing bracelets at $25 each.  JJ should choose to make Product B, rings, as the break-even output is much lower at 625 than the 2000 needed for bracelets and therefore may be easier to achieve.

This question in 0986/22 May/June 2024

1 (a) Explain two advantages and two disadvantages of a business being a private limited company. Advantage 1: … … … … Advantage 2: … … … … Disadvantage 1: … … … … Disadvantage 2: … … … … [8] (b) Consider the following three economies of scale for LB. Which economy of scale is likely to have benefited LB the most? Justify your answer. • Financial • Purchasing • Managerial Financial: … … … … … … Purchasing: … … … … … … Managerial: … … … … … … Conclusion: … … … … … … [12]

20 marks

Mark scheme: Question Answer Marks 1(a) Explain two advantages and two disadvantages of a business being a 8 private limited company. Award 1 mark for each advantage/disadvantage (max 2 advantages/max 2 disadvantages). Award 1 additional mark for each explanation of the advantage/disadvantage. There are no application marks for this question. Relevant advantages might include: • Has a separate legal identity – company can be sued but not usually the owners • Can sell shares to family and friends to raise capital – larger amounts of capital may be raised than if a sole trader / partnership • Limited liability – owners will not lose personal possessions if business is unable to pay its debts • Cannot be taken over without the consent of the shareholders • Provides continuity on the death of the owner Relevant disadvantages might include: • Accounts are not private – competitors may access the accounts • Cannot sell shares to the public / shares cannot be sold on the stock exchange - not easy to transfer shares so family and friends may be less willing to buy shares • Legal formalities required to operate the company – need to have accounts audited and registered with government which takes time and increases costs • Legal formalities setting up the company – has to complete paperwork to register the company which takes time and money / may take more time for owner than setting up as a sole trader/partnership For example: Cannot sell shares to the public on the stock exchange (1) as it is not easy to transfer / sell shares family and friends may be less willing to buy shares in the first place (1). 1(b) Consider the following three economies of scale for LB. Which 12 economy of scale is likely to have benefited LB the most? Justify your answer. • Financial • Purchasing • Managerial 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 economies of scale. Well-justified conclusion. Candidates discussing all three economies of scale, 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. 2 Sound application of knowledge and understanding of 5–8 relevant business concepts using appropriate terminology. Detailed discussion of at least one economy of scale. Judgement with some justification / some evaluation of choice made. Candidates discussing in detail two or more economies of scale and applying these to the case should be rewarded with the top marks in the band. 1 Limited application of knowledge and understanding 1–4 of relevant business concepts. Limited ability to discuss the economies of scale with little/no explanation. 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: Financial • Raise finance more easily and cheaply – as lower risk of not repaying debts due to larger size of business • Banks may offer lower interest rates – lower costs of borrowing for the expansion of the large business than if it was a smaller business Purchasing • Bulk buy components – discounts / cheaper prices for bulk purchases – reduces average / unit cost of components • May be able to lower prices – as average cost of each product is lower – becomes more competitive – increases sales of bathroom products – revenue increases Managerial • Specialist managers can be employed – better at their jobs / more knowledgeable as only carried out this task – e.g. marketing manager knows best place to advertise to be more cost efficient • Able to attract the most talented managers – more efficient in manufacturing luxury bathroom products Conclusion Justification might include: • Financial economies of scale will have the greatest effect as LB plans to expand and build a new factory in another country and will probably need to raise some of the finance by borrowing. This will keep down the repayment costs of expanding. LB is already producing on a large scale so the increased benefits from the purchasing and managerial economies may be limited leaving financial economies giving the biggest reduction in unit costs. • Purchasing economies of scale will have the greatest effect on LB’s average costs as it produces bathroom products on a large scale so discounts on components will reduce unit costs by a significant amount, increasing gross profit and profit. • Managerial economies of scale will have the biggest effect on unit costs as all managers will be experienced in producing showers and baths and are specialists in their areas leading to efficiencies in all departments of the business.

This question in 0986/21 Oct/Nov 2025