Economic issues — 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) Explain four ways an increase in government spending may affect a business. Way 1: … … … … Way 2: … … … … Way 3: … … … … Way 4: … … … … [8] (b) Referring to Appendix 2, consider the suitability of the three applicants for the position of manager. Which applicant should Simon select? Justify your answer. Joe: … … … … … … Zabeen: … … … … … … Jim: … … … … … … Recommendation: … … … … … … [12]

20 marks

Mark scheme: 3(a) Explain four ways an increase in government spending may affect a 8 business. Award 1 mark for each relevant way (maximum of four ways). Relevant ways might include: • Government may increase purchases from other businesses – increasing demands for its products • May lead to higher inflation - increase business costs • May reduce unemployment - increase consumer spending • May lead to a need to increase taxes - reducing consumer spending Award a maximum of 1 additional mark for explanation of how an increase in government spending may affect a business. For example: Government may increase purchases from other businesses (1) increasing the revenue of these businesses (1). 3(b) Referring to Appendix 2, consider the suitability of the three applicants 12 for the position of manager. Which applicant should Simon select? 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 applicants. 3 Well-justified recommendation. 9–12 Candidates discussing all three applicants in detail, in context and with well-justified recommendation including why the alternative applicants 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 applicant. 2 Judgement with some justification/some evaluation of 5–8 choice made. Candidates discussing two or more applicants 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 applicants with little/no explanation. 1 1–4 Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining all three applicants in context should be rewarded with the top marks in the band. 0 No creditable response. 0 3(b) Relevant points might include: • Inexperienced as only worked part-time • Doesn’t want to work long hours so may not work hard for Simon • Has experience of the food and drink industry Joe and already trained in hygiene regulations so saving time and money • But cheapest at $6 hourly wage of the three so costs will be lower • Experience of management – may be skilled to manage the market stalls without training • No qualifications so may not have much ability to learn – training less effective • Ambitious so may be keen to do well and impress Zabeen Simon • But the most expensive at $15 per hour to employ so costs will be higher • May leave if better job comes along to higher costs of recruitment as need to replace her • Has experience of the food industry and already trained in hygiene regulations so saving time and money • Enthusiastic and wants to do more Jim challenging work – will work hard to impress Simon • Has already worked as a manager so no need to train him in what to do – do the job quicker and cheaper Justification might include: • Joe is probably youngest and cheapest (at $6 per hour) of the three applicants to employ but has the least experience and Simon needs someone reliable to make the stall successful. • Zabeen most experience but not on a food or drinks stall. Also has no formal qualifications and is the most expensive of the three applicants to Recommendation employ. As FJ is a new business it will need to keep costs down. • Jim has hygiene certificate and so lower costs than Zabeen as training not required. Has more experience than Joe of working in a food and drinks establishment. He is ambitious so will try hard and more likely to help make the market stall successful.

This question in 0986/21 May/June 2020

4 (a) Explain how the following four legal controls may affect ES. • Control over misleading promotion • Control over faulty products • Control over location decisions • Control over pollution Misleading promotion: … … … … Faulty products: … … … … Location: … … … … Pollution: … … … … [8] (b) Consider the effect on ES of the following two economic changes in country Z. Which change is likely to have the biggest effect on ES’s profit? Justify your answer. • Increasing unemployment • Increasing inflation Increasing unemployment: … … … … … … … … Increasing inflation: … … … … … … … … Conclusion: … … … … … … … … [12]

20 marks

Mark scheme: 4(a) Explain how the following four legal controls may affect ES. 8 • Control over misleading promotion • Control over faulty products • Control over location decisions • Control over pollution Award one mark for each effect (maximum of four). Relevant legal controls might include: • Misleading promotion: restrictions on claims in adverts about the speed scooters can go or fuel consumption • Faulty products: consumers have the right to return them to have your money back if the scooter engine has a fault • Location – restrictions on where to expand the scooter factory • Pollution – emissions from scooters may mean production has to change Award a maximum of 1 additional mark for each effect applied to this context. For example: Environmental laws may restrict pollution from exhaust fumes (1) this may mean ES has to change the engines of its scooters which may increase costs (app). 4(b) Consider the effect on ES of the following two economic changes in 12 country Z. Which change is likely to have the biggest effect on ES’s profit? Justify your answer. • Increasing unemployment • Increasing inflation Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of both economic changes. 3 9–12 Well-justified conclusion. Candidates discussing both economic changes in detail, in context and with well-justified conclusion including why the alternative change 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 economic change. 2 5–8 Judgement with some justification/some evaluation of choice made. Candidates discussing both economic changes 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 economic changes with little/no explanation. 1 1–4 Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining both economic changes in context should be rewarded with the top marks in the band. 0 No creditable response. 0 4(b) Relevant points might include: • Lower incomes • Lower sales on expensive items such as scooters • However, if scooters are bought instead of cars Increasing then sales may be higher unemployment • Easier to recruit employees as larger pool of unemployed workers available to select the additional 100 production workers • Less pressure on wage rate increases to be well above the legal minimum wage rate • Higher supplier costs of components for scooters • Price of scooter may have to increase – reducing sales • Less competitive if imported scooters do not Increasing have higher prices inflation • Pressure for wage to be increased to much higher than the legal minimum wage rate – increasing costs • But all domestic manufacturers face the same problems to so may not be less competitive Justification might include: • Increasing unemployment may lead to lower wage costs and if revenue from the sale of scooters also rises then profit will increase. • Increasing inflation may make it easier for ES to Conclusion increase prices on its scooters as consumers expect prices to rise, so revenue increases. Some of its costs will rise as inflation increases but if ES does not increase wages, as unemployment has now started to increase, then profit may still increase.

This question in 0986/22 May/June 2020

4 (a) Explain the effect of the following changes on GJ. • Depreciation in the exchange rate of country Z • Increase in income tax in country Z Depreciation in the exchange rate of country Z: … … … … … … … … Increase in income tax in country Z: … … … … … … … … [8] (b) Consider how the following three changes might affect GJ. Which change is likely to have the most effect on GJ’s profit? Justify your answer. • All jewellery packaging must state in which country the product has been made • Country Z has entered a boom phase of the business cycle • A higher percentage of people in country Z use mobile (cell) phones All jewellery packaging must state in which country the product has been made: … … … … … … Country Z has entered a boom phase of the business cycle: … … … … … … A higher percentage of people in country Z use mobile (cell) phones: … … … … … … Conclusion: … … … … … … [12]

20 marks

Mark scheme: 4(a) Explain the effect of the following changes on GJ. 8 • Depreciation in the exchange rate of country Z • Increase in income tax in country Z Award 1 mark for each relevant effect (maximum of two): Relevant effects might include: Depreciation in the exchange rate of country Z: • This means the value of the currency falls - higher cost of imported goods/higher cost of supplies of imported jewellery – possibly decreased profit • GJ may need to increase prices which may discourage sales • If GJ export jewellery using their app – export prices are lower after depreciation so easier to sell abroad – more overseas customers Increase in income tax in country Z: • This decreases consumer disposable income and decreases demand for luxuries which may decrease revenue for GJ • Employees may ask for a wage increase due to lower disposable income Award a maximum of 3 additional marks for each explanation – one of which must be applied to this context. For example: Depreciation in the exchange rate will result in import prices rising. (1) This will increase the cost of jewellery to GJ (app) which will lead to either higher prices and lower sales (1) or lower gross profit being made if she keeps prices the same. (1) Application could include: Gemma has developed a website, customers can download an app to order jewellery. Note: Gemma sells expensive items of jewellery, rings and bracelets may be considered to be luxury goods. 4(b) Consider how the following three changes might affect GJ. Which 12 change is likely to have the most effect on GJ’s profit? Justify your answer. • All jewellery packaging must state in which country the product has been made • Country Z has entered a boom phase of the business cycle • A higher percentage of people in country Z use mobile (cell) phones 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 changes. Well-justified conclusion. Candidates discussing all three changes in detail, in context and with well-justified conclusion, including why the alternative changes 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 change. Judgement with some justification/some evaluation of choice made. Candidates discussing two or more changes 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 changes with little/no explanation. Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining all three changes in context should be rewarded with the top marks in the band. 0 No creditable response. 0 4(b) Relevant reasons might include: All jewellery • May improve reputation as GJ jewellery supplied by packaging the Beautywise franchise is ethically sourced must state in when it is imported which country • Customers may not bother about which countries the product jewellery has come from and only be concerned with has been style and price made Country Z has • Increased consumer incomes may lead to higher entered a sales of jewellery as it is a luxury good boom phase of • GJ may take the opportunity to raise prices the business • May buy jewellery from GJ as it is higher quality cycle jewellery and now consumers can afford to buy from GJ therefore increasing sales • However, there may be other products consumers want to purchase first – jewellery may be bought at certain times such as weddings or birthdays and this may not be affected by higher incomes A higher • More people will find it easier to check GJ website to percentage of see what jewellery it has for sale – easier to compare people in with competitors – may increase or decrease sales country Z use depending on how GJ compares with competitors mobile (cell) • GJ may start to advertise using social media phones • May be able to expand sales to other countries • Overseas sales may result in added delivery costs • May have little effect on GJ if consumers still prefer to go into the shop to see and try on jewellery before buying 4(b) Conclusion Justification might include: • The changes to packaging may have the most effect if consumers are concerned about ethical issues and even if they have a higher income from the boom, they will not purchase jewellery from shops that do not sell ethically sourced inventory so GJ should have increased profit. • Economic boom is likely to have the biggest effect on profit as consumers will have higher incomes and be more likely to spend some of this on expensive jewellery rather than cheaper jewellery and therefore GJ will have higher revenue and higher profit even after payments to the franchisor. If only some consumers are concerned about ethical issues this change will have less effect on sales and profit. • More mobile (cell) phones will allow GJ to increase the target customers for sales from beyond where the shop is located as they have their own mobile phone app. The potential increase in the number of customers and therefore sales may be greater than the increase in disposable income of local residents near to the shops. Therefore, this may provide the greater increase in revenue and possibly profit as costs of selling on the internet are also lower.

This question in 0986/21 Oct/Nov 2020

4 (a) Explain two ways SSM’s cash-flow problems could be overcome. Way 1: … … Explanation: … … … … … … Way 2: … … Explanation: … … … … … … [8] (b) Consider the effects on SSM of the following changes in country Y. Which effect is likely to have the greatest impact on SSM’s profit? Justify your answer. • Increase in employment • Increase in inflation Increase in employment: … … … … … … … … Increase in inflation: … … … … … … … … Conclusion: … … … … … … … … … [12]

20 marks

Mark scheme: 4(a) Explain two ways SSM’s cash-flow problems could be overcome. 8 Award 1 mark for each way (maximum 2 marks). Award three additional marks for explaining each way cash flow problems can be overcome – one of which must be in context. Relevant points might include: • Increase access to short-term source of funds – short-term bank loan / overdraft – will inject cash into the business / provide funds when there is a liquidity problem – suppliers need to be paid quickly in 20 days in 2021 • Delay payment to suppliers – as it used to be 40 days and is now 20 days – cash outflow decreases – less working capital required so eases cash flow problem • To ask customers to pay promptly – instead of waiting 60 days – cash flows into the business more quickly – may have time to receive revenue from sales before payment for raw materials is necessary • Delay or cancel purchases of capital equipment – delay paying out the $15 million for expansion – reduces cash outflow in the short-term • Example of how to increase cash inflows such as increase price of product • Example of how to reduce cash outflows such as find cheaper supplier of raw materials For example: Delay payment to suppliers (1) as this will reduce the cash outflow (1) and will reduce the amount of working capital required by SSM (1). The time taken to pay suppliers has been reducing 40 days to 20 days which seems to have been an increasing problem for SSM (app). Application might include: debtors pay in 60 days – used to pay in 20 or 40 days; suppliers paid in 20 days – used to be paid in 30 or 40 days: debtors take more days to pay for soap powder; suppliers have been paid more quickly over the last two years. 4(b) Consider the effects on SSM of the following changes in country Y. 12 Which effect is likely to have the greatest impact on SSM’s profit? Justify your answer. • Increase in employment • Increase in inflation Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of at least one change. Well-justified conclusion. Candidates discussing both changes in detail, in context and with a well-justified conclusion including why the alternative change 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 change. Judgement with some justification / some evaluation of choices made. Candidates discussing at least one change 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 changes with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining both changes in context should be rewarded with the top marks in the band. 0 No creditable response. 0 4(b) Relevant points might include: Increase in • Higher incomes as more people employed – increase in employment sales of SSM soap powder • Higher incomes appear to have resulted in a 15% increase in the sales of washing machines – resulting in a higher demand for soap powder • However, wage rates may increase due to more competition in the labour market – SSM may have to increase its wage rate • May be more difficult to recruit new employees – might disrupt production Increase in • Increase in pressure to raise wage rates at SSM as cost inflation of living increases due to 8% inflation this year for employees • SSM may have increased raw material costs – raise prices to maintain gross profit margin of soap powder • Inflation will cause prices to rise leading to lower sales for SSM / Customers may not be able to afford SSM products as prices have increased • Foreign competitors’ products may be cheaper – if inflation rates abroad are lower than the 8% inflation rate in country Y – may put pressure on SSM to lower its prices – reduce revenue • However, if employees are well-motivated and now do not find their job boring then productivity may have increased – wage cost per unit may not change • Inflation may cause wages generally to increase and so an increase in the price of SSM products may have little or no effect on their sales • Soap powder for washing clothes can be seen as a necessity and not a luxury product – so sales will be maintained even when there is inflation as consumers still need to buy these products 4(b) Conclusion • It depends on the extent to which the increase in employment leads to increased sales of SSM soap powder. If there is a large increase in the number of people employed, then disposable incomes will increase significantly and may lead to consumers spending a higher amount on luxury items such as washing machines and therefore soap powder – higher profit for SSM. An increase in inflation is likely to have less effect on profit as an increase in costs may be matched by an increase in prices. • Whether SSM has an increase in its profit may depend on whether the products in country Y are competitive with products from other countries due to the different inflation rates. If they are, then SSM revenue from the sales of its products for washing clothes may increase possibly leading to higher profit. This will depend on whether SSM can remain competitive.

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

4 (a) Explain two possible effects on SA of the increase in the rate of inflation in country X. Effect 1: … … Explanation: … … … … … … Effect 2: … … Explanation: … … … … … … [8] (b) Consider the advantages and disadvantages of two methods of training Tokumbo could use for his existing employees. Which method should he use? Justify your answer. Method 1: … … … … … … … … Method 2: … … … … … … … … Recommendation: … … … … … … … … … [12]

20 marks

Mark scheme: 4(a) Explain two possible effects on SA of the increase in the rate of inflation 8 in country X. Award 1 mark for each effect (max 2). Award a maximum of 3 additional marks for each explanation of an effect on SA of an increase in the rate of inflation in country X – one of which must be applied to this context. Relevant answers might include: • Likely rise in prices for safari tours – decreased demand / harder to attract tourists to country X – decreased revenue for SA if demand is price elastic – possible decrease in profits if costs rise more than revenue • Increase in costs for SA – may need to spend time sourcing lower cost inputs / updating the brochures – keep recalculating prices / need to keep printing brochures with new prices • More pressure to increase wages for SA employees – prices of basic goods may be increasing significantly in country X – as employees cannot maintain their standard of living without a wage increase – increases costs • Increased cost of investment / equipment – may mean expansion is delayed For example: Prices of basic goods may be increasing significantly in country X (1) as the inflation rate is now 4% (app). This will mean there is more pressure on SA to increase the wages of employees (1) because employees cannot maintain their standard of living without a wage increase (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; sole trader; game reserve; camping / tent; wild animals; 4 safari guides; 4 safari vehicles; accommodation in local / luxury hotels; fuel. 4(b) Consider the advantages and disadvantages of two methods of training 12 Tokumbo could use for his existing employees. Which method should he use? Justify your answer. Level Description Marks 3 Sound application of knowledge and understanding 9–12 of 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 5–8 of relevant business concepts using appropriate terminology. Detailed discussion of at least one method. Judgement with some justification / some evaluation of choice made. Candidates discussing both methods in detail and applying it 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 methods with little / no explanation. Simple judgement with limited justification / limited evaluation of choice made. Candidates outlining both methods 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 On-the-job • Individual training • Some output will be training given on the safari lost by the trainer as tours – leads to they would usually be training specific to SA working instead of • There will be some training output from the • The trainer may pass trainee as training is on bad habits to the provided while a trainee – and these safari tour is being may lead to bad given reputation with • Usually costs less tourists / lower than off-the-job productivity training – as it will be provided by existing employees Off-the-job • Provided by experts – • Costs are usually training more knowledge of higher – as tourist the different animals guides will usually be seen in the game sent away to college reserve – better or other training techniques taught institution • The courses may be • Employees are paid a taught in the evening wage, but no safari – so no tours are lost tours are being taken in the normal working for the business whilst day training • Employee may be • Qualification gained taught a range of new by employees may skills that current make it easier for employees may not them to leave – may know about – be attracted by improves productivity another tourist business that will not then need to pay for training 4(b) Recommendation Justification might include: • On-the-job training is the best method to use because the employees will develop skills specific to the safari tours Tokumbo wants them to provide. If they undertake off-the-job training then it will not only cost more but it may not provide the training specific to SA, making it more expensive but less effective • Off-the-job training is the best method to use because it will be delivered by experts who will have the most up-to-date knowledge of the wild animals in the game reserve leading to better trained employees and they may be better than the employees of competitors. This may give SA a competitive edge and lead to higher sales that will more than cover the additional costs of the training

This question in 0986/21 Oct/Nov 2022

4 (a) Explain, using an example, one reason why VP might need: • short-term finance • long-term finance. Short-term finance: … … … … … … … … Long-term finance: … … … … … … … … [8] (b) Using Appendix 3 and other information, consider how the following three changes in country Z may affect VP. Which change is likely to have the greatest effect on VP's profits? Justify your answer. • Increase in interest rates. • Depreciation of country Z’s exchange rate. • New legal controls which require all restaurants to list the ingredients in their meals. Increase in interest rates: … … … … … … Depreciation of country Z’s exchange rate: … … … … … … New legal controls which require all restaurants to list the ingredients in their meals: … … … … … … Conclusion: … … … … … … [12]

20 marks

Mark scheme: 4(a) Explain, using an example, one reason why VP might need: 8  short-term finance  long-term finance. One mark for reason for short-term/long-term finance (max 1). Award a maximum of three additional marks for the explanation of the reason why VP needs short-term/long-term finance, one of which must be in context, and one must include an example. Answers for short-term finance might include:  To provide working capital for the business – so that day-to-day expenses can be paid for – an overdraft may be suitable as it is only used if needed/potentially reducing interest paid  To prevent cash-flow problem/improve the cash position of the business – by taking short-term bank loan – this will provide finance for a short time to overcome the potential shortage of cash and increase liquidity For example: To provide working capital for the business (1) so that day-to-day expenses can be paid for (1). An overdraft may be suitable as it is only used if needed which potentially reduces the interest to be paid (1) when buying food ingredients for the restaurants (app). Answers for long-term finance might include:  To purchase long-term non-current assets – as these assets are likely to be very expensive – so a long-term bank loan may be suitable as it is repaid over a long period of time reducing the amount of monthly repayments/outflows each month  To expand the business – which requires a large amount of money in order to grow – the issue of shares will not incur interest payments  To update the business – often involves new technology which is expensive – so payments may need to be spread over a long period of time such as with a lease For example: To expand the business (1) as VP is planning to expand in another country (app) which requires a large amount of money to grow (1). VP might choose to issue new shares which will not incur interest payments (1). Application could include: fast food; restaurant; vegetarians; meals; public limited company/shareholders; food outlets across the country; diners; 500 restaurants; 25 000 employees; ingredients; expand into another country. 4(b) Using Appendix 3 and other information, consider how the following 12 three changes in country Z may affect VP. Which change is likely to have the greatest effect on VP's profits? Justify your answer.  Increase in interest rates.  Depreciation of country Z’s exchange rate.  New legal controls which require all restaurants to list the ingredients in their meals. Level Description Marks 3 Sound application of knowledge and 9–12 understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more changes. Well- justified conclusion. Candidates discussing all three changes in detail, in context and with well-justified conclusion including why the alternative changes are rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and 5–8 understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one change. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more changes 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 changes with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining all three changes in context should be rewarded with the top marks in the band. 0 No creditable response. 0 4(b) Relevant points might include: • Higher fixed costs from interest paid if bank loan taken out for expansion of the restaurant chain in another country – likely to lead to lower profit • Customers may buy fewer meals due to interest rates being increased for 3% to 5% to be paid on borrowing leaving less money to spend leading to reduced revenue for VP Increase in • As VP is a public limited company it is large interest rates and may enjoy financial economies of scale – leading to relatively lower interest rates charged on bank loans than smaller businesses – reducing the impact of the interest payable on the loans • Increased interest received on any reserves held by VP – increase income into the business – leading to an increase in profit • Imported food ingredients will now cost more – leading to higher variable costs – possibly lower profit margin/higher prices • Increased cost of imported ingredients may lead to VP changing to purchase from local suppliers Depreciation of - however the quality may be lower country Z • When VP has expanded to another country exchange rate and set up new restaurants profits sent back to country Z will exchange for a higher amount of country Z currency – but capital needed for expansion will exchange at a lower rate – higher investment needed • Increased costs of rewriting all menus – time taken to work out and list all the ingredients in meals – will need to be repeated every time a Introduction of new meal is added to the menu – increases new legal costs both in the short-run and possibly the long- controls that run – reducing profit require all • If VP wants to keep the same mark-up on costs restaurants to – may lead to increased price of meals –– may provide lead to lower demand/lower sales – reduced information profit about the • All restaurants will have the same costs – so ingredients in competitiveness may not change their meals • May attract different target market who didn’t appreciate the ingredients used by VP – as these are now listed on menus - may increase sales 4(b) Justification may include: • Increase in interest rates will have the greatest effect on profit because VP will need to take out large bank loans to finance the expansion in another country leading to a large increase in costs from the interest payable which will reduce VP profits. Depreciation will have little effect as ingredients are only a small proportion of costs and only 30% of ingredients are imported. The new legal controls will have little effect on profit as these are a relatively small cost and the menus are printed regularly anyway when the Conclusion of menus change with the new meals. which is likely • Depreciation of the exchange rate of country Z to have the will have the greatest effect on profit as 30% of greatest effect food ingredients are imported. This will lead to on profits a large increase in variable costs which will reduce gross profit and then profit for VP. • New legal controls that require all restaurants to provide information about the ingredients in their meals will have the greatest effect on profit as menus will have to all be reprinted every time a new meal is developed. As VP do this regularly to encourage customers to return so they do not get bored with the same meals it will result in a regular increase in costs and therefore a reduction in profit.

This question in 0986/21 May/June 2023

4 (a) Using Appendix 2 and other information, explain two ways JJ may be affected by the forecast increase in unemployment in country X. Way 1: … … Explanation: … … … … … … Way 2: … … Explanation: … … … … … … [8] (b) Using Appendix 3 and other information, consider the following two environmental issues when JJ manufactures its products. Which issue should JJ choose to solve first? Justify your answer. • Using coal for fuel in its factory • Buying from suppliers that damage the environment Using coal for fuel in its factory: … … … … … … … … Buying from suppliers that damage the environment: … … … … … … … … Conclusion: … … … … … … … … [12]

20 marks

Mark scheme: 4(a) Using Appendix 2 and other information, explain two ways JJ may be 8 affected by the forecast increase in unemployment in country X. Award 1 mark for each way (max 2). Award a maximum of 3 additional marks for each explanation of the way JJ may be affected by the forecast increase in unemployment – one of which must be applied to this context. Relevant ways might include:  Makes it easier for JJ to recruit new employees – larger pool of unemployed people to choose from – may be more skilled people available for work  May make it easier to resist demand for higher wages from employees – rising level of unemployment means more competition amongst workers for jobs - so willing to accept lower wages  May lead to lower demand for JJ's products – consumer spending is lower – as many people have lost their jobs so incomes are lower  Lower priced products produced by JJ may see an increase in demand – as consumers have less income available to spend on luxury high priced items  JJ may be less willing to invest – as future sales may not increase for some time – making it more difficult to gain a return on investment  Lower sales in country X so JJ may try harder to export its products - spreads risk For example: May make it easier for JJ to recruit new employees (1) as there is a larger pool of unemployed people to choose from (1) and many of these workers may be skilled people available for work (1) with experience of how to manufacture jewellery (app). 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; increase from 3% to 6%. 4(b) Using Appendix 3 and other information, consider the following two 12 environmental issues when JJ manufactures its products. Which issue should JJ choose to solve first? Justify your answer.  Using coal for fuel in its factory  Buying from suppliers that damage the environment Level Description Marks 3 Sound application of knowledge and 9–12 understanding of relevant business concepts using appropriate terminology. Detailed discussion of the two issues. Well-justified conclusion. Candidates discussing the two issues in detail, in context and with a well-justified conclusion including why the alternative issue was rejected should be rewarded with the top marks in the band. 2 Sound application of knowledge and 5–8 understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one issue. Judgement with some justification/some evaluation of choice made. Candidates discussing at least one issue in detail and applying it 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 problems with little/no explanation. Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining the two issues in context should be rewarded with the top marks in the band. 0 No creditable response 0 4(b) Relevant points might include: Using coal  Using coal causes global warming giving JJ a bad for fuel in its reputation - bad publicity from pressure groups factory  Price of coal is increasing which continually increases cost of power for the factory – if JJ continues to use coal it will raise the costs of manufacturing jewellery  Could choose to reduce use of coal so JJ could benefit from the 25% government grant to invest in solar power for the factory – this would reduce the environmental impact of JJ’s factory which other manufacturers may not be doing so improving JJ’s image - reducing the pressure from environmental pressure groups  As all jewellery manufacturers use the same process and have the same increases in the price of coal – may be no change in JJ’s competitiveness Buying from  JJ may be negatively affected by its association if suppliers consumers become aware of where JJ buys its raw that damage materials - JJ’s suppliers are causing environmental the damage to the areas around their mines environment  Some consumers are only interested in the price of JJ’s products and may not care about the suppliers – so may have no effect on JJ’s sales/revenue  Pressure groups may try to make JJ change its suppliers – may lead to increased raw material costs as located further away – raising prices/reducing profit margins  JJ could encourage its suppliers to change their mining operations to more environmentally friendly methods helps JJ’s reputation – but may lead to increased costs Conclusion Justification might include:  The issue of using coal should be the first to solve because coal prices are increasing so costs will continue to rise if JJ does not change to solar power. The 25% grant from the government will help. The initial investment can be repaid over a long time period and costs reduced throughout this time. Customers may not be aware of the environmental damage caused by the suppliers JJ uses and so there may be no effect on sales or revenue and there is no rush to reduce this problem.  The issue of buying from local suppliers that damage the environment should be solved first as the damage to JJ's reputation may be difficult to recover from and the business may lose many loyal customers of its jewellery, leading to lower revenue/profit.

This question in 0986/22 May/June 2024

4 (a) Explain one effect on PF of the increase in each of the two taxes outlined in Appendix 2. Tax on people’s income: … … Explanation: … … … … … … Tax on profit made by businesses: … … Explanation: … … … … … … [8] (b) Using Appendix 3 and other information, consider PF’s financial position in 2025 and forecast financial position in 2026. Do you think Philip’s sister should invest in PF? Justify your answer using suitable calculations. 2025: … … … … … … … … 2026 (forecast): … … … … … … … … Recommendation: … … … … … … … … [12]

20 marks

Mark scheme: 4(a) Explain one effect on PF of the increase in each of the two taxes 8 outlined in Appendix 2. • Tax on people’s income • Tax on profit made by businesses Award 1 mark for each effect (max 2). Award a maximum of 3 additional marks for each explanation of the effect of the increase in each tax – one of which must be applied to this context. Relevant effects of the increase in tax on people’s income might include: • Consumers will have less income to spend – may reduce demand for products – leads to lower sales and revenue • Little effect on sales of non-luxury products – as consumers may still make purchases of lower priced goods – so output remains at a similar level • If seen as a lower priced alternative product – then may even see sales increase – as customers switch from higher priced competing products • Employees may ask for a wage increase to return their take home pay to what it was before the increase in tax level – if successful then wage costs will increase • Employees may not be as motivated as now lower pay after tax – may reduce output/efficiency Relevant effects of the increase in tax on profit made by businesses might include: • May leave less profit to be retained for future investment in the business – reduces investment in the business – may become less competitive in the future leading to lower sales • Owner will be left with less profit to be received in dividends – less incentive to carry on with the risks of owning a business • Discourages existing/new shareholders from investing in the business – so will have to look for other ways to obtain funds For example: Consumers will have less income available to spend (1) as the increase in tax will reduce their take-home pay (1) may reduce demand for PF’s shoes (app) which will lead to lower sales and revenue (1). Application could include: rubber shoes; natural rubber raw material; build a new factory; 20 workers; paid a weekly wage; selling in a mass market; bank loan for new factory; sister wants to invest in the business; $100 000; 2% rise tax on incomes; 4% rise in tax on profits; information from Appendix 3. 4(b) Using Appendix 3 and other information, consider PF’s financial 12 position in 2025 and forecast financial position in 2026. Do you think Philip’s sister should invest in PF? Justify your answer using suitable calculations. Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of the both statements. Well-justified recommendation. Candidates discussing both statements in detail, in context and with a well-justified recommendation, including whether or not Philip’s sister should invest in PF, 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 statement. Judgement with some justification/some evaluation of choice made. Candidates discussing at least one statement 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 statements with little/no explanation. Simple judgement with limited justification/limited evaluation of choice made. Candidates outlining both statements in context should be rewarded with the top marks in the band. 0 No creditable response. 0 4(b) Relevant points might include: Basic points might • The non-current assets are forecast to increase include: by $500 000 • Inventories are forecast to increase by $20 000 • Long-term bank loans are forecast to increase by $460 000 • The amount of retained profit is forecast to increase by $40 000 to $100 000 in 2026 More developed • The current ratio for 2025 is 1.25 points might • The current ratio forecast for 2026 is 1.2 include: • The acid test ratio for 2025 is 1 • The acid test ratio forecast for 2026 is 0.6 • The current ratio for 2025 could be considered low and is better to be nearer 2 which would show that the business is able to pay its short- term debts and has sufficient liquidity • The current ratio forecast for 2026 is lower than for 2025 and is a cause for concern as to why it has fallen. This may mean that the business will have expanded too quickly and may have cash flow problems in the future • The low acid test ratio for 2026 suggests that the business is likely to have liquidity problems after the new factory is built • The expansion appears to have been forecast to be mainly funded by a large bank loan of $460 000 – this may cause problems in the future as the interest repayments of this loan will result in a large increase in expenses – possibly reducing profitability in the future Recommendation Justification might include: • Philip’s sister should invest in PF as the non- current assets are forecast to increase by nearly double and the building of the new factory is predicted to be financed mainly by a bank loan. The bank will be confident of a successful expansion of PF, or it will not grant such a big loan. This should help reassure Philip’s sister that the investment will provide good returns in the future. • Philip’s sister should not invest in PF as the forecast statement of financial position suggests that there may be significant liquidity problems producing shoes in the future with an expected fall in the current ratio of 0.05 and an expected fall in the acid test ratio of 0.4.

This question in 0986/21 May/June 2025

4 (a) Explain two possible effects on TSE of the business cycle in country P moving into the recession stage. Effect 1: … … Explanation: … … … … … … Effect 2: … … Explanation: … … … … … … [8] (b) Using Appendix 3 and other information, consider the extracts from the income statements for the two companies in country P. Which company should TSE take over? Justify your answer using suitable calculations. Company A: … … … … … … … … Company B: … … … … … … … … Recommendation: … … … … … … … … [12]

20 marks

Mark scheme: 4(a) Explain two possible effects on TSE of the business cycle in country P 8 moving into the recession stage. Award 1 mark for each relevant effect (max 2). Award a maximum of 3 additional marks for each explanation of the effects on TSE of the business cycle moving into the recession phase – one of which must be applied to this context. Relevant effects might include: • Makes it easier for TSE to recruit new employees – larger pool of unemployed people to choose from – may be more skilled people available for work • May make it easier to resist demand for higher wages from employees – with a high level of unemployment – there will be more competition amongst workers for jobs so willing to accept lower wages • May lead to lower demand for TSE’s products – consumer spending is lower – as many people have lost their jobs – so incomes are lower • Lower priced products produced by TSE may see an increase in demand – as consumers have less income available to spend on luxury high priced items – buy cheaper substitutes • TSE may be less willing to invest – as future sales and therefore profit may not increase for some time in country P – making it more difficult to gain a return on investment • TSE may focus more on the export of its products to make up for the lower sales in country P • Lower revenue – may lead to lower profits For example: Makes it easier for TSE to recruit new employees (1) as there is a larger pool of unemployed people to choose from (1) and there may be more skilled people available to work for TSE (1) leading to an increase in the output of sports equipment (app). Application could include: sports equipment; skilled and full-time workers; plastic raw materials; sells in more than 30 countries; factories in 10 countries; want to increase market share; a well-motivated workforce is important; uses new technology and automation for flow production; unemployment is increasing. 4(b) Using Appendix 3 and other information, consider the extracts from the 12 income statements for the two companies in country P. Which company should TSE take over? Justify your answer using suitable calculations. Level Description Marks 3 Sound application of knowledge and understanding of 9–12 relevant business concepts using appropriate terminology. Detailed discussion of both companies. Well-justified recommendation. Candidates discussing both companies in detail, in context and with a well-justified recommendation, including why the alternative company 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 one company. Judgement with some justification / some evaluation of choice made. Candidates discussing at least one company 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 companies with little/no explanation. Simple judgement with limited justification / limited evaluation of choice made. Candidates outlining the two companies in context should be rewarded with the top marks in the band. 0 No creditable response. 0 4(b) Relevant points might include: Simple statements: • Company B has twice as much revenue at $200m • Company A has less revenue than Company B • Company A has less than half the cost of sales, a difference of $50m • Company B has higher cost of sales at $90m • The expenses are less than twice as much for Company B at $60m • Lower revenue means that Company A is probably smaller than Company B Possible calculations: • The gross profit of Company A is $60m • The gross profit margin of Company A is 60% • The gross profit of Company B is $110m • The gross profit margin of Company B is 55% • The profit of Company A is $20m • The profit margin of Company A is 20% • The profit of Company B is $50m • The profit margin of Company B is 25% Justification might include: • TSE should take over Company A because it has a 5% higher gross profit margin than Company B. This suggests that it is more efficient in its management of variable costs. It is a smaller competitor as its revenue is lower at $100m and therefore it could require a lower amount of capital to take over the company. It should not take over Company B as TSE may need to borrow a much higher amount of capital as the company appears to be larger. • TSE should take over Company B because it has much higher revenue suggesting it is a larger competitor than Company A and will better help TSE to achieve the aim of increasing its market share and it has a 5% higher profit margin than Company A.

This question in 0986/22 May/June 2025