Business Studies · May / June 2020 · Paper 11 · Question 1

0450

As printed in the paper

The question as text

Kara’s business makes wax candles. She sells them to retailers at low prices. She gives retailers 60 days to pay. Kara has to pay her suppliers when raw materials are delivered. Kara used 1 crowd-funding to set up her business. The bank would not give Kara a loan as she did not have a business plan. Last year revenue was $50000. Demand is increasing but Kara is not yet able to benefit from economies of scale. She said: ‘Cash-flow is a problem. All cash inflows are used to buy inventory.’

Read automatically from the paper; the printed page above is exact.

Show the answer and mark scheme

1(a)[2]
Define ‘crowd-funding’. Award 2 marks for a full definition. Award 1 mark for a partial definition. Asking a large number of people each for a small amount of money to raise finance for a project [2]
Partial definition: asking general public/people to give money [1]
1(b)[2]
State two economies of scale.
Award 1 mark per economy of scale.
Two from:
Purchasing/bulk buying
Marketing
Technical
Financial
Risk bearing
Managerial
1(c)[4]
Outline two reasons why a bank might want Kara to produce a business plan before agreeing to give a loan.
Award 1 mark for each relevant reason.
Award 1 mark for each relevant reference to this business.
Points might include:
Supports request for finance/shows ability to repay [k] increasing chance of getting finance for her candle business [app]
Shows planning/thought seriously about issues [k] such as recognising that cash-flow is a problem [app]
Provide (important) information about business [k] such as demand is increasing [app]
Shows what security/assets the business has which can be used to support any loan [k]
Other appropriate responses should also be credited.
Note: The focus of the question is from the viewpoint of the bank and not the business.
1(d)[6]
Explain two factors Kara should consider when deciding whether to increase prices.
Award 1 mark for identification of each relevant factor (max 2).
Award 1 mark for each relevant reference made to this business (max 2). Award 1 mark for each relevant explanation (max 2).
Points might include:
Level of competition/selling price of competitors [k] for candles [app] as a higher price could mean fewer customers [an]
Cost of production [k] as a higher price should improve her profit margin [an] especially as she does not benefit from economies of scale [app]
Price elasticity of demand [k] as if price elastic a higher price will result in a greater fall in demand [an] so revenue this year may not be $50 000 [app]
Brand image/reputation [k] as higher price might suggest better quality [an]
Other appropriate responses should also be credited.
1(e)[6]
Do you think delaying payments to suppliers is the best way for a small business to improve its cash-flow? Justify your answer. Award up to 2 marks for identification of relevant points or alternative ways. Award up to 2 marks for relevant development.
Award 2 marks for justified decision as to whether delaying payments to suppliers is the best way for a small business to improve its cash-flow. Points might include:
Delaying payment will allow them to delay cash outflow [k]
Suppliers may be unwilling to supply materials [k] and without the necessary materials would not be able to generate any cash inflows [an] Other options might include:
Ask customers to pay more quickly [k] but could result in fewer customers leading to lower cash inflows [an]
Arrange an overdraft/short-term loan [k] but could be charged interest which would increase cash outflows [an]
Sell unwanted non-current assets [k] which would free up cash currently tied up in the business [an]
Buy cheaper materials [k] which would reduce cash outflows [an] Justification might include:
As the business is small suppliers may not be willing to offer credit as they are seen as too high a risk so this may not be an option for a small business. [eval] [eval]
Other appropriate responses should also be credited.

Practise this paper →

Make a free account to save your answers and see your weak topics and ask the AI why a wrong answer is wrong.