Business Studies · Oct / Nov 2020 · Paper 11 · Question 3

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Elton is a sole trader. He sells specialist clothing and equipment for sports, including baseball and hockey. It is a niche market. Elton started his business 5 years ago and it has remained small. A 3 wide range of inventory is important. Elton has been looking at the financial performance of his business. The profit margin for 2018 was 35%. An extract of the accounts is shown in Table 3.1. Table 3.1 Revenue and cost information for Elton’s business for 2018 and 2019 ($) 2019 2018 25000 24000 Revenue ($) Y 7200 Cost of sales ($) 18000 16800 Gross profit ($) 10000 8400 Expenses ($) 8000 X Profit ($)

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3(a)[2]
Define ‘sole trader’. Award 2 marks for a full definition. Award 1 mark for a partial definition. Ownership of business in the hands of one individual/person [2]
Unincorporated business owned by one person [2]
Partial definition e.g. Run/operated by one person [1]
2 Do not accept features such as unlimited liability as this is NAQ.
3(b)[2]
Calculate X and Y. Award 1 mark for each correct calculation. X = 8400 Y = 7000 2 $ not required. Notes
3(c)[4]
State four factors that can influence the amount of inventory a business might hold. Award 1 mark per factor. Points might include:
Demand from customers/amount of sales
Perishability of the items
Storage space available
Cost of storage
Delivery charges
Seasons/celebrations/festivals
Amount of money available (to buy inventory)
Lead time/reliability of supplier
Method of production (mass may require high inventory)
Stock control system – JIT/lean production Other appropriate responses should also be credited. 4 Only award the first four responses given. Notes
3(d)[6]
Explain one advantage and one disadvantage to Elton of operating in a niche market. Award 1 mark for identification of each relevant advantage and disadvantage (max 1 for each). 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: Advantages:
Less competition [k] so easier to attract/retain customers [an] to his shop [app]
Clear focus/easier to target customers [k] interested in certain sports [app] reducing costs of advertising [an]
Builds up specialist skills and knowledge [k]
Can often charge a higher price [k] helps improve profit margin [an]
Customers are prepared to pay for expertise [k]
Customers tend to be more loyal [k] so may remain in business for another 5 years [app] Disadvantages:
Lack of economies of scale [k] leading to higher unit costs [an] so not able to lower cost of sales of $7000 [app]
Risk of over dependence on a single product or market [k]
Likely to attract competition if successful [k]
Vulnerable to market changes [k] Other appropriate responses should also be credited. 6 Note: To use words from the stem as application, the reference must be appropriate (i.e. make sense) in relation to the point being made. The following words are likely to be appropriate for this question:
Sole trader
5 years
Clothing and equipment for sports
shop
Remained small
Wide range of inventory needed
Profit margin was 35%
Use of figures from Table 3.1 Other appropriate examples in context can still be credited. Candidates may gain credit for changes to profit margin only once in either the advantage OR the disadvantage. Notes
3(e)[6]
Do you think Elton should be pleased with the financial performance of his business? Justify your answer using appropriate ratios. Award up to 2 marks for identification of relevant issues. Award up to 2 marks for relevant development of points. Award 2 marks for justified decision as to whether Elton should be pleased with his financial performance. Answers might include:
Gross profit margin has improved [k] from 70% [an] to 72% [an] showing better control of its variable costs [an].
Profit margin has decreased [k] showing less control of expenses [an]
Revenue improved [k] by $1000 [an]
Gross profit increased [k] by $1200 [an]
Profit decreased [k] by $400 [an] Other appropriate responses should also be credited. Justification might include:
Gross profit margin has improved [k] from 70 % [an] to 72% [an] However profit margin has decreased. [k] He should be pleased as sales and gross profit are rising [eval] but he must be concerned about expenses. [eval] 6 Relevant calculations for analysis: Profit margin: 32% in 2019 Fallen by 3% in 2019 Gross profit margin: 70% in 2018 72% in 2019 Risen by 2% [an][an] OFR applies if candidates have incorrectly calculated profit in question 3 (b). For evaluation to be awarded justification will follow on from relevant analysis of points and must include ratio analysis. Notes

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