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Business Studies · Oct / Nov 2020 · Paper 22 · Question 4

0450

As printed in the paper

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  • 4(a)[8]

    Using the data in Appendix 3, calculate the following ratios for CC:

    Gross profit margin
    Profit margin
    Current ratio
    Acid test ratio Show your workings. Award 1 mark for each correct formula (maximum of four) gross profit/revenue × 100 (1)

    profit/revenue × 100 (1)

    current assets/current liabilities (1)

    current assets – inventory/current liabilities (1)

    OR 1 mark for use of correct formula + 1 mark for correct answer (4 × 2 marks) $400 000/$800 000 × 100 (1)

    = 50% (1)

    $150 000/$800 000 × 100 (1)

    = 18.75% (1)

    $20 000/$15 000 (1)

    = 1.33 or 4:3 (1)

    $15 000/$15 000 (1)

    = 1 (1)

  • 4(b)[12]

    Consider how the changes in the following three government legal controls could affect CC. Which change is likely to have the greatest effect on profit? Justify your answer.

    Increase in the minimum wage
    More controls over what can be stated in advertisements
    No waste plastic can be sent to landfill sites Level Description Sound application of knowledge and 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 were rejected, should be rewarded with the top marks in the band. 9–12 Sound application of knowledge and 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. 5–8 Limited application of knowledge and 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 the three changes in context should be rewarded with the top marks in the band. 1–4 No creditable response. Relevant reasons might include: Increase in the minimum wage
    If wages increase it may improve motivation
    Increased costs as have to pay 10 workers higher pay
    Already pay just above minimum wage so may not have to increase pay – costs may not change
    Alternative employers may attract the workers away from CC if does not give a pay increase – higher recruitment costs
    Increase in potential customers due to increase in disposable income leading to more sales of CC’s mobile phone covers More controls over what can be stated in advertisements
    Adverts for mobile phone covers may have to be changed if they are misleading and may be less appealing/less attractive to customers leading to lower sales
    May not make any difference if CC already only makes true claims about the covers always preventing phones from being damaged
    Competitors will have to tell the truth so may increase sales of CC phone covers if they are better No waste plastic can be sent to landfill sites
    Increased cost to remove waste from factory as all plastic will need to be disposed of correctly – may recycle plastic
    If competitors have higher costs because they produce more plastic waste then CC will be more competitive and increase sales of phone covers and possibly have higher profit
    Need to train 10 workers and change production techniques to minimise waste – increases cost initially – long-term could save on purchasing raw materials Conclusion Justification may include:
    Impact will depend on what competitors are paying as wages but CC is paying just above the minimum wage and if it has to increase pay then wage costs will rise and this will have the greatest effect on profit as it is likely to fall. CC is already producing plastic waste but it could simply change the materials used to produce the phone covers so this legal control would have no effect. Advertising claims may already be truthful so this will not have any effect on profit.
    Stricter laws on advertising are likely to have a big effect on profit if CC is taken to court and fined for making false claims. If the claims about protecting phones from damage are not true then CC may need to change its advertising to stop it having bad publicity. Otherwise, this could lead to a large fall in sales and profit and it will be the biggest effect on profit of the three changes in legal controls.
    Increased costs from the disposal of plastic waste will have the biggest impact on profit as prices may have to rise to cover the increased costs of alternative ways of waste disposal. CC already produces a large amount of plastic waste so costs will increase significantly, and sales will fall due to the higher prices.
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