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Business Studies · May / June 2021 · Paper 21 · Question 3

0450

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  • 3(a)[8]

    Explain how one internal source and one external source of finance could be used by FO as it expands. One mark for each suitable method of internal/external source of finance. Award a maximum of three additional marks for each explanation of the example of internal/external source of finance one of which must be in context. Internal

    Retained profit – nothing to repay / no interest to pay – keeps expenses down
    Sale of existing non-current assets – these might be unused equipment and not affect existing production levels
    Sale of inventories to reduce inventory levels External
    Bank loan – easier to obtain due to previous business success – repayments can be spread out over several years
    New share issue – existing shareholders may be willing to increase their investment due to business success – may be able to attract more family and friends for investment in new capital
    Grants and subsidies from the government – funds may be available from the government to support sustainable businesses – FO would qualify for these grants – do not have to be repaid
    Debentures
    Crowd-funding For example: Bank loan (1)

    is easier to obtain due to previous business success (1)

    over the last 20 years (app). Repayments can be spread out over several years (1). Application might include: FO is a private limited company, FO has been operating for 20 years, FO is a sustainable business, for many years’ shareholders have reinvested profits, FO recently took over two other furniture businesses, FO plans further takeovers, FO is quite a large business.

  • 3(b)[12]

    Consider the advantages and disadvantages to FO of using a wholesaler, retailer or selling direct to the customer when distributing its products. Which channel of distribution should FO use? Justify your answer. Level Description Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more channels of distribution. Well-justified recommendation. Candidates discussing all three channels of distribution in detail, in context and with a well-justified recommendation including why the alternative channels of distribution 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 channel of distribution. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more channels of distribution in detail and applying it 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 channels of distribution with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining three channels of distribution in context should be rewarded with the top marks in the band. 1–4 No creditable response. Relevant points might include: Advantages Disadvantages Wholesaler

    Buys tables in large quantities – fewer deliveries needed – reducing distribution costs
    Saves storage space for manufacturer
    Lower administration costs as fewer orders to process
    May give advice to manufacturer on what furniture sells well
    May undertake some of the marketing to retailers/customers – boost sales – reduce marketing costs for FO
    Prices of chairs and tables may be higher as wholesaler needs to add their mark up
    Wholesaler may not want to buy the full range of products
    May also sell competitors’ products
    Longer chain of distribution – longer to reach the customer Retailer
    Sell in large quantities of tables to retailers
    Reduced distribution costs
    Can promote the furniture – reducing marketing costs for FO
    No direct contact with customers of wooden furniture
    Price is often higher – retailer will add their mark up Direct to customer
    Lower price of furniture than if sold through other intermediaries
    Can use internet or mail order to sell products
    Have direct control over marketing
    Develops a direct relationship between the customer and the producer – easier to follow up with direct marketing to customer
    May have increased distribution costs for tables and chairs as selling to many customers rather than just a few with the other methods
    Higher costs of administration
    Not all customers feel confident or are able to order online Recommendation
    Direct to customer should be chosen as FO sells furniture that is not bought in large quantities by customers and a higher price can be charged. Wholesalers may not convey the sustainable features of the furniture to smaller retailers so fewer sales. Retailer may take part of the profit margin reducing the profit for FO.
    If FO use a wholesaler or a retailer to sell its furniture FO will need to discount the price so it will make less profit from these methods of distribution.
    Customers pay a high price for furniture if sold direct to the customer so it will allow FO to make a high profit margin on each item of furniture.
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