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Business Studies · May / June 2021 · Paper 22 · Question 1

0450

As printed in the paper

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  • 1(a)[8]

    Explain two advantages and two disadvantages of setting up a business as a private limited company. Award 1 mark for each relevant advantage/disadvantage (maximum of two advantages / two disadvantages). Award a maximum of one additional mark for each explanation of the advantage/disadvantage of setting up a private limited company. Relevant answers might include: Advantages

    Raise capital from the sale of shares – may raise more capital than if a sole trader / partnership
    Limited liability – will not lose personal possessions if business fails
    Separate legal identity – company can be sued instead of the owners
    Continuity
    Cannot be taken over without the consent of the shareholders Disadvantages
    Cannot sell shares to the public / cannot be sold on the stock exchange – as can only be sold to family and friends so restricts the capital that can be raised from share issue
    Legal formalities setting up the company – have to complete paperwork to register the company which takes time and money
    Accounts / financial statements are available for the public to see
    Not easy to transfer shares – as must have the approval of the other shareholders
    Financial statements need to be audited each year – increase in annual expenses For example: Capital can be raised from the sale of shares (1)

    and this may provide more finance than if just owners’ savings are used if a sole trader. (1)

  • 1(b)[12]

    Consider the following three factors that affect the location of TT’s shop. Which of the locations in Appendix 1 should Tandeep choose? Justify your answer.

    Customers in the area
    Rent
    Types of shops nearby Level Description Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more factors. Well-justified conclusion. Candidates discussing the three factors in detail, in context and with a well-justified conclusion including why the alternative factors 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 factor. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more factors 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 the factors with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining the three factors in context should be rewarded with the top marks in the band. 1–4 No creditable response. Relevant points might include: Customers in the area
    High footfall in the shopping mall in location A makes high sales more likely
    What types of shoppers are there – high or low- income shoppers?
    If high-income customers in the mall then target market uses the mall and higher number of sales of nursery items likely in location A
    Location B seems to have lower-income customers and may not be the target market for toys sales
    Do families visit the area – if so, then higher sales of toys are more likely Rent
    If high rent as in location A then this increases fixed costs – may lead to prices being higher – lower sales
    But if sales of toys are high then the rent per item sold will be low – may not have much effect on prices
    Rent is low in location B giving lower costs – but there may not be sufficient customers in the area to provide higher revenue to make the profit higher in this location Types of shops nearby
    As there are several other toy shops in location A then may lead to lower sales due to competition
    However, several competitors in the area may lead to more customers coming to the mall to look for toys – may be a well-known area for toys and attract more customers
    If banks and children’s playground are in the area in location A then this may attract more customers to the mall leading to higher sales Conclusion
    The number of shoppers in the area is most important and so Location A is the best one to choose. Without the area being busy and attracting a high number of shoppers the toy shop will not have many customers. Low rent at location B is less important because high revenue from toy sales will more than compensate for the higher rent in location A. Other shops nearby are also less important as customers come to the shop specifically to buy toys irrespective of the other shops in the area so this will not affect the choice between location A and B
    The rent is low in location B and this should be chosen for the new toy shop. It will be more affordable for a new business that will be short of funds and will keep the expenses low during the time it gets established and well-known by customers.
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