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Business Studies · Oct / Nov 2021 · Paper 11 · Question 1

0450

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After identifying a gap in the soft drinks market, Jerome developed a low sugar drink. He borrowed $5000 from family and friends to start-up a business and to provide working capital. Jerome operates 1 as a sole trader. To promote his product, Jerome handed out free samples in the town centre. In the first year, Jerome’s business sold 10000 units. This is 200 units more than his break-even output. Jerome is considering ways to increase added value.

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  • 1(a)[2]

    Identify two features of a sole trader. Award 1 mark per feature. Points might include:

    Keeps all the profit
    Unlimited liability
    Unincorporated / no separate legal identity
    Takes all decisions / own boss
    Has total ownership of business / owned by one person
    Few legal requirements Other appropriate responses should also be credited. 2 Do not credit in private sector as this applies to many forms of business organisation.

  • 1(b)[2]

    Define ‘working capital’. Award 2 marks for a full definition. Award 1 mark for a partial definition. Amount of capital available to a business to pay its day-to-day expenses/costs [2]

    OR The capital needed to finance the day to day running expenses (and pay the short-term debts of the business) [2]

    OR Current assets – current liabilities [2]

    Partial definition e.g. funds used to buy inventory [1]

    2 Do not credit examples. Notes

  • 1(c)[4]

    Outline two ways that break-even information can help Jerome’s business. Award 1 mark for each relevant way. Award 1 mark for each relevant reference to this business. Points might include:

    He knows the level of output needed to make a profit / cover costs [k] for his (low sugar) drink [app]
    Helps planning/forecasting/decision-making [k] such as how best to increase added value [app]
    Help apply for finance [k] as so far only borrowed from friends and family [app]
    Can see what will happen if costs/prices change [k]
    Helps identify the expected level of profit/loss at different levels of output [k]
    Help identify the margin of safety [k] based on the 10 000 units sold [app] Other appropriate responses should also be credited. 4 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:
    (low sugar) drinks
    200 units above break-even
    10 000 / 9800 units sold
    Added value
    Family and friends Other appropriate examples in context can still be credited. Do not award points such as shows costs/sales/revenue/profit on own as this is too vague. Notes

  • 1(d)[6]

    Explain how each of the following can help Jerome increase added value:

    Change the packaging
    Use cheaper materials Award 1 mark for identification of each relevant point (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: Change the packaging:
    This will allow Jerome to be able to increase the price [k] of his drink [app] increasing the gap between price and costs [an]
    Customers can perceive the product to be worth more [k] so may be prepared to pay more for the same product [an] Use cheaper materials:
    This will help lower input costs [k] when making 10 000 units [app] increasing the gap between cost and price [an]
    Lower costs [k] can lead to higher profit per unit sold [an] 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:
    (low sugar) drinks
    200 units above break-even
    10 000 units sold
    9800 (break-even) Other appropriate examples in context can still be credited. Notes

  • 1(e)[6]

    Do you think giving out free samples is the best method of sales promotion for a business to use when promoting a new food product? Justify your answer. Award up to 2 marks for identification of relevant points. Award up to 2 marks for relevant development of points. Award 2 marks for a justified decision as to whether free samples are the best method of sales promotion for a business to use when promoting a new (food) product. Points might include: Free samples:

    Encourages potential customers to try something [k] which can persuade them to buy [an]
    Trying is likely to be more effective than just telling someone about it [k] as the taste is an important part of the buying process [an]
    Tempts existing customers to buy more [k] which can increase revenue [an]
    Cost of providing samples [k] can decrease profit margin [an]
    Way to use up inventory [k]
    No guarantee people will buy [k] Other options could include:
    Buy one get one free [k] would generate some income [an]
    Point of sale displays [k] raise awareness of the product [an] Other appropriate responses should also be credited. Justification might include:
    Encourages potential customers to try something new [k] which can persuade them to buy [an]. However, the cost of providing samples [k] can decrease the profit margin. [an] Free samples are the best method despite the cost [eval] as taste is important when buying food [eval]. 6 This is a general question so there are no marks for application. Candidates can discuss other options, but evaluation must focus on whether free samples is the best method of sales promotion to use. Notes
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