Business Studies · Oct / Nov 2021 · Paper 11 · Question 4

0450

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BGR is a private limited company. It operates 6 cinemas in different towns. Effective internal communication is important for BGR. The Finance Director has been analysing BGR’s accounts 4 and an extract is shown in Table 4.1. BGR plans to open another cinema and will need to recruit 10 new employees. The new cinema will cost $8m. The Finance Director has to decide whether BGR should issue new shares or use a bank loan to finance the expansion. Table 4.1 Extract from BGR’s Income statement for year ending 2020 ($000’s) X Revenue 180 Cost of sales 720 Gross profit Y Expenses 400 Profit

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4(a)[2]
Define ‘cost of sales’. Award 2 marks for a full definition. Award 1 mark for a partial definition. Cost of producing or buying in the goods sold by the business during a period of time [2]
OR Cost of purchasing the goods used to make the products sold [2]
OR Variable cost of making the goods sold [2]
OR Cost per unit x number of output sold [2]
OR Opening inventory + purchases – closing inventory [2]
Partial definition e.g. money spent on materials [1]
2 Do not award examples or answers which include references to expenses.
4(b)[2]
Calculate X and Y. Award 1 mark for each correct calculation. X 900 000 or 900 Y 320 000 or 320 2 Notes
4(c)[4]
Identify four stages of the recruitment process. Award 1 mark per stage. Four from:
Job analysis / identify vacancy
Job description
Person/job specification
Advertising (the vacancy)
Application forms sent out/received
Short listing/screening
Interview/testing
Selection / job offer / hire Other appropriate responses should also be credited. 4 Only award the first four responses given. Note: Answer must be from the business viewpoint not the applicants e.g. CV or letter of application. Notes
4(d)[6]
Explain two reasons why effective communication might be important to BGR. Award 1 mark for identification of each relevant reason (max 2). Award 1 mark for each relevant reference to this business (max 2). Award 1 mark for each relevant explanation (max 2). Points might include:
To ensure employees / suppliers carry out the instructions correctly / understand what to do [k] to make sure the right thing is done / there is no wastage [an]
Speed up decision-making [k] at the new location [app] so able to quickly react to changing customer tastes [an]
To ensure customers are given correct information [k] which can help improve customer loyalty [an]
Find customer preferences [k] so can use the information to help improve its services / make it more competitive [an]
Motivates employees [k] increasing efficiency [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:
Cinemas (or cinema related words such as movies, suppliers of popcorn)
New location
$320 000 expenses
Recruit 10 more employees Other appropriate examples in context can still be credited. Notes
4(e)[6]
Do you think issuing new shares is a better way for a limited company to finance expansion than using a bank loan? 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 issuing new shares is a better way for a limited company to finance expansion than using a bank loan. Points might include: Issue new shares:
Permanent source of capital [k] so no need to repay [an]
Access to greater amounts of capital [k] as no restriction on number of shares [an]
No interest to pay [k] so fixed costs do not increase [an] so can avoid increasing debt [an]
Possible loss of control / risk of takeover [k] making it difficult to manage or take decisions [an]
Cost/time to arrange [k] so not able to focus on other issues [an]
Shareholders might expect dividends [k] 6 This is a general question so there are no marks for application. Candidates can discuss other options, but evaluation must focus on whether new shares is better than a bank loan to finance expansion. Notes Bank loan:
Increase debt [k] which can increase gearing ratio [an]
Need to repay [k]
Must pay interest [k] which increases expenses [an]
Have long time to repay [k] allows time to gain extra revenue to meet repayments [an]
Can keep profits for future/emergency [k]
Can borrow large amount / all the money [k] Other appropriate responses should also be credited. Justification might include: Issuing new shares give access to large amounts of capital [k] as there is no restriction on the number of shares. [an] Bank loans require interest payments [k] which will increase costs. [an] It can depend on the current level of debt as a bank loan will increase financial risk[eval] so it may be safer to issue shares as a limited company will not be required to repay the funds. [eval]

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