Note AcademyNote Academy
Start

Business Studies · May / June 2022 · Paper 22 · Question 1

0450

As printed in the paper

Show the answer and mark scheme

  • 1(a)[8]

    Explain two ways TT could grow. Award 1 mark for each relevant way (maximum of two marks). Award a maximum of 3 additional marks for each explanation of the way TT could grow – one of which must be applied to this context. Relevant reasons might include: Internal growth such as:

    TT grows its existing operations – often by using retained profits from its existing business – to set up a new factory abroad producing a new toy for children up to the age of 5
    Develop new products – to increase sales
    Entering new markets – e.g. produce products for a different age group
    Diversification External growth such as:
    TT takes over another toy manufacturer – this is horizontal integration where TT takes over a competitor – TT wants to expand into country Z and could take over a toy manufacturer already located in that country
    Mergers
    Vertical integration – takes over a supplier or retailer
    Joint ventures
    Licensing For example: Internal growth (1)

    as TT decides to expand by opening its own new factory (1). This could be in country Z where TT plans to expand sales (app). This is a less risky way to grow than taking over another business, even though it is quite slow if it has to use its own funds (1). Application could include: manufacture toys;

    toys/toys for under 5’s;

    older children/children;

    expanding into new markets abroad;

    existing economies of scale;

    toy shops;

    cost $10m;

    multinational company;

    specialist new equipment;

    flow production.

  • 1(b)[12]

    Consider how TT might benefit from the following three economies of scale as it continues to grow. Which is likely to have the greatest effect on TT’s profit? Justify your answer.

    Purchasing
    Technical
    Financial Level Description Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more economies of scale. Well-justified conclusion. Candidates discussing all three economies of scale in detail, in context and with a well-justified conclusion including why the alternative economies of scale 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 economy of scale. Judgement with some justification / some evaluation of choice made. Candidates discussing two or more economies of scale 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 economies of scale with little/no explanation. Simple judgement with limited justification / limited evaluation of choice made. Candidates outlining all three economies of scale in context should be rewarded with the top marks in the band. 1–4 No creditable response. Relevant points might include: Purchasing
    Bulk buy components – discounts/cheaper prices for bulk purchases – reduces unit costs of components/lower average cost – may be able to lower prices – becomes more competitive – increases sales of toys – revenue increases and reduced unit costs Technical
    Specialist machines can be used – specialisation easier to implement – easier to use in flow production – speeding up the production process and becoming more efficient – unit costs lower as output of toys per worker is higher Financial
    Raise capital more cheaply – lower risk of not repaying debts – banks may offer lower interest rates – lower costs of borrowing for the expansion of the large business than if it was a smaller business Conclusion
    Purchasing economy of scale will have the greatest effect on TTs profit as it produces toys on a large scale so discounts on components will reduce unit costs by a significant amount, increasing gross profit and profit. TT has already benefited from technical economies when it purchased specialist equipment for its flow production line and therefore there may be few additional increases in efficiency and if TT uses internal sources of finance for expansion then financial economies will not benefit TT at all.
    Technical economy of scale will have the greatest effect as this will enable TT to expand flow production further and more technologically advanced machines can be purchased, speeding up the production process and increasing productivity by a high amount. There may be significant savings on unit costs, which will allow TT to be more competitive in the new market in country Z. Lower unit costs and increased revenue will probably lead to higher profit.
    Financial economy of scale will have the greatest effect as TT plans to expand and will probably need to raise some of the capital by borrowing. This will keep down the costs of expanding, as $10m may need to be borrowed if TT takes over the other company or builds a factory in country Z. TT is already producing on a large scale so the increased benefits from the other economies may be limited leaving financial economies giving the biggest increase in profit.
Practise this paper →

Make a free account to save your answers and see your weak topics and ask the AI why a wrong answer is wrong.