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Business Studies · Oct / Nov 2023 · Paper 22 · Question 2

0450

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  • 2(a)[8]

    Explain four factors a business should consider when choosing which source of finance to use for expansion. Award 1 mark for each relevant factor to consider when choosing which source of finance to use for expansion (max 4). Award a maximum of one additional mark for each explanation of the factor. There are no application marks available for this question. Relevant answers might include:

    Legal form of business – if the business is a company, then share issue is an option/if the business is unincorporated then owner’s savings may have to be used as it cannot issue shares to raise finance
    Amount required – as the finance is for expansion then a large amount is likely to be required so sources such as bank loans or share issue may be chosen
    Purpose – as the finance is needed for expansion it is likely to be a large amount and so should be able to be repaid over a long period to make the repayments manageable
    Existing loans – if the business already has a high number of bank loans, then this may not be an option due to the already high expenses of paying the interest on loans
    Control of the business – if the business is a company, then issuing additional shares may lead to the original shareholders losing control of the business so may need to decide which is more important, expansion or control
    Cost of finance – the interest rate charged on the borrowing
    Length of time needed to repay
    Size of business For example: Legal form of business (1)

    if the business is unincorporated then owner’s capital or borrowing may have to be used as the business cannot issue shares to raise finance for expansion (1).

  • 2(b)[12]

    Consider the advantages and disadvantages of the following two options for SSE to distribute its products in the new markets in other countries. Which option should SSE choose? Justify your answer.

    Sell direct to customers using SSE’s website
    Sell to large sports retailers in other countries Level Description Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of both options. Well-justified recommendation. Candidates discussing both options in detail, in context and with a well-justified recommendation, including why the alternative option was 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 option. Judgement with some justification / some evaluation of choice made. Candidates discussing at least one option 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 options with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining both options in context should be rewarded with the top marks in the band. 1–4 No creditable response. Relevant points might include: Advantages Disadvantages Sell direct to customers using SSE's website
    Price may be lower as profit margins are only for SSE and do not include a retail profit margin – so sales may be higher – hence profit gained from selling cricket helmets may be higher
    Direct relationship with customers who ride bicycles – possibly better knowledge of customer needs as can gain direct feedback from customers – may lead to improved customer loyalty – increased repeat sales/improved reputation and word- of-mouth advertising
    Reaches a wider market for sport safety helmets in other countries – website can be accessed all over the world for customers to view and order sports helmets
    SSE controls all of the marketing mix
    Increased costs of processing returned goods – as not able to try on sport helmets before buying – may lead to higher costs if safety helmets are returned if do not fit well
    Increased costs of distribution due to postage to each individual customer – fewer journeys made in larger orders if supply retailers
    Increased administration costs as processing large number of individual orders for bicycle safety helmets rather than fewer bulk purchases from large retailers
    May require increased storage for sport helmets before being dispatched to customers – increased warehouse costs
    Increased advertising costs and costs of maintaining and upgrading the website
    Not all customers have access to the internet Advantages Disadvantages Sell to large sports retailers in other countries
    Bulk orders from large retail chains in other countries – shipped as large bulk orders abroad – reducing distribution costs
    Retailers are more familiar with the markets in other countries – may only order sports helmets such as cricket safety helmets for children that are likely to sell well in other countries – increases sales/revenue
    May carry out some advertising for SSE – reduces marketing costs
    Large sports retailers attract customers who are likely to be interested in SSE's products – easier to reach its target customers in other countries than selling direct through a website
    Improved reputation/higher sales/revenue – customers can try on the sport helmets – buy a better fitting product – better meets their needs for protection whilst playing sports
    Costs of storage are all or at least partly paid for by the retailer
    Sold with sports helmets of competitors – may be more difficult to compete as products directly next to each other in the sports shops – harder to increase sales
    No direct contact with customers – less likely to gain feedback about customers’ thoughts on the sport helmets
    Prices may be higher if markup is added- reduced demand or profit margin reduced for SSE as discount required by retailer – lower profit Recommendation Justification could include:
    SSE should choose to sell directly to customers in other countries using its own website as it will have complete control over the marketing of its sports safety helmets. It can gain feedback directly from its customers so it can adapt to market changes and better meet customer needs leading to increased demand and sales. Sports retailers should not be chosen as they sell many other brands of sports safety helmets and SSE cannot control the advice given to customers when they make a purchase which could lead to the wrong products being purchased and SSE's reputation being ruined.
    SSE should choose to distribute through large sports retailers in other countries as it will reduce both administration and transport costs. Warehouse space will also be reduced. Customers can try on the sports safety helmets in shops making it more likely that they will make a purchase and increase sales for SSE.
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