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Business Studies · May / June 2024 · Paper 11 · Question 1

0450

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FBM is a boat building business. It has 100 skilled employees. The Operations Director is concerned that FBM holds a high level of inventory. She is also concerned that the business is starting to 1 experience diseconomies of scale. The Finance Director has been asked to analyse FBM’s cost and output data. An extract is shown in Table 1.1. Table 1.1 Extract from FBM’s cost and output data $5000 Variable costs per unit $600000 Fixed costs per year 300 Number of boats made each year

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  • 1(a)[2]

    Define ‘diseconomies of scale’. Award 2 marks for a full definition. Award 1 mark for a partial definition. Factors that lead to an increase in average costs as a business grows beyond a certain size [2]

    OR Factors that cause average costs to increase as the scale of operations increases [2]

    OR The disadvantages of a business growing (too large) that result in an increase in costs per unit [2]

    Partial definition e.g. when costs increase because business grows [1]

    OR increase in average unit cost [1]

    2 For two marks candidates must have the idea that ‘business grows’ and it ‘increases average/unit costs’. Do not award examples as this does not define the term.

  • 1(b)[2]

    Identify two ways a business can use cost data to help make decisions. Award 1 mark for each relevant way (max 2). Points might include:

    Setting prices
    Decide whether to stop/continue production/change production
    Decide on the best location
    Decide if finance is required/set budgets
    Decide which costs need to be reduced/whether to change suppliers
    Setting objectives Other appropriate responses should be credited. 2 Only award the first two responses given. Allow ‘carry out break-even analysis’. Notes

  • 1(c)[4]

    Identify four fixed costs a business might have. Award 1 mark per fixed cost (max 4). Points might include:

    Rent/rates/storage costs
    Insurance
    Advertising
    Salaries
    Interest (on loans)/finance payments
    Cleaning/maintenance Other appropriate responses should be credited. 4 Only award the first four responses given. Do not award: wages/direct labour costs or power. Allow heating/lighting/electricity/water/utilities once. Notes

  • 1(d)[6]

    Explain one advantage and one disadvantage to FBM of holding a high level of inventory. 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: Advantages:

    Maintain production [k] so able to meet orders on time [an] of boats [app]
    Benefit from (purchasing) economies of scale [k] leading to lower average/unit cost [an]
    Able to respond quickly to unexpected order [k] increasing customer loyalty [an] Disadvantages:
    Space needed to store products [k] increasing (storage) costs [an] so costs increase above $600 000 [app]
    Cash/money tied up in inventory [k] leading to cash flow/liquidity problems [an]
    Risk of damage/waste[k]
    Opportunity cost [k]
    Insurance [k] Other appropriate responses should be credited. 6 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:
    Boat (building) or related words
    100 employees
    Skilled (workers)
    Diseconomies of scale
    $5000 (variable cost)
    $600 000 (fixed costs)
    300 (boats)
    Total cost 2 100 000 Other appropriate examples can be credited. The same analysis can be used for different points but only award once. Notes

  • 1(e)[6]

    Do you think customers have a more important role in the success of a business than its employees? Justify your answer. Award up to 2 marks for identification of relevant points. Award up to 2 marks for relevant development of points. Award up to 2 marks for a justified decision as to whether customers have a more important role in the success of a business than its employees. Points might include: Customers:

    Buy the products [k] and if ignores their needs the business will lose revenue/won’t survive [an]
    Can share opinions to help improve products [k] which can help increase market share [an]
    Provide recommendations/word of mouth advertising [k] Employees:
    Make the products [k] otherwise there is nothing to sell [an]
    Employees can affect quality [k] which could damage/improve its reputation [an]
    Employees provide customer service [k] which is important for brand image [an]
    Without sufficient employees the business may not be able to meet demand [k]
    Workers can be replaced by machines [k] Other appropriate responses should be credited. 6 This is a general question so there are no marks for application. For evaluation to be awarded justification will usually follow on from relevant analysis of points. Notes Justification might include: Customers are important, they buy the products [k] which generates revenue [an]. Employees make the goods [k] without them, there is nothing to sell [an]. However, customers are more important as without revenue, the business cannot cover its costs and survive in long term [eval]. A business can use automation reducing the importance of employees [eval]. Notes
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