Business Studies · May / June 2024 · Paper 21 · Question 4
0450
As printed in the paper
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4(a)[8]
Explain two factors EP should consider when choosing a source of finance. Award 1 mark for each factor (max 2). Award a maximum of 3 additional marks for each explanation of a factor that affects which source of finance to choose – one of which must be applied to this context. Relevant answers might include:
Legal form of business – EP is a private limited company so share issue is an option – and new shares can be sold to raise financeAmount required – if the finance is required to improve cash flow then it may not be a very large amount – and it is likely sources such as an overdraft will provide sufficient fundsLength of time to repay – if the finance is required for a short length of time then trade credit might be suitable – as this is repaid to the supplier within 30/60 days – if needed for long period of time then other sources may be more suitableExisting loans – if the business already has several loans, then this may not be an option – due to the already high expense of interest payments on the loansControl of the business – the original owners may not want to lose control and therefore may not choose to sell more shares – so the control and ownership of the business remains with the original ownersPurpose for using the financeSize of businessThe interest cost involved with some sources of finance – which will increase costs and lower profit margins For example: The purpose for using the finance. (1)If the finance is required for ways to improve efficiency at EP (app) then a source such as a bank loan could be chosen (1)
as this finance can be used to increase efficiency and then repaid over a longer period of time as unit costs are reduced and profitability increases (1). Application could include: pottery;
cups;
plates;
bowls;
trading for 40 years;
private limited company;
high-quality products;
want sales to increase;
plastic or bamboo products;
wants to increase efficiency;
improving labour skills;
more automation and technology;
information from Appendix 2.
4(b)[12]
Using Appendix 3 and other information, consider the following two products EP makes. Which product should EP stop making? Justify your answer.
Product AProduct B Level Description Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of both products. Well-justified recommendation. Candidates discussing both products in detail, in context and with a well-justified recommendation of which product to stop making, including why the alternative product 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 product. Judgement with some justification/some evaluation of choices made. Candidates discussing at least one product 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 products with little/no explanation. Simple judgement with limited justification/limited evaluation of choices made. Candidates outlining both products in context should be rewarded with the top marks in the band. 1–4 No creditable response. Relevant points might include: Advantages Disadvantages Product ASales in volume terms are much higher than Product BTotal cost is lower than for Product B by $210 000PM is higher at 30%Profit is higher at $60 000 but from a lower number of sales so the profit margin must be higherDemand is increasing by 10% each year so future sales are likely to be higher – may become even more profitable in the future as revenue is likely to increase and total cost stays the samePrice is lower by $30 per product at $40 per unitGPM is lower by 12.5%Sales are increasing at the lower rate of 10% per year than for Product B – so revenue is not likely to increase as much as for Product B Product BGPM is higher at 62.5%Price per unit is higher at $40 per unit – leading to higher revenueRevenue is higher at $400 000Demand is increasing at double the rate of Product A each year – so sales are likely to increase to 12 000 units leading to higher revenue of $480 000 in the futurePM is lower at 12.5%Sales are lower at 10 000 units per yearProfit in 2023 is lower by $10 000 Recommendation Justification might include:EP should stop producing Product A because demand is growing at only 10% per year whereas demand for Product B is growing at 20% so will increase revenue at a faster rate hence profit should overtake the $60 000 profit made from Product A.EP should stop producing Product B because the total cost is much higher at $350 000, and the Managing Director wants to keep costs low. Product B also makes a lower profit of $50 000 in 2023.
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