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Business Studies · Oct / Nov 2024 · Paper 21 · Question 4

0450

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  • 4(a)[8]

    Explain two reasons why CC might need finance. Award 1 mark for each relevant reason (max 2). Award a maximum of 3 additional marks for each explanation of the reason why finance may have been needed – one of which must be applied to this context. Relevant answers might include:

    For the purchase of investment / capital goods – buy equipment to replace worn out machinery – high amount of finance needed so may not all be from owner’s capital
    To finance the expansion/growth of the business – the business plans to increase output on a larger scale so may need a larger factory
    To invest in the latest technology – to remain competitive
    To provide working capital / pay expenses / fixed costs / variable costs / overheads / day-to-day expenses – e.g. payment of wages / raw materials – if not able to pay costs then output cannot be produced and/or prevents cash flow problems / lack of liquidity
    Development of new product / new markets – high cost of producing prototypes / cost of market research for new product – outflow of cash with no inflow for a certain time
    Start up another new business – needs to purchase equipment / raw materials owner may lack sufficient capital and/or – may take time for sufficient cash to be built up in the business to pay for assets For example: For the purchase of investment goods (1)

    to replace old worn-out machinery (1)

    for example machinery to produce cookies (app) to improve productivity and remain competitive (1). Application could include: cookies;

    high-quality products;

    small business;

    sole trader;

    established for 5 years;

    considering taking out a bank loan;

    using specialized baking equipment;

    sells at own shop;

    wants to sell more cookies;

    developing new cookies;10 production employees;

    5 shop employees;

    Operations manager;

    fresh ingredients purchased regularly.

  • 4(b)[12]

    Consider the following three pricing methods CC could use for its existing products. Which pricing method should CC use? Justify your answer.

    Cost-plus
    Promotional
    Competitive Level Description Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more methods. Well-justified recommendation. Candidates discussing all three methods in detail, in context and with a well-justified recommendation, including why the alternative methods 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 method. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more methods 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 methods with little / no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining three methods in context should be rewarded with the top marks in the band. 1–4 No creditable response. Relevant points might include: Advantages Disadvantages Cost-plus
    Easy to apply to cookies – as just add a percentage mark-up to costs
    Can have different mark-ups in different markets – can gain more profit from markets where a higher price can be charged
    Each product makes a profit for the business
    Profit will only be made if CC sells sufficient high- quality products to break-even
    Time is taken to research costs of all the fresh ingredients and difficult to calculate costs
    No incentive to reduce costs
    If costs are high, then the selling price of the products with personalised messages may be too high to be competitive Promotional
    Low price attracts customers and increases sales of cookies for special occasions such as birthdays – attracts attention to the products to encourage new customers to try them – hopefully establish regular sales
    Helps to ensure a successful launch into a new market in other cities – could increase sales and potentially increase market share
    It is useful to get rid of unwanted inventory that did not sell – as cookies are perishable and need to be sold quickly
    Can help to renew interest in a product if sales are falling
    Low price will mean low profit per cookie
    Customers may expect prices to remain low and therefore not purchase the products with personalised messages on them when the price is raised at a later date
    Consumer may think low price is due to low quality product
    May lead to price competition with competitors that sell in retail shops in other cities – so business may have to reduce prices again Competitive
    Sales are likely to be high due to prices being set around the same price as competitors’ prices in retail shops in other cities
    May avoid price competition – so achieves steady revenue for the high-quality cookies
    The cookies may not be very different to the cookies of competitors – so customers will buy from CC as they cannot tell the difference between products
    May compete on quality rather than price
    High research costs to find out competitor’s prices – may increase costs overall
    If costs of fresh ingredients to produce the cookies are higher than the costs of competitors, then may be harder to achieve a profit – may even be a loss
    Higher-quality cookies might need to be sold at a slightly higher prices than competitors to emphasise the higher quality image Recommendation Justification might include:
    Cost-plus pricing method should be used as it ensures a profit is made on each cookie. Whereas promotional pricing does not ensure a profit is made and may even lead to a loss initially. The cookies are of high-quality which will mean the price is likely to be higher than competitors’ cookies and therefore low profits are likely if it uses competitive pricing.
    Promotional pricing method should be used as it will ensure the cookies attract attention and renew interest in the products. Sales should increase as this will help to maintain customer loyalty when the price is raised later.
    Competitive pricing method should be used as it will mean the cookies will often be chosen over competitors cookies that are sold in retail shops in other cities as it has a higher quality but sold at a similar price. So the cookies will have high sales increasing market share.
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