5.4. Costs
A subsection of Business Studies, 9609, through 5. Finance and accounting (AS Level)
Listing 10 of 47 questions
Super Heroes (SH) SH is a leisure park aimed at 10–18 year olds. It is owned by two companies, X and Y, which started SH as a joint venture. Company X owns many leisure centres and swimming pools. Company Y owns many brands based on superheroes. SH employs 200 full-time workers and an extra 50 seasonal workers during the busiest times of the year. The park has 10 large rides which take up 2 km2 of land. There are also many smaller rides, restaurants, toilets and shops. The price of an entrance ticket is $11 per customer. Table 1.1 shows the costs for SH in 2019. Table 1.1: SH costs for 2019 Total fixed costs (per year) $12m Variable costs (per customer) $3 Total costs $42m One of the larger rides at SH is the Iron Blaster. The number of customers who use this ride has decreased each year for the last three years. This has led the management of SH to consider its options for internal growth. Option 1 – A new virtual reality (VR) ride This option would involve developing the Iron Blaster into a VR ride. Most of the structure of the Iron Blaster could be used but customers would be given a VR headset to wear during the ride. The cost of developing the VR ride would be $2m. The Iron Blaster ride would be closed for a three month period during the off-peak season for the development to be carried out. No employees would be made redundant or dismissed. Option 2 – A new hotel SH does not currently have a hotel. It could demolish the Iron Blaster to provide the space to build one. Many of the competitors of SH have a hotel near or within their leisure parks. Hotel customers would pay a high price for a room but have free access to the leisure park’s facilities. Market research suggests that the average hotel customer would spend twice as long in the leisure park than a non-hotel customer. The cost of developing the hotel would be $15m and take a year to build. All of the employees currently working on the Iron Blaster ride would face redundancy or dismissal. Define the term ‘joint venture’ (line 2). Explain the difference between ‘redundancy’ and ‘dismissal’ (line 28). Refer to Table 1.1 and any other information. Calculate the total revenue from entrance tickets for SH in 2019. Explain one way in which SH could increase the sales of entrance tickets. Analyse two factors that may have determined the location of SH. Recommend which one of the two options SH should choose for internal growth. Justify your recommendation.
9609_s20_qp_23
THEORY
2020
Paper 2, Variant 3
View
Lakeland Oysters (LO) Lakeland Oysters (LO) is a private limited company in country G that was started by the Dar family in 2010. LO farms oysters in a lake that is owned by the business. Oysters are a type of shellfish. The business employs six people from the local town. LO has two markets for its oysters (see Table 2.1). Table 2.1: Market and financial data for LO, 2020 Market Description Sales Revenue Profit margin Industrial Restaurants ordering from LO’s website 80 000 oysters $100 000 15% Consumer Customers visiting the farm 50 000 oysters $150 000 25% LO believes that corporate social responsibility and its triple bottom line are important. There has been a recent news article on the internet about oyster farming (see ). Oyster farming can be good for the environment Oyster farming can have a beneficial impact on the water by removing harmful pollutants. Oyster farms also benefit the local community by turning lakes into pleasant areas for the public. The government is considering giving grants to encourage oyster farming in country G. : Extract from a recent news article about oyster farming The directors of LO would like to expand the business by purchasing a second location. The business has two options (see Table 2.2). Table 2.2: Data about a potential second location for LO Location A Location B Current use An oyster farm A fishing lake Distance from LO’s current location 100 km 5 km Potential output per year 100 000 oysters 150 000 oysters Purchase price $250 000 $300 000 Start-up costs $20 000 $100 000 Operating costs $150 000 per year $200 000 per year Define the term ‘market’ (line 6). Explain the term ‘profit margin’ (line 6). Refer to Table 2.1. Calculate the total profit made from selling oysters in 2020. Explain two possible reasons why the profit margin for the consumer market is higher than the profit margin for the industrial market. Analyse why two of the elements of the triple bottom line are important to LO. Refer to Table 2.2 and any other relevant information. Recommend which location LO should choose. Justify your recommendation.
9609_s21_qp_22
THEORY
2021
Paper 2, Variant 2
View
Farm Produce (FP) FP is a primary sector co-operative made up of six farms in country G. Each farm grows a range of fruit and vegetables. FP employs 26 workers across the farms and distribution centre. Each farm transports its fruit and vegetables to the distribution centre where they are packaged and sent to customers’ homes. Table 1.1 contains data about the farming industry in country G. Table 1.1: Data about the farming industry in country G • Farms producing fruit and vegetables are given an annual government grant. • Most farms are labour intensive. • The government promotes the importance of eating fresh fruit and vegetables. • Most farms are small family businesses. • Minimum wage for farm workers will increase by 10% next year. FP’s customers pay for a box of seasonal fruit and vegetables that is delivered each week. Data about the different box sizes sold by FP is shown in Table 1.2. Table 1.2: FP’s cost and price data Box size Variable cost per box ($) Allocated monthly fixed costs ($) Price per box ($) Sales in April Small Medium Large FP is concerned about the profitability of the small box size. It believes it should stop selling this product. Define the term ‘labour intensive’ (line 8). Explain the term ‘co-operative’ (line 1). Refer to Table 1.2. Calculate the profit made by FP in April 2022. Explain one problem FP may have when deciding how to allocate fixed costs to each box size. Analyse how two stakeholders of FP might be affected by a decision to stop selling the small box size. Evaluate the most important factor affecting the supply of FP’s boxes of fruit and vegetables to customers. Please ensure text is fully justified throughout.
9609_s22_qp_22
THEORY
2022
Paper 2, Variant 2
View
Quality Fencing (QF) QF is owned by Seojun. Seojun is a sole trader who repairs and builds wooden fences. Most of his customers own houses with gardens in city X. Seojun is an entrepreneur who has an aim to be rich. He set up QF two years ago to fulfil his aim and he set himself the following objectives: • to make $1m profit within 5 years • to have a 20% market share in city X within 5 years. Seojun has made some progress towards his objectives (see Table 1.1). Table 1.1: Financial and market share data for QF Year 1 Year 2 Year 3 Total revenue $120 000 $240 000 $480 000 Direct costs $70 000 $110 000 $150 000 Indirect costs $20 000 $40 000 $80 000 Market share in city X 2% 4% 8% Seojun’s target market is house owners with medium to large gardens. Most houses in city X have a garden. Promotion is important to Seojun, because the market for fence building and repairs is very competitive in city X. Most customers book QF’s services by telephone, but there is a growing need for online bookings. The business is forecast to continue to grow. Seojun has decided to employ two new workers. He has written a job description (see Table 1.2). Table 1.2: Job description Job title: Fence builder Required: As soon as possible Salary: Based on age Qualifications: A-Levels are desirable but not essential A workman is required to build and repair fences for a growing local business called QF. Full training will be provided. Experience of building and repairing fences is essential. Must be fully physically fit and under the age of 25. Define the term ‘training’ (line 27). Explain the term ‘entrepreneur’ (line 3). Refer to Table 1.1. Calculate the percentage change in profit from Year 1 to Year 2. Explain one difficulty in measuring the market share of QF. Analyse two problems with the job description created by Seojun in Table 1.2. Recommend suitable promotion methods which would help Seojun to achieve his objectives.
9609_w19_qp_22
THEORY
2019
Paper 2, Variant 2
View
Van Man (VM) Obi is a sole trader who operates a van service. He used to be employed by a similar business but realised that he likes to be in control. Obi used all of his savings to start his business so that he did not have to go into debt. He owns three vans which can carry furniture, packages and other large items. He has eight full-time employees who drive the vans and move items. Customers can hire a van with two employees to move these items from one place to another. The cost per day of providing a van with two employees is $170. The prices of the service are shown in Table 1.1. Table 1.1: Price of hiring one van (including two employees) Price for the first day’s hire Price for each additional day $250 10% discount on the price for the first day’s hire Demand for Obi’s service is growing fast. To supply this demand he needs a new van and he is investigating sources of finance. He has a choice of two vans. The details of the vans are in Table 1.2. Table 1.2: Van details Van A Van B Capital cost $30 000 $40 000 Estimated maintenance costs per year $600 $450 Insurance cost per year $500 $550 Expected life 7 years 9 years Van owner reviews • Easy to drive but not very fast • Boring but fuel efficient • Engine is very noisy, but reliable • Fast and great fun to drive • Looks great and the range of colours is fantastic • It broke down a few times, but the manufacturer repaired it quickly Define the term ‘sole trader’ (line 1). Explain the difference, for a business, between price and cost. Calculate the profit that Obi will make from a customer who hires two vans for three days. Explain one factor which may affect the demand for Obi’s services. Recommend whether Obi should purchase Van A or Van B. Justify your recommendation. Analyse two factors which may influence the source of finance that Obi chooses for the new van.
9609_w21_qp_23
THEORY
2021
Paper 2, Variant 3
View
Gourmet Ices (GGI is a partnership owned by Tom and Amy Smith. The business makes and sells high- quality ice cream. At present the ice cream is only sold through businesses near to GI, but the owners would like to expand the business and sell ice cream throughout the country. The ice cream is handmade in small batches. GI employs five skilled workers who make the ice cream. Labour costs account for over half of the direct costs of the business. Tom believes that it will be necessary to use Computer Aided Manufacturing (CAM) to increase production and decrease costs so that GI can sell throughout the country (see Table 1). However, Amy is worried that the quality of the ice cream may decrease. Table 1: Estimated production costs and revenue data Without CAM With CAM Variable costs (per unit) $1.50 $1.00 Total fixed costs each month $5000 $15 000 Revenue (per unit) $2.50 $2.50 Estimated output each month 7500 units 25 000 units Tom and Amy would need to raise $50 000 of additional finance to expand GI. They have researched crowd funding and venture capital as possible sources of finance. Tom and Amy have decided that they would prefer to use venture capital. They are considering two offers from venture capitalists. Offer 1: Amit The offer is for $50 000 and Amit would want 51% ownership of the business. Amit owns a nationwide supermarket chain and would be willing to stock the ice cream in all of the supermarkets if his offer is accepted. He also has a lot of marketing experience. Offer 2: Rebecca The offer is for $50 000 and Rebecca would want 30% ownership of the business. Rebecca owns a clothes manufacturing factory and she has knowledge of using CAM. She is very experienced with operations and project management and she believes that she can further reduce the costs of the business and increase the profit margin. Define the term ‘partnership’ (line 1). Briefly explain the term ‘crowd funding’ (line 16). Refer to Table 1. Calculate the break-even level of production with CAM. Explain one benefit to GI of using break-even analysis. Analyse two possible disadvantages to GI of introducing CAM to produce ice cream. Recommend which one of the two venture capital offers Tom and Amy should accept. Justify your answer.
9609_m17_qp_22
THEORY
2017
Paper 2, Variant 2
View
Benjamin’s Beds (BB) Benjamin’s Beds (BB) is a large manufacturer of beds and has a strong brand image for quality. Its main channel of distribution is through the producer market (B2B) to national hotel chains. Recently, BB has also entered the consumer market (B2C) by selling online direct to customers. BB uses flow production. BB’s existing machinery is old and cannot satisfy the increased demand. The directors of BB have decided its existing machinery needs replacing. Table 2.1 shows data for existing and proposed new machinery. Table 2.1 Data for existing and proposed new machinery Variable cost per unit ($) Output per year Existing machinery New machinery Fixed costs are $500 000 per year. Using new machinery would reduce this by 10%. BB sales data suggests that its market share is growing rapidly. The consumer market (B2C) is becoming more important to BB because online orders are increasing. However, online demand is for a wide range of bed styles. The consumer market requires a substantial marketing budget and some retraining of employees. Orders from national hotel chains in the producer market (B2B) are for a more limited range of bed styles. These orders remain constant with low marketing costs. However, BB is increasingly under pressure to reduce prices to hotels. BB uses non-financial motivators and until recently had a motivated workforce. Efficiency is falling due to employees having to work longer hours because of increased demand. This is decreasing staff morale and welfare. Define the term ‘market share’ (line 14). Explain the term ‘efficiency’ (line 21). Refer to Table 2.1 and other information. Calculate BB’s total annual cost if it uses the proposed new machinery. Explain one possible limitation to BB of using the proposed new machinery. Analyse two possible disadvantages to BB of decreased staff morale and welfare. Recommend whether BB should focus on the producer market (B2B) or the consumer market (B2C). Justify your recommendation.
9609_m22_qp_22
THEORY
2022
Paper 2, Variant 2
View
Umpire Umbrellas (UU) UU is a private limited company that sells umbrellas with pictures it prints on them. All of the pictures on the umbrellas are printed using batch production. The umbrellas can be used to shelter from the rain or as a shade from the sun. The company has two main markets: consumer and business. UU sells individual umbrellas to consumers. These have pictures of famous people or places on them. They are mainly sold through UU’s website. UU produces 20 000 of each design. The business market for UU is made up of businesses that want their logo printed on a large number of umbrellas. UU guarantees all business orders are delivered within 10 days. Recently, UU received an order from a large bank for 10 000 umbrellas with the bank logo printed on them. The bank gave an umbrella to any customer who opened a new account. The fixed cost for the order was $2000 and the variable costs were $0.75 per unit. UU made $3000 profit on the order. UU’s Board of Directors has been considering two different options to grow the business. Option 1: UU would sell franchise opportunities to entrepreneurs who can print and sell UU branded umbrellas to the consumer market in the entrepreneur’s local area. These entrepreneurs would pay a fee to UU as well as 10% royalties on the profits. In return UU would provide the machinery needed to print the umbrellas. The franchisee would be required to purchase all of their inventory from UU. Option 2: UU would increase its product portfolio by selling other goods to the business market, such as pens, USB sticks and clothing. This would require external finance to purchase the machinery needed to be able to print on these products. The market for these is growing but is very competitive. Define the term ‘consumer’ (line 4). Briefly explain the term ‘variable costs’ (line 11). Calculate the total revenue of the order from the large bank (lines 7–12). Explain one reason why UU needs accurate cost data. Analyse two advantages to UU of using batch production. Recommend which of the two options for growth UU should use. Justify your answer.
9609_s18_qp_22
THEORY
2018
Paper 2, Variant 2
View
Festival Wear (FW) FW is a partnership started by two friends, Maz and Jane. FW manufactures and sells high quality T-shirts at $40 each. The business can manufacture 35 000 T-shirts per month using mass customisation. The T-shirts are only sold at music festivals and concerts and are customised to each event. FW has never advertised the T-shirts, relying on a sales team to attend a festival or concert and personally sell the T-shirts. Current costs: • variable: $10 per T-shirt • fixed: $200 000 per month. Sales average 27 000 T-shirts per month. Currently the sales team is paid a monthly salary, but Maz is proposing a new payment method in order to increase sales volume. This will mean a lower monthly salary but a commission of $2 per T-shirt will be paid. Maz estimates that sales volume would increase to 30 000 per month. Costs if the new payment method is introduced: • variable: $12 per T-shirt • fixed: $182 000 per month. This proposal has been discussed with the sales team. Some members of the team are enthusiastic about the proposal, but others are not happy with what they see as a reduction in their pay. The business is expanding and considering moving to a bigger factory. This would require a $4 million investment in new machinery and staff training. Jane would also like to consider methods to increase sales volume. She has suggested that FW should expand its product portfolio to manufacture other items such as baseball caps. Identify one fixed cost. Explain the term mass customisation. Calculate FW’s break-even output per month if the new payment method is introduced. Explain one advantage to FW’s employees of the new payment method. Analyse two external sources of finance that FW could use to invest in new machinery. Evaluate whether FW should expand its product portfolio to increase its sales volume.
9609_s24_qp_23
THEORY
2024
Paper 2, Variant 3
View
Questions Discovered
47