WG is owned by Tomas who is a sole trader. He used to own part of a large wedding business which failed and went into administration. Tomas started up WG two years ago using all his savings. WG is profitable but there are no retained profits. It has a positive cash flow and no debts. Tomas manufactures personalised gifts using the factors of production. WG's target market is people who are getting married. Each gift can be personalised with the names of the married couple and their wedding date. These gifts (favours) are given to wedding guests by the married couple. The gifts are made to each customer's specifications using a 3D printer owned by Tomas. Table 2.1 shows the data for a recent order enquiry from Jo who is getting married soon. Table 2.1 Jo's order details | Design | Small star with personalisation | |---|---| | Quantity | 250 | | Variable costs (per star) | $1.20 | | Allocated fixed costs | $150 | Tomas prepared a quote to send to Jo. He used cost-based pricing to add a 50% mark-up to the cost of the order and sent the quote to Jo. Tomas received an email reply from Jo (see Fig. 2.1). Fig. 2.1 Email from Jo Hey Tomas Thanks for the quote. I am a social media influencer, and my wedding will be streamed on the internet for lots of people to see. I have 0.2m followers on social media and I know that they will love your products. I think you should give me the order for free! Thanks, Jo The demand for Tomas' products is high, especially during the peak (busiest) wedding season. He would like to purchase an additional 3D printing machine so that he can meet demand throughout the year. He has found the ideal machine which will cost $60000. Tomas knows that there are many factors which will influence his choice of sources of finance for the new machine.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2023). The mark or mark type is shown in brackets.

1. [1] Identify one factor of production. Indicative content: Responses may include: The four factors of production: land; labour; capital; enterprise/entrepreneurship. Do not accept examples of the factors of production.
2. [1] AO1 Knowledge and understanding: One individual or one person (must be a clear idea of a single person) owning a business.
3. [2] AO2 Application: Limited application applies knowledge of a sole trader through one aspect of the ownership. Developed application applies knowledge of a sole trader through two or more aspects of the ownership. One mark for each of the following (up to a maximum of two marks): unlimited liability; shared legal identity with business; no continuity; no requirement to produce or make available accounts; unincorporated / no shares / no shareholders; likely to be a small business; the owner keeps all the profits or bears the losses. Accept all valid responses.
4. [1] 1 mark for formula or correct calculation of total costs ($450)
5. [1] Calculation of total cost (1): 250 × $1.20 = $300 + $150 = $450 (1)
6. [1] Calculation of price (1 OFR): $450 × 1.5 = $675
7. [3] Answer = ($)675 (3)
8. [1] AO1 Knowledge and understanding: Knowledge of an advantage of using cost-based pricing including: easy to calculate; flexibility/ can change price for different customers /products; all costs are covered; always provides a profit (margin per unit) / does not make a loss.
9. [2] AO2 Application: Limited application, applies knowledge to Tomas/WG once. Developed application applies knowledge to Tomas/WG twice. Application of knowledge to FF may include: answer to Q2(b)(i) (OFR); Will give Tomas a 33.33% profit margin; Tomas' variable costs (1.20); Tomas' allocated fixed costs (150); 3D printer accessories, such as computer, graphite, carbon fibre etc.; level of mark-up (50%); Will provide Tomas with a $375 contribution to FC; Will provide Tomas with a $225 profit on Jo's order. Accept all valid responses.
10. [2] AO1 Knowledge and understanding: Knowledge of an advantage (max one) might include: open up new markets; promote the business; Increased publicity; increased (future) sales. Knowledge of a disadvantage (max one) might include: lost revenue; missed opportunity; Not cover costs; reduced profitability.
11. [2] AO2 Application: Limited application, applies knowledge to Tomas/WG once. Developed application applies knowledge to Tomas/WG twice. Max one for application in the advantage and max one for application in the disadvantage. Price with mark-up should be $675 (OFR from Q2(b)(i)); Total variable costs for the order of $300; Allocated fixed costs on this order of $150; Total (full) cost will be $450; Jo would like the products for free; Jo is a social media influencer 0.2m followers wedding streamed on internet; WG is at 90% capacity which may mean that he can produce Jo's order.
12. [4] AO3 Analysis: Limited analysis candidate shows one link in the chain of analysis. Developed analysis candidate shows two or more links in the chain of analysis. Advantages, including: (Open up new markets) may open WG up to a new market of people who might use WG in the future increased sales, profit; (Promote the business) marketing benefits may allow Tomas to increase sales and make the purchase of the new machine more likely – although may be busy, the promotion may lead to future orders which will be needed to afford the machine; (Increased future sales) promotion through this is likely to be lower cost than above the line methods of promotion to a similar number of people – increased profitability. Disadvantages, including: (Lost revenue) order would make a loss which may affect Tomas' income or lead to WG making a loss for the year; (Missed opportunity) Since Jo has suggested promotion for WG, the price she paid may be advertised – leading to Tomas being unable to charge full-price to future orders; (Reduced profitability) taking the order will affect Tomas' profitability and may jeopardise his ability to gain external finance - may not be able to purchase the new machine. Accept all valid responses.
13. [2] AO1 Knowledge and understanding: Limited knowledge will be demonstrated through knowledge of a factor or knowledge of source(s) of finance. Developed knowledge will be demonstrated through knowledge of a factor and knowledge of source(s) of finance. Factors influencing sources of finance, including: cost; flexibility; need to retain control/ownership; the use to which it is put / type of business; level of existing debt; Availability of funds/finance – may not be any retained profit / may be a country with no banking infrastructure; Size of the business a large business may have more collateral; Reputation (credit rating) – of the business/owner. Knowledge of sources of finance: Internal and external sources of finance; Identification of any source of finance (owners' investment, retained earnings, sale of unwanted assets, sale and leaseback of non-current assets, working capital, share capital, debentures, new partners, venture capital, bank overdrafts, leasing, hire purchase, bank loans, mortgages, debt factoring, trade credit, micro-finance, crowd funding and government grants)
14. [2] AO2 Application: Limited application applies knowledge to Tomas/WG once. Developed application applies knowledge to Tomas/WG twice. $60 000 for new machine; WG/Tomas is a sole trader; Previous business went into administration; WG is profitable; 33.33% profit margin; 50% mark up; but not enough retained earnings to fund whole $60 000; No current debts; Positive cash flow; Niche market; 3D printer, owned by Tomas.
15. [2] AO3 Analysis: Limited analysis candidate shows one link in the chain of analysis. Developed analysis candidate shows two or more links in the chain of analysis. (Cost) small businesses are likely to need an external source of finance however there will be a cost (interest, payments etc.) which might make WG unprofitable; (Flexibility) may allow a wider choice of source however without repeat business there is little stability of income; (Need to retain control) by taking a partner or selling shares the owner is likely to lose full control – however may not be able to attract an investor; (The use to which it is put) gains a fixed asset with value – may make a securable source of finance more likely to be given (at a lower cost); (Level of existing debt) will increase debt to be paid back – could makes some sources unobtainable or more expensive; (Type of business) new businesses are likely to have high repayments – reducing the profitability; (Ownership) selling part of the business may bring in enough capital – however the percentage required by the investor might be very high.
16. [6] AO4 Evaluation: Limited evaluation unsupported judgement and/or a weak attempt at evaluative comment. Developed evaluation supported judgement and/or reasonable evaluative comment. Developed evaluation in context supported judgement in context and/or reasonable evaluative comment in context. A judgement over the most important/influential factor when Tomas is choosing the sources of finance for the new 3D printing machine. Elements that the judgement could depend upon, including: level of current and forecast demand, will there be enough demand to cover the cost of repayments, potential partners/investors, will Tomas be able to work with these personalities, Tomas' willingness to give up control of WG, the extent to which external sources of finance are open to Tomas with his background, the willingness of the supplier to offer terms of credit, etc. Weighing up of the factors and their relative influence on Tomas' decision of sources of finance. Accept all valid responses.