Gourmet Ices (GI) Gl 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 Gl, but the owners would like to expand the business and sell ice cream throughout the country. The ice cream is handmade in small batches. Gl 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 Gl 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] Variable costs (per unit) Without CAM With CAM $1.50 $1.00 Total fixed costs each month $5000 $15000 Revenue (per unit) $2.50 $2.50 Estimated output each month 7500 units 25000 units Tom and Amy would need to raise $50000 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 $50000 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 $50000 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.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2017). The mark or mark type is shown in brackets.

1. [2] A correct definition
2. [1] A partial, vague or unfocused definition
3. [0] No creditable content
4. Note: A correct definition must distinguish between a partnership and any other form of business ownership.
5. Content A business formed by two or more people with shared responsibilities and shared capital investment. Unlimited liability, no continuity. Often partnerships will have a partnership agreement to separate out investment and responsibilities.
6. Exemplar A partnership has two or more owners with unlimited liability. [2] A correct definition
7. Exemplar An unincorporated business with more than one owner. [2] A correct definition
8. Exemplar A business formed by two or more people with shared responsibilities and shared capital investment [1] This could be confused with a private limited company
9. Exemplar An unincorporated business with unlimited liability and no continuity. [1] This could be confused with a sole trader
10. Award one mark for each point of explanation: [1 mark] C Example of some other way of showing good understanding, i.e. rewards, returns etc.
11. [1 mark] B Each contributing a (relatively small) amount or from each individual
12. [1 mark] A Large number of people
13. Note: No credit for stating that crowd funding is a source of finance, as this is stated in the data.
14. Content Crowd funding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet. Typically made up of the business who is looking for funding, the people who may wish to fund the business and an intermediary organisation/agent who link the two together. There are different types of crowd funding, such as debt crowd funding and equity crowd funding where the rewards may be advance products or services, visits to the factor, interest or shares/equity in the business.
15. [3 marks] Correct calculation of break-even level of production with CAM (with or without working)
16. [2 marks] Attempt with correct use of figures
17. [1 mark] Correct formula
18. [0 marks] No creditable content
19. Content Formula: FC / Contribution (1) or TR=TC (1)
20. Content Contribution = $2.50 – $1.00 = $1.50 (1)
21. Content 15 000 / 1.50 = 10000 (1)
22. Content Answer = 10000 (3)
23. Content Correct answer with no working should be awarded 3 marks. OFR
24. [3] Explanation of a benefit of using break-even analysis in context
25. [2] Identification of a benefit of using break-even analysis in context
26. [1] Shows understanding of the use of break-even analysis
27. [0] No creditable content
28. Correct use of an incorrect answer to 1(b)(i) should be fully rewarded (own figure rule – OFR)
29. No credit for knowledge of BE or formula – already awarded in previous question.
30. Content Answers may include: decisions over how many to make/sell, to plan production, to monitor costs, to model pricing options, to target/forecast a profit level, to target/forecast a margin of safety.
31. Context may include: BE is higher with CAM, probably due to extra machinery, however output is significantly higher, as is the profit margin, batch production, expansion throughout country, quality ice cream – not about quantity.
32. Level 2 Shows understanding of CAM in context [4] Good analysis of two (or more) disadvantages of introducing/using CAM in context [4]
33. Level 2 Shows understanding of CAM in context [3] Good analysis of one disadvantage of introducing/using CAM in context [3]
34. Level 1 Shows knowledge of CAM [1-2] Limited analysis of two (or more) disadvantages of introducing/using CAM [2]
35. Level 1 Shows knowledge of CAM [1-2] Limited analysis of one disadvantage of introducing/using CAM [1]
36. [0] No creditable content
37. A non-contextual answer can only be awarded a maximum of 2 + 2 = 4
38. Content Answers could include: Possible loss of quality in the production of the ice cream – could lead to poor customer satisfaction (GI makes and sells high quality ice cream).
39. Content Possible loss of perceived quality as the business loses it's 'handmade' badge.
40. Content Cost of introducing the technology ($10000 extra FC costs per month).
41. Content Damage to the relationship with the five skilled workers.
42. Content Loss of skills (GI employs five skilled workers).
43. Content Reliability of the machinery (GI do not have the money to repair it – as seen in their need to raise $50000 form venture capitalists).
44. Content Need for training/retraining as the employees are already trained in handmaking ice-cream.
45. ARA
46. Knowledge and Application (4 marks) [3-4] Shows understanding of one or both venture capital offers [4] Two sided argument(s) based on one or both venture capital offers [7] A justified recommendation, for Tom and Amy, which venture capital offer they should accept based on a balanced argument.
47. Knowledge and Application (4 marks) [3-4] Shows understanding of one or both venture capital offers [3] One sided argument based on one venture capital offer [6] A recommendation, for Tom and Amy, which venture capital offer they should accept based on a balanced argument.
48. Knowledge and Application (4 marks) [1-2] Shows knowledge of venture capital [1-2] Limited analysis of venture capital [5] A balanced argument based on one or both venture capital offers with evaluative comments
49. Justification can come from looking at the advantages and/or disadvantages of BOTH offers, or from the advantages and disadvantages of the recommended offer.
50. Content Answers could include: Offer 1 Loss of control – 51% equity given away – are Tom and Amy willing to give up so much?
51. Content Offer 1 Ease of distribution – should allow easier national expansion
52. Content Offer 1 Marketing knowledge and expertise - again should allow easier expansion
53. Content Offer 2 Lower equity stake required – Tom and Amy would keep overall control of the business
54. Content Offer 2 Use of CAM will reduce costs of expansion – may further lower BE point and increase profit margin
55. Content Offer 2 Experience of Rebecca in project management and ops man – very important for expansion.
56. ARA