Security Alarms (SA) SA was set up 20 years ago as a partnership. It had one shop that sold car alarms. It had an objective to become the market leader within the car alarm retail market. SA is now a large public limited company. It produces and retails a large range of security alarms which are sold in consumer markets. Most of the revenue is from sales of alarms to protect homes. SA's current objective is to maximise shareholder value. SA is developing a new service that it wants to sell to the industrial market. The service will offer the following features. • SA will install a new telephone line to work with the alarm. If the alarm is started then employees at the SA call centre will contact the police. Customers will pay an annual fee to use this new service. Forecast financial information about the new service is shown in Table 2. Table 2: Forecast financial data for the new service Break-even level of customers for first year 3000 Forecast revenue for the first year $2.5m Annual fee to be paid by the customer $500 Calvin, the Marketing Director, is planning to carry out detailed market research in the next two months. After the results of this research and the financial data have been analysed, a decision will be made by the Board of Directors about whether to launch the new service.

Mark scheme

Marking points from the official mark scheme (May/June 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. Price x Quantity [2] A reasonable definition of revenue
5. Money from sales [2] A correct definition
6. Income from business activities [2] A correct definition
7. Revenue is sales [1] A partial definition
8. The number of products a business sells [1] A partial definition
9. Revenue is found at the top of the Income Statement [0] Not a definition
10. Sales - total costs [0] Confusion with profit
11. C Example or some other way of showing good understanding, i.e. rather than buying for business or capital use, not business to business/industrial markets (1 mark)
12. B An explanation of market(s) – sales, trade etc. (1 mark)
13. A An explanation of consumers – end user, purchase for use (allow consumption), not to change or resale (1 mark)
14. Where the business sells to the end user for example a supermarket [3] Sells, end user and an example
15. SA sells directly families who use the alarms not shops [3] All three elements
16. The consumer is the person who actually uses the product, for example a child is the end user of a toy [2] A and C – no understanding of market
17. A place where business go to sell and people go to buy products and services [1] B only
18. The person who uses the product or service [1] A only
19. Sold directly to the consumers [1] B only
20. Someone who buys a product, such as an alarm [0] Misunderstanding with a customer – example is irrelevant
21. [3] Correct calculation of the forecast margin of safety (with or without working, units or %)
22. [2] Correct formula and correct calculation of expected sales
23. [1] Correct formula or correct calculation expected sales
24. [0] No creditable content
25. 3000 × $500 = $1.5 m [2] Calculated the revenue MoS - all the candidate needed to do was divide answer by price correct answer, so one step missed
26. $1 m [0] An incorrect answer with no working
27. $2.5 m / 500 = 5000 [1] Correct calculation of expected sales
28. 5000 [0] An incorrect answer with no working
29. [3] Explanation of a limitation of using break-even analysis in context
30. [2] Identification of a limitation of using break-even analysis
31. [1] Knowledge of break-even analysis
32. [0] No creditable content
33. Limitation: Based on forecasts/estimates; Possible context: SA have not started selling this service yet and have no experience in this industrial market
34. Limitation: Assumes a constant price; Possible context: Likely to need to discount the price to penetrate the industrial alarm market
35. Limitation: Assumes fixed costs remain constant as output rises; Possible context: As more alarms are fitted SA may need to increase the office size etc.
36. Limitation: Assumes a constant variable cost per unit; Possible context: As more alarms are fitted less efficient staff to man the telephones may need to be employed – diminishing returns
37. Limitation: Assumes all output is sold; Possible context: SA may produce a stock of alarms which may not all be sold in the first year
38. Limitation: Assumes the fixed costs from one product can be allocated accurately; Possible context: SA will have some fixed costs (such as management) which are difficult to allocate between the consumer and industrial markets
39. Unrealistic original objective; one shop to become market leader?
40. Not specific enough original objective; market leader where?
41. Legal structure has changed to plc, so shareholders may now be part of the objective
42. Core business has changed – now in secondary and tertiary sector
43. Now producing and selling home alarms, not car alarms
44. Tastes may have changed
45. New focus on the industrial market.
46. The priority of objectives may have changed
47. Exemplar: Legal structure has changed: As a partnership the owners were less likely to sell their stake in the business if their return was not high in the short term. However as a PLC, shareholders are disconnected from the business and may well sell their shares if they do not get reasonable dividends and/or increases in share price (AN). This could lead to a further fall in share price and a loss in confidence of other shareholders (ANAN).
48. Exemplar: Move to industrial market: It may be unrealistic to become market leader in the industrial market and pursuing this objective may make penetrating the market more difficult (AN). This could lead to a poor launch and SA not breaking even with 23 000 customers in the first year (ANAN).
49. Primary: Focus groups linked to their current home or business customers, advantages of focus groups (can cover profile of customers, have a dialogue, ask/respond to questions)
50. Primary: Surveys/questionnaires to business or home customers (advantages: more quantitative data can be analysed, large sample used; disadvantages: cost, customers may not complete, would need a large sample to be accurate of the results)
51. Primary: Interviews to business/home customers (advantages: 1-1 contact, can have a very detailed conversation, qualitative data can come through; disadvantages: cost, expertise to ask the correct questions, compiling the results can take time)
52. Secondary: Surveys of the competition – do they provide this service? What is the cost? usefulness: being in line with market trends.
53. Secondary: Reports on the market from marketing specialists
54. Secondary: Analysis of crime statistics/reports on the area
55. Secondary: Any newspaper articles about crime/local area
56. Secondary: Economic/demographic information: unemployment, households, incomes
57. Advantages of secondary: can be easily available, most available on-line, cheaper
58. Disadvantages of secondary: not as accurate, may be out of date, lack of qualitative data