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 20000 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 10000 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.

Mark scheme

Marking points from the official mark scheme (May/June 2018). The mark or mark type is shown in brackets.

1. [2] (a)(i) A correct definition
2. [1] (a)(i) A partial, vague or unfocused definition
3. [0] (a)(i) No creditable content
4. (a)(i) Content: A person who purchases a good or service for personal use/enjoyment.
5. (a)(i) Content: A person who uses a good or service
6. [1] (a)(ii) C: Example or some other way of showing good understanding (e.g. comparison with fixed costs)
7. [1] (a)(ii) B: Link to output changing
8. [1] (a)(ii) A: Costs that change (allow vary)
9. (a)(ii) Award one mark for each point of explanation:
10. (a)(ii) Content: A variable cost is one that changes as output changes. For example bread is a variable cost for a sandwich producer because the more sandwiches are made the more bread is needed.
11. [3] (b)(i) Correct answer with or without correct working or $
12. [2] (b)(i) Correct calculation of TC
13. [1] (b)(i) Formulae or correct calculation or TVC
14. [0] (b)(i) No creditable content
15. (b)(i) Content: Formula: Price x quantity = total revenue OR Profit = total revenue – total costs, so total costs + profit = total revenue NB the abbreviation for profit is pi
16. (b)(i) Content: 10 000 × $0.75 = $7500 (TVC) – 1 mark with working
17. (b)(i) Content: $7500 + $2000 = $9500 (TC) – 2 marks with working
18. (b)(i) Content: $9500 + $3000 = $12500 (TR)
19. (b)(i) Content: Answer = $12500 (3 marks)
20. (b)(i) Common answers: 12 500 (no working) / Rationale: A correct answer / Marks: 3
21. (b)(i) Common answers: (10 000 × $0.75) + $3000 = $10 500 / Rationale: Missed out FC one error Correct calculation of TVC and then OFR for the final step / Marks: 2
22. (b)(i) Common answers: $10 500 (no working) / Marks: 0
23. (b)(i) Common answers: $2000 + $3000 = $5000 / Rationale: No correct calculation of TVC or TC but OFR for final step / Marks: 1
24. (b)(i) Common answers: $3000 / Rationale: Just used profit figure / Marks: 0
25. (b)(i) OFR applies
26. [3] (b)(ii) Level 2b (APP): Explanation of a use of cost data in context
27. [2] (b)(ii) Level 2a (K+K): Explanation of a use of cost data
28. [1] (b)(ii) Level 1 (K): Identification of a use of cost data
29. [0] (b)(ii) No creditable content
30. (b)(ii) Note: use of the answer to Q2(b)(i) is not required for context, but is an obvious way to contextualise an answer.
31. (b)(ii) Correct use of an incorrect answer to 2(b)(i) should be fully rewarded (own figure rule -OFR)
32. (b)(ii) Content: To set prices (e.g. the bank order has a 33.33% profit margin), so that UU does not make a loss / To plan resources (land, labour, capital) / To make good business decisions / To ensure the business makes profit / To calculate break even
33. (b)(ii) ARA Reason (K): To set prices / Possible context (APP): Each design may have different costs so the data is important to set the price / The bank order has a 33.33% mark up – this may be the standard cost-plus pricing strategy of UU
34. (b)(ii) ARA Reason (K): To plan resources / Possible context (APP): To plan what resources they need to make each batch of products (the context here is batch as they are made by batch production)
35. (b)(ii) ARA Reason (K): To make good business decisions / Possible context (APP): So that UU can decide how best to grow the business (i.e. Options 1 or 2) / To know which design of Umbrella is most profitable
36. [4] (c) Level 2b: Shows understanding of two advantages to UU of batch production
37. [4] (c) Level 2b: Developed analysis of two advantages of batch production in context
38. [3] (c) Level 2a: Shows understanding of one advantage to UU of batch production
39. [3] (c) Level 2a: Developed analysis of one advantage of batch production in context
40. [2] (c) Level 1b: Shows knowledge specifically of batch production
41. [2] (c) Level 1b: Limited analysis of two advantages of batch production
42. [1] (c) Level 1a: Shows knowledge of production processes
43. [1] (c) Level 1a: Limited analysis of one advantage of batch production
44. [0] (c) No creditable content
45. (c) Note: give candidates the BOD if they have made a point which could apply to more than just batch production.
46. (c) Content: Cheaper than job production – important because UU produces 20 000 of each consumer design / Allows for economies of scale which can reduce the unit cost of each umbrella (currently $0.75 for the bank order) / Quicker than job production – important because of the 10 day delivery guarantee. / Allows for more flexibility than flow production – important because of the range of designs that UU have.
47. (c) ARA Examples of advantages: More standardised quality than job production / Examples of application/context: 20 000 made of each design / Examples of possible analysis: Making a batch allows UU to make sure each umbrella is the same quality so that customers are not disappointed, losing customer loyalty and repeat sales.
48. (c) ARA Examples of advantages: More flexible than flow production / Examples of application/context: Business orders are all unique with the logo on / Examples of possible analysis: So UU can make the designs to the customers specification, leading to increase customer satisfaction and more sales.
49. [7] (d) A justified recommendation based on a developed argument of both options
50. [6] (d) A developed recommendation based on a developed argument of both options
51. [5] (d) A basic recommendation/judgement based on a developed argument of both options
52. [4] (d) Shows understanding of Option 1 for growth and Option 2 for growth
53. [4] (d) Developed argument based on the impact on UU of using Option 1 and Option 2
54. [3] (d) Shows understanding of Option 1 for growth or Option 2 for growth
55. [3] (d) Developed argument based on the impact on UU of using Option 1 or Option 2
56. [1-2] (d) Shows knowledge of business growth
57. [2] (d) Limited analysis of Option 1 and Option 2
58. [1] (d) Limited analysis of Option 1 or Option 2
59. [0] (d) No creditable content
60. (d) Content Option 1: Risk of growth through franchise – may lose control of brand and image. / Only the consumer market – UU still retain control of the business market - but could poor image reduce this market too? / Less risk to UU because they have lower costs which will be covered by the fee and royalties. If the franchisee makes a profit UU gets royalties, however if the franchisee makes a loss UU are not affected. / Could this reduce UU's consumer market through the internet (ie not localised).
61. (d) Content Option 2: Increasing the range of the product portfolio reduces risk. / Could allow UU to expand into areas where Umbrellas are not appropriate or used. / Requires external finance which is likely to be expensive for UU and increase costs. / Very competitive market – low profit margins / Growing market – Boston Matrix starting out as a problem child (?).