Pencil Pushers (PP) Jacqueline is a sole trader who owns PP. She set up the business six months ago to manufacture pencils. The market for pencils in PP's country is separated into the niche market of supplying pencils for schools and the mass market. When she started the business, Jacqueline decided to target the mass market. Table 3 shows Jacqueline's initial market research into the two markets. Table 3: Initial market research data Mass market • 10 producers are in the market. Each producer has 7% – 12% market share. • Sold through many retailers, including online retailers. • Branding and reputation are very important. Schools market • One producer is in the market with 100% market share. • Sold directly through e-commerce. • Branding and reputation are not important. PP is establishing a good reputation as a reliable supplier of pencils to shops that sell stationery. However, as a relatively new business, PP has had to use penetration pricing to build up a customer base. She sells each pack of five pencils for $1. PP holds a large inventory so that orders can be delivered quickly. PP employs four full-time production workers in one factory. The production process is capital intensive. Production data for the factory is in Table 4. Table 4: Production data for PP's factory Maximum capacity per month 75000 pencils Monthly fixed costs $8500 Variable costs per 100 pencils $3 PP has no trade payables but Jacqueline is concerned about the cash flow of PP. The latest cash flow forecast showed that PP might run out of cash in three months' time. This is mainly because the shops which sell PP's pencils demand 30–60 days to pay for their orders.

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) The use of machinery/equipment/technology rather than labour.
5. [1] (a)(ii) Award one mark for each point of explanation: Example or some other way of showing good understanding
6. [1] (a)(ii) Specific target market
7. [1] (a)(ii) Small segment
8. (a)(ii) A small sector of the market – targeting a specific group. Can be defined by a number of different characteristics. Examples.
9. [4] (b)(i) Correct answer with or without correct working
10. [3] (b)(i) Correct calculation of contribution
11. [2] (b)(i) Correct calculation of VC per pack price
12. [1] (b)(i) Formulae
13. [0] (b)(i) No creditable content
14. (b)(i) Fixed costs
15. (b)(i) Contribution
16. (b)(i) $3.00 / 100 pencils = $0.03 (per pencil)
17. (b)(i) $0.03 × 5 (pack) = $0.15 (per pack of 5 pencils)
18. (b)(i) $1.00 – $0.15 = $0.85 (contribution)
19. (b)(i) $8500 / $0.85 = 10 000 pencils
20. [2] (b)(ii) Explanation of a use of the answer to 1(b)(i) in context
21. [1] (b)(ii) Explanation of a use of break-even analysis/calculation
22. [0] (b)(ii) No creditable content
23. (b)(ii) To plan for inventory
24. (b)(ii) To increase production to meet BE
25. (b)(ii) To manage capacity
26. (b)(ii) To calculate margin of safety
27. (b)(ii) To understand level of risk
28. (b)(ii) ARA and OFR
29. [4] (c) Shows understanding of two methods of improving cash flow in context
30. [3] (c) Shows understanding of one method of improving cash flow in context
31. [2] (c) Shows knowledge of methods to improve cash flow
32. [1] (c) Shows knowledge of methods to improve cash flow
33. [0] (c) No creditable content
34. [4] (c) Good analysis of two methods of improving cash flow in context
35. [3] (c) Good analysis of one method of improving cash flow in context
36. [2] (c) Limited analysis of two methods of improving cash flow
37. [1] (c) Limited analysis of one method of improving cash flow
38. (c) Reduce the debtor time – however will shops still trade with PP?
39. (c) Take out a short-term source of finance (no debt)
40. (c) Reduce inventory (PP has high inventory) – however will PP be able to fulfill orders in time?
41. (c) Ask suppliers for time to pay (no creditors at present) – 30-60 days might allow PP to pay for supplies when they have been paid by customers.
42. (c) Increase revenue – however likely to need short term investment in marketing
43. (c) Discounts for prompt payment – however could reduce profitability
44. (c) Increase price – however likely to reduce demand and revenue – depends on elasticity
45. (c) ARA
46. [7] (d) A justified about Jacqueline's decision to enter the mass market
47. [6] (d) A judgement about Jacqueline's decision to enter the mass market
48. [5] (d) A balanced argument (two-sided) that evaluates Jacqueline's decision to target the mass market
49. [4] (d) Argument (one-sided) based on Jacqueline's decision to target the mass market
50. [3] (d) Argument (one-sided) based on Jacqueline's decision to target the mass market
51. [2] (d) Limited analysis of mass marketing
52. [1] (d) Limited analysis of mass marketing
53. [0] (d) No creditable content
54. (d) Pros of mass market: More potential customers – the mass market for pencils may include everyone, so demand will be higher
55. (d) Pros of mass market: Retailers provide a route to market
56. (d) Pros of mass market: Retailers may provide some of the promotion needed
57. (d) Pros of mass market: Few barriers to entry – competitive market
58. (d) Pros of mass market: Potential for economies of scale
59. (d) Cons of mass market: More competitive – 10 producers
60. (d) Cons of mass market: Lower profit margin – retailers will reduce profit margin and competition
61. (d) Cons of mass market: PP will need to build up brand and reputation (high costs – only established 6 months ago)