Yazeem is a highly skilled shoemaker. He opened CS in 1975, as a sole trader, to design and repair shoes. When Yazeem set up CS the main target market was professional people who wanted shoes to wear to work or to dress smartly. He produced the shoes using batch production and sold them in his own shop. Each design of shoe was made in a range of sizes and colours. Recently there has a been an increase in low-priced shoes produced for the mass market, which has reduced Yazeem's sales of new shoes. It has also reduced the demand for shoe repairs. Yazeem's daughter, Abir, is keen to take over the running of CS. She has been fully trained in making shoes and feels that it is time for Yazeem to retire. Abir thinks that the business should be targeting niche markets. She would like to design and produce unique shoes and use price skimming to increase the profitability of the business. Abir is also concerned about the contribution made on each batch of shoes. Table 2.1 shows some break-even data for a recent batch of shoes. [Table 2.1] Abir has suggested that CS should adopt a just in time (JIT) approach to inventory management. By using JIT, she argues, CS would be able to increase its working capital and avoid having money tied up in inventory that might not be used or sold. CS currently has a large number of shoes on display in the shop. There is also a large amount of their main raw material, which is leather and must be kept in a climate-controlled storage area. Abir has already found a new local supplier which is happy to deliver inventory as required. Table 2.1 Break-even data about a recent batch of shoes | | | |---|---| | Break-even level of output | 400 units | | Margin of safety | 100 units | | Total variable costs | $18750 | | Total costs | $23750 | | Total revenue | $25000 |

Mark scheme

Marking points from the official mark scheme (May/June 2024). The mark or mark type is shown in brackets.

1. [1] Induction
2. [1] On the job
3. [1] Off the job
4. [1] Knowledge of mass market: Aiming a product or service at the majority of people; Made for the large part of the population; Made for most of the population/market; Allow 'not a segment of the market' or 'all of the market' or 'everyone'.
5. [1] Explanation of a characteristic of the mass market (or mass marketing), including: Many different size/colour products; One size fits all products / standardised; Customer wants are more general and less specific; Associated with high output/quantity (than a segment or niche market); Associated with low(er) prices (than a segment or niche market); May benefit from economies of scale; Lower risk than niche markets or segmented markets; High level of competition; Competition on national/international/global scale.
6. [1] Context applied to mass market(s) (e.g., Relevant example of mass market(s) (including the shoe market); Must be an example of the market (the people who might purchase canned drinks) – not a product aimed at the mass market (Coke)).
7. [1] Formula: Contribution per unit = price – VC or TR – TVC / output or Profit (TR – TC) / margin of safety.
8. [1] Method 1: VC per unit = $18 750 / 500 = $37.50.
9. [1] Method 1: Price per unit = $25 000 / 500 = $50.
10. [1] Method 1: Contribution per unit = $50 - $37.50 = $12.50.
11. [1] Method 2: Total Contribution = $25 000 - $18 750 = $6250.
12. [1] Method 2: Contribution per unit = $6250 / 500 = $12.50.
13. [1] Method 3: Profit = $25 000 - $23 750 = $1250.
14. [1] Method 3: Contribution per unit = $1250 / 100 = $12.50.
15. [3] Answer = $12.50.
16. [1] Knowledge of a limitation of using break-even analysis: not all costs and revenue can be split; assumes all costs are a straight line (constant); assumes price is constant; assumes all output is sold/does not take into account demand/demand fluctuates; assumes all costs are fixed or variable; needs to be calculated for each product; it ignores capacity; assumes that fixed costs do not change as output increases; assumes fixed costs can be allocated; assumes no external influences.
17. [0] Do not accept that break-even analysis data may be inaccurate/wrong or time consuming. This is not a specific limitation of break-even analysis.
18. [1] Explanation of a limitation for a business using break-even analysis.
19. [1] Context linked to CS (e.g. Yazeem uses a range of colours and sizes; Uses batch production; At least two employees (Yazeem and Abir); Increase in low-priced shoes; Use of Table 2.1; OFR from Q2(b)(i)).
20. [1] Knowledge of Just in Time (JIT) inventory management: Orders made from suppliers as needed; Products produced as required by customers; Limited or zero inventory required to be held.
21. [2] Knowledge of disadvantages of JIT: Risk of running out of stock; Reliance on (new) suppliers – frequency of ordering/deliveries; Requires planning/time; Limited scope for mass/batch production (little scope for economies of scale) – increased average cost; Finished product inventory cannot be used for promotional purposes; Difficult to forecast/budget; Cost of infrastructure/capital; Might be difficult to respond to changing demand.
22. [2] Context applied to CS (e.g. Currently selling to mass market (professionals for work or smart dress); Currently using batch production; Abir has suggested a move towards niche, unique (job produced) shoes; New local supplier suggested by Abir; Shoes on display in the shop; Raw material of leather must be in climate controlled storage; No current relationship to suggested new supplier; Range of sizes and colours).
23. [AO3: 1-2] Analysis for each disadvantage (e.g. Risk of running out of stock may dissatisfy customers and lead to bad publicity – lower sales/profit; Reliance on new suppliers means if supplier fails, production delayed – decreased sales/profit).
24. [2] Knowledge of the features of being a small business: Lifestyle; Independence; Opportunities; Creative freedom; Less reliance on other people; Expertise; Unique selling point (USP); Personal satisfaction; Personal service for customers; Focus; Easy to plan; Easy to control/coordinate/lead; Potential for growth; Encourages innovation/intrapreneurship/entrepreneurship; May struggle obtaining finance / limited finance; Increased risk.
25. [2] Context applied to CS (e.g. Yazeem is highly skilled shoemaker; Sole trader; Abir fully trained in making shoes; CS opened in 1975; Currently targeting a mass market (professional men and women); Currently produced using batch production; Shoes sold in own shop; Range of sizes and colours; Increase in low-priced mass market shoes – reduced CS sales and repairs; Abir feels it is time for Yazeem to retire; Abir would like to design and produce unique shoes for niche markets; New products would use price skimming; Use of Table 2.1; Abir suggested adoption of JIT).
26. [AO3: 1-2] Analysis of importance/factors (e.g., Independence allows Yazeem/Abir to make own decisions; Creative freedom allows unique shoes; Personal service leads to increased customer satisfaction; Expertise for USP allows higher prices/profit; Small size easier to plan/control; Can easily take advantage of new trends (niche markets) – increased sales/profit; Less reliance on other people – less wastage/lower costs; But also struggle obtaining finance / increased risk).
27. [AO4: 1-2] Limited evaluation: unsupported judgement / weak evaluative comment / attempt to balance arguments.
28. [AO4: 3-4] Developed evaluation: supported judgement / reasonable evaluative comment.
29. [AO4: 5-6] Developed evaluation in context: supported judgement in context / reasonable evaluative comment in context (factors: Yazeem/Abir's personal objectives; whether Yazeem retires; relative size of competitors; location of CS; changes in shoe market/technology; price elasticity of demand).