JF is a private limited company which owns a farm. It produces crops including maize and sunflower seeds. The crops are sold to manufacturers that produce cooking oils for supermarkets. Jim is worried as the price JF receives for its crops is falling. JF is only paid four times a year when the crops are ready, so cash flow is poor. Sam, Jim's son, has recently completed a management degree at university. He is worried that the farm will not reach its break-even point if the price continues to fall. He has researched ways his father could increase the value added to the crops. Sam has identified that healthy eating is a growing trend. He has created a plan for the business which considers two options, shown in Table 1.1. Sam has identified that supermarkets would buy most of the new products and he could also sell them to independent retailers. Table 1.1: Options for the future of JF | Product | Option 1 Healthy snacks | Option 2 Healthy cooking oil | | :------------------------- | :-------------------------- | :--------------------------- | | Market type | Mass | Niche | | Start-up capital (000) | 100 | 75 | | Annual expenses (000) | 50 | 35 | | Annual cost of goods sold ($000) | 60 | 75 | | Forecast annual market growth | 10% | 15% | | Forecast annual sales | 300000 units | 100000 units | | Proposed price per unit | $0.50 | $2.00 | Figs. 1.1 and 1.2 show extracts from articles about the two options. Healthy eating campaigns in schools are changing the way that young people snack and the sales of 'healthy snacks' made from nuts and seeds are growing. Healthy eating is rapidly becoming an important social issue and for some consumers, quality is more important than price. Fig. 1.1: The rise of the healthy eating campaign Business analysts are excited about the potential profitability of premium cooking oils, which offer a healthy alternative to traditional products. High income consumers are prepared to pay high prices for healthy oils made by small independent producers. Fig. 1.2: Future demand for healthy cooking oil

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2019). 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 credible content
4. A correct definition should cover the following:
5. • expenditure (costs) and income (revenue) are equal
6. • the level of sales/units where there is no profit or loss
7. • TR = TC
8. Exemplar: When a business makes enough sales/revenue/income to cover all the costs [2] Both elements covered
9. Exemplar: TC = TR [2] Both elements covered
10. [1] A The increase in worth of a product/service
11. [1] B To a customer/leading to an increase in price
12. [1] C Example or some other way of showing good understanding – e.g. refining raw materials, adding packaging etc., at different stages of production
13. Exemplar: Adding value is the process of increasing the worth of a good (A) to a customer (B), such as refining a raw material (C). [3] All three elements
14. [3] Correct answer (with or without calculation and/or %)
15. [2] Attempt using correct figures/formula or correct calculation of gross profit (90000) and correct calculation of revenue (150 000)
16. [1] Correct formula or correct calculation of gross profit (90000) or correct calculation of revenue (150000)
17. [0] No credible content
18. Gross profit / Sales revenue × 100 (1 mark)
19. Sales revenue – cost of goods sold / Revenue (output × SP) × 100 (1 mark)
20. 150000-60000 / 150000 × 100
21. 90000 / 150000 × 100
22. Answer = 60% (accept with or without %)
23. Exemplar: 60 (no working) [3] Correct answer - accept without %
24. [3] 2a (APP) Explains one reason for aiming for a high gross profit margin in context
25. [2] 1b (K+K) Explains one reason for aiming for a high gross profit margin (no context)
26. [1] 1a (K) Identifies one or more reasons for aiming for a high gross profit margin (no context)
27. [0] No creditable content
28. Note: this question asks specifically about GP marking – to reward any answer that links to overall (net) profit or net profit margin, there must be a link, i.e. high GP margin may allow JF to make more NP to give to shareholders.
29. Some reasons for aiming for a high GPM:
30. • Shows potential investors/shareholders that the business can produce efficiently
31. • To leave enough to pay the business expenses/indirect costs
32. • To increase the overall (net) profit of the business
33. Knowledge of a reason why JF might aim for a high GPM (K): Measure of efficiency. Explanation (K+K): JF may need to prove it is operating efficiently to any potential investors. Possible context (APP): Particularly important because it is a private limited company
34. Knowledge of a reason why JF might aim for a high GPM (K): To cover expenses/indirect costs. Explanation (K+K): Otherwise JF may not make any profit for the year. Possible context (APP): The expenses are $50 000 for option 1
35. Knowledge of a reason why JF might aim for a high GPM (K): To increase (net) profit for the year. Explanation (K+K): Which will allow the owners to have more income. Possible context (APP): The owners are shareholders (Ltd) The (net) profit is currently $40 000 for option 1
36. Level 7: A justified recommendation based on a developed argument of both options [7 marks for A&E]
37. Level 6: A developed recommendation based on a developed argument of both options [6 marks for A&E]
38. Level 5: A basic recommendation/judgement based on a developed argument of both options [5 marks for A&E]
39. Level 4: Shows understanding of Option 1 (healthy snacks) and Option 2 (healthy cooking oil) [4 marks for K&A], Developed argument based on the impact on JF of choosing Option 1 (healthy snacks) and Option 2 (healthy cooking oil) [4 marks for A&E]
40. Level 3: Shows understanding of Option 1 (healthy snacks) or Option 2 (healthy cooking oil) [3 marks for K&A], Developed argument based on the impact on JF of choosing Option 1 (healthy cooking oil) (healthy snacks) or Option 2 (healthy cooking oil) [3 marks for A&E]
41. Level 2: Shows knowledge of product development [1-2 marks for K&A], Limited analysis of product development [2 marks for A&E]
42. Level 1: Shows knowledge of product development [1-2 marks for K&A], Limited analysis of Product development [1 mark for A&E]
43. Content: Option 1 (healthy snacks)
44. • A new market opportunity for JF but no experience of marketing/selling these healthy snacks
45. • Mass market – high sales but possibility of high competition
46. • A growth market (10%) but less than Healthy cooking oil (15%)
47. • Society sees this as an important issue – good publicity for JF
48. • High price can be charged for a quality product
49. • Can JF produce this product?
50. • Will the supermarkets purchase from JF?
51. • Higher start up costs (100 000) than Healthy cooking oil (75 000)
52. • Higher expenses (50000) than healthy cooking oil (75000)
53. • Lower CoGS (60000) than healthy cooking oil (75,000)
54. • Forecast sales higher (300 000) than healthy cooking oil (100 000)
55. • Lower price (0.50) than healthy cooking oil (2.00)
56. • Lower forecast revenue (150 000) than healthy cooking oil (200 000)
57. • Lower GPM (60%) than healthy cooking oil (62.5%)
58. • Lower NPM (26.7%) than healthy cooking oil (45%)
59. • Forecast to make a loss (-$60 000) in Year 1 compared to profit of healthy cooking oil (+£15000)
60. Content: Option 2 (healthy cooking oil)
61. • Synergy with JF's current product range
62. • Lower start up capital required (75000) than Healthy snacks (100 000)
63. • Lower fixed costs/annual expenses (35000) than Healthy snacks (50 000)
64. • Higher forecast market growth (15%) than Healthy snacks (10%)
65. • A development from what JF already produces – less risk
66. • Attracts high income consumers/customers
67. • High price can be charged (2) than Healthy snacks (0.50)
68. • Could enhance JF's image
69. • JF already has a link to distribution through supermarkets
70. • ARA
71. Level 2b: Shows understanding of two suitable sources of finance in context [4 marks for K&A], Developed analysis of two suitable sources of finance in context [4 marks for A&E]
72. Level 2a: Shows understanding of one suitable source of finance in context [3 marks for K&A], Developed analysis of one suitable source of finance in context [3 marks for A&E]
73. Level 1: Shows knowledge of two sources of finance [2 marks for K&A], Limited analysis of two sources of finance [2 marks for A&E]
74. Level 1: Shows knowledge of one source of finance [1 mark for K&A], Limited analysis of one sources of finance [1 mark for A&E]
75. Answers could include:
76. • Long term loan to pay for the fixed costs of milling/bottling etc.
77. • Re-mortgaging/extending the mortgage on the farm
78. • Attracting new shareholders into the farm (Note: JF is a Ltd)
79. • Leasing/HP for additional machinery
80. • Overdrafts for the short term variable costs
81. • Trade credit for short term variable costs
82. Any answer which mixes a long term solution for a short term problem should not be classed as suitable.