Nearly New (NN) NN sells second-hand computers. NN is owned by Nathan who is a sole trader. Nathan is a fully trained and qualified computer engineer. Nathan buys broken computers from large electrical retailers and repairs them. The repaired computers are then sold through NN's website. Nathan uses a cost-based pricing strategy and adds 50% to the cost of the computer and the cost of repairs. Nathan currently works alone and has no employees. Nathan has recently purchased, for $2000, a batch of 20 laptop computers all of which have broken screens. Nathan thinks that each will cost $50 to repair and he hopes to make a profit from selling them. One of Nathan's biggest problems is cash flow. Nathan pays for all of his inventory in cash and he must spend time repairing the computers before he can sell them. Customers expect a range of computers to choose from and expect next day delivery. This means that most of Nathan's working capital is tied up in inventory. Sometimes Nathan is offered large batches of computers and he cannot buy them because he does not have the cash available. Nathan wants to recruit an employee to allow him to increase the production at NN. He has interviewed two potential employees and he has made some notes about their suitability (see Table 2). Table 2: Nathan's notes on the potential employees | Name | Katy | Sahdat | | :-------------------- | :-------- | :-------- | | Current income per year | $20000 | $25000 | | Industry experience | Two years as a computer repairer for a large electrical retailer | Ten years as a sole trader repairing computers | | Qualifications | University degree in computer engineering | No formal qualifications | | Age | 23 | 55 | | Skills | • Repairing computers <br> • Being organised | • Repairing computers <br> • Managing employees <br> • Communication with customers |

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2017). The mark or mark type is shown in brackets.

1. [2] A correct definition will cover two of the following bullets: Stock; Raw materials, work in progress, finished products; Used in, or the result of the production process/operations – to fulfil future demand, to sell; Current asset.
2. [1] A partially correct definition (e.g. only one element).
3. [0] No creditable content.
4. [Note: Inventory is a syllabus term to mean the stock of a business – a definition of inventory in terms of all the assets owned by a business (i.e. to take an inventory) is not rewardable.]
5. [1] A One individual or one person (must be a clear idea of a single person).
6. [1-2] C One mark for each of the following (up to a maximum of two marks): Unincorporated; Unlimited liability; No continuity; No separate legal identity; Income tax must be paid (not corporation tax); Owns all of the profit/responsible for all the losses/takes all the risk; Shares cannot be sold; Accounts do not need to be produced/published/made available.
7. [Note: the B and C marks are dependent on gaining the A mark.]
8. [0] No creditable content.
9. [3] Correct calculation of the total profit (no $ required) with or without correct working (1500).
10. [2] Correct calculation of total costs (3000) or correct calculation of total revenue (4500) (with working).
11. [1] Correct formula (Total revenue - Total costs = profit) or correct calculation of total variable costs ($1000) (with working).
12. [0] No creditable content.
13. [Note: allow an answer of 1500 even if the candidate has identified it as a different figure in the answer (i.e. Total Cost = 1500 = 3 marks).]
14. [Calculations: Total variable costs = 20 × $50 repair = $1000.]
15. [Total costs = Purchase cost ($2000) + (20 × $50 repair ($1000)) = $3000.]
16. [50% mark up = $1500 (50% of $3000).]
17. [Selling price = Total costs (3000) + Mark up (1500) = $4500.]
18. [Profit = Total revenue (4500) - Total costs (3000) = $1500.]
19. [3] Explanation of an advantage of using cost based pricing in context (APPAPP).
20. [2] Identification of an advantage of using cost based pricing in context (APP).
21. [1] Identification of an advantage of using cost based pricing (K).
22. [0] No creditable content.
23. [Possible answers include: Quick and simple (K) → Nathan is a computer engineer and may not be experienced in running a business (APP) → Therefore this will save Nathan time (APPAPP).]
24. [Always leads to a profit (K) → Each computer has a total cost of $150 (APP) → So any price higher than this will result in a profit for Nathan (APPAPP).]
25. [Predictable profit margin (K) → Nathan chose a 50% mark-up (APP) → So the mark-up should always equal the profit margin (APPAPP).]
26. [Level 2 (4 K+APP, 4 AN)] Good analysis of TWO methods of improving cash flow in context.
27. [Level 2 (3 K+APP, 3 AN)] Good analysis of ONE method of improving cash flow in context.
28. [Level 1 (2 K+APP, 2 AN)] Limited analysis of TWO methods of improving cash flow.
29. [Level 1 (1 K+APP, 1 AN)] Limited analysis of ONE method of improving cash flow.
30. [0] No creditable content.
31. [Note: the focus of the analysis must be on improving cashflow.]
32. [Method 1: K] Arrange credit with suppliers. [APP] Nathan is purchasing from large electrical retailers who may be likely to give him credit. [AN] More time to pay → sell computers before paying for the stock → revenue before costs need to be paid. [ANAN] Less chance of negative cashflow.
33. [Method 2: K] Short term source of finance. [APP] Nathan is an established business and may get credit. [AN] Allow purchase without needing cash → Will not worsen Nathan's cashflow position. [ANAN] Less chance of negative cashflow. [However] Increase costs of NN → Increase price of a computer → May reduce sales → may reduce profits.
34. [Other methods include: Cashflow forecast; Take a partner; Customers pay on delivery or in advance; Keep a low amount of cash tied up in inventory.]
35. [Level 4 (7 EVAL)] A justified recommendation for Nathan on which potential employee he should select based on the given arguments for selecting Katy and Sahdat.
36. [Level 3 (6 EVAL)] A developed recommendation for Nathan on which potential employee he should select based on the given arguments for selecting Katy and Sahdat.
37. [Level 2 (5 EVAL)] An evaluative statement/recommendation based on the given arguments for selecting Katy and Sahdat.
38. [Level 2 (4 AN)] Argument(s) based on selecting Katy and Sahdat as potential employees for NN.
39. [Level 1 (3-4 K+APP)] Shows understanding of selection criteria for Katy and Sahdat.
40. [Level 1 (1-2 K+APP)] Shows knowledge of selection.
41. [Level 1 (2 AN)] Limited analysis of Katy and Sahdat as potential employees.
42. [Level 1 (1 AN)] Limited analysis of Katy or Sahdat as potential employees.
43. [0] No creditable content.
44. [Katy advantages: Lower previous salary; Some experience of dealing with electrical retailers (NNs suppliers); Degree - but is this necessary?; Younger - but is this a benefit and should Nathan make a decision based on age (legal issues?); Relevant skills and organisation could be useful.]
45. [Sahdat advantages: Higher previous salary – does this mean that he will expect more?; More experience in relevant area; No qualifications, but are they necessary?; Older, but could this be a benefit?; Will his skills of managing employees and communication be any use within NN where he will be the only employee and possibly not customer facing?]
46. [Example development for Katy: K] Selection is the ability to choose between potential employees for a position. [APP] Katy has got some experience working for a large electrical retailer. [AN] This may help Nathan to negotiate better prices and credit with his suppliers who are the large electrical retailers. [ANAN] This is likely to reduce the costs for Nathan of doing business, improve his cashflow and increase his chances of making a profit. [EVAL] I would recommend that Nathan chooses Katy because better productivity will help Nathan to sell computers quicker and this may help solve his major problem of cashflow.
47. [Example development for Sahdat: K] A business can select employees through interviews, experience, skills etc. [APP] However Sahdat has more experience than Katy in repairing computers but he has been his own boss for the last 10 years. [AN] More experience may lead to quicker repairs. [ANAN] Quicker repairs could increase the productivity of NN and mean that he can sell more computers, quicker and gain more profit. [ANAN] If Sahdat cannot take orders then Nathan may find him difficult to manage and this may lead to conflict and lower productivity for NN. [EVAL - developed] However it depends upon whether Nathan feels he can manage Sahdat. [EVAL - justified] If he can't then this productivity boost is unlikely to happen and Katy might be the better option as she may be easier to manage.