Lian is a chicken farmer. Her farm is located on the edge of a busy town. The main output from her farm is eggs. The eggs are transported by truck to customers. The eggs are sold through various channels of distribution. CE has an excellent reputation for fresh, high quality eggs. It offers a 'money back' guarantee if the consumer is not happy with the quality of the eggs. All the eggs are labelled with a 'best before' date which gives the consumer an idea of how long each egg will remain fresh. Lian has two production lines at the farm; one for the industrial market and one for the consumer market. Table 1.1 contains some data about the two production lines. Table 1.1: Production line data | | Production Line A | Production Line B | |---|---|---| | Type of market | Industrial | Consumer | | Number of employees | 4 | 6 | | Sorting process | None | Eggs sorted into small, medium and large | | Packaging | Trays of 100 eggs | Boxes with 6 of the same size egg in each box | | Total variable costs | $2.70 per tray | $0.45 per box | | Price | $4.00 per tray | $0.90 per box | The fixed costs for the business are $10000 per month. These are allocated equally between the two production lines. Lian would like to expand CE by keeping more chickens and opening a new production line. The new production line would require five employees who would need to be recruited and trained. It would specialise in sorting and packaging eggs that will be sold to retailers.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2019). The mark or mark type is shown in brackets.

1. A correct definition [2]
2. A partial, vague or unfocused definition [1]
3. No creditable content [0]
4. Content: Money paid by a business where the amount does not change (1) as output changes (1).
5. Award one mark for each element of a correct definition: ∞ does not change/stays the same ∞ as output changes/varies
6. Exemplar: Costs that don't vary (1) with output (1) [2] Both elements, costs don't change as output changes
7. Exemplar: The cost doesn't change [1] Only one element
8. Exemplar: Unchanging costs [1] Only one element
9. Exemplar: costs change with output [0] Confused with variable costs
10. Award one mark for each point of explanation: Rationale C Example or some other way of showing good understanding, i.e. examples of intermediaries, channels [1]
11. Rationale B Stages/intermediaries/different ways of selling/chain of businesses [1]
12. Rationale A From producer to consumer/sell products to consumers [1]
13. Content: ∞ A chain of stages which a product or service goes through on the way from the producer to the consumer. ∞ Can be direct, using the internet, or through intermediaries such as a warehouse, agent or retailer.
14. Exemplar: Different ways of selling (B mark) products to consumers (A mark) e.g. supplier to wholesaler to consumer (C mark) [3] Point from each category
15. Exemplar: A chain of intermediaries (B) a good passes through until it reaches the final buyer (A) e.g. wholesalers, retailers, direct (C) [3] Point from each category
16. Exemplar: Chain of businesses (B) that sell products to consumers (A) [2] Only two categories covered
17. Exemplar: The ways in which (B) producers sell to consumers (A) [2] Only two categories covered
18. Exemplar: Stages a product passes through (B) [1] A bit vague but BOD for 'stages'
19. Exemplar: Selling products to consumers (A) [1] Again a bit vague but fits the A category
20. Exemplar: The production process [0] No understanding shown
21. Correct answer with or without correct working [4]
22. Formulae or correct calculation of two from TVC or TFC or TR OR Correct calculation of TVC, TFC and TR [3]
23. Formulae and correct calculation of one from TVC or TFC or TR OR Correct calculation of two from TVC, TFC or TR [2]
24. Formulae or correct calculation of one from TVC or TFC or TR [1]
25. No creditable content [0]
26. NB Can award a mark for OFR where relevant
27. Profit = (P x Q) – ((VC × Q) + FC)) or TR – TC or TR – (TVC + TFC)
28. 150 000 / 6 per box = 25 000 boxes
29. 25 000 × $0.45 = $11250 (TVC)
30. $10 000 / 2 = $5000 (TFC)
31. $0.90 × 25 000 = $22 500 (TR)
32. $22 500 - ($11250 + $5000) = $6250
33. Correct answer is $6250
34. NB Formulae can be implied through use of relevant figures
35. Answer: 22 500 – (11250 + 10000) = 1250 (OFR) [3] Correct calculation of TR and TVC but didn't divide FC/2 but under OFR rule mark for the final answer
36. Answer: Profit = TR–TC (1) = (0.90 × 150 000) – ((0.45 × 150 000) + 5000 (1)) = 62 500 (OFR) [3] Correct formula and calculation of TFC but didn't divide eggs/6 to arrive at boxes but under OFR rule mark for the final answer as this is the correct product of their calculation
37. Answer: 22 500 – 16 250 [3] Correct formula implied (1) Correct calculation of TR (1) and TC (1)
38. Answer: Profit = TR – TC (1) = (0.90 × 150 000) – ((0.45 × 150 000) + 10 000)) = 57 500 (OFR) [2] Correct formula but didn't divide FC/2 and didn't divide eggs/6 to arrive at boxes but under OFR rule mark for the final answer as this is the correct product of their calculation
39. Answer: 28 500 – 25 300 = 3200 (OFR) [2] This is both production lines so 1 mark for correct (implied) formula and OFR for answer as this is the correct product of their calculation
40. Answer: Profit = TR – TC [1] Correct formula
41. Answer: TR = P × Q [1] Correct formula for TR
42. Answer: 62 500 [0] No working to show how arrived at this answer
43. Answer: 1250 [0] No working to show how arrived at this answer
44. Level 2 (APP) Explanation of a problem of allocating fixed costs for CE in context [2]
45. Level 1 (K) Identification of a problem with allocating fixed costs [1]
46. Level 0 No creditable content [0]
47. Content: ∞ The two production lines have different revenues - $0.04 per egg (A) compared to $0.15 per egg (B) – should both lines pay the same. ∞ Production line B has a much larger gross profit margin (50% compared for B to 32.5% for A) – paying the same fixed costs may make production line A seem unprofitable. ∞ Production line A would seem to have less processing (no sorting, bigger quantities) so should it need to pay the same as line B? ∞ We do not know how many eggs are processed by each line so it is difficult to know if the allocation is appropriate. ∞ We do not know how employees are paid, could be salaries, so line B has more employees so higher costs
48. ARA Example of how responses should be marked: Identification of a problem (K) (1 mark) The two lines do not have the same level of output so allocation unfair Explanation of a problem in context (APP) (2 marks) May be unfair if the two lines have different outputs but we don't know how many eggs each line produces
49. ARA Example: One line might have higher fixed costs than the other, e.g. salaries. Employees may be paid a salary and line B has more employees so could have higher fixed costs
50. ARA Example: One line could have less processes than the other. Line A has less processing as they don't have to sort into sizes so unfair that they have the same fixed costs as line B
51. ARA Example: Not accurate. CE have not identified relevant fixed costs for each line, just divided total fixed costs between the two lines
52. Level 2b Shows understanding of two ways in which CE adds value to its products in context [4] Good analysis of two ways in which CE adds value to its products in context [4]
53. Level 2a Shows understanding of one way in which CE adds value to its products in context [3] Good analysis of one way in which CE adds value to its products in context [3]
54. Level 1b Shows knowledge of two ways of adding value [2] Limited analysis of two ways in which CE adds value to its products [2]
55. Level 1a Shows knowledge of one way of adding value [1] Limited analysis of one way in which CE adds value to its products [1]
56. Level 0 no creditable content [0] [0]
57. Content: ∞ Packaging (boxes and trays) – a cost for the firm, but has a double benefit to consumer market - protects and advertises. ∞ Sorting - consumers obviously see value in different sized eggs and therefore CE can probably have higher prices for large eggs and therefore gain more profit. ∞ Money back guarantee - little cost for the firm but builds up trust for the brand. ∞ Branding - food product so trust in the brand will be important. ∞ Convenience – availability through retailers for the consumer market - more likely to purchase than coming to the farm. ∞ Best before date – both in consumer and producer markets this will help to avoid wastage when purchased and again builds trust in the brand.
58. ARA Example of a way (K): Branding. Examples of application/context (APP): CE has built a brand with a reputation for high quality eggs. Examples of possible analysis (AN + DEV): customers are prepared to pay higher prices for a quality product (AN) which means that CE can charge a premium price for the eggs therefore increasing the added value resulting in higher profits (DEV)
59. ARA Example: Increase the price whilst keeping costs the same. The costs of production are the same for each box but CE could charge more for the larger eggs. as customers are getting more egg in the larger sizes they won't mind paying a higher price (AN). This is also a way of segmenting their market into those who will only pay a lower price compared to those who will pay a higher price therefore maximizing CE's revenue from each segment (DEV)
60. ARA Example: Decrease costs whilst keeping price the same. CE could use cheaper packaging for the eggs by e.g. using cheaper materials in the boxes and trays. This could damage their reputation for quality (AN) and customers may stop buying the eggs and buy those of CE's competitors instead, therefore reducing the revenue CE receives (DEV)
61. Justified evaluation based on argument in context [7]
62. Developed evaluation based on argument in context [6]
63. An evaluative statement based on argument in context [5]
64. Shows understanding of more than one stakeholder in context [4] Argument based on an impact of the planned expansion on two (or more) stakeholders of CE [4]
65. Shows understanding of one stakeholder in context [3] Argument based on an impact of the planned expansion on one stakeholder of CE [3]
66. Shows knowledge of more than one stakeholder [2] Limited analysis of an impact of expansion on two (or more) stakeholders [2]
67. Shows knowledge of one stakeholder [1] Limited analysis of an impact of expansion on one stakeholder [1]
68. Content: ∞ Lian (owner) – Lian may need to fund the investment but the reward of more sales should outweigh this cost. May depend on the market growth of the retail market. ∞ Employees – Expansion is likely to make the current employees feel more secure – some may get promoted to supervise the new production line or training new workers. ∞ Consumers – More retail eggs may make CE’s products more accessible, which is good for the customers. The extra investment may be recouped with higher prices, alternatively in the long run, economies of scale may lead to lower average costs/prices ∞ Local residents – more noise, pollution – might reduce house prices. More trucks picking up eggs? ∞ Business customers - Will the allocated fixed costs increase on Production Line A, increasing costs/prices on the eggs – alternatively there could be savings from economies of scale passed on to business customers. ∞ Shareholders – Might be asked to invest more to fund the expansion or the costs of the expansion could increase costs and reduce dividends. ∞ Competitors – CE’s expansion will mean that they can supply more to the market which could reduce the demand for competitors’ eggs.
69. ARA Example (Owner): K: Lian the owner. APP: Needs a loan to finance the expansion. AN: The new product line will require investment in more machinery and more employees. The employees will need to be trained. This might mean that Lian will need a bank loan, which will increase the costs and possibly reduce profit. EVAL: However, the profit from the new production line should outweigh the costs (EVAL) and allow greater distribution of the product thereby increasing market share and revenue (EVAL) so the owner will feel the greater impact from the expansion (EVAL)
70. ARA Example (Customer): K: Customer. APP: CE have two types of customers – the industrial market and the consumer market and are to expand to retailers. AN: Expanding to retailers will be more convenient for the customer. Customers can get their eggs closer to home, which will cut down on travel time and cost as they no longer have to go to the farm but still can get high quality fresh eggs. EVAL: However the eggs may increase in price (EVAL) as the retailer will add a mark-up to the cost to them so customers may still travel to the farm to get the lower price (EVAL) therefore not as great an impact on the customer (EVAL)