Energy Solutions (ES) ES is a public limited company in country X. The business was set up in 1980. For 25 years most of ES's revenue came from coal mining. Although ES still owns many coal mines, the business now specialises in hydraulic fracturing, known as fracking. This is a process used to extract gas from underneath the ground. The government of country X encourages firms like ES to grow. The growth of ES has led to economies of scale and lower unit costs. ES considers the effects of fracking on all the stakeholders of the business. Fig. 1.1 is an extract from a recent newspaper article about fracking. Fracking is not liked by everyone. On the positive side it could produce enough gas to mean that country X can produce its own energy for the next 100 years. This is also likely to mean lower energy prices for both businesses and consumers. Competing companies in the market have taken full advantage of fracking and are expecting to increase their revenue and profit substantially in the future. However, people who live near the fracking sites have reported many minor earthquakes. These have not damaged any buildings but the price of houses in those areas has decreased significantly. There has also been a concern that fracking could lead to pollution and a loss of wildlife. [Figure 1.1] Despite the complaints from some external stakeholders, ES plans to increase the number of fracking sites in country X. This will require ES to buy licences from the government of country X. Each licence costs $50m and ES will require both internal and external sources of finance to fund this purchase. ES employs over 1000 people. Every worker benefits from a profit-sharing scheme (see Table 1.1) as well as their basic pay. Table 1.1: Profit-sharing scheme at ES Profit in 2019 $12m Each director's share of profit 0.25% Each manager's share of profit 0.1% Each of other employees' share of profit 0.002%

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2020). The mark or mark type is shown in brackets.

1. [2] A correct definition should include the following elements (allow one mark for each element): Revenue is the money received (by a business) for selling its products and services.
2. [2] Alternatively, a candidate can gain BOTH marks for a correct formula: Price × quantity sold (2)
3. [1] The income of a firm
4. [1] A An understanding of costs – must be an idea that a cost is something paid by a business or incurred from production
5. [1] B An understanding of unit – must be an idea of a single product/good
6. [1] C Example or some other way of showing good understanding – only if both A and B marks have been gained
7. [3] The amount that a business must pay out (A) to produce a single item (B). For example, this may be what ES has to pay out to produce a single unit of energy.
8. [2] How much a business pays (A) to make a single produce (B).
9. [2] Total costs/output.
10. [1] Costs are incurred by a business by production.
11. [1] The total costs, which include fixed and variable costs of products divided by the number of products (B).
12. [1] What it costs for a unit (B).
13. [1] The cost of one (B) unit of a good. An example would be the cost of one can of cola.
14. [3] Correct answer with or without correct working or $
15. [2] Correct calculation of Directors share and Managers share
16. [1] Correct calculation of Directors share or Managers share
17. [3] Directors share of the profit = 0.25% = 0.25% of $12 m = $30 000 ($0.03 m)
18. [3] Managers share of the profit = 0.1% = 0.1% of $12 m = $12000 ($0.012 m)
19. [3] $30 000 - $12000 = $18 000
20. [3] Answer = $18000 ($0.018 m)
21. [3] OFR - award for the answer if there is clear working shown for the two earlier numbers (even if both of these numbers are wrong)
22. [2] Candidate has inverted the profit-sharing formula for both Directors and Managers, which are not creditable. However, the candidate then completes the last stage correctly and based on their own figure (OFR) should be awarded one mark.
23. [3] Explanation of one disadvantage to ES of a profit-sharing scheme in context
24. [2] Explanation of one disadvantage to a business of a profit-sharing scheme
25. [1] Identification of one disadvantage to a business of a profit-sharing scheme
26. [Content] ES might not have enough retained profit to invest in the new licenses for fracking.
27. [Content] ES shareholders might sell their shares because of low dividends leading to the company being taken over.
28. [Content] Increases the costs of the business and therefore could make ES less competitive (many competitors in the market).
29. [Content] May cause employer/employee issues because of the different shares gained (use of previous answers – OFR).
30. [4] Shows understanding of one internal and one external source of finance in context
31. [4] Good analysis of one internal and one external source of finance in context
32. [3] Shows understanding of one internal or one external source of finance in context
33. [3] Good analysis of one internal or one external source of finance in context
34. [2] Shows knowledge of one internal and one external source of finance
35. [2] Limited analysis of one internal and one external source of finance
36. [1] Shows knowledge of one internal or one external source of finance
37. [1] Limited analysis of one internal or one external source of finance
38. [0] No creditable content
39. [K] Retained earnings – ES made $12m profit in 2018, so likely to have some retained earnings to use as a source of finance
40. [K] Sale of assets - ES owns some old coalmines - could these be sold to raise finance for the licenses.
41. [K] Selling shares – plc so able to raise funds in this way – profitable and may be able to sell on the basis of publicity that profits will increase
42. [K] Government grants – government of country X is very supportive of fracking, so may be willing to give a grant to ES
43. [K] Bank loans - profitable business, promising future returns
44. [APP] ES had $12m retained profit in 2019 (APP)
45. [AN + DEV] Does not need to be repaid (AN) but there is an opportunity cost (DEV)
46. [APP] ES is a Public Limited Company (APP)
47. [AN + DEV] So, by selling shares this can release cash to finance the purchase of the fracking license (AN), however, this may lead to a loss of control by the current owners (DEV)
48. [7] Justified evaluation based on arguments in context
49. [6] Developed evaluation based on arguments in context
50. [5] An evaluative statement based on arguments in context
51. [4] Shows understanding of two external stakeholders in context
52. [4] Arguments based on the effect on two external stakeholders in context
53. [3] Shows understanding of one external stakeholder in context
54. [3] Arguments based on the effect on one external stakeholder in context
55. [2] Shows knowledge of two external stakeholders
56. [2] Limited analysis of the effect on two external stakeholders
57. [1] Shows knowledge of one external stakeholder
58. [1] Limited analysis of the effect on one external stakeholder
59. [0] No creditable content
60. [Content] Local community/society – devaluation of houses, earthquakes, pollution
61. [Content] Activists/environmentalists/pressure groups – damage to the natural environment, pollution etc.
62. [Content] Potential investors – attracted to future profit but could be put off by bad publicity (not current shareholders)
63. [Content] Customers - cheaper energy, cost of living
64. [Content] Government - increase energy self-sufficiency, increased tax revenue, economic growth
65. [Content] Competitors – May lead them to having to purchase a fracking license and increasing costs to compete
66. [K] Local community (Κ).
67. [APP] Who live near a fracking site may see a reduction in the price of their home (APP).
68. [AN] This means their houses are worth less (AN)
69. [DEV] Which might mean they get less money if they sell their home (DEV).
70. [EVAL] The local community are likely to be most affected (EVAL) because they also have to suffer from earthquakes whereas the government will get the money from the licenses no matter what (EVAL). However, this depends on whether the people keep voting for the government (EVAL).
71. [K] Customers (Κ).
72. [APP] May get cheaper energy through ES growing (APP).
73. [AN] Which means the customers have to pay less for their energy (AN).
74. [DEV] And have more money to spend on household goods (DEV).
75. [EVAL] The customers are likely to only benefit from ES continuing to use the fracking process (EVAL) because increased competition may lead to even lower prices (EVAL). However, this depends on whether ES and their competitors reduce their prices (EVAL).
76. [K] Government (Κ).
77. [APP] Gain money from selling the licenses (APP).
78. [AN] Allows the government to invest in infrastructure (AN).
79. [DEV] Which may increase the welfare of the citizens of country X (DEV).
80. [EVAL] The local community are likely to be most affected (EVAL) because they also have to suffer from earthquakes whereas the government will get the money from the licenses no matter what (EVAL). However, this depends on whether the people keep voting for the government (EVAL).