QF is a public limited company in country S. It manufactures furniture for cafés. The number of cafés in country S has increased by more than 50% over the last 5 years. This has meant that QF has been able to expand and achieve internal economies of scale. However, the growth of the café market has attracted new firms supplying café furniture and increased competition for QF. An extract from QF's income statement is shown in Table 1.1. [Table 1.1] Although QF has been successful so far, Javid, the Managing Director, has identified two problem areas: inventory and human resources. Inventory QF's inventory includes raw materials, work in progress and finished tables and chairs. QF buys 80% of its materials from country T and there is a long delivery lead time. This means that QF holds a high level of buffer inventory which has a high value. Human resources QF's production employees are unhappy that they have not received any benefit from the company's expansion. Profit has doubled over the past three years but employees have not received any pay increases or bonuses. The employees have all been trained by QF and have specialist skills which had ensured that customer expectations were met. However, customers are starting to complain about a fall in the quality of the furniture, which could be the result of the low morale of the employees. Some highly trained employees have left QF to work for competitor firms.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2021). The mark or mark type is shown in brackets.

1. [2] (a)(i) A correct definition
2. [1] (a)(i) A partial, vague or unfocused definition
3. [0] (a)(i) No creditable content
4. [Indicative content] (a)(i) A01 Knowledge and understanding The (minimum) level of stocks/components/supplies – a business aims to hold to ensure orders can be met/point at which business re-orders.
5. [Indicative content] (a)(i) A correct definition should include: an understanding of inventory; an understanding of buffer.
6. [1] (a)(ii) C Example or some other way of showing good understanding, i.e. can arise from bulk buying, technical/managerial efficiencies, etc.
7. [1] (a)(ii) B Understanding of internal economies of scale, e.g. Internal economies arise from the growth of the business
8. [1] (a)(ii) A Understanding of economies of scale (when unit/average costs fall as output rises)
9. [Indicative content] (a)(ii) A01 Knowledge and understanding Economies of scale occur when unit/average costs fall as output rises. Internal economies arise from the growth of the business, e.g. technical economies.
10. [Indicative content] (a)(ii) AO2 Application Application of an internal economy of scale to a business, such as: An example of a type of internal economy of scale. A description of an internal economy of scale that a business might benefit from.
11. [3] (a)(ii) Exemplar Average unit costs decrease (A) as a result of the increase in the scale of operations (B), e.g. purchasing economies (C)
12. [2] (b)(i) Correct answer with or without correct working
13. [1] (b)(i) Formulae/attempt to calculate/calculation of profit
14. [0] (b)(i) No creditable content
15. [Content] (b)(i) Gross profit - expenses, interest and tax = profit $180m - $150m = $30m (1) OR Profit / Revenue × 100 = profit margin (1) 30/300 × 100 Profit margin = 10% Accept 10 (2)
16. [2] (b)(i) Exemplar 10 Correct answer – % not needed
17. [4] (b)(ii) Level 2b (APP + APP) Explanation of two factors which would increase the profit margin, in context
18. [3] (b)(ii) Level 2a (APP) Explanation of one factor which would increase the profit margin, in context
19. [2] (b)(ii) Level 1 (K) Identification of two factors affecting the profit margin
20. [1] (b)(ii) Level 1 (K) Identification of one factor affecting the profit margin
21. [0] (b)(ii) No creditable content
22. [Content] (b)(ii) Increase quantity sold without a change in costs / price; Increase price whilst maintaining sales; Reduce costs without change in quantity sold / price
23. [Indicative content] (b)(ii) A01 Knowledge and understanding Ways of increasing the profit margin: to decrease costs; to increase revenue; increase/decrease price
24. [Indicative content] (b)(ii) AO2 Application Application to QF, including: QF's costs - internal economies of scale achieved, so costs will reduce and improve profit margin/buy cheaper wood/decrease inventory holdings as high value, bulky so reduce overhead costs. QF's revenue – likely to increase due to 50% growth in cafes over last 5 years/may be difficult due to increased competition/could improve quality to reduce customer complaints and increase sales. Increased price difficult in competitive market/may be able to decrease price due to lower costs leading to increased revenue.
25. [Example] (b)(ii) Identification of a way (K - 2 marks) Reduce cost of sales; Application (APP - 2 marks) by opting for cheaper timber
26. [Example] (b)(ii) Identification of a way (K - 2 marks) Increase revenue by increasing quality; Application (APP - 2 marks) of its tables and chairs
27. [Example] (b)(ii) Identification of a way (K - 2 marks) Increase revenue; Application (APP - 2 marks) from 2020 it earned $300m; they should boost this potentially by increasing the price
28. [Example] (b)(ii) Identification of a way (K - 2 marks) Decrease cost by buying raw materials from a cheaper supplier; Application (APP - 2 marks) by buying from a supplier in country S rather than country T
29. [Example] (b)(ii) Identification of a way (K - 2 marks) Reduce stock to decrease costs; Application (APP - 2 marks) buffer inventory is high value and bulky so can reduce overhead costs
30. [4] (c) Level 2b Shows understanding of two disadvantages of holding a high level of inventory
31. [3] (c) Level 2a Shows understanding of one disadvantage of holding a high level of inventory
32. [2] (c) Level 1b Shows knowledge of two disadvantages of holding a high level of inventory
33. [1] (c) Level 1a Shows knowledge of one disadvantage of holding a high level of inventory
34. [0] (c) No creditable content
35. [4] (c) Marks Good analysis of two disadvantages of holding a high level of inventory
36. [3] (c) Marks Good analysis of one disadvantage of holding a high level of inventory
37. [2] (c) Marks Limited analysis of two disadvantages of holding a high level of inventory
38. [1] (c) Marks Limited analysis of one disadvantage of holding a high level of inventory
39. [Indicative content] (c) Purpose of inventory within a business (raw materials, work in progress, finished products).
40. [Indicative content] (c) A01 Knowledge and understanding Knowledge of a disadvantage of holding a high level of inventory, including: cost; security required; waste/damage; storage space could be utilised for other purposes
41. [Indicative content] (c) AO2 Application Number of cafes increased by more than 50% over last five years. QF has expanded. Growth of market has attracted new firms. Cost of sales = $120m (40% of revenue). 80% of materials from country T, long delivery lead time. High value, high level of buffer inventory. QF wants to reduce costs. Cost of storing may reduce ability to pay higher wages, so trained staff leaving. PLC - effect on shareholder value.
42. [Indicative content] (c) AO3 Analysis Disadvantages may include: costs - high costs of holding stock leading to lower profits affecting shareholders as dividends lower, and may lower share price affecting shareholder value; storage space – could be used elsewhere, e.g. expand manufacturing without needing new premises; security - high value, worth stealing so will require good security measures and expensive insurance; waste/damage – wood furniture, storing for a long period could dry out wood, make it susceptible to damage, e.g. leaks, also could go out of fashion and become obsolete; more management required – ensure stock rotation to avoid any component remaining in store for a long period where it may be damaged/not fit for purpose
43. [Example] (c) K High storage costs; APP opportunity cost as money could be used for motivating employees; AN extra outflow of cash to pay for fixed cost; DEV this is a disadvantage as employees have complained about low pay, and employee dissatisfaction has reduced quality
44. [Example] (c) K Capital is tied up in stock which would have to be sold; APP such as paying for the training of new recruits to replace those who have left; AN reduces working capital; DEV they may face difficulties paying day-to-day expenses and short term debts
45. [7] (d) A justified recommendation based on a developed two-sided argument
46. [6] (d) A developed recommendation based on a developed two-sided argument
47. [5] (d) A basic recommendation based on a developed two-sided argument
48. [4] (d) Shows understanding of more than one method of improving morale in context
49. [3] (d) Shows understanding of one method of improving morale in context
50. [2] (d) Shows knowledge of at least two methods of improving morale
51. [1] (d) Shows knowledge one method of improving morale
52. [4] (d) Developed analysis of more than one method of improving morale in context
53. [3] (d) Developed analysis of one method of improving morale in context
54. [2] (d) Limited analysis of more than one method of improving morale
55. [1] (d) Limited analysis of one method of improving morale
56. [Indicative content] (d) A01 Knowledge and understanding Knowledge of methods to improve morale including: financial - higher payments/bonus/change payment method/award shares in company; non-financial – team working, increase holidays, employee participation encouraged, management style (democratic/laissez-faire as highly skilled), job rotation, promotion opportunities/training
57. [Indicative content] (d) AO2 Application Application of morale to QF's production workers, may include: low morale of employees leading to a fall in quality and a rise in customer complaints; skilled/highly trained labour leaving leading to high recruitment costs; profits doubled but employees seen no benefit; PLC so employee share ownership could work; highly trained and highly skilled, so more training unlikely to work; increase in competitors willing to attract highly skilled employees from QF
58. [Indicative content] (d) AO3 Analysis Analysis of methods may include: financial morale boosters, e.g. pay increases; employees have not received a pay increase in three years although profits at QF have doubled; non-financial morale boosters, e.g. increase in holidays – employees' suggestion, promotion opportunities, job redesign, ask employees' advice on reducing stocks/efficiencies, etc.
59. [Indicative content] (d) AO4 Evaluation A recommendation about how QF's management could improve the morale of its production employees. A judgement over the relative suitability of the chosen method(s). Elements that the recommendation could depend upon, including costs v benefits, employee views, e.g. already highly skilled so more training unlikely to improve morale, competitors' pay and conditions should be considered. Weighing up of the impacts on QF/employees – employees complaining about pay and bonuses so increasing these more likely to improve morale. Ownership of shares gives a greater stake in the company, so QF's objectives (e.g. growth, profits, quality) become the employees' objectives/employees likely to want to improve quality and reduce customer complaints/increase profits/ensure loyalty so less likely to move to a competitor firm.
60. [Example] (d) K Increase wages; APP can be one as profits have doubled over the last 3 years; AN increase in pay will make them work harder; DEV productivity will increase and quality may improve sales; EVAL increase (wages) is the best way to increase morale (eval) as the employees do not think their pay is fair (eval – justifying recommendation), this has affected the quality of the furniture. Increased quality can increase sales and revenue to offset the increase in wages (eval – balancing costs against revenue)
61. [Example] (d) K Introduce piece rates; APP suitable for furniture manufacturing as division of labour can be used; AN this will lead to more units being produced; DEV and lead to increased profits but quality may go down as employees rush to produce a higher quantity; EVAL increase (wages) is the best way to increase morale (eval) as the employees do not think their pay is fair (eval – justifying recommendation), this has affected the quality of the furniture. Increased quality can increase sales and revenue to offset the increase in wages (eval – balancing costs against revenue)