Snappy Box (SB) SB is owned by Ralph who is a sole trader. The business prints photographs. Ralph has one shop on the main street of city D. Customers bring their saved digital photographs into the shop and these are printed on high-quality paper. SB uses a large printing machine that can print on almost any size of paper to produce different sized photograph prints. The process is very capital-intensive and most customers request a batch of photographs to be printed. SB is the only shop in city D that prints photographs. However, recently a number of online competitors have started to offer low-priced photograph prints to customers. Ralph has noticed that his sales have decreased significantly because of this competition. Ralph estimates the demand for his photograph prints has a price elasticity of demand of -4. SB already has a low profit margin and Ralph is struggling to compete with the online retailers. However, Ralph has an idea to introduce job production into his shop. He could stop printing photographs and instead focus on framing individual photographs for customers. These frames will be made for any sized photograph or picture and can be made from a variety of materials chosen by the customer. Ralph will need specialised equipment to allow him to make the frames. The equipment would cost $10000. He has identified two possible sources of finance for this equipment. The first possible source of finance is for Ralph to lease the equipment from the company that produces it. The lease would be for five years at a fixed cost of $400 per month. The second possible source of finance is for Ralph to sell the photograph printing machine for at least $10000, to purchase the equipment to make frames.

Mark scheme

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

1. [2] A correct definition
2. [1] A partial, vague or unfocused definition
3. [2] Does not vary when the business produces more
4. [2] It stays the same no matter how much is produced
5. [1] Fixed costs do not change over time
6. [1] They do not vary
7. [1] Not linked to sales
8. [0] Costs which are fixed
9. [1] Understanding of profit.
10. [1] Understanding of the concept of a profit margin (in terms of a percentage or proportion) – assume knowledge of profit.
11. [1] Application of a profit margin to a business through an example or some other way of showing good understanding – i.e. a use of profit margins, or two different profit margins – gross, net, operating, etc.
12. [3] Net profit/revenue x 100. It can be used to compare business performance
13. [3] It is the proportion of revenue that is profit. A 15% profit margin means that for every $1 of revenue, the business makes $0.15 profit
14. [2] Gross profit / Revenue (×100)
15. [2] The proportion of revenue that is profit
16. [1] It is the difference between costs and revenue
17. [0] It is how much profit a business makes
18. [3] Correct answer with or without correct working or %
19. [2] Attempt made with correct use of figures
20. [1] Formula
21. [1] PED = % change in demand / % change in price OR % change in demand = PED × % change in price
22. [2] % change in demand / -10% OR % change in demand = x-10%
23. [3] -4 × -10% = (+) 40%
24. [3] 40 (no working)
25. [2] -10% × 4, Change in demand = -40%
26. [2] -10% / Demand, Change in demand = 2.5%
27. [3] Explanation of one use of PED when making pricing decisions in context
28. [2] Identification of one use of PED when making pricing decisions in context
29. [1] Identification of one use of PED
30. [3] To see if he should increase or decrease the price. In this case it has an elasticity of -4 which shows an elastic response
31. [3] To estimate the effect of a price drop. For a 10% fall, QD will change by 40% which will make Ralph more money
32. [AO1] To know whether to increase or decrease the price to gain higher revenue.
33. [AO1] To know whether to offer price discounts/promotions to gain more sales.
34. [AO1] To understand if a business could survive/be profitable – could link to the break-even point.
35. [AO1] To decide a pricing strategy.
36. [AO2] If Ralph decreases the price of photography printing by 10%, he may gain an increase in sales of 40% (OFR) – which means he makes more money/profit.
37. [AO2] If Ralph increases the price by 10%, sales may fall by 40% (OFR) – which means he makes less money/profit.
38. [4] Applies context to understanding of one advantage and one disadvantage of job production
39. [4] Good analysis of one advantage and one disadvantage of introducing job production in context
40. [K] high-quality
41. [K] meets customer's specific needs
42. [K] greater job satisfaction
43. [K] makes a unique product
44. [K] high unit cost of production
45. [K] labour/time intensive process
46. [K] may require new equipment/training
47. [K] may require job redesign
48. [APP] SB currently uses batch production but based on individual customer photographs.
49. [APP] SB currently has a low-profit margin.
50. [APP] Idea to introduce framed individual photographs made by job production.
51. [APP] Frames can be made for any sized photograph or picture.
52. [APP] Variety of customer chosen materials.
53. [APP] Requires specialised equipment.
54. [APP] Equipment would cost $10 000.
55. [APP] Industry is more competitive (online competitors).
56. [APP] Current process is capital intensive.
57. [AO3] high quality: may be particularly important in framing and to compete against lower priced competitors
58. [AO3] meets customer's specific needs: important because each frame will be different, and Ralph will be framing many sizes of photograph/picture
59. [AO3] makes a unique product: may provide Ralph with a USP over other online competitors
60. [AO3] high unit cost of production: may make Ralph's frames too expensive to compete with the flow-produced frames – may require Ralph to enter into a lease agreement
61. [AO3] labour/time intensive process: may take a great deal of Ralph's time (AN) – will he be able to produce at a rate that will be profitable? (DEV)
62. [AO3] may require new equipment/training: requires the purchase/lease of new equipment
63. [AO3] may require job redesign: may require Ralph to sell his photograph printing equipment – loss of current revenue
64. [ADVANTAGE EXAMPLE] An advantage may be that Ralph could make unique (K) photo frames to fit any sized photo (APP) This means that he can have a higher profit margin (AN) which could lead to more profit and income for Ralph (DEV)
65. [DISADVANTAGE EXAMPLE] A disadvantage will be the high cost of producing each frame (K) because each frame will be tailor-made using the customer chosen materials (APP) This means that Ralph will need to charge a high price (AN) and he might lose customers, decreasing his sales revenue (DEV)
66. [7] Justified recommendation based on argument in context
67. [K] Leasing is a way of financing the acquisition of assets without actually having to buy it. Leasing involves a finance company purchasing the asset for the business and the business pays a regular (monthly/yearly) fee for use of the asset. Leasing is similar to renting and usually the asset is not ever owned by the business. An external source of finance.
68. [K] Sale of assets is when a business sells off its assets and the cash generated is used as a source of finance for the business. An internal source of finance.
69. [APP] specialised equipment to frame individual photographs – may require maintenance which will be covered in a lease agreement
70. [APP] Ralph may still be able to continue printing photographs
71. [APP] five-year lease
72. [APP] $400 per month
73. [APP] $400 × 12 months = $4800 per year
74. [APP] $4800 × 5 years = $24 000 in total
75. [APP] Sell photograph printing machine for at least $10 000 – based on an estimate of what he can sell it for.
76. [APP] Ralph will be unable to continue his current business of printing photographs.
77. [APP] Ralph would have full ownership of the specialised equipment, with no additional costs of ownership.
78. [APP] Ralph may need to pay for maintenance/breakdown of machine – whole business will be based on this.
79. [AO3] (Leasing) No upfront cost – but a monthly cost of $400 – may be particularly useful while Ralph is building up the business.
80. [AO3] (Leasing) Fixed cost for five years – but it would work out significantly more expensive than outright purchase – $400 × 60 months = $24000, compared to $10 000.
81. [AO3] (Leasing) Maintenance and breakdown would be covered for the five-year term of the lease - reduces uncertainty for Ralph.
82. [AO3] (Leasing) Ralph would be able to upgrade after five years – to better equipment which may allow him to increase his profit margin.
83. [AO3] (Sale of asset) Cheaper (10000) than leasing (24 000) – increases the overall profit of the business.
84. [AO3] (Sale of asset) No longer able to provide photography printing – loss of current sales – far riskier.
85. [AO3] (Sale of asset) Ralph would be responsible for maintenance and breakdown costs – may lead to unexpected costs and have an impact on profit.
86. [AO3] (Sale of asset) Ralph may be unable to find a buyer for his photography printing machine, especially since the market has moved online – may mean this is an unsuitable source of finance.
87. [EVAL] A recommendation about whether Ralph should choose leasing or sell his photography machine as a source of finance for the equipment to make the frames.
88. [EVAL] A judgement over the relative suitability of the chosen sources of finance.
89. [EVAL] Elements that the recommendation/judgement could depend upon, including the selling price of the photograph printing machine, the terms of the lease, the forecast demand for the frames, the forecast demand for printed photographs, the competition in the framing market, etc.
90. [EVAL] Weighing up of the impacts on Ralph of the recommended source(s) of finance.
91. [EXAMPLE] Leasing involves paying a monthly fee (K) In this case Ralph would pay $400 per month for five years (APP) That is a greater cost to Ralph than purchasing outright (AN) Because it would be $14 000 more, reducing Ralph's profit (DEV) Ralph should choose to sell his printing machine (EVAL) because the level of competition in his current market is already increasing. There may be no market for his printing machine if he waits (EVAL). It really depends on how confident Ralph is about the likely success of the new business venture (EVAL)
92. [EXAMPLE] Selling the photograph printing machine would mean he no longer has it (K) Which means Ralph can't continue his current printing business (APP) This is a much bigger risk for Ralph than leasing (AN) However, it is $14 000 cheaper so he is able to make a bigger profit (DEV)