Auto Bike (AB) AB is a private limited company that repairs and maintains motorbikes. AB has nine garages in country J and employs eight highly qualified mechanics in each garage. Two of the most popular motorbike services that AB sells are the standard service and the advanced service. Table 2.1 contains price and cost information for these services. Table 2.1: Price and cost information Price | Direct costs per service | Allocated indirect costs per service ---|---|--- Standard service | $250 | $50 | $60 Advanced service | $400 | $60 | $100 In April, AB sold 1000 standard services and 200 advanced services. The profit margin for an advanced service is higher than the standard service. The directors have decided to promote the advanced service to try and increase sales. Each garage has been given a budget to use for below the line promotion methods with an objective of increasing sales of advanced services in the next six months. The level of motivation of the mechanics is low. Many mechanics believe that they are not paid well and the conditions of work are dirty and noisy. AB uses a time-based payment method which rewards each mechanic at the same hourly rate. In a recent survey, many mechanics complained that the payment method was unfair. They believe it rewards ‘lazy workers' as much as those who work hard. It also does not take into account the difficulties involved in some jobs and the simplicity of others. The Human Resources Director has been asked to investigate a new payment method.

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] The aims that a business wants to achieve
4. [2] The targets a business wants to reach
5. [2] What an owner is aiming to do
6. [1] The long-term aims which can be about profit, sales, or CSR
7. [1] What a business wants to achieve
8. [0] Objectives are the business objectives that a business has
9. [AO1] Specific and measurable goals which a business sets out to achieve.
10. [AO1] an idea that an objective is an aim/goal/target (allow any similar term)
11. [AO1] that a business (or a stakeholder) wants to achieve/reach/obtain (allow any similar term).
12. [1] Understanding of feature(s) of a company
13. [1] Understanding of a feature unique to a private limited company
14. [1] Application of a private limited company to an example or some other way of showing good understanding
15. [3] A business with shares but they cannot be sold on the stock market. This limits their sources of finance
16. [3] A limited liability business that does not have to publish its accounts so the competitors cannot see them
17. [2] Sells shares but not on the stock exchange
18. [1] A company which can sell shares has limited liability and is incorporated
19. [AO1] an incorporated business
20. [AO1] shares can be sold/owners are shareholders
21. [AO1] limited liability
22. [AO1] separate legal identity
23. [AO1] continuity
24. [AO1] must make accounts available to everyone
25. [AO1] cannot sell shares on a public stock exchange
26. [AO1] do not need to publish accounts (just make available)
27. [AO1] may only be sold to family and/or friends
28. [AO2] application of how any of the K&U points might apply to a business, e.g. a private limited company not being able to sell shares on the stock market might restrict its ability to raise finance
29. [3] Correct answer(s) with or without correct working or $
30. [2] Correct calculation of total revenue and total costs for both services
31. [2] Correct calculation of the total profit of standard or advanced services
32. [2] Correct calculation of the profit from one standard and one advanced service
33. [1] Formula: revenue – total costs or (price – total costs per unit) x quantity
34. [1] Correct calculation of one total revenue or one total cost figure
35. [1] Correct calculation of the profit from one advanced or one standard service
36. [3] 188 000 (no working)
37. [3] 140 000 and 48 000
38. [2] 140 000
39. [2] 48 000
40. [2] $140 + $240 = $380
41. [3] Explanation of one possible problem of allocating indirect costs in context
42. [2] Identification of one possible problem of allocating indirect costs in context
43. [1] Knowledge of one possible problem of allocating indirect costs
44. [K] not attributable to the production process
45. [K] not attributable to a specific product/service
46. [K] how to split costs such as marketing, administration, expenses when they are not directly linked to a costs centre
47. [APP] The attributed indirect cost of an advanced service is $40 more than a standard service (APP) – this may not reflect the difference in marketing/admin/expenses (APP+APP).
48. [APP] It may be difficult to allocate costs to the different types of service (APP) because some garages may be busier than others (APP+APP).
49. [APP] The allocation is fixed, even though the garage sells five times more standard services than advanced (APP). If a garage does more/fewer services, then the contribution should vary (APP+APP).
50. [APP] The two services have different allocated indirect costs (APP) – $60 for a standard service and $100 for an advanced service (APP+APP) – however, there is no reason given for the difference (APP+APP).
51. [EXAMPLE] It may be difficult to know the true level of indirect cost that should be allocated to each product. The standard service only has an allocation of $60. But it may take as much administration as the advanced service.
52. [4] Applies promotion to two below the line promotion methods
53. [4] Good analysis of two below the line promotion methods in context
54. [K] Sales promotion; allow promotional pricing (i.e. BOGOF), but not just pricing
55. [K] Direct marketing and direct mail, e.g. flyers
56. [K] Public relations
57. [K] Sponsorship
58. [K] Personal selling
59. [K] Branding and merchandising
60. [K] Telemarketing
61. [K] Trade fairs and exhibitions
62. [K] Social media
63. [K] Using own website (not a third party)
64. [K] Word of mouth
65. [APP] AB repairs and maintains motorcycles
66. [APP] Nine garages
67. [APP] Highly qualified mechanics
68. [APP] Two types of service: standard and advanced
69. [APP] May be possible to 'upsell' from standard to advanced services
70. [APP] AB sells five times as many standard services compared to advanced services
71. [APP] Higher profit margin for advanced services
72. [AO3] Sales promotion: no outlay required (AN) – may focus on upselling from standard services to advanced, meeting the objective of increasing advanced sales (DEV) – however, may reduce sales of standard services (DEV).
73. [AO3] Direct marketing and direct mail: can be focussed on customers who may have purchased services from AB in the past which can increase the chance of targeting the right customers (AN) – reduces the cost of promotion, increasing profits (DEV).
74. [AO3] Personal selling: upselling advanced services increases sales of a more profitable service (AN) – which could lead to a higher average profit margin and increased total profit (DEV).
75. [AO3] Sponsorship: of local/national sports teams close to branches of AB may link AB to a successful team leading to increased sales (AN) – however, if the team does badly then AB may suffer from being associated with the team, leading to decreased sales (DEV).
76. [EXAMPLE 1] Sponsorship (K) Of a sports team that competes near one of AB's nine garages (APP) This could lead to the supporters of the team seeing the AB brand every week when their team plays, increasing sales for AB (AN) However, AB may have to pay a large amount to sponsor the team and the audience may not have a motorcycle, leading to a waste of AB's marketing budget (DEV)
77. [EXAMPLE 2] Direct mail (K) AB could send emails to all of their previous customers because they know that they are most likely to own a motorcycle (APP) These previous customers are likely to purchase services from AB, increasing sales (AN) And since many vehicles need a yearly service, it may build up a loyal customer base who repeat purchase from AB often (DEV)
78. [7] Justified evaluation based on argument in context
79. [K] Salary - a set payment for the completion of a set of tasks. Does not vary based on time/output.
80. [K] Piece rates - payment per item of output.
81. [K] Commission - a reward for sales, usually as a percentage of sales/profit.
82. [K] Bonuses - a payment to reward the best employees.
83. [K] Profit sharing – a reward based on the level of profit to link employee pay to success of the business.
84. [K] Performance related pay – linking the business/employee performance to the amount paid.
85. [APP] AB repairs and maintains motorcycles
86. [APP] Nine garages
87. [APP] Highly qualified mechanics
88. [APP] Two types of service: standard and advanced
89. [APP] Higher profit margin for advanced services
90. [APP] Motivation of the mechanics is low
91. [APP] Mechanics believe that they are not paid well
92. [APP] Working conditions are dirty and noisy
93. [APP] Currently use time-based payment based on hours worked
94. [APP] Some mechanics believe current pay system rewards lazy workers
95. [APP] Current pay does not take into account level of difficulty of different jobs.
96. [AO3] (Salary) could be varied for each employee based on experience/skill, increasing motivation of those who have higher skills (AN) – however, likely to be seen as unfair as current method and therefore increasing cost with no increase in revenue (DEV).
97. [AO3] (Piece rates) may reward speed increasing the number of services that AB can perform and increase revenue (AN) – but could reduce quality which may ruin AB's reputation which is important for a service (DEV).
98. [AO3] (Commission) may reward sales and encourage the upselling of standard to advanced service, increasing the profit of AB (AN) – however, since services seem to have a fixed price this again would not reward complexity or quality of work, demotivating the mechanics (DEV).
99. [AO3] (Bonuses) could be used to reward harder work/skill increasing the number of and/or quality of AB's services and increasing revenue (AN) – but may be divisive amongst workforce leading to more demotivation and a lack of quantity or quality (DEV).
100. [AO3] (Profit sharing) may be used to reward hardest worker/those with greater skill, motivating the mechanics to produce more (AN) – however, may not account for how much each worker really contributes to the overall profit (DEV).
101. [AO3] (Performance related pay) may reward hardest workers leading to increased sales (AN) – but might not reward the complexity of the task, in which case it may demotivate and be seen as unfair (DEV).
102. [EVAL] A recommendation about a new payment method for the mechanics at AB.
103. [EVAL] A judgement over the relative suitability of the chosen payment method.
104. [EVAL] Elements that the recommendation/judgement could depend upon, including: the AB's budget, AB's profitability, the expected increase in sales from a motivated workforce, the profit margin of each of the types of services, the reaction of the mechanics, the payment system/level at similar businesses (competitors).
105. [EVAL] Weighing up of the impacts on the mechanics and AB of the recommended new payment method.
106. [EXAMPLE 1] AB could pay their mechanics using a piece rate (K) This would mean paying them for each service they complete on a motorcycle (APP) This will reward the mechanics who work hardest because they will earn more and increase the capacity of AB (AN) This means that AB can sell more services leading to increased profit (DEV) A piece rate system of payment may be a suitable replacement for AB's time-based system (EVAL). This is because it overcomes one of the mechanics' biggest concerns that lazy workers are currently rewarded the same as those who work hard (EVAL). However, its suitability depends on whether AB can ensure the mechanics do not cut corners and give poor quality services (EVAL)
107. [EXAMPLE 2] However, piece rate rewards quantity not quality (K) And a service business like AB needs a good reputation so that customers feel their motorcycle is safe (APP) If the services are rushed, then customers might start to complain and seek their money back (AN) This will damage AB's reputation and could lead to a significant loss of sales and profit (DEV)