Evaluate the likely impact on AC's future profitability of the forecast economic changes in Appendix 1.

Mark scheme

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

1. [Level 2 Knowledge 2 marks] 2 marks Two relevant points
2. [Level 2 Application 2 marks] 2 marks Two points applied
3. [Level 2 Analysis 6 marks] 4-6 marks Good use of theory and/or reasoned argument
4. [Level 2 Evaluation 6 marks] 4-6 marks Good judgement shown
5. [Knowledge] Understanding of profitability – profit margins and ROCE.
6. [Knowledge] Economic environment includes consideration of: Real GDP is measure of output of economy adjusted for inflation.
7. [Knowledge] Economic environment includes consideration of: Inflation is a sustained increase in the average price level.
8. [Knowledge] Economic environment includes consideration of: The unemployment rate measures the percentage of the labour market without work.
9. [Knowledge] Economic environment includes consideration of: Interest rates are the cost of borrowing.
10. [Knowledge] Economic environment includes consideration of: Direct taxes include taxes on income and profits.
11. [Knowledge] Economic environment includes consideration of: Indirect taxes are a tax on spending.
12. [Knowledge] Economic environment includes consideration of: Fiscal policy – taxation.
13. [Knowledge] Economic environment includes consideration of: Monetary policy – interest rates.
14. [Application] Inflation is increasing. This will lead to increase in costs.
15. [Application] Increase in indirect tax may reduce spending.
16. [Application] Direct tax increase will reduce disposable income.
17. [Application] Higher interest rates make borrowing more expensive.
18. [Application] Fall in unemployment may affect ability of AC to recruit.
19. [Application] Linking economic changes to expansion plans including opening premium gyms, selling to consumer market and exporting.
20. [Application] Capital cost of expansion plans: option 1 is $15m and option 2 is $20m.
21. [Application] Contractionary fiscal and monetary policies being implemented.
22. [Analysis] Higher inflation leading to higher costs for AC and therefore higher prices which will reduce demand.
23. [Analysis] As GDP grows, incomes may increase resulting in more spending.
24. [Analysis] Fitness equipment a luxury good and demand likely to have a positive correlation with income.
25. [Analysis] Changes in taxation are negative for AC and likely to dampen demand in the economy due to lower disposable income and higher prices as result of indirect taxes. This could result in lower profits when combined with the higher inflation.
26. [Analysis] Increases in taxation could result in increase in wage demands from employees.
27. [Analysis] Real interest rates are negative, so this could be a good time to borrow as value of debt will decrease over time.
28. [Analysis] Lower unemployment may lead to employees demanding higher wages as they will be more difficult to replace.
29. [Evaluation] Decision, supported by reasoning, on the likely impact on AC of the economic changes in Appendix 1.
30. [Evaluation] Judgement, supported by reasoning, of the most important economic change.
31. [Evaluation] Elements that the evaluation/judgement might depend on: Changes broadly negative for AC in terms of costs and demand.
32. [Evaluation] Elements that the evaluation/judgement might depend on: Impact depends on accuracy of the forecasts.
33. [Evaluation] Elements that the evaluation/judgement might depend on: How long term are the changes?
34. [Evaluation] Elements that the evaluation/judgement might depend on: AC is considering strategies for growth. How will the economic changes impact the risk of those strategies?
35. [Evaluation] ARA