NN is a small business owned by Natalia. NN produces and sells a range of natural skincare products. In 2020, Natalia started making her own skincare products at home using natural ingredients. She realised that there was a demand for her products among her friends and family. Natalia then decided to turn her hobby into a business and launched NN in 2021. Natalia operates her business from a rented workshop with limited space, where she makes her products by hand. She buys her ingredients from local suppliers who share her values of environmentally friendly production. NN has been growing steadily and has gained a loyal customer base. NN has received positive reviews from beauty magazines. Natalia's skincare products are sold through her own website, social media platforms and local retailers who specialise in selling natural products. Natalia is developing a new face cream. Table 2.1 shows price and cost estimates for the new face cream. Table 2.1 Price and cost estimates | Product | Price | Allocated fixed costs | Variable costs per unit | |---|---|---|---| | Face cream | $5 | $12000 | $2 | The skincare market is very competitive. There are many established brands that offer similar products to NN, but with wider distribution channels. Natalia needs to balance her time between production, managing orders, delivery, marketing and other administrative tasks. She works long hours and is stressed and exhausted. Natalia is considering outsourcing to increase NN's production capacity.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2025). The mark or mark type is shown in brackets.

1. [1] (a)(i) A01 Knowledge and understandin (max 1 mark) Indicative content Responses may include: • employees • owners • shareholders • managers • directors • investors
2. [1] (a)(ii) A01 Knowledge and understandin (max 1 mark), including: • stages/routes/path a good/service passes through to the final buyer/customer/consumer • how a product or service gets from the producer to the final customer/from supplier to consumer
3. [1] (a)(ii) AO2 Application Explanation of distribution channels (max 1 mark), including: • can be direct/indirect/digital • help businesses access wider markets • efficient for getting products to customers • convenient for customers • reduce costs through specialisation • help gain brand recognition
4. [1] (a)(ii) Application for distribution channels (max 1 mark), including: • vary according to business type • business can use more than one channel such as selling through website and retail shop • examples of distribution channels such as: producer sells direct to the consumer involves intermediaries such as wholesalers/retailers/agents digital platforms/websites/apps/social media • example of a business distribution channel
5. [1] (b)(i) formula: break-even output = fixed costs / selling price-variable costs (contribution per unit) (1)
6. [1] (b)(i) calculation of contribution per unit = $5 – $2 = $3 (1)
7. [1] (b)(i) calculation of output = 12 000/3 (1) = 4000 units
8. [3] (b)(i) Answer = 4000 (3)
9. [1] (b)(ii) A01 Knowledge and understanding – Knowledge of a limitatic _(max 1 mark), including: • may be based on unrealistic assumptions • price can change • fixed costs can change • variable costs do not always stay the same • some costs semi-fixed/variable • sales not the same as output • hard to calculate for a single product in a business. • does not take account of changes in the external environment
10. [1] (b)(ii) AO2 Application Explanation of a limitation (max 1 mark), including: • leads to inaccurate analysis • assumes all units produced are sold • example of changing fixed costs such as rent/salaries/investments • example of changing variable costs • example of semi-fixed/variable costs • example of difference between sales and output such as unsold inventory/returns/discounts • products may have different profit margins
11. [1] (b)(ii) Context applied to a limitation (max 1 mark), including: • answer to 2(b)(i) (OFR) • price of $5 • sells other products that contribute to fixed costs • use of table 2.2 • rents workshop • competitive market
12. [1-2] (c) A01 Knowledge and understanding (2 marks max) Knowledge of an advantage (max 1 mark), including: • more flexible and adaptable to changing customer needs or market conditions • more personal and responsive customer service • lower overheads and operating costs • easier to control and manage • able to target niche markets or segments Knowledge of a disadvantage (max 1 mark), including: • lower economies of scale • high unit costs. • low bargaining power • difficult to be competitive • may not be able to fulfil all orders • smaller customer base • fewer distribution channels • limited funding opportunities
13. [1-2] (c) AO2 Application (2 marks max) Max one APP for application to an advantage and Max о APP for application to a disadvantage • needs to sell 4000 units of new product to break even (OFR from 2(b)(i)) • high fixed costs of one product such as the new face cream $12 000 • niche market for natural ingredients in skincare • competitive market with large chains/established brands • can quickly adapt products for different skin types • hand-made products • Natalia manages all tasks/no employees • Natalia works long hours/stressed and exhausted
14. [1-4] (c) AO3 Analysis (4 marks max) Limited analysis (AN) candidate shows one link in the chain of analysis. Developed analysis (DEV) candidate shows two or more links in the chain of analysis or a two-sided analysis. Advantages, including: • can be more flexible and adaptable as a small business – such as by being able to modify its products/prices/promotions/places quickly and easily according to customer feedback or market trends. • increase customer satisfaction – leading to customer loyalty/retention. • reduced fixed costs more profit Disadvantages, including: • small market and high costs – lead to a lower profit margin • less potential for growth – limited access to capital • difficult to compete in the market – less brand recognition • limited sources of finance - difficult to attract investors/obtain loans
15. [1-2] (d) A01 Knowledge and understanding – of outsourcing (mas), including: • the process of contracting out a business activity or function to another business/organisation • pay other businesses to take on some tasks • can help reduce unit costs • a business can concentrate on what it does best • can reduce risks • specialists skilled in function • specialist facilities
16. [1-2] (d) AO2 Application (2 marks max) Limited applicatior APP applies knowledge of outsourcing to NN once. Developed application APP APP applies knowledge of outsourcing to NN twice. • growing demand for its products • small business • Natalia works long hours/stressed and exhausted • NN's values/standards • Natalia's passion and satisfaction as an entrepreneur • loyal customer base • competitive market • narrow distribution channels • organic ingredients • natural, handmade products • local suppliers • small, rented workshop • answer to 2(b)(i), required output/sales to break-even
17. [1-4] (d) AO3 Analysis (4 marks max) Limited analysis (AN) candidate shows one link in the chain of analysis. Developed analysis DEV candidate shows two or more links in the chain of analysis or a two-sided analysis. Arguments for outsourcing: • outsourcing allows a business to scale up production no need to invest in larger premises or equipment. • would free up time to focus on other tasks – like product development/marketing. • external manufacturers may have better equipment and processes – leading to improved efficiency/product consistency. • this could enhance reputation – supporting growth/sales
18. [1-4] (d) AO3 Analysis (4 marks max) Arguments against outsourcing: • could compromise product quality – resulting on dissatisfied customers • customers may perceive outsourced products as less personal – reducing demand • may conflict with values – especially if the external firm does not share the same environmental standards. • may involve high initial costs or long-term contracts- risky for a small business with limited financial resources.
19. [1-6] (d) AO4 Evaluation (6 marks max) Limited evaluation (EVAL) unsupported judgement and/or a weak attempt at evaluative comment Developed evaluation (E) supported judgement and/or reasonable evaluative comment Developed evaluation in context (EE) supported judgement in context and/or reasonable evaluative comment in context. Outsourcing could help NN expand production and reduce Natalia's workload, but it also poses risks to quality, brand identity, and cost control. A hybrid approach may be most suitable – Natalia could outsource part of the production while maintaining control over key processes. This would allow NN to grow sustainably while preserving its unique brand values. Other points might include: • depends on various factors – such as her objectives, resources, capabilities, market conditions • judgement over the most important/influential factor affecting growth of NN • elements that the judgement could depend upon, such as losing control over the quality and consistency of the products, compromising on the natural and organic ingredients used in the products, or damaging the reputation and image of NN • judgement on the implications for cost and NN's ability to compete with big brands • weighing up of the factors and their relative influence on NN's options Accept all valid responses