FB is a private limited company that produces premium meat-free burgers. FB has two shareholders, Bill and Sanjay. They each own 50% of the shares. FB's burgers are produced in a factory using batch production. FB employs semi-skilled workers in the factory and promotes its burgers as being 'hand-made'. FB has been operating in country Q for three years. The demand for premium meat-free burgers in country Q has increased significantly in this period. An extract from FB's financial data over this time period is shown in Table 2.1. Table 2.1: Financial data for FB 2018 2019 2020 Gross profit (m) 0.6 3 12 Revenue (m) 1.8 7.2 25 Gross profit margin 33.33% 41.67% X% The brand awareness and market share of FB has also been increasing. Bill thinks this is because of effective advertising, good customer retention and an effective price strategy. However, FB's current factory is not modern enough to keep up with this increase in demand. Bill and Sanjay want to change from batch production to flow production to modernise the factory. However, this will require an external source of finance. Bill has suggested two possible sources of finance to fund this change. Source 1 – venture capital A venture capitalist has offered to buy 10% of FB for $1m. She wants to be part of the decision-making at FB. She has experience of helping businesses to grow within country Q. Source 2 - a bank loan A bank has offered to loan FB $1m at a high interest rate. The bank manager is worried that the demand for meat-free burgers may decline in the future and would require the loan to be paid back within one year.

Mark scheme

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

1. [2] A full definition should cover the following elements: owners have limited liability; cannot sell shares on the stock market.
2. [2] A business with limited liability and shares cannot be sold on the stock market.
3. [2] An incorporated business and shares can only be offered to specified people.
4. [1] A business with limited liability.
5. [1] Can only offer shares to specified people.
6. [1] An incorporated business.
7. Do not credit 'A company with private owners' as TV.
8. [1] Owner of a part of a business and receives dividends.
9. [1] A person or company that owns at least one part of a business and benefit from a rise in the value of a company.
10. [1] The owner of a part of a business.
11. [1] Owns the business.
12. [1] Example or some other way of showing good understanding, e.g. a benefit of being a shareholder; dividends, invite to AGM etc.
13. [1] Some understanding that it is ownership of part of a company.
14. [1] Understanding of ownership of a business (buys, purchases, invests etc.)
15. Do not accept share in a company.
16. [3] Correct calculation (with or without working or %)
17. [2] Correct use of figures
18. [1] Correct formula
19. Note: formula can be implied form correct use of figures
20. Gross profit margin = (Gross profit / Revenue) × 100
21. Gross profit margin = ($12,000,000 / $25,000,000) × 100 = 48%
22. Do not accept an incorrect answer e.g. 0.48 without working.
23. [3] Explanation of one reason for a change in gross profit margin in context (APP + APP)
24. [2] Explanation of one reason for a change in gross profit in context (APP)
25. [1] Identification of one reason for a change in gross profit (K)
26. Knowledge: A change in gross profit margin is likely to come from: A decrease in costs – whilst maintaining (or increasing revenue) revenue; An increase in revenue – whilst maintaining (or decreasing costs).
27. Context is likely to come from: GPM is increasing from 33.33% to 41.67% to 48% (OFR from Q2bi); Revenue has increased from $1.8m to $7.2m to $25m; Brand awareness has increased; Market share has increased; Demand for premium meat-free burgers has increased in country Q; FB uses semi-skilled workers; FB uses batch production.
28. Exemplars: Revenue has increased (K) from $1.8m in 2018 to $25m in 2020 (App) but costs have not risen by as much as revenue (App); FB is selling more (K) because the market share has increased (App) and gained economies of scale (App).
29. [4] Shows understanding of both batch and flow production in context (Knowledge and Application)
30. [4] Developed analysis of one advantage and one disadvantage of changing from batch to flow production in context (Analysis)
31. [3] Shows understanding of batch or flow production in context (Knowledge and Application)
32. [3] Developed analysis of one advantage or one disadvantage of changing from batch to flow production in context (Analysis)
33. [2] Shows knowledge of both batch and flow production (Knowledge and Application)
34. [2] Limited analysis of one advantage and one disadvantage of changing from batch to flow production (Analysis)
35. [1] Shows knowledge of batch or flow production (Knowledge and Application)
36. [1] Limited analysis of one advantage or one disadvantage of changing from batch to flow production (Analysis)
37. Knowledge: Batch production; Flow production.
38. Application: Premium meat-free burgers; Semi-skilled workers; Burgers are promoted as 'hand-made'; Demand for premium meat-free burgers increasing; FB's brand awareness and market share has been increasing; Good customer retention; Factory not modern enough to keep up with demand; Need for an external source of finance.
39. Analysis: Advantages may include: Faster production; Uniformity of production; Increased quality (fit for purpose); Economies of scale; Lower labour costs. Disadvantages may include: Decreased perceived quality (less premium); Reduced employee motivation; Initial capital cost; Possible decreasing demand in the future.
40. [7] A justified recommendation for FB's chosen source of finance in context (Analysis and Evaluation)
41. [6] A recommendation for FB's chosen source of finance in context (Analysis and Evaluation)
42. [5] An evaluation statement of one source of finance in context (Analysis and Evaluation)
43. [4] Understanding of venture capital and a bank loan in context (Knowledge and Application)
44. [4] Two-sided argument based on the use of venture capital or a bank loan in context (Analysis and Evaluation)
45. [3] Understanding of venture capital or understanding of a bank loan in context (Knowledge and Application)
46. [3] One-sided argument based on the use of venture capital or a bank loan in context (Analysis and Evaluation)
47. [2] Knowledge of two sources of finance (Knowledge and Application)
48. [2] Limited analysis two sources of finance (Analysis and Evaluation)
49. [1] Knowledge of one source of finance (Knowledge and Application)
50. [1] Limited analysis of one source of finance (Analysis and Evaluation)
51. Knowledge: Internal sources of finance: retained earnings, sale of unwanted assets, sale and leaseback of non-current assets, working capital. External sources of finance: share capital, new partners, venture capital, overdrafts, leasing, hire purchase, bank loans, mortgages, debentures, micro-finance, crowd funding and government grants.
52. Application: Source 1 (venture capital): 10% ownership of FB for $1m – values the business at $10m; She wants to be part of the decision-making at FB; Experience of growing business in country Q. Source 2 (bank loan): High interest rate; Bank manager worried that demand may decline in the future; Needs to be repaid within a year.
53. Analysis: Source 1 (venture capital): Lower profit/dividend for Bill and Sanjay – however revenue and GPM is growing; VC may disagree with Bill and Sanjay – however her experience may be beneficial; VC knows how to grow a business – however she may not have any knowledge of the specific market. Source 2 (bank loan): Increased business costs (interest) – however no loss of ownership; Speed of repayment may affect business operations/growth – however reduces the interest to be paid; May increase risk of business – however no impact on Bill and Sanjay's decision making.
54. Evaluation: A judgement/recommendation over which source should be chosen; Evaluation of the most important factors in the decision; Evaluation of what other information the decision may depend upon; market expectations, external influences etc.