DDD Enterprises exports leather goods to customers in other countries.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2016). The mark or mark type is shown in brackets.

1. [4] (a) (i) 1 mark for stating method: air/sea freight and up to 3 further marks for explanation of why DDD Enterprises uses it • Air transport (1) is the fastest way (1) of getting goods over long distances (1) • Leather goods will generally be low in bulk/lightweight (1) and high in value (1) thus absorbing the increased cost (1) • Costs have been decreasing (1) such as insurance/packing (1) due to larger capacity planes (1) and better fuel economy (1) • Less risk of theft/damage/more secure (1) as not likely to be with an airline for a long time (1) • If fashion goods arrive quickly, they can be sold more quickly (1) so less risks of going of fashion (1) and of damage/deterioration (1) • Sea transport (1) carries many goods/bulky loads (1) over long distances (1) cheaper than air (1) Note. No marks to 'other countries'. Accept any other relevant points.
2. [2] (a) (ii) 1 mark for a brief explanation and a further mark for a fuller explanation • Customs officers may need to examine the leather goods due to the need to ensure that hides of endangered animals have not been used (1) as that would be against the law (1) • To inspect documentation (1) e.g. ensure the details of number on the invoice is correct (1) to ensure that goods are what they are (1) • That the correct amount of duty has been paid (1) to raise revenue/protect home leather producers (1) • To prevent smuggling (1) of ille.g.al goods/any other items inside the leather goods (1) • For trade barriers (1) e.g. quotas (1) Accept any other relevant points.
3. [4] (a) (iii) Valid points include (Any 4 × 1 marks): • Different countries use different currencies (1) and exchange rates fluctuate daily (1) DDD may price goods in U.S.$, (1) but the amount paid by the local importer will fluctuate as the local currency fluctuates/may lead to a loss for DDD (1) • If DDD's currency becomes stronger (1) DDD may not be able to export the same quantity of goods before (1) since DDD's goods will be more expensive (1) and the importer may look elsewhere to import leather goods (1) • If DDD gives credit to its international customers, then it is more difficult to establish the credit worthiness of its customer (1) Different customs and unstable countries may increase the risk of non-payment (1) and leads to the need to recover debts (1) through the court system may be more difficult (1) Accept any other relevant points.
4. [6] (b) (i) Level 2 (4–6 marks) Has discussed two sources of finance and has given a reasoned recommendation. (If a candidate has discussed only one source award 4 marks max). Level 1 (1-3 marks) Has commented on one or both sources with/without recommendation • One source of finance would be the retained capital, a second would be a bank loan, another would be to sell shares, and selling assets. • The advantage of using retained earnings is that there is no interest to pay, as the cash is already owned by the business. • The disadvantage of retained earnings is that there is often not enough, because it has been used for dividends or other capital expenditure. • A bank loan may be approved if DDD has a good record and the financial statements show that it could be repaid. • The bank loan will cost DDD interest and has to be repaid over a number of years. • Selling shares could raise more capital to fund the machinery purchase. This would be easier if DDD is a public limited company. • The ownership of the company would have to be shared with the new shareholders. • If the company have sufficient internal funds (retained earnings) this would be the cheapest way, otherwise the bank loan would probably be the easiest to obtain. Note. Hire Purchase and leasing not suitable sources. Accept any other relevant points.
5. [4] (b) (ii) Valid points include (Any 4 × 1 marks) • No initial cost of purchasing (1) as leasing means DDD does not own the machinery (1) • No borrowing needed (1) so no interest to pay (1) • A maintenance contract is usually in place for a leased machine (1) so they do not have to pay/worry about paying for repairs (1) • They may keep their machinery up-to-date/upgraded (1) by leasing new machines when one lease is finished (1) • Working capital can be used for other purposes (1) allow example (1) Accept any other relevant points.