Kyle bought a small fitness studio (gym) one year ago. He also sells some fitness clothing and healthy drinks and snacks. Kyle receives most of his gym bookings through text messages from customers. Fig. 3.1 shows a summary of his balance sheet. [Figure 3.1] Use Fig. 3.1 to help you answer the following questions.

Mark scheme

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

1. [1] A loan to buy property/house/land
2. [1] Overdraft
3. [2] Amount = $129 000 (2)
4. [1] Method = $100 000 + $29000 (1)
5. [3] Amount = $4000 (3)
6. [1] Method = $2000 + $1000 = $3000 (1)
7. [1] $5000 + 2000 = $7000 (1)
8. [1] $3000-$7000 or current assets – current liabilities (1)
9. [2] Only a small studio (1) lacks space (1)
10. Holding some perishables (1) can spoil/expire/go bad (1)
11. Reduces overcrowding of stock (1) less damage caused (1)
12. Reduces cost (1) of buying/warehousing stock/insurance (1) less capital tied up in stock (1) cannot afford to buy/hold more stock (1)
13. May lack demand for this stock/low rate of inventory turnover (1) better to use money for other activities (1)
14. Buy stock when demanded (1) reduces storage costs/expenses (1)
15. [3] Up to 3 marks for justified reasoning of yes and/or no responses
16. Yes – convenient/easy to receive (1) reduces time to take phone calls (1) no need to employ staff to take bookings (1) which would increase costs (1) easy to record customer phone number (1) Kyle can respond quickly (1) has record of booking (1) able to refer back to message later (1) in case of dispute (1) more convenient for customers to send (1) quicker than sending an email (1) cheaper/quicker to send (1) as most customers would have mobile/smartphones (1) can send message anytime/anywhere (1) no need for internet connection (1)
17. No - Kyle might not have all the customer details (1) and if there is a poor signal (1) he will not receive the message (1) the customer will not know whether he has read/ignored the message (1) expectation on Kyle to respond quickly (1) can put pressure on Kyle (1) some customers may not wish to use text messages (1) and might go to another fitness centre (1) some customers would prefer face-to-face/formal method / website (1)
18. [8] Level Mark Description
19. 3 7-8 The candidate is able to offer a thorough evaluation of whether Kyle should buy a fitness centre franchise.
20. 2 5-6 Candidate offers a satisfactory analysis of the advantages and/or disadvantages of Kyle buying a fitness centre franchise without evaluation.
21. 1 1-4 Candidate demonstrates some knowledge and understanding, with application to buying a fitness centre franchise.
22. 0 0 No creditable response.
23. A franchisee buys the local rights to use a well-known name, product and marketing of another company with a successful business model.
24. Advantages: Franchise will have access to a bigger market so Kyle does not have to establish his personal reputation
25. Kyle will receive advice on how to make the fitness centre successful – he needs this because he has made mistakes and has negative working capital
26. Support with marketing can increase sales
27. He can sell his studio, repay his mortgage and use his capital to buy the franchise
28. Disadvantages: Kyle has to pay for the franchise
29. Royalties will have to be paid from profits
30. Kyle will lose control so he cannot make his own decisions
31. Mistakes by one franchisee may create a bad image for whole business damaging Kyle's reputation and reducing sales revenue
32. Evaluation: As Kyle is ambitious to succeed, he might see buying a franchise as an opportunity to overcome his problems with his independent studio and benefit from gaining support and having an already established successful franchise. However, much depends on whether Kyle is happy to run the way the franchisor wants and pay royalties for all of his hard work.