Fashion Watches Ltd owns several shops that sell imported watches.

Mark scheme

Marking points from the official mark scheme (May/June 2014). The mark or mark type is shown in brackets.

1. [4] (a) Any four points × 1 mark each and up to 2 marks for a well-developed point: • examine the watch strap • look at receipt • apologise • replace the watch strap • offer better quality watch strap • refund the money • could do nothing as the customer has had the watch strap for six weeks • refer the problem to the producer – poor quality. Any other relevant point.
2. [1] (b) (i) One mark for profit margin on a product offered for sale or percentage/allowance added to cost price.
3. [4] (ii) Any two factors explained × 2 marks each: • the overall profit that the company wishes to make – may have a high mark-up because watches will have a low rate of turnover • the level of expenses the company incurs – if located in area of high rents, may have a higher mark-up to cover higher expenses • the competition that Fashion Watches Ltd faces – may need to charge at the same price or lower than the competition • how long individual watches have been in stock – may want to dispose of stock so has a low mark-up on these watches • the season of the year – may have a higher mark-up just before Christmas when people may purchase watches as presents • value of the watches – higher value watches may have a higher mark-up level of sales than the business is experiencing – may need a lower mark-up to encourage sales • level of gross profit made in the previous year • what the company thinks it might be able to 'get away with' and not lose sales. Any other relevant point.
4. [6] (c) Level 2 (4-6 marks) Has discussed both options and has made a reasoned recommendation. (If only one option is discussed, award 4 marks max). Fashion Watches Ltd may make use of retained profits if there are sufficient profits to use. There would be no repayment and no interest paid and this money would be available immediately. Fashion Watches Ltd might, however, prefer to use any retained profits it has for other purposes or to keep it for emergencies. It will then look to alternative external sources of finance. A bank loan is available for set purposes at a fixed rate of interest. It can be long-term with instalments paid from the earnings of the business. The shops would be used as security for the loan and may be repossessed for non-payment of the loan. Before deciding which option to choose, Fashion Watches Ltd should consider factors such as the amount needed, the length of time the finance required, interest rates charged for both the mortgage and the loan, the urgency of the finance, the amount of borrowing it already has and the risk of non-repayment. It is recommended that Fashion Watches Ltd use some retained profits and then consider a bank loan. Level 1 (1-3 marks) Has commented on one or both options with/without a recommendation. Fashion Watches Ltd should use retained profits. No interest is paid. No repayment is is needed. It may not be enough. Fashion Watches Ltd should then borrow from a bank. There is fixed interest. The shops can be used as security.
5. [2] (d) (i) Any two points × 1 mark each: • A group of countries that have made a free trade agreement between them agreeing that no tariffs are paid between them and have established a common external tariff to non-member countries. • Allow an example. Any other relevant point.
6. [3] (ii) Any three points × 1 mark each and up to 2 marks for a well-developed point: • imported watches will be cheaper than those imported from outside the trading bloc as there will be no import duty • less regulations when importing the watches so quicker to obtain them • manufacturers of watches within the trading bloc may be keen to do business on competitive terms • may be purchasing using a common currency so no problems of exchange rates. Any other relevant point.