O-LevelCommerceBusiness enterprise7100/21 · Oct/Nov 2013 · Q420 Marks

Lucy and Imran own a fashion boutique as a partnership. They invite Max to join them as a sleeping partner.

(a)(i)State three features of a partnership.[3]
(a)(ii)Explain why operating a business as a partnership might be considered risky.[4]
(b)Explain what is meant by a sleeping partner.[3]
(c)After signing the partnership deed, Max applies to an insurance company to buy insurance cover against the failure of the business. Will the insurance company accept Max's application or not? Give reasons for your answer.[4]
(d)Lucy and Imran are considering: • introducing a store card for customers • offering informal credit to customers • providing loyalty cards for customers. Would these benefit the business? Give reasons for your answer.[6]

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2013). The mark or mark type is shown in brackets.

[3] owners are partners
the aim of the business is to make a profit
enable people to pool together their skills/knowledge/contacts
capital provided by the partners
unlimited liability
profits distributed among the partners
number of partners is usually 2-20
control of the partnership is by the partners
any other relevant feature
N.B. can have sleeping partners = 0 marks
[4] partners have unlimited liability and so are responsible for all the debts of the business
personal assets are at risk
disagreements between partners may hinder the partnership and could lead to the break up of the business
each partner can bind the other partners to a certain course of action that may not have been agreed upon
profits are shared among several people
the number of partners is usually restricted. This could limit the partnership's ability to raise capital
there may be lack of continuity as the death of a partner may lead to the break up of the partnership unless provided for in the Partnership Deed
the partnership is not a legal entity. Each partner could be sued individually. Each partner has complete responsibility legally for the actions of the partnership
any other relevant point
[3] a partner who contributes capital
and shares in the profits
but does not take an active part in the business
and has no voting rights in the business
any other relevant point
[4] no
business failure is a non-insurable risk
the risk of failure cannot be assessed/mathematically calculated
as there are no past records to identify what is business failure
and so no premium can be fixed
it is possible that the partners may deliberately cause the business to fail in order to collect the compensation
any other relevant point
[6] Level 2 (4-6 marks)
Has discussed all three options (or two or the options) and has shown, with reasons, whether or not any or all of them would benefit the business.
(If a candidate has discussed only one option, award 4 marks max.)
Lucy and Imran might decide to introduce a store card for customers. If it is a large shop, with many customers, this may be worthwhile but if it is a small shop, the costs of setting this up and the administrative costs may be prohibitive. Many customers may not be interested in the store card and many of the customers may not visit the shop on a regular basis. There would also be the risk of bad debts.
Lucy and Imran might offer informal credit to their regular customers. They are likely to be selling quite expensive clothing and may increase sales by allowing regular customers to pay gradually for items on a weekly basis. There would be no interest added so there would not be an immediate monetary benefit but it might lead to increased trade.
Lucy and Imran might provide loyalty cards for customers. They are in a competitive market and providing loyalty cards might make customers use their shop rather than those of their competitors. Again there would be costs in setting up the scheme and providing cards to customers. They would have to decide what rewards to offer to return customers such as money off additional goods or free gifts and again this could add to their costs.
The most likely option to benefit the business is informal credit. There would be some administrative work involved but it is possible that increased trade would result. The other two options involve costs and the business might find that these costs outweigh the benefits.
Level 1 (1-3 marks)
Has commented on some of the options and has shown with/without reasons whether or not they would benefit the business.
Store cards are offered by department stores and other large-scale retailers. Store cards would cost too much. There may be bad debts. Informal credit means paying weekly. Some customers might like this. No interest is paid. Loyalty cards might make customers return. They will need to reward their loyalty. This will be costly. None of these may benefit the business.