Explain one benefit and one problem for ES of taking over other businesses.

Mark scheme

Marking points from the official mark scheme (May/June 2020). The mark or mark type is shown in brackets.

1. Award 1 mark for each relevant benefit/problem (maximum of two):
2. Relevant benefits might include:
3. Assets already set up for use – can use existing scooter factories and skilled employees
4. Makes it quicker to grow – as the existing production facilities can be used to increase the output of scooters – faster than setting up own factories
5. Have access to ready trained/skilled staff
6. Relevant problems might include:
7. High cost of buying other business – may need to sell additional shares on the stock exchange
8. May be difficult integrating the two companies – as the way of working may be very different in the smaller scooter businesses – and employees may not like the changes – leading to less efficiency
9. More difficult to control larger business – many more skilled employees in the business – possible diseconomies of scale
10. Award a maximum of 3 additional marks for each explanation of the benefits and problems of growing by taking over other businesses – one of which must be applied to this context.
11. For example:
12. The cost of buying other companies is high (1) and ES will have to raise large amounts of funds to allow them to do this (1). As a public limited company (app), it could sell additional shares to raise the finance, but this may lead to the existing shareholders losing some control over the business (1).
13. Level Description Marks
14. 3 Sound application of knowledge and understanding of relevant business concepts using appropriate terminology.
15. Detailed discussion of both companies.
16. Well-justified recommendation.
17. Candidates discussing both companies in detail, in context and with well-justified recommendation including why the alternative company was rejected should be rewarded with the top marks in the band.
18. 2 Sound application of knowledge and understanding of relevant business concepts using appropriate terminology.
19. Detailed discussion of at least one company.
20. Judgement with some justification/some evaluation of choice made.
21. Candidates discussing both companies in detail and applying it to the case should be rewarded with the top marks in the band.
22. 1 Limited application of knowledge and understanding of relevant business concepts.
23. Limited ability to discuss each company with little/no explanation.
24. Simple judgement with limited justification/limited evaluation of choice made.
25. Candidates outlining both companies in context should be rewarded with the top marks in the band.
26. 0 No creditable response.
27. Relevant reasons might include:
28. ABC company:
29. Revenue 300m lower than FGH (400m for FGH company - $100m for ABC company)
30. Gross profit = $50m
31. GPM = 50%
32. Profit = $10m
33. Profit Margin = 10%
34. ROCE is 5% lower than FGH but still good return on investment (25% for FGH – 20% for ABC)
35. Liquidity is good and shows that ABC can easily pay any short-term liabilities
36. FGH company:
37. Gross profit = $240m (Revenue $400m – Cost of sales $160m)
38. GPM = 60%
39. Profit = $30m
40. PM = 7.5%
41. Profit $20m higher than ABC
42. Current ratio is higher than ABC (ABC current ratio of 2 while FGH current ratio is 3)
43. Liquidity is too high and is not making good use of its current assets. There may be too much cash being held in the business.
44. Recommendation:
45. Justification might include:
46. ABC as profitability higher than FGH even though GPM is lower overall profitability is higher. Liquidity is also better for ABC as FGH has too high an amount of current assets to current liabilities with a current ratio of 3.
47. FGH as the actual profit is higher than for ABC and GPM higher showing if improve control of expenses then profitability will be higher as well. ROCE is 25%, higher than ABC by 5%.