Ramford is a private limited company. It has four factories which make a wide range of food products including breakfast cereal and ice cream. The Finance Director is worried about the company's financial performance. She has read that many businesses failed in the last year. 'I think we are suffering from diseconomies of scale' she said. Ramford's directors have decided to cut the number of different products it makes from 80 to 10. Table 2: Extract from accounts 2013 2014 Revenue (sales) (m) 200 150 (Net) profit (m) 70 60 Capital employed ($m) 280 300 (Net) profit margin 35% ? Return on Capital Employed 25% ?

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2015). The mark or mark type is shown in brackets.

1. [2] Clear understanding e.g. a business whose shares cannot be sold to the general public [2] Or shares only sold to family and friends [2]
2. [1] Some understanding e.g. outlines general features of limited companies e.g. have limited liability/separate legal identity from owners/can sell shares/incorporated
3. Do not accept in private sector/no Government involvement as generic statement also applies to unlimited businesses.
4. [2 × 1] Knowledge 1 mark per cause
5. Points might include:
6. • lack of management skills
7. • actions of competition
8. • change in government laws
9. • poor product range/outdated products
10. • lack of demand/recession
11. • lack of/poor market research
12. • lack of finance/cash flow problems
13. • diseconomies of scale/over expansion
14. Note: points could refer to either new or established business. Accept any reasonable answer.
15. [2 × 1] Knowledge - award 1 mark for each relevant diseconomy [max 2]
16. [2 × 1] Application – award 1 mark for each relevant explanation in context of Ramford
17. Relevant points might include:
18. • Poor communication [k] as messages need to be sent/received from 4 factories [app]
19. • Low morale/motivation [k] as worried products they make might be cut [app]
20. • Slow decision making [k] as 80 products to consider [app]
21. • Lack of control [k]
22. Application marks may be awarded for appropriate use of the following: calculations/use of numbers, factories, 80 products, reduced profit, financial performance, wide range, private limited company.
23. [2 × 1] Knowledge - identification of relevant factor [max 2]
24. [2 × 1] Application – award 1 mark for each way if relevant reference made to this business
25. [2 × 1] Analysis - award 1 mark for each relevant explanation
26. Relevant points might include:
27. • Stage in product life cycle [k] if some foods are in decline [app] few people are likely to be buying them anyway [an]
28. • Availability of substitutes/competition [k] if many breakfast cereals [app] so might not be cost effective to keep making it [an]
29. • Cost of producing each product [k] as worried about financial performance [app] might want to stop making expensive items [an]
30. • Current level of sales/popularity/demand [k] as profits falling [app] need to remove the least popular lines [an]
31. • Not suit current season [k]
32. Application marks may be awarded for appropriate use of the following: calculations/use of numbers, food, cereal, ice cream, factories, 80 to 10 products, reduce profit, financial performance.
33. [1] Knowledge – award 1 mark for identification of relevant point(s) [max 1]
34. [1] Application – award 1 mark if relevant reference made to this business
35. [2] Analysis – award up to 2 marks for relevant development of point(s)
36. [2] Evaluation – justified decision as to whether Ramford should be worried about its performance
37. Points include:
38. • Sales down [k] which is a 25% fall [app + an]
39. • (net) profit down [k] by $10m [app]
40. • Profit margin increased [k] to 40% [app+ an] showing better control of fixed costs [an]
41. • ROCE has fallen [k] to 20% [app + an] showing a lower return on each $ invested [an]
42. • Financial Director is aware of the problem [k] as they are cutting the number of products to 10 [app]
43. Note: using percentage calculation or ratio award application and analysis. Max 1 for application.
44. Application marks may be awarded for appropriate use of the following: appropriate calculations/use of numbers, diseconomies of scale, four factories, 80 to 10 products