Identify and explain two problems for GS of having a high level of inventory.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2017). The mark or mark type is shown in brackets.

1. [8] Identify and explain two problems for GS of having a high level of inventory.
2. [2 × 1] Knowledge – award one mark for each problem.
3. [2 × 1] Analysis - award one mark for a relevant explanation of each problem.
4. [2 × 2] Application – award two application marks for each problem.
5. Award one mark for each problem (maximum of two), such as:
6. ∞ Capital tied up/ liquidity problem
7. ∞ High levels of working capital required
8. ∞ Inventory may deteriorate and be wasted – loss of profit
9. ∞ Inventory may go out of date/seasonal changes / fashion changes – cannot sell inventory unless at a discount – reduce profit
10. ∞ Costs of storage space
11. ∞ Maintenance costs such as paying wages of workers to water plants
12. Award a maximum of three additional marks for each explanation – 2 of which must be applied to this context – of the problem.
13. Indicative response: Capital is tied up in stock (k) and this will mean GS has large amounts of plants and trees taking up space. (ap) The plants and trees will need to have been paid for before the gardeners will need them for planting at the hotels (ap) and this will increase the cash outflow, which may cause a cash flow problem for GS, but will certainly reduce its liquidity. (an)
14. Possible application marks: GS want to expand the business; wilting/dying plants; grows plants and trees; looks after the gardens of luxury hotels; want to buy more land to expand; information on the three sites in the case; ornamental trees; information from Appendix 1; information from Appendix 2; information from Appendix 3.
15. There may be other examples in context that have not been included here.
16. [12] Do you think GS will be as successful as other similar businesses? Justify your answer using the data in Appendix 3 and calculate appropriate ratios.
17. Relevant points might include:
18. Profit: $5 000 (L2)
19. GPM: 50000/60000 × 100 = 83% (L2)
20. NPM: 5000/60000 × 100 = 8% (L2)
21. ROCE: 5000/10000 × 100 = 50% (L2)
22. Total revenue: $60 000 (L1)
23. Total cost: $55 000 (L1)
24. Level 3 judgements may be based on: – Survival in the first year – GS may build on this in the future – GS ratios worse than competing businesses but only just started-up – Comparison of the figures and suggestions made of why GS ratios might be worse than the ratios of other similar businesses – Other information that may be useful to make a judgement
25. Knowledge/Analysis/Evaluation – award up to 10 marks using the levels-based mark scheme below.
26. Level 3: At least 2 x Level 2 + 9-10 marks for well justified conclusion as to whether or not GS will be as successful as other similar businesses. 7-8 marks for some limited conclusion as to whether or not GS will be as successful as other similar businesses.
27. Level 2: 4-6 marks Correct calculation of profit &/or profitability ratios.
28. Level 1: 1-3 marks Outline of the significance of the financial information.
29. Level 1 - 1 mark for each L1 statement (max of 3 marks) e.g. The average profit for other businesses is higher than GS.
30. Level 2 - 1 x L2 calculation can gain 4 marks and a further mark can be awarded for each additional L2 calculation (max 6 marks) e.g. Gross Profit Margin is 83%. (4 marks for L2 calculation)
31. Level 3 - For L3 to be awarded there needs to be at least two L2 marks awarded for correct calculation of profit and appropriate ratios and then a conclusion as to whether or not GS will be as successful as other similar businesses.
32. Award up to 2 additional marks for relevant application.
33. Possible application marks: Partnership; set-up last year; set up by 2 brothers; grows plants and trees; looks after the gardens of luxury hotels; partners invested $5000 each; total investment of $10 000; new gardening equipment required costing $10 000; holds high level of inventory; want to buy more land to expand; information on the three sites in the case; information from Appendix 1; written information from Appendix 3, e.g. seeds but NOT the financial information itself.
34. There may be other examples in context that have not been included here.