Elton is a sole trader. He sells specialist clothing and equipment for sports, including baseball and hockey. It is a niche market. Elton started his business 5 years ago and it has remained small. A wide range of inventory is important. Elton has been looking at the financial performance of his business. The profit margin for 2018 was 35%. An extract of the accounts is shown in Table 3.1. [Table 3.1: Revenue and cost information for Elton's business for 2018 and 2019 () | | 2018 | 2019 | | Revenue () | 24 000 | 25 000 | | Cost of sales () | 7200 | Y | | Gross profit () | 16800 | 18000 | | Expenses () | 8400 | 10000 | | Profit () | X | 8000 |]

Mark scheme

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

1. [2] Award 2 marks for a full definition. Award 1 mark for a partial definition.
2. [2] Ownership of business in the hands of one individual/person
3. [2] Unincorporated business owned by one person
4. [1] Partial definition e.g. Run/operated by one person
5. [2] Award 1 mark for each correct calculation.
6. X = 8400
7. Y = 7000
8. [4] Award 1 mark per factor.
9. Demand from customers/amount of sales
10. Perishability of the items
11. Storage space available
12. Cost of storage
13. Delivery charges
14. Seasons/celebrations/festivals
15. Amount of money available (to buy inventory)
16. Lead time/reliability of supplier
17. Method of production (mass may require high inventory)
18. Stock control system - JIT/lean production
19. [6] Award 1 mark for identification of each relevant advantage and disadvantage (max 1 for each).
20. Award 1 mark for each relevant reference made to this business (max 2).
21. Award 1 mark for each relevant explanation (max 2).
22. Advantages: Less competition [k] so easier to attract/retain customers [an] to his shop [app]
23. Clear focus/easier to target customers [k] interested in certain sports [app] reducing costs of advertising [an]
24. Builds up specialist skills and knowledge [k]
25. Can often charge a higher price [k] helps improve profit margin [an]
26. Customers are prepared to pay for expertise [k]
27. Customers tend to be more loyal [k] so may remain in business for another 5 years [app]
28. Disadvantages: Lack of economies of scale [k] leading to higher unit costs [an] so not able to lower cost of sales of $7000 [app]
29. Risk of over dependence on a single product or market [k]
30. Likely to attract competition if successful [k]
31. Vulnerable to market changes [k]
32. [6] Award up to 2 marks for identification of relevant issues.
33. Award up to 2 marks for relevant development of points.
34. Award 2 marks for justified decision as to whether Elton should be pleased with his financial performance.
35. Relevant calculations for analysis: Profit margin: 32% in 2019, Fallen by 3% in 2019
36. Gross profit margin: 70% in 2018, 72% in 2019, Risen by 2% [an][an]
37. Gross profit margin has improved [k] from 70% [an] to 72% [an] showing better control of its variable costs [an].
38. Profit margin has decreased [k] showing less control of expenses [an]
39. Revenue improved [k] by $1000 [an]
40. Gross profit increased [k] by $1200 [an]
41. Profit decreased [k] by $400 [an]
42. Justification might include: Gross profit margin has improved [k] from 70% [an] to 72% [an] However profit margin has decreased. [k] He should be pleased as sales and gross profit are rising [eval] but he must be concerned about expenses. [eval]