After identifying a gap in the soft drinks market, Jerome developed a low sugar drink. He borrowed $5000 from family and friends to start-up a business and to provide working capital. Jerome operates as a sole trader. To promote his product, Jerome handed out free samples in the town centre. In the first year, Jerome's business sold 10000 units. This is 200 units more than his break-even output. Jerome is considering ways to increase added value.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2021). The mark or mark type is shown in brackets.

1. [1] Keeps all the profit
2. [1] Unlimited liability
3. [1] Unincorporated / no separate legal identity
4. [1] Takes all decisions / own boss
5. [1] Has total ownership of business / owned by one person
6. [1] Few legal requirements
7. [2] Amount of capital available to a business to pay its day-to-day expenses/costs
8. [2] The capital needed to finance the day to day running expenses (and pay the short-term debts of the business)
9. [2] Current assets – current liabilities
10. [1] funds used to buy inventory
11. [1] He knows the level of output needed to make a profit / cover costs [k]
12. [1] for his (low sugar) drink [app]
13. [1] Helps planning/forecasting/decision-making [k]
14. [1] such as how best to increase added value [app]
15. [1] Help apply for finance [k]
16. [1] as so far only borrowed from friends and family [app]
17. [1] Can see what will happen if costs/prices change [k]
18. [1] Helps identify the expected level of profit/loss at different levels of output [k]
19. [1] Help identify the margin of safety [k]
20. [1] based on the 10000 units sold [app]
21. [1] This will allow Jerome to be able to increase the price [k] of his drink [app]
22. [1] increasing the gap between price and costs [an]
23. [1] Customers can perceive the product to be worth more [k]
24. [1] so may be prepared to pay more for the same product [an]
25. [1] This will help lower input costs [k] when making 10000 units [app]
26. [1] increasing the gap between cost and price [an]
27. [1] Lower costs [k] can lead to higher profit per unit sold [an]
28. [1] Encourages potential customers to try something [k]
29. [1] which can persuade them to buy [an]
30. [1] Trying is likely to be more effective than just telling someone about it [k]
31. [1] as the taste is an important part of the buying process [an]
32. [1] Tempts existing customers to buy more [k]
33. [1] which can increase revenue [an]
34. [1] Cost of providing samples [k]
35. [1] can decrease profit margin [an]
36. [1] Way to use up inventory [k]
37. [1] No guarantee people will buy [k]
38. [1] Buy one get one free [k]
39. [1] would generate some income [an]
40. [1] Point of sale displays [k]
41. [1] raise awareness of the product [an]
42. [1] Encourages potential customers to try something new [k] which can persuade them to buy [an].
43. [1] However, the cost of providing samples [k] can decrease the profit margin. [an]
44. [1] Free samples are the best method despite the cost [eval] as taste is important when buying food [eval].