Explain four reasons why quality is important to a business.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2022). The mark or mark type is shown in brackets.

1. Award 1 mark for each reason (max 4).
2. Award a maximum of 1 additional mark for each explanation of the reason.
3. There are no application marks for this question.
4. Answers might include:
5. To establish a brand image – so that customers are encouraged to buy the product and new customers are attracted
6. To build brand loyalty / customer loyalty – so that customers will make repeat purchases and maintain sales
7. To maintain a good reputation / not to gain a bad reputation – friends and family tell others about the good or service which may lead to a good / bad reputation
8. To increase sales / attract more customers - due to customer needs being satisfied by the products supplied
9. So that faulty products do not have to be replaced – which would reduce waste / ensures customer safety / avoids legal action
10. Able to charge a high price – may lead to higher profits / as may increase added value
11. For example: To maintain a good reputation (1) because if quality is not good then friends and family will tell others about the product which may lead to a bad reputation and sales will be lower (1).
12. Level 3: Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more sources. Well-justified recommendation. Candidates discussing all three sources in detail, in context and with a well-justified recommendation including why the alternative sources were rejected should be rewarded with the top marks in the band.
13. Level 2: Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one source. Judgement with some justification / some evaluation of choice made. Candidates discussing two of more sources in detail and applying it to the case should be rewarded with the top marks in the band.
14. Level 1: Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the sources with little / no explanation. Simple judgement with limited justification / limited evaluation of choice made. Candidates outlining all three sources in context should be rewarded with the top marks in the band.
15. Relevant points might include:
16. Leasing (Advantages)
17. • Allows SA to use the vehicles without a large sum of capital required to purchase it
18. • Payments are made each month so this spreads out the payments instead of one large sum at the start which can help management of cash flow
19. • Maintenance of the vehicle will be paid for by the lease company – lower cost
20. • May be able to purchase the vehicle at the end of the lease
21. • Easier to replace the vehicles more regularly as new models are brought out
22. Leasing (Disadvantages)
23. • Will be more expensive than buying the vehicle outright as total cost is likely to be higher
24. • SA does not own the vehicle, so it is not an asset
25. • May have to return the vehicle at the end of the lease and will have to start again to replace it or safari tours may have to be cancelled
26. Bank loan (Advantages)
27. • Usually quite quick to arrange compared to some other sources
28. • Can be repaid over various periods of time – so if over a longer period then the repayments will be lower each month especially as interest rates are now only 2%
29. • Paid back in instalments – usually monthly
30. Bank loan (Disadvantages)
31. • It has to be repaid with interest – increases costs
32. • As SA is a small business then the interest rate on the loan may be quite high relative to the interest rate for a large business - it may be harder to be competitive with other holiday businesses
33. • As a sole trader Tokumbo will have his personal assets at risk if he does not repay the loan
34. • Security is often required
35. Retained profit (Advantages)
36. • Does not have to be repaid
37. • No interest paid on it – making it a cheaper source of finance than possibly 2% on bank loans
38. • No security needed which would be required with a bank loan - Tokumbo does not have to risk any personal assets due to being a sole trader
39. Retained profit (Disadvantages)
40. • SA only started 2 years ago so there may not be any retained profit available to use
41. • It may use all the reserves of SA then there will be no reserves left for any emergencies in the future
42. • Reduces the payment to Tokumbo, as there will be less profit available to be distributed
43. • Loss of 3% interest as money not left in a savings account
44. Recommendation Justification might include:
45. • Leasing will be the best because no capital is required, and SA has only been trading for 2 years so is unlikely to have the funds required to be able to use retained profit. As Tokumbo is unlikely to have the capital to purchase a vehicle, leasing will allow him to use the vehicle and just make monthly payments which he can afford with revenue from tourists when they pay for holidays. A bank may not grant a loan as SA is a new business and may not have the financial statements that show it is able to repay the loan
46. • A bank loan will be the best choice because Tokumbo needs to spread out the repayments for a new vehicle. The business has been trading successfully for 2 years and may have a good relationship with the bank. As a sole trader Tokumbo will use his personal assets as collateral for the loan so the bank will be willing to grant the loan
47. • Retained profit should be used because it has the lowest cost of the three sources which is important as SA will be incurring increased expenditure as it expands and provides more holidays. Tokumbo will not want additional costs from interest payments if it can be avoided so retained profit will be more beneficial to SA than the other two sources