Explain one advantage and one disadvantage to Tokumbo of being a sole trader.

Mark scheme

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

1. 1 mark for each advantage/disadvantage identified (max 2).
2. Award a maximum of 3 additional marks for explanation of each advantage/disadvantage for Tokumbo of being a sole trader – one of which must be applied to this context.
3. Relevant advantages might include:
4. • Owner is in complete control / makes all the decisions – likes being his own boss with no one to tell him what to do – prefers making all the business decisions instead of having to consult others – such as deciding whether to start offering other safari tours
5. • Does not have to share profits – as there is only one owner – keeps all the returns from his own hard work – his 5 employees
6. • It was easy to set-up – as there were few legal requirements – reduced the costs of setting up, such as accountancy costs
7. • Freedom to choose own working hours or holidays – if worked for another business he would have to work the hours stated in his employment contract - which he would have done when he worked for a holiday company - no flexibility to change these hours if needed
8. • Complete privacy – does not have to share any financial details with anyone else – apart from the tax office, as he will still have to pay tax
9. Relevant disadvantages might include:
10. • Unlimited liability / no limited liability – which means all his personal possessions are at risk – not just the capital he invested in the business
11. • There is no-one to share responsibilities with or discuss business decisions - everything is the sole responsibility of the owner – this can be stressful, and he may be more likely to make mistakes
12. • No continuity – if the owner dies then because the owner is the business it will end - unlike a company where the shares allow it to carry on as it has a separate legal identity
13. • Lack of capital / difficult to raise finance as only the funds of the sole trader or borrowing is available to the business – may make it more difficult to expand in the future
14. • May need to work long hours / difficult to take holidays / increased workload
15. For example: A disadvantage is that Tokumbo has unlimited liability (1) and he put his own money into the business to start it 2 years ago (app). If SA fails, he could lose all his personal possessions (1) and not just the capital he invested in SA as would happen if it was a limited company (1).
16. Application could include: safari holidays; increase in tourists from other countries; high income tourists; luxury safari holidays; 5 employees; only been operating for 2 years; game reserve; camping / tent; wild animals; 4 safari guides; 4 safari vehicles; accommodation in local / luxury hotels; fuel.
17. Level 3: Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of the two or more options. Well-justified recommendation. Candidates discussing all three options in detail, in context and with a well-justified recommendation including why the alternative options were rejected should be rewarded with the top marks in the band.
18. Level 2: Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one option. Judgement with some justification / some evaluation of choice made. Candidates discussing two or more options in detail and applying them to the case should be rewarded with the top marks in the band.
19. Level 1: Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the options with little / no explanation. Simple judgement with limited justification / limited evaluation of choice made. Candidates outlining all three options in context should be rewarded with the top marks in the band.
20. Relevant points might include:
21. Option 1
22. • Already familiar with these type of holidays – have existing customers that may return regularly
23. • Existing relationship with hotels so no need to find new suppliers
24. • Total costs of $12 000 per week are lower than Option 3
25. • Average cost per tourist is $1250 lower than Option 3 - but $500 higher than Option 2
26. • Profit per tourist is $250
27. • Total profit per week is $4000
28. • Revenue per week is $16 000 which is higher than Option 2
29. Option 2
30. • New target market and this has a growing trend for young people to demand this type of holiday
31. • Lower total costs to provide this holiday $8000 per week - this is the lowest of the 3 Options – less likely to cause a cash flow problem as the business expands as lowest outflow of cash to pay for costs
32. • The lowest average cost of the three options at $250 per tourist
33. • Total profit per week is the highest at $4800
34. • The revenue per week is the lowest of the 3 Options at $12 800
35. • However SA may need to buy tents and camping equipment – high initial cost of setting up for this option whereas the other options use hotel rooms
36. • Not familiar with the requirements of customers in this market and may have increased costs from carrying out market research into the preferences of young people
37. Option 3
38. • New target market and tourists are willing to pay a high price for a luxury safari holiday
39. • Highest revenue of the 3 options at $24 000 per week
40. • Highest price of $2400 per tourist can be charged - leads to higher profit per tourist per week
41. • Average cost per tourist is the highest of the 3 Options at $2000 per week
42. • Profit per tourist is $400
43. • Total profit per week is $4000
44. • However, costs are a lot higher than the other two options - $20 000 per week, $8000 more than Option 1 and $12 000 more than Option 2
45. • This is a new market for SA, and it may be difficult to find suitable luxury hotels to meet the needs of these consumers need to establish relationship with new hotels
46. • May need to buy more expensive vehicles which will further increase costs to serve the needs of these high-income consumers
47. Recommendation Justification might include:
48. • Option 1 is the best one to choose as it is a market Tokumbo is already familiar with and he just needs to increase the number of vehicles and guides. The total cost is $12 000 per week and makes the same profit per week of $4000 as option 3 without the risk of trying to attract a new target market. Option 2 is a very different market and SA has no experience of providing these types of holidays therefore the holidays may not meet the needs of these customers and SA may not attract the forecast 32 customers a week. Option 3 should not be chosen as it has high total costs and SA is a new business of 2 years with limited capital
49. • Option 2 is the best one to choose as it has the lowest total costs and the highest total profit per week of the 3 options. The lowest average cost may make it easier for SA to be competitive with other tourist businesses in country X and set lower prices. Also this is a growing market so this option may make it easier for continued growth of SA in the future
50. • Option 3 is the best one to choose because it has the highest price of the 3 options at $2000 per tourist. High-income consumers are less price sensitive making it easier for SA to charge a high price for this holiday and has the highest profit per tourist of $400. This also has the highest revenue at $24 000 per week, nearly twice as much as option 2