Nuwan is a sole trader. He has a specialist sports shop selling a wide range of cricket and tennis products. His 3 employees are trained to provide good customer service. Nuwan is pleased the economy is growing but he is worried that interest rates might be increased. He believes his small business has advantages compared to large retailers. Nuwan would like to improve profit margins and thinks the best way to do this is to reduce costs.

Mark scheme

Marking points from the official mark scheme (May/June 2016). The mark or mark type is shown in brackets.

1. [2] (a) Clear understanding [2] e.g. ownership of business in the hands of one individual/person.
2. [1] (a) Some understanding [1] e.g. run/operated by one person.
3. [2] (b) Knowledge [2 × 1] - award 1 mark per feature. Points might include: rise in GDP, falling unemployment, shortage of skilled workers, higher living standards, business profits rising/business growing, increased spending/demand, rising investment.
4. [2] (c) Knowledge [2] [2 × 1] - award 1 mark per relevant point.
5. [2] (c) Application [2] [2 × 1] - award 1 mark per explanation in context. Relevant points might include:
6. [K] (c) Increases cost of borrowing [k] so harder to improve profit margins [app]
7. [K] (c) Increasing expenses [k] so might have to reduce amount he has available to spend on training [app]
8. [K] (c) Less spending by customers [k] so lower sales especially as sports goods not necessities [app]
9. [K] (c) Employees want pay rise [k] so not able to reduce his costs [app]
10. [K] (c) Business less likely to expand [k]
11. [K] (c) May have to increase prices [k].
12. [2] (d) Knowledge [2 × 1] – award 1 mark for each relevant advantage identified [max 2].
13. [2] (d) Application [2 × 1] - award 1 mark if relevant reference made to Nuwan's business.
14. [2] (d) Analysis [2 × 1] - award 1 mark for each relevant explanation. Reasons might include:
15. [K] (d) Better service [k] – all employees are trained [app] so able to maintain customer loyalty [an]
16. [K] (d) Flexible [k] – able to react quickly to changes in customer requirements [an] if customers want a different cricket product [app]
17. [K] (d) Leaner management [k]. Nuwan only has his 3 employees to inform/ask [app] so able to make decisions quicker [an]
18. [K] (d) More control [k] as he owns the business [app]
19. [K] (d) Better communication [k]
20. [K] (d) Specialised knowledge [k] as a sports shop [app] so will attract more customers [an].
21. [1] (e) Knowledge [1] – award 1 mark for identification of relevant knowledge [max 1].
22. [1] (e) Application [1] – award 1 mark if relevant reference made to Nuwan's business.
23. [2] (e) Analysis [2] – award up to 2 marks for relevant development of point.
24. [2] (e) Evaluation [2] – justified decision made as to whether the best way to improve profit margins is to reduce costs. Relevant points might include:
25. [K] (e) Lower costs could mean poorer quality goods [k] so customers might look elsewhere for sports goods [app]
26. [K] (e) Higher prices [k] could make them less competitive [an] so customers buy tennis goods elsewhere [app] leading to fewer products sold [an] so overall profit margin would rise but overall total profit might be lower [eval]
27. [K] (e) Higher prices could help image of high quality [k] customers might be willing to pay more for specialist goods / good customer service [app]
28. [K] (e) Lower costs could mean a reduced wide range [app] of inventory [k].