O-LevelBusiness StudiesFinancial information and decisions7115/22 · May/June 2017 · Q320 Marks

Identify and explain one advantage and one disadvantage to CC if it changes to a public limited company.

(a)Identify and explain one advantage and one disadvantage to CC if it changes to a public limited company.[8]
(b)Refer to Appendix 2 and other information in the case. Draw on the graph below the break-even output of Fizz Bomm if the variable cost is reduced to $0.60. Do you think this would be the best way for CC to gain the highest profit for Fizz Bomm? Justify your answer.[12]

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Mark scheme

Marking points from the official mark scheme (May/June 2017). The mark or mark type is shown in brackets.

[2 × 1] - award one mark for each relevant advantage /disadvantage
[2 x 1] - award one mark for a relevant explanation for each advantage/disadvantage
[2 × 2] - award two application marks for each advantage /disadvantage
Award one mark for each relevant advantage/disadvantage (max 1 each) and one additional mark for explaining why it is an advantage/disadvantage.
Answers are likely to include: Advantage: No restriction on who can buy shares/shares sold to the public
Increased share capital issued to purchase fixed assets/increased capital raised
Easier to obtain bank loan/attract suppliers/perceived as less risky and higher status
Disadvantage: Accounts published/less privacy
Easier to be taken over/original owners lose control
More legal formalities/expensive and time consuming to convert to plc. and issue shares to the public
More regulations and controls over plc.
Award a maximum of three additional marks for each explanation – 2 of which must be applied to this context - of the advantage/disadvantage.
Indicative response: A public limited company can issue new shares to the public (k) this will allow it to raise the additional $500 000 needed for the expansion (app). This is a cheaper way to raise this necessary capital for the expansion as interest will not need to be paid on the finance (an). As the finance can be used for expansion of the automated production line then the higher profit from the increased output may not lead to reduced dividends for the shareholders (app).
Award up to 4 additional marks for relevant application.
Possible application marks: Chocolates/high quality chocolates/luxury chocolates; hand-made chocolates; private limited company; set up 15 years ago in country X; batch production; objective of expansion; developing a new brand of chocolate bar; targeted at the mass market; purchase a new automated production line; output is expected to be high; borrow $500 000.
Relevant points might include: Lower variable cost to $0.60: New TC line correctly drawn on the graph (L2)
B/E identified at 40 000 (L2) and 20 000 (L2)
Profit increases from $12000 (L2) to $32000 (L2)
Cheaper ingredients – may be poorer quality chocolates – fewer sales than predicted
Knowledge/Analysis/Evaluation – award up to 10 marks using the levels-based mark scheme below.
Must have 2 × L2 – correct TC line plotted onto the graph and/or break-even output(s) and/or profit(s) correctly.
Level 3: 9-10 marks for well justified conclusion as to the best way to increase profit to choose compared to other ways.
Level 3: 7-8 marks for some limited judgement shown in conclusion as to the best way to increase profit.
Level 2: 4-6 marks Correct new TC line drawn on the graph and/or correct break-even output(s) identified, and/or profit(s) correctly calculated and/or Explanation of the effects of lower variable cost and/or alternative way to increase profit even if no correct answer on break – even graph.
Level 1: 1-3 marks (No correct answer on break – even graph) Outline of effects of lowering variable cost and /or alternative way to increase profit such as increase price.
Level 1 - 1 mark for each L1 statement (max of 3 marks) e.g. Lowering the variable cost will lead to higher profit.
Level 2 – 1 x L2 explanation can gain 4 marks and a further mark can be awarded for each additional L2 explanation (max 6 marks) e.g. The new break-even output is 20 000. (L2)
Level 3 - For L3 to be awarded there needs to be at least two L2 marks awarded and then a recommendation which justifies which is the best way to choose to increase profit.
Award up to 2 additional marks for relevant application in the conclusion.
Possible application marks: high quality chocolates/luxury chocolates; hand-made chocolates; fillings made with luxury ingredients; sold to specialist sweet shops; objective of expansion; developing a new brand of chocolate bar; targeted at the mass market; reduce variable costs by using lower quality ingredients; purchase a new automated production line; output is expected to be high; borrow $500 000.