Question
Office Supplies (OS)
Office Supplies (OS) is a family-owned private limited company that, for 40 years, has operated three retail office supply stores in a small city. OS offers a wide range of office products (such as computer paper and stationery) and office machinery (such as computers and printers). When each store opened, OS purchased the buildings using long-term loan capital. OS’s objective is to have enough profit to finance the company’s working capital and pay annual dividends.
OS has no clear marketing strategy. Traditionally, OS competed with several other office supply stores operating in the same city. The market was not competitive, however, and most customers went to the nearest office supply store. OS’s prices were comparable to those of other retail office supply stores, and the company did little promotion.
Nationally, the retail office supply store industry is declining. Many retail office supply stores have had to close, and new competitors have entered the market, many of which benefit from some or all of the following:
Specialization in particular office products
Economies of scale leading to more competitive prices
Greater convenience, including e-commerce with door-to-door delivery
Like other physical retail stores, OS has seen its sales decline. Gross and net profit margins have fallen. Last year, to ensure enough funds for capital expenditure and revenue expenditure, OS’s board of directors chose not to pay dividends. OS also anticipates the need for additional finance next year. OS’s board is considering changes to the company’s marketing mix in response to new competitors.
a.State two marketing objectives that a company might have.[2]
b.With reference to OS, explain one advantage and one disadvantage of operating as a private limited company.[4]
c.With reference to OS, explain the difference between capital expenditure and revenue expenditure.[4]
d.Discuss possible changes to any two elements of OS’s marketing mix.[10]
▶️Answer/Explanation
Ans:
Marketing objectives include:
attract new customers
enter new market
improve brand loyalty
increase awareness
increase market share
increase profit
increase revenue
increase sales
retain existing customers.
Accept any other valid marketing objective.
Award [1] for each objective identified up to a maximum award of [2].
a.
Advantages of operating as a private limited company include:
Compared to sole traders and partnerships, private limited companies typically can raise more capital.
Control of the company cannot be lost to outsiders.
Members of the board of directors, many/most of whom are major shareholders in the company, can make decisions with fewer concerns about shareholder and/or market reaction.
Owners have limited liability.
Private limited companies do not have to disclose fully their financial information.
The business continues if one of the owners dies.
For OS, one advantage to operating as a private limited company is that OS could make changes in dividend policy without affecting perceptions of the company in the marketplace. When OS realized that it needed to preserve cash, it suspended dividend payments for one year and said it possibly would for a second year. When a publicly traded company lowers or eliminates dividend payments to preserve cash, the share price typically falls, sometimes significantly, which can make capital sufficiency issues even worse.
Disadvantages of operating as a privately limited company often include:
If a shareholder wants to sell their shares, finding a suitable buyer may take time.
Often (though not always) private limited companies are relatively small organizations which possesses lesser expertise than large, publicly traded companies.
Opening a private limited company takes time and has some legal expenses.
Private limited companies cannot sell shares to the public, thus limiting the amount of capital than be raised.
Profits have to be shared with more people/owners compared to a sole trader or most partnerships.
OS is currently facing a difficult moment, as its industry is changing, a situation that has led to a decline in sales and a contraction of margins. As a private limited company, OS may not have the expertise to face this situation. Currently, the company has no real marketing strategy and may not have the marketing expertise to make appropriate adjustments.
Additionally, many potential adjustments OS may make will require capital, which, as a private limited company, OS has lesser access to than if it were public.
Mark as [2 + 2].
Award [1] for identification of an advantage and an additional [1] for an explanation thereof with application to the stimulus.
Award [1] for identification of a disadvantage and an additional [1] for an explanation thereof with application to the stimulus.
Maximum award: [4].
b.
Capital expenditure refers to any expenditure for assets with a life of more than one year. The stimulus refers to three instances of capital expenditure in the company’s history: each time OS purchased a building location.
Revenue expenditure refers to those expenses that will be accounted for fully in the year in which the expense occurs. In the case of OS, revenue expenditures mention in the case are expenditures for inventory.
Mark as [2 + 2].
Award [1] for an explanation of capital expenditure and an additional [1] for an explanation with application to the stimulus.
Award [1] for an explanation of revenue expenditure and an additional [1] for an explanation with application to the stimulus.
c.
Refer to Paper 2 markbands for 2016 forward, available under the “Your tests” tab > supplemental materials.
Ways that OS could modify its marketing mix to match and compete with the new competitors.
Product: Changing its product range (either contracting or expanding its product range).
Price: Adopting a different pricing strategy.
Place: Modifying its distribution strategy to include e-commerce.
Promotion: Initiating a more aggressive promotion strategy.
For each of the four Ps, OS could make modifications. Modifying each has advantages and disadvantages. For example, contracting its product range could give the organization more focus and require lesser investment in stock. On the other hand, assuming that OS process its products properly, each inventory item makes some contribution to fixed costs. Further, any termination of a product line means that customers for that product, however few, will have to go to a competitor for that product.
OS could modify its prices, particularly try being more aggressive with its pricing. Whereas that may attract more customers (advantage), margins will be thinner.
An ecommerce shift with a door-to-door aspect will change OS’s supply chain considerably. Time and resources will need to be devoted to this task
There is a sense that OS is a traditional business and new aggressive forms of pricing and promotion will be required. Will they know how to do the latter? Do they need to introduce a social media campaign backed up with a membership or loyalty programme?
Candidates are expected to provide a conclusion with a substantiated judgment.
Grade according to the paper 2 markbands for May 2016 forward.
For one relevant modification to the marketing mix that is one-sided, award a maximum of [3].
For two relevant modifications, but the discussion of both is one-sided, award a maximum of [4].
For two relevant modifications, one treated in a balanced way and another in an unbalanced way, award a maximum of [5].
For two relevant modifications, both treated in balanced ways, but no real conclusion, award a maximum of [6]. Conclusions must be more than nominal (for example, when a candidate opens a final paragraph with “In conclusion . . . “ but then has no real conclusion), award a maximum of [6].
QUESTION
Hafs
Hafs is a new cooperative. It plans to manufacture wastepaper bins for the household market.
Hafs has forecast its sales in 2021 as 25000 units. Its forecasted break-even chart is shown in Figure 1.
Figure 1: Forecasted break-even chart for Hafs for 2021
a. State two features of a cooperative.
b.i. Using Figure 1 explain what the $y$ axis shows.
b.ii.Using Figure 1 calculate forecasted profit if sales are 25000 units in 2021 (show all your working).
b.iiissing Figure 1 calculate the total contribution in 2021 if Hafs only sells 20000 units (show all your working).
c. Explain whether an increase in total fixed costs has an impact on unit contribution.
▶️Answer/Explanation
Ans:
a.
Co-operatives are businesses owned and run by and for their members. The members may be customers, employees or residents. All members have an equal say in what the business does and a share in the profits.
Award [1] for each feature identified – no reference to Hafs is needed:
Profits are shared amongst members
Members share decision making
Each member has the same voting rights on decisions
Members are owners of the business
Operate in the private sector
N.B. If a candidate states that a cooperative is a social enterprise, accept that point as one feature for [1].
b.i
PLEASE NOTE: This content is not included in the syllabus for 2024 exams onward. Related parts of this multi-part question may be used.
Award [1] for a correct label or naming of revenue and costs and a second mark for a full explanation, such as “The y-axis represents both the forecasted cost and revenue figures for Hafs. As its sales or output or activity increases (x-axis), Hafs has higher revenue and higher total costs, which can be determined by their relationship to the y-axis and its scale. Wording does not have to be exactly as above. Maximum award: [2].
b.ii.
The level of profit if sales are 25 000 units in 2021 is
TR = $250 000 TC = $175 000 [1]
= $75 000 [1]
Candidates that do not show any working and simply write 75 000 can only be awarded [1].
c.
Total contribution is the difference between total sales revenue and total variable costs.
At an output of 20 000 units TR = $200 000
TVC = $100 000 (TC = $150 000; TFC = $50 000)
= $200 000 − $100 000
= $100 000
To calculate TVC, take total costs and subtract fixed costs, as follows
$150 000 minus $50 000 = $100 000
Candidates that do not show any working and simply write 100 000 can only be awarded [1].
b.iii.
Award [1] for a statement such as “it will have no impact”.
Award a further [1] for an explanation such as “unit contribution is the difference between the selling price and its variable cost, therefore an increase in fixed costs will have no impact on unit contribution”.