Question
jill’s Jeans (JJ)
Jill created Jill’s Jeans, which operates as a sole trader. JJ makes custom-design jeans. Jill designs all the jeans and sells them online and at local markets.
Because of increasing demand in 2020, JJ has benefitted from economies of scale.
Table 1: Budgeted and actual figures for the year ending 31 October 2020
a. State two features of a sole trader.[2]
b.i. Using information in Table 1, for JJ, prepare a profit and loss account for the budgeted figures and the actual figures
(show all your working).[3]
b.ii. Using information in Table 1, for JJ, prepare a variance analysis (show all your working)[3]
c.Explain one possible economy of scale from which JJ has benefitted.[2]
▶️Answer/Explanation
Ans:
a.Features include:
Easy to set up – no legal formalities
Owner has complete control – not answerable to anyone else
Owner keeps all profits
Able to choose times and patterns of working
Able to establish close personal relationships with staff (if any are employed) and customers
The business can be based on the interests or skills of the owner – rather than working as an employee for a larger firm
Unlimited liability – all of owner’s assets are potentially at risk
Often faces intense competition from bigger firms, e.g. food retailing
Owner is unable to specialise in areas of the business that are most interesting – is responsible for all aspects of management
Difficult to raise additional capital
Long hours often necessary to make business pay
Lack of continuity – as the business does not have separate legal status, when the owner dies the business ends too
Accept any other relevant feature. However, do not credit ‘unincorporated’ and ‘unlimited liability’ as two features. They are the same thing.
Award [1] for each relevant characteristic stated to a maximum of [2].
Application to the organization is not required
b.i. If the profit and loss account is constructed following a generally accepted format and is correct in all respects, award [3].
Award [2] if the candidate produces a correct net profit but does not follow a generally accepted format. Award [1] if the candidate shows some understanding of what a profit and loss account is, but the actual account constructed is not in a generally accepted format and has numerous errors.
We need to be consistent with previous years where the format required is consistent with the guide – as 3 of the headings already given, then marks are for 2 headings and 4 calculations.
b.ii.
For a perfect understanding of variances award [3]. There must be calculations and explicit reference to variances that are favourable or adverse.
For variance analysis that has 1 calculation error and/or makes no reference to variances as favourable or adverse award [2].
For a vague understanding of variances award or more than one calculation error and no reference to favourable/adverse [1].
c. Purchasing economies of scale. Bulk buying of her raw materials such as the material for jeans, stitching and sowing needles. Unit costs may fall.
Technical economies of scale through the purchase of machines to help her produce jeans in larger quantities. Over the long run, unit costs will fall as the scale of production increases.
Given rising demand, marketing economies of scale are possible for JJ as unit costs per jean falls as advertising costs may be constant over a larger range of output.
Accept any other relevant answer.
Mark 1 + 1.
Award [1] for a relevant economy of scale explained and [1] for appropriate application to JJ to a maximum of [2].
N.B As there is limited stimulus information application must necessarily be in the form of reference to jeans, tailoring machinery or tailoring supplies. Do not reward generic references simply to ‘machinery or supplies’.
Question
Enjuice
Enjuice produces canned juices. The market for canned juices is very competitive. Each can is sold at $8. Enjuice’s profit margins are falling. The marketing manager has conducted primary market research and suggested increasing advertising to increase sales. In 2018 Enjuice sold 360 000 cans.
Table 1: Selected financial information for 2018 (all figures in $000s)
a. State two methods of primary market research.[2]
b.i. Using the information provided and in Table 1, calculating $\mathbf{X}$ and $\mathbf{Y}$, construct a profit and loss account for Enjuice.
b.ii.Using the information provided and in Table 1, calculate the gross profit margin (no working required).
c. Explain one strategy that Enjuice could use to increase its gross profit margin.[2]
▶️Answer/Explanation
Ans:
Surveys
Interviews
Focus groups
Observations
N.B. No application required. Do not credit examples. Sampling is not a method.
Award [1] for each relevant method of primary market research identified. Award a maximum of [2].
a.
X = (360 000 × $8) = $2 880 000
Y = 160 000 × 10 % = $16 000
Profit and loss account for Enjuice for 2018: (all figures in $000s)
Allow candidate own figure rule (OFR).
Award [0] if the profit and loss account does not reach a standard described below.
Award [1] if there is some limited understanding of a profit and loss account. There are more than three errors in presentation and calculations.
Award [2] if there are three clear errors. which includes omission of working, formatting error, mathematical error, presentation. There is limited evidence of a general understanding of the format.
Award [3–4] if the principal elements of the profit and loss account is constructed, but may not be entirely accurate. The calculations under each heading/component/part are largely correct.
Allow up to two mistakes in calculations and/or presentation for [3].
Allow for either one error in calculation or one error in presentation for [4].
Allow candidate OFR.
For example, if one irrelevant figure that belongs to the profit and loss account is added, the rest will not match.
Award [5] if the profit and loss account is accurately constructed in the expected IBO format. All the relevant headings of each component/parts are used and correctly classified. All relevant figures are presented. No extra irrelevant figures are included. The calculations under each part/component are correct and well-presented.
Deduct [1] for one omission including the overall heading/title. Accept a partial title.
N.B. If the candidate did not follow the IBO format award up to [2].
b.ii. $\frac{440}{2880} \times 100=15.27 \%$
Accept $15.2 \%$ or $15.3 \%$.
Award [1] for the correct answer (working not required). Candidates must show a percentage sign.
Do not accept $15 \%$, or the formulae.
Allow candidate OFR.
c.
- Enjuice could increase its gross profit margin by reducing direct costs/cost of goods sold. It could use cheaper raw materials or instead, find cheaper materials for producing the cans or find cheaper suppliers of cans.
- Enjuice can reduce labour costs by reducing the wages / salaries of its labour on the production line, or by increasing automation in the canning process.
- Enjuice could decrease the price of its juices. Sales revenue might increase as the market for juices is very competitive and customers are likely to be very responsive / very price elastic.
- JIT – perhaps Enjuice can use JIT stock management for aluminum / fruit, or any other metals for the canning process to cut cost of holding stock.
- Technically, if the suggestion of the marketing manager is followed, increasing advertising will reduce net profit before interest and tax, but can increase total revenue with positive impact on gross profit.
N.B. Do not accept increase in price given the information in the stimulus.
Do not credit any suggestion to reduce expenses.
Award [1] for a relevant generic explanation and [1] for application.
[2] cannot be awarded if the response lacks either explanation and/or application.
For an identification or a description of a strategy with or without application [1].
For explanation of a strategy with no application [1].
For description of a strategy with application [1].
For explanation of a strategy and application [2].