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’.