Unit 3 HL [170 marks]

1. [Maximum mark: 10]

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]

Markscheme

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) 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]

Markscheme

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.
(c) Using information in Table 1, for JJ, prepare a variance analysis
(show all your working). [3]

Markscheme

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].

(d) Explain one possible economy of scale from which JJ has

benefitted. [2]

Markscheme

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’.

2. [Maximum mark: 10]

Prime Pies (PP)

Prime Pies (PP ) produces the highest quality luxury pies. The pies contain organic*
ingredients and are priced at $20 each, which is significantly more expensive
than the pies of PP’s competitors. PP’s profits have fallen, so PP’s operations
manager is looking at producing a cheaper pie that is not made from organic
ingredients to meet the needs of the mass market. To finance the production of
this new pie, PP is planning to sell older non-current assets rather than increase its
long-term liabilities, such as loans.

Forecasted financial information on the production of the new pie for 2023 is
given in Table 1.

Table 1: Forecasted financial information on the production of PP’s new pie

* organic: food produced without the use of chemical fertilizers, pesticides, or
other artificial chemicals
(a) Define the term mass market. [2]

Markscheme

A market for goods that are produced in very large quantities. Because of
economies of scale, products sold in mass markets are less expensive than
goods produced for niche or highly specialized markets.

Candidates are not expected to word their definition exactly as above.

Award [1] for partial understanding which may include some reference to either an undifferentiated market
or large volume operations. Award [2] if the candidate provides an accurate and clear definition which
includes references to products sold in large quantities and reference to an undifferentiated market.

(b.i) Construct a forecasted profit and loss account for the

production of PP’s new pie (show all your working). [4]

Markscheme

Statement of forecasted profit or loss for PP for the year ended

December 2023
 Award [1] for each correct calculation (if any calculations are needed in addition to the construction of the
P&L). In this question, cost of sales needs to be calculated.

If the profit and loss account is constructed following the IBO format and is correct in all respects with full
working shown, award [4]. Apply own figure rule (OFR): if the candidate incorrectly calculated cost of sales
but otherwise the profit and loss account is constructed following the IBO format and is correct in all other
respects, award [3] If the answer is correct and done according to the IBO format but no working is shown,
award [3]

Award [2] if the candidate produces a profit for period figure (OFR regarding cost of sales), but does not
follow the IBO 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 the IBO format and has numerous errors.

(b.ii) Calculate the forecasted gross profit margin for the new pie. [2]

Markscheme

gross prof it
Gross prof it margin = × 100
sales revenue

159600
Gross prof it margin = × 100 = 47. 5 %
336000

Award [1] for correct working and [1] for a correct answer – allow for own figure rule (OFR).

(c) Explain one disadvantage for PP of selling older non-current

assets to finance the production of the new pie. [2]

Markscheme

Selling assets to finance the new pie will reduce PP’s productive capacity.
Even though sales of their more expensive pies have fallen, PP will still have
to produce a forecasted 42 000 new pies.

PP sell the highest quality luxury pies. Reducing productive capacity may
impact on PP’s ability to continue to sell the highest quality pies.

Award [1] for an explanation of a relevant disadvantage with an additional [1] for application to PP.
3. [Maximum mark: 10]
Make-Up (MU)

Lana Lane is an image coach and plans to open Make-Up (MU), a shop where she
can sell her own brand of beauty products. Because Lana is a female
entrepreneur, her local government will pay 50 % of the rent for the space in
which MU will operate.

Lana has forecasted the following figures for MU for the first six months of
operation, beginning on 1 July 2023 (see Table 1). The opening balance will be
$0.

Table 1: Figures for the first six months of operation, beginning on 1 July
2023

Lana has learned that a new competitor with lower prices will enter the market
before the end of 2023.
(a) State two characteristics of an entrepreneur. [2]

Markscheme

A person who starts a business/self-starter.

A person who has raised the finance to start up the business/attracts
investment.
A person that organizes the new business (planning), from hiring and
buying inputs like raw materials and workers to producing/providing
the finished goods/services for sale.
A person that has to be a risk taker because the business could
perform poorly or even fail; hence, can lose money in a business as
well as make it.
It is an individual who demonstrates enterprise and initiative in order
to make profit.
Creative/innovative/relies on innovation.
Resourceful resilient or determined
Self-motivated.

Accept any other relevant characteristic.

N.B. no description is required.

Award [1] for each appropriate characteristic stated. Award a maximum of [2].

(b) Using the information in Table 1, prepare a monthly cash-flow

forecast for MU for the first six months of operation. [6]

Markscheme

Method 1
Method 2 - where rent has been reduced by the $500.

N.B. Allow candidate own figure rule (OFR): if a candidate makes an error in one row and carries it through
the remainder of the forecast, that is only one error. This provision includes both mathematical and
conceptual errors (for example, if a candidate has the electricity fee monthly rather than every other
month, it is one error) and candidates should only lose [1] for that error.
 [1] if the candidate has some idea of what a cash flow forecast is and looks like.
[2] for a cash flow that has some problems in layout and wording and which has more than three
mistakes or omissions in layout/heading/calculations (apply OFR).
[3] for a largely correct cash flow that has some minor problems or omissions in layout/wording and which
has three mistakes (apply OFR).
[4] for a largely correct cash flow that has some minor mistakes with layout and /or headings/wording and
which has two mistakes (apply OFR) or the candidate does not produce a mathematically correct cash flow.
[5] for a mathematically correct cash flow that has some omission of one category or one mistake in
calculations or headings.
[6] for a fully correct cash flow forecast with a generally accepted format and lines/headings for total
inflows/receipts, total outflows/payments (or some other acceptable wording), a line/headings for net
cash flow/inflow, etc. and lines/headings for opening and closing balance.

N.B. If the candidate writes net profit/net cash profit instead of net cash flow, deduct [1].

If a candidate produces a cashflow that looks something like below, award the marks that follow:

Award [3] if the response is 100% mathematically correct.

Deduct [1] for each mathematical error.
Thus, if the candidate produces a cashflow such as above and has one mathematical error, award [2].
If the candidate produces a cashflow such as above and has two mathematical errors, award [1].
if the candidate produces a cashflow such as above and has three mathematical errors, award [0].

Own figure rule (OFR) applies.

(c) Comment on the possible impact of the new competitor on MU’s

cash flow.
 [2]

Markscheme

If Lana believes that she needs to react to the entry of the new competitor
by also lowering her prices, she needs to be aware that her cash flow will
be diminished with a tighter profit margin.
Lana needs to decide if, temporarily, tighter but at least protected profit
margins because of reduced prices is a wise strategy. So far, her cash flow
looks good and is increasing. However, in the long run, reducing prices
without ensuring that she is increasing profit, will lead to a decreasing cash
flow (which can become negative) and to giving away her margins.

N.B. If a candidate states that revenue will likely fall but makes no reference to cash flow, award [0].

If a candidate states only that the cash flow will decrease with no logical explanation, award [0].

Accept any other relevant comment.

Award [1] for a partial/generic comment of the impact on MU, such as “the cash flow will decrease.”
Award [2] for an explanation of the impact on MU’s cash flow, that makes use of the stimulus provided.

4. [Maximum mark: 10]

Windmills OPQ (WO)

Windmills OPQ (WO) develops and produces electrical and mechanical components
for windmills. WO has developed a unique selling point/proposition (USP)
because of its customization and modification services.

In 2023, WO identified two six-year investment project

options that could be beneficial.

Option 1: Research and development (R&D).

Option 2: Open a wind farm with five windmills.
[Source: Wind turbines, Carno Wind Farm. Image by Philip Halling.
https://commons.wikimedia.org/wiki/File:Wind_ turbines,_Carno_Wind_Farm_-_geograph.org.uk_-
_1909021.jpg. Under copyright and licensed under the Creative Commons Attribution-ShareAlike 2.0
Generic (CC BY-SA 2.0). https://creativecommons.org/licenses/bysa/2.0/deed.en.]

The capital costs and forecasted cash flows for both investment projects are
shown in Table 2.

Table 2: Capital costs and expected cash flows for both investment projects
(all figures in $000s)

WO’s board of directors think that the forecasted cash flow for Option 2 is too low.
They believe that the demand for electricity generated by windmills is likely to
rise more than the current forecast assumes. Electricity prices are also increasing.
(a) Define the term unique selling point/proposition (USP). [2]

Markscheme

This is the aspect or feature of the product that may differentiate it from its
rivals. It may help a business to gain a competitive advantage over
competitors.
 N.B. no application required. Do not credit examples. Just mentioning competition is not enough.
Candidates must get at the idea of competitive advantage for the second mark.

Candidates are not expected to word their definition exactly as above.

To be awarded [2] candidates must include references to both differentiation and competitive advantage.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the answer above.

(b) Using relevant information from Table 2, calculate:

(b.i) the average rate of return (ARR) for Option 1 (show all your working); [2]

Markscheme

ARR option 1 (R&D)

ARR = Net profit per annum/capital (outlay) cost x 100

ARR option 1 = 1,333.33 / 9,600 x 100 = 13.888 = 13.89% (Allow rounding)

If a candidate writes 13%, 13.8%, or 13.88%, award [1] because of incorrect

rounding. Accept 13.9% or 14%.

Award marks as follows,

[2] if a candidate provides the correct answer with workings. A correct answer must include the
percentage sign (%) in the final answer or in the working.
[1] If a candidate who has shown workings provides a correct procedure (thus, demonstrates an
understanding of the underlying concepts) but has made an error in calculation or the working / answer
does not include the percentage sign (%).
 [1] If a candidate does not show any working and simply writes the answer.
Award no marks [0] merely for writing the formula.

(b.ii) the average rate of return (ARR) for Option 2 (show all your working); [2]

Markscheme

ARR option 2 (open a wind farm with five windmills)

ARR option 2 = 1,166.67 / 9,000 X 100 = 12.962 = 12.96% (Allow rounding)

If a candidate writes 12.9%, award [1] because of incorrect rounding. Accept

13%.

Award marks as follows,

[2] if a candidate provides the correct answer with workings. A correct answer must include the
percentage sign (%) in the final answer or in the working.

Deduct [1] if no % sign. If the candidate has already lost [1] for no % sign in (b)(i), do not deduct [1] in (b)
(ii) for the same error.

[1] If a candidate who has shown workings provides a correct procedure (thus, demonstrates an
understanding of the underlying concepts) but has made an error in calculation or the working / answer
does not include the percentage sign (%).

[1] If a candidate does not show any working and simply writes the answer. Award no marks [0] merely for
writing the formula.

(b.iii) the payback period for Option 1 (show all your working). [2]
 Markscheme

Total capital cost ($000) for option 1 (R&D) = 9600

Minus cumulative net cash flow until Y4 −7100

2500
2500 (amount required)

(Amount required / net cash flow in year) x 12 = No. of months

2500 / 5000 x 12 = 0.5 x 12 = 6 months
Payback period for option 1 is 4 years and 6 months or 4.5 years or 4 ½
years

Year 5:
if $5000 12 months
$2500 x = $2500 x 12 / $ 5000 = 6 months
Answer: So, payback period for option 1 is 4 years and 6 months or 54
months

Award [1] for correct answer and [1] for the working shown.

(c) Comment on whether WO should choose Option 1 or Option 2. [2]

Markscheme

Award [1] for making each valid point up to a maximum of [2]. Examples include:

Restating what they have calculated. Basically, the candidate will

state that option 1 has an ARR of 13.89%, which is almost one point
higher than option 2, which has an ARR of 12.96%. Accept “Option 1
has a higher rate of return than Option 2” commenting that if the
demand for wind generated electricity and electricity price rise then
option 2 would be better in the long run.
 Commenting on the fact that the payback for option 2 is quicker (4
years, versus option 1 being 4.5 years).
Commenting that under Option 1, WO receives no cash inflows in the
first two years whereas under Option 2 WO starts having cash inflows
from year 1.
Commenting on the fact that Option 1 has more cash inflows.

Accept any other relevant comment.

Award [1] for stating a partial/generic comment. Award [2] for an explanation with application to the
stimulus.

5. [Maximum mark: 10]

Alfombras Horizonte (AH)

Alfombras Horizonte (AH) produces natural henequen* rugs in Yucatán, Mexico, and
sells them online. AH rugs are very popular among young people because of their
eco-friendly materials and AH’s mission statement: “We are responsible with
Mother Earth for our environment and ourselves.”
In 2022, AH’s costs increased, but it kept prices unchanged. For 2023, AH decided to
change its pricing strategy and pass on all cost increases to customers.

Table 2: Selected financial information for AH for 2022 and forecasted

financial information for 2023

* henequen: a fibre plant from Mexico and Guatemala. Fabrics made from
henequen fibre are used to make a wide variety of products, including bags, rugs
and hammocks.
(a) State two benefits to a business of having a mission statement. [2]

Markscheme

A mission statement is an action-oriented statement and declares the

purpose of an organization to its audience. It often includes a general
description of the organization, its function, and its objectives. As a
company grows, its objectives and goals may be reached, and in turn they
will change. Therefore, mission statements should be revised as needed to
reflect the business's new culture as previous goals are met. Some benefits
are that it helps to:

communicate the direction or purpose of the organization (can state

aims and goals);
make day-to-day operating decisions;
keep the organization focused;
motivate the employees and attract new talent;
differentiate from the competition;
give stakeholders an idea of the business’ values;
assist in establishment or maintenance of brand image;
promotional tool that might attract customers when the business’s
values (as embedded inthe mission statement) align with potential
new customers.

Accept any other relevant benefit. Candidates do not have to use identical wording to the above.
Award [1] for each benefit stated up to a maximum of [2].
N.B. no description is required.

(b) Using relevant information from Table 2, calculate:

(b.i) the break-even quantity of rugs in 2022 (show all your working); [2]

Markscheme

Break-even = Fixed cost / Contribution

 = $ 2 000 / $105 − $65
= $ 2 000 / 40
= 50 rugs

Accept if the candidate does not say rugs or units.

Alternative answer:
Break-even point ($):
Price per unit x units = Fixed cost + (variable cost per unit x units)

Q = Quantity/units/rugs

$105 x Q = $2 000 + ($65 x Q)

$105 x Q − ($65 x Q) = $2 000
$40 x Q = $2 000
Q = $2 000 / $40 = 50 rugs

Accept if the candidate does not say rugs or units.

Award [1] for the correct working and [1] for the correct answer.
Award [2] for a correct answer with working.
Award [1] for correct answer without working.
Award [1] for correct method with an error in the calculation.

(b.ii) the profit or loss for AH if 500 rugs were sold in 2022 (show all your [2]
working).

Markscheme

Profit = Total revenue − Total cost

= $105 x 500 − ($2 000 + ($65 x 500))
= $52 500 − ($ 2 000 + $32 500)
= $52 500 − $34 500
Profit = $18 000

An alternative method could be:

 450 x $40 = $18 000

Award the marks if the unit sign is shown somewhere in the working and omitted in the final answer.

Award [2] for a correct answer with working.

Award [1] for correct answer without working.

Award [1] for correct method with an error in the calculation.

(b.iii) the margin of safety in 2023 if AH sells 750 rugs (show all your [2]
working).

Markscheme

Margin of safety = Current output (units) − Break-even output

MoS = 750 − ($2000 / ($120 − $70))

MoS = 750 − 40

MoS = 710 rugs

Apply Own Figure Rule

Provided that the candidate uses a mathematically correct method, they

may express the margin of safety in dollars or as a percentage.

Typically, the way to calculate the MoS in dollars would be:

(750 x $120) − (40 x $120) = $90 000 − $4800 = $85 200.

MoS = $85 200.

To calculate MoS as a percentage, use the following formula:

(Total revenue − break-even revenue)/(total revenue) x 100 =

 ($90 000 − $4 800)/$90 000 x 100 = 94.66666667%

Allow rounding, provided they have rounded correctly. Accept 94.67%,

94.7%, or 95%.

Award [2] for a correct answer with working.

Award [1] for correct answer without working.

Award [1] for correct method with an error in the calculation.

(c) Explain whether AH’s change in pricing strategy for 2023 will
have an impact on its unit contribution. [2]

Markscheme

AH decided to pass on all cost increases to its customers, therefore, the $5

increase in variable cost means that the new selling price of $120 will
represent a $10 unit contribution increase.
Or,
Since unit contribution is the difference between the selling price and its
variable cost, according to the figures from the table in 2023, $120 −$70 =
$50, which is a $10 increase in contribution from 2022.

Candidates do not have to word their responses in exactly the same way.

Award [1] for some understanding.

Award [2] for a clear explanation such as those mentioned above.
N.B. If a candidate says only “it will increase” (or something to that effect, without further explanation),
award [1].

6. [Maximum mark: 10]

Lusanka Company (LC)
Lusanka Company (LC) manufactures ceiling fans using a mass production process.
Selected financial information for LC is shown in Table 1.

Table 1: Selected financial information for LC for the year ended 31 December
2022 and as of 31 December 2022 (figures in $000s)

Currently, LC manufactures ceiling fans in a building that is financed by long-term

debt. LC is considering selling the building to pay off the long-term debt and
moving production to a new building, which LC would lease.
(a) State two features of a mass production process. [2]

Markscheme
 Features of a mass production process include:

continuous flow production;

division of labour;
high start-up costs;
highly automated;
uniformity of products/standardized products;
high volume of products;
typically much of the labour force can be unskilled and need minimal
training.

Do not accept economies of scale, which is not always true of mass production, and is a benefit, not a
feature.

Accept any other relevant feature of mass production.

N.B. no description is required.

Award [1] for each relevant feature stated. Award a maximum of [2].

(b) Using relevant information from Table 1:

(b.i) calculate LC’s net profit after interest and tax for the year ended [1]
31 December 2022 (no working required);

Markscheme

net profit after interest and tax = $11 000 [sales revenue] − $6 000 [cost of
goods sold]
− $3 000 [expenses] − $150 [interest] − $370 [tax] = $1 480.

The correct answer is $1 480. Candidates are not required to produce a

profit and loss account, though they may without penalty (assuming that
they arrive at the correct answer).

sales revenues $11 000

<Cost of goods sold > − $6 000
Gross profit $5 000
 <Expenses> − $3 000
Net Profit before interest and tax $2 000
<Interest> − $ 150
Net Profit before tax $1 850
<Tax> − $ 370
Net profit after interest and tax $1 480

Accept $1 480 or $1 480 000. Also, accept without a dollar sign.

Award [1] if a candidate provides the correct answer.

(b.ii) construct a fully labelled balance sheet for LC as of 31 December

2022. [5]

Markscheme

Balance sheet for LC as of 31 December 2022 (figures in $ 000s)

$000s $000s
Net fixed assets 3 000

Current assets
Cash 100
Debtors 900
Stock 1 000
Total current assets 2 000

Current liabilities
Overdraft 200
Creditors 1 300
Total current liabilities 1 500

Net current assets (working capital) 500

Total assets less current liabilities 3 500
 Long-term liabilities (debt) 1 500

Net assets 2 000

Financed by:

share capital 1 000

accumulated retained profit 1 000

Equity 2 000

N.B. if the candidate does not follow the IB prescribed format award a maximum of [3].
N.B. candidates should not be penalized for: omitting the row “Long-term liabilities (debt)”, or for writing
“retained profit” omitting the word “accumulated”.
Award [1] if the candidate demonstrated some understanding of what a balance sheet is.
Award [2] if the candidate constructs a largely recognizable balance sheet, but it does not balance, or it has
two major problems of classification. If the balance sheet such as one described here but lacks a heading,
award [2].
Award [3] for a largely accurate balance sheet that balances. (There could be one misclassification.) If it
lacks a proper heading, deduct [1]. Thus, [3] − [1] = [2].
Award [4] if the candidate constructs an accurate balance sheet (that balances) according to the IB
prescribed format. If it lacks a proper heading, still award [4].
Award [5] if the candidate constructs an accurate balance sheet (that balances) according to the IB
prescribed format and the balance sheet is dated.

N.B. A minor misclassification that is numerically correct demonstrated that the candidate has sufficient
understanding. In the spirit of positive marking, give the candidate credit. If, above, the candidate wrote
“Total assets”" instead of “Total assets less current liabilities, accept, provided that to the right they have
the mathematically correct figure, in this case $3500.

(c) Explain the impact on LC’s profit and loss account of selling its
current building and leasing a new one. [2]
 Markscheme

Leasing means that paying the costs of the building will be an expense,
deducted before tax. Previously, the company was paying for its building
costs by owning the building and paying a long-term loan, which is paid,
apart from the interest, with after-tax finance. Therefore, LC will see its
expenses rise and its profit before interest and tax decline. Additionally,
when the company sells the current building and pays off its long-term
debt, interest expense will decrease. LC’s tax expense will also decline, as
the lease payments will be higher than interest expense, and the net
profit after interest before tax will be lower.

Award [2] for a clear explanation of any of the three outcomes explained above with application to LC.
Award [1] for some understanding.

N.B. If a candidates says only “expenses will increase” (or something to that effect, without further
explanation), award [1].

7. [Maximum mark: 10]

Jenny and Rose

Jenny and Rose are entrepreneurs. They want to sell baskets of local organic
food products online in 2025. Their fixed costs include website design,
advertising, insurance, and setup costs.

Forecasted fixed costs for 2025 are $4000, but they are expected to decrease the
following year. Table 1 shows forecasted variable costs per basket of local
organic food products for 2025.

Table 1: Jenny and Rose’s forecasted variable costs per basket of local organic
food products for 2025 (all figures in $)
Jenny and Rose will sell their baskets of local organic food products for $80 each.
They aim to sell 400 baskets in 2025.
(a) State two features of an entrepreneur. [2]

Markscheme

An entrepreneur:

take risks
identify business opportunities / comes up with a business idea / starts
up (creates) a business
has a vision
is passionate about their business
put their own funds / finance into the business
is innovative / creative
(highly) motivated
adaptable
resilient / persevering
confident
ambitious
is a decision / strategy maker
problem solvers / think outside the box / open minded.

Accept any other relevant feature.

N.B. no description is required.

Award [1] for each correct feature identified. Award a maximum of [2].
 Do not award answers such as: operates a business / combine the factors of production / have leadership
skills, as these are descriptions / definitions rather than features.

Do not award the following answers as these are features of a sole trader:

has unlimited liability

works on own
keeps all the profits
decides own working hours etc.

(b) Construct a fully labelled break-even chart, to scale, for the

baskets of local organic food products for 2025.

[4]

Markscheme

The break-even point is 200 units: $16 000

At an output / sales of 400:
TR = $32 000
TC = $28 000

Award marks as follows:

[1] for a correctly labelled and accurately drawn total revenue (TR) line – can be TR or revenue (but not
“sales” on its own).

[1] for a correctly labelled and accurately drawn total cost (TC) line.

[1] for identifying the break-even point. The break-even point must show where the total revenue and total
cost line intercept. Ideally, the candidate will draw an arrow pointing to the break-even point and label the
arrow. However, accept as an accurately labelled break-even point a vertical line from the x-axis to the
break-even point, provided that the line is labelled “break-even point”.

[1] for correctly labelling BOTH axes – y-axis must have both costs and revenue; x-axis must have some
indication of quantity, e.g. output/units/quantity/items/number of baskets of local organic products.

A break-even chart that is not neat, not drawn with a straight edge, can be awarded a maximum of [2].
 A break-even chart that is not drawn to scale can be awarded a maximum of [2] if the axes are both
correctly labelled and the break-even point is identified on the chart.

If a candidate produces a table rather than a chart, award [0].

N.B. drawn diagrams must have a consistent verifiable scale, otherwise it cannot be determined if TR and
TC are accurate, even if correctly labelled.

(c) Jenny and Rose have forecasted fixed costs in 2026 to be $2000
and predicted that they would sell 500 baskets of local organic
food products. Per unit variable costs will remain the same as
they were in 2025.

(c.i) Calculate the profit if 500 baskets of local organic food products
are sold in 2026 (show all your working). [2]

Markscheme

Profit = TR – TC
= 500 units × $80 – ($2000 + 500 × $60)
= $40 000 – ($2000 + $30 000)
= $40 000 – $32 000
= $8000

Alternative answer:

Profit = Units × (contribution per unit) – Fixed costs

Profit = 500 units × ($80 − $60) – 2000 = $8000

Award [1] for the correct answer with $ sign and [1] for correct working, up to a maximum of [2].

Award [1] for the correct answer without $ sign and correct working.

Award [0] for an answer of 8000, with no $ sign and no working.

 (c.ii) Explain one reason why fixed costs are likely to decrease in
2026. [2]

Markscheme

The fixed costs are likely to decrease in 2026 because some of the fixed
costs incurred in 2025 would have been “one-off” or setup costs. These
include in this stimulus:

setting up a website. (This cost would not be repeated in 2026.)

the business may also spend less on advertising as business awareness
will have been created.

Accept any other relevant explanation.

Award [1] for identifying that some costs would be “one-off” or setup costs when starting the business,
and an additional [1] for application to the stimulus up to a maximum of [2].

Award [1] for a tautological answer that states “will have less setup costs as is already setup” as this
applies to any business and is therefore not application – needs to mention website and or advertising for
an application mark to be awarded.

8. [Maximum mark: 10]

Hernan Gutierrez (HG)

Hernan Gutierrez (HG), a sole trader, runs a print shop. He wants to acquire more paper
stock, for which he needs a $5000 one-year short-term loan. He has prepared a
quarterly cash-flow forecast for 2025 for his loan application, shown in Table 1.
The forecast assumes that the loan will be granted and repaid.

Table 1: Quarterly cash-flow forecast for HG for 2025 (all figures in $)

(a) State two features of a sole trader. [2]

Markscheme

As a sole trader, an individual:

has full control and runs the business

has sole ownership of the business
is not a separate legal entity (assumes full legal responsibility for all
business debts)
has minimal admin and filing requirements. Registering the business
is generally relatively easy and inexpensive and quick
 enjoys a greater level of privacy and limited accountability
compared to a corporation
usually has limited finance
the owner has unlimited liability
lacks continuity.

Accept any other relevant feature.

N.B. no description is required.

Award [1] for each correct feature stated. Award a maximum of [2].

(b) Using Table 1, complete the following figures for the cash-flow
forecast for HG for 2025:

(b.i) total cash outflows, W, for quarter 1 (no working required); [1]

Markscheme

Total payments (cash outflow) (W) for quarter 1 = ($13 400 + $1 395 + $900
+ $1500 + $370 + $170) = $17 735

N.B. no working required.

Award [1] for the correct answer, $ sign not needed.

(b.ii) total cash inflows, X, for quarter 2 (no working required); [1]

Markscheme

Total cash inflow (X) for quarter 2 = Total cash outflows + Net cash flow
Total cash inflow (X) for quarter 2 = $17 945 + $2 055 = $20 000

Alternative calculations:
 Total cash inflow (X) for quarter 2 = Cash sales revenues + Bank loan =
Total cash inflow (X) for quarter 2 = $20 000 + $0 = $20 000

N.B. no working required.

Award [1] for the correct answer, $ sign not needed.

(b.iii) opening balance, Y, for quarter 3 (no working required); [1]

Markscheme

The opening balance (Y) for quarter 3 2025 is $2030

(The same as the closing balance in Q2)

N.B. no working required.

Award [1] for the correct answer, $ sign not needed.

(b.iiii) closing balance, Z, for quarter 4 (no working required). [1]

Markscheme

Closing balance (Z) for quarter 4 = Net cash flow Q4 + opening balance Q4
=
Closing balance (Z) for quarter 4 = $3895 + $2325 = $6220

Alternative calculations:
Opening balance Q4 + cash inflows Q4 – cash outflows Q4 = $2325 + $19
300 - $15 405 = $6220

N.B. no working required.

 Award [1] for the correct answer, $ sign not needed.

(c) Using information from Table 1, calculate the interest rate on

HG’s one-year short-term loan for 2025 (show all your working). [2]

Markscheme

$1395 × 4 – $5000 = $580 / $5000 × 100 % = 11.6 %

Alternative answer:

Original amount of the bank loan = $5000

Total loan outflows (loan + interest) = loan Q1 + loan Q2 + loan Q3 + loan

Q4 = $1395 + $1395 + $1395 + $1395 = $5580

Interest paid = Total loan outflows – Original amount of the bank loan =
$5580 – $5000 = $580

Interest rate = (interest / original amount of the bank loan) × 100 %

= ($580 / $5000) × 100 % = 11.6 %

Award marks as follows:

[2] if a candidate provides the correct answer with working. A correct answer must include the
percentage sign (%).

[1] If a candidate who has shown working but has an incorrect answer.

[0] If a candidate does not show any working and simply writes the answer without a % sign i.e. 11.6.

Award no marks [0] merely for writing the formula.

(d) Explain how this cash-flow forecast might help Hernan operate
his business, other than by supporting his loan application. [2]
 Markscheme

Cash flow forecasts help control and monitor cash flow in the business. It
will help Hernan to identify, in advance, the cash position each month (or
in this case, each quarter). For example, Hernan shows in advance that his
business will need some extra cash from somewhere in the first quarter.
Closing balance for the first quarter is (25). He also knows that his cash
position is likely to improve at the end of the time period. Producing a cash-
flow forecast is part of the planning process because it deals with the future.

Accept any other relevant explanation.

Award [1] if the candidate states that cash-flow forecasts help control and monitor cash in the business, or
if it helps Hernan identify in advance the cash position each quarter by showing how much cash he is
expected to have at the end of each quarter. Award an additional [1] for another relevant explanation with
application to the stimulus, such as needing extra cash somewhere in the first quarter. Award a maximum
of [2].

9. [Maximum mark: 10]

JnDj

Jane Ngandu and Donal Jeall each own 50 % of a partnership, JnDj. Jane has
designed a high-quality video doorbell that will have the brand name ICU.

Figure 1: Example of a video doorbell

[Source: dourleak, n.d. Pushing an electronic doorbell - stock photo. [image online] Available at:
https://www.gettyimages.co.uk/detail/photo/pushing-an-electronic-doorbell-royalty-free-
image/530349479 [Accessed 11 December 2023]. Source adapted.]

The ICU video doorbell allows homeowners, using a mobile phone app, to see
and talk to people ringing the doorbell. However, competition in the video
doorbell market is growing, with low-priced products taking an increasing share
of the market.

JnDj will:

sell the ICU video doorbell on JnDj’s website for $50, with a five-year
guarantee. Competitors offer a two-year guarantee.
launch the ICU video doorbell in January 2025. Donal forecasts sales of 2500
ICU video doorbells in the first year.

Table 2 shows JnDj’s forecasted costs.

Table 2: JnDj’s forecasted costs for 2025 (all figures in $)

(a) State two features of operating as a partnership. [2]

Markscheme

Features could include:

usually more capital is available for the business.

greater borrowing capacity than a sole trader.
partners’ business affairs are private.
there is limited regulation.
spreads the risk across more people, so if the business gets into
difficulty, then there are more people to share the burden of debt.
partner may bring other skills and ideas to the business.
increased credibility with potential customers and suppliers.
partners will (usually) have unlimited liability.
decisions are made jointly by the partners.
the business is owned and managed by more than one person.
typically has a greater degree of accountability than a sole trader.
set-up costs typically higher than sole traders and less than a company.

Accept any other relevant feature.

Do not accept “shared resources” as it is too vague. The response must be more specific.

Award [1] for each feature stated, up to a maximum of [2].

(b) Using information from Table 2:

(b.i) construct a fully labelled break-even chart for JnDj, to scale, for
the new ICU video doorbell;

[4]

Markscheme
N.B. drawn diagrams must have a consistent verifiable scale, otherwise it cannot be determined if TR and
TC are accurate, even if correctly labelled.

The BE(Q) is 1500 units --- BE(Q) = fixed costs / Contribution per unit =
$15000 / ($50 – $40)

The BE($) is = 1500 units × $50 = $75 000

The break-even point is 1500 units; $75 000

Award marks as follows:

[1] for a correctly labelled and accurately drawn total revenue (TR) line – can be TR or revenue (but not
“sales” on its own).

[1] for a correctly labelled and accurately drawn total cost (TC) line.
 [1] for identifying the break-even point. The break-even point must show where the total revenue and total
cost line intercept. Ideally, the candidate will draw an arrow pointing to the break-even point and label the
arrow. However, accept as an accurately labelled break-even point a vertical line from the x-axis to the
break-even point, provided that the line is labelled “break-even point”.

[1] for correctly labelling BOTH axes – y-axis must have both costs and revenue; x-axis must have some
indication of quantity, e.g. output/units/quantity/items/number of ICU video doorbells.

A break-even chart that is not neat, not drawn with a straight edge, can be awarded a maximum of [2].

A break-even chart that is not drawn to scale can be awarded a maximum of [2] if the axes are both
correctly labelled and the break-even point is identified on the chart.

If a candidate produces a table rather than a chart, award [0].

(b.ii) calculate the change in the break-even level of output if it is

estimated that JnDj’s fixed costs for 2025 will be 10 % higher (show
all your working). [2]

Markscheme

Original break even (Q) = 1500 units

10 % increase in fixed costs ($15000 x 10 %) = $1500. TFC rises from $15 000
to $16 500

BEQ = TFC/contribution à $16 500 / ($50-$40) = 1650 units

New BEQ = 1650 units

Change = 150 units (1650 units – 1500 units)

Allow for candidates own figure rule (OFR).

Award [1] for the correct answer and [1] for correct working, up to a maximum of [2].
 Award [1] to a candidate who correctly calculates the new BEQ (1650) but goes no further with their
answer.

N.B. if a candidate draws a new TC and new TFC line and uses that to establish the new BEQ quantity then
they have not performed the calculation or shown a grasp of contribution – hence “show your working”
matters and answers without working but with the correct answer cannot achieve more than [1].

(c) Explain one reason why JnDj chose to offer a five-year guarantee
on the ICU video doorbell. [2]

Markscheme

Reasons may include:

A five-year guarantee will:

provide JnDj with competitive edge/advantage as competition in
the video doorbell market is growing with low-priced products
taking an increasing share of the market / as rivals only offer a 2-
year guarantee ([2]).
differentiate JnDj’s product allowing a higher price to be charged
as the guarantee lasts 3 years more than rival doorbells ([2]).
JnDj are confident in the ICU’s quality and believe the guarantee will
help with creating the ICU’s quality image ([1]).

Accept any other relevant reason.

Award [1] for identification of a reason and an additional [1] for explanation and application, up to a
maximum of [2].

10. [Maximum mark: 10]

MotorZycle (MZ)
MotorZycle (MZ), a manufacturer of motorcycle transmissions, is seeking to establish
a strategic alliance with a spare parts dealer.

[Source: loraks, n.d. Gear set - stock photo. [image online] Available at:
https://www.gettyimages.co.uk/detail/photo/gear-set-royalty-free-image/478199195?
phrase=motorcycle+transmission&adppopup=true [Accessed 17 May 2023]. Source adapted.]

MZ sells motorcycle transmissions for $3000 per unit.

MZ has forecasted sales of 160 motorcycle transmissions in 2024.

(a) Define the term strategic alliance. [2]

Markscheme

A strategic alliance is an arrangement between two or more companies to

undertake a mutually beneficial project while each retains its
 independence. No new business is created.

Candidates are not expected to word their definition exactly as above.

N.B. No application required. Do not credit examples.

Award [1] for a basic definition that conveys partial knowledge and understanding, stating the agreement
between two or more companies to benefit from a project.

Award [2] for a full, clear definition that conveys knowledge and understanding similar to the answer
above and that includes reference to companies remaining independent.

(b) Calculate, for MZ, the break-even quantity/point for 2024 (show all
your working). [2]

Markscheme

Fixed costs = $ 60 000 + $ 80 000 + $ 20 000 = $ 160 000

Variable costs per unit = $800 + $200

Contribution per unit = Price per unit – variable costs per unit = $ 3 000 - $ 1
000 = $ 2 000

Break-Even quantity/point = Fixed costs / Contribution per unit = $ 160

000 / $ 2 000 = 80 motorcycle transmissions (units).

Award [1] for correct working and [1] for the correct answer. Award a maximum of [2].

N.B. Do not penalize candidates who omit the word units/motorcycle transmissions.

(c) Construct a fully labelled break-even chart, to scale, for MZ, for
2024. [4]

Markscheme
Award marks as follows:

[1] for both appropriately labelled axes. The y-axis must include both costs and revenue. The x-axis can be
any suggestion of quantity: units, motorcycles.

[1] for accurately drawn and labelled total cost line.

[1] for accurately drawn and labelled total revenue line.

[1] for indication of break-even point. OFR applies from part b. To get [1] for the break-even point, the
candidate must write “break-even point” or “BEP” somewhere near the break-even point or have an arrow
from their words to the BAEAP. Accept break-even quantity.
 Award a maximum of [2] if the chart is not neat, not drawn with a straight edge, or is not to scale. If a
candidate produces a table rather than a chart, award [0].

(d) Explain the impact on MZ’s margin of safety if motorcycle

transmissions are sold for $2000 per unit and all costs remain
the same.

[2]

Markscheme

Considering that the margin of safety (for Price = $3 000 per unit) is 80
motorcycle transmissions (that is because the forecasted output for 2024 is
160 motorcycle transmissions and the break-even output for price $3 000 is
80 motorcycle transmissions. So, 160 − 80 = 80 motorcycle transmissions).

If the price falls to $2 000 per unit, with fixed and variable costs remaining
the same, the margin of safety would disappear (it will fall by 80 units or
reduce to zero) because according to the stimulus the forecasted sales for
2024 are 160 motorcycle transmissions and the new break-even point
(considering the new price $2 000) will be also 160 motorcycle
transmissions in 2024. So, the new margin of safety will be = 160 − 160 = 0
motorcycle transmissions.

Award [1] for stating that the margin of safety falls and [1] for stating that it falls by 80 or to zero. Up to a
maximum of [2].

Allow candidate own figure rule (OFR).

11. [Maximum mark: 10]

Static Force (SF)

Static Force (SF ) produces disposable watches. It has a unique selling

point/proposition (USP) and strong brand awareness in the watch market for
offering very low prices. However, with online competition growing, SF is
experiencing falling sales. The Chief Executive Officer (CEO) of SF is considering
launching a new watch produced from recyclable materials and selling it at a
much higher price. The CEO is looking to set the price of this new watch at $160.
SF’s current watches are usually priced between $42 and $84.

Financial information on the new watch is shown in Table 2.

Table 2: Financial information on SF’s new watch

(a) Define the term brand awareness. [2]

Markscheme

Brand awareness refers to the degree to which consumers recognize a

product by its name and/or special characteristics.
This recognition could be due to a specific logo or trademark associated
with the brand.

Candidates are not expected to word their definition exactly as above.

Award [1] for partial understanding concerning recognition. Award [2] if the candidate provides an
accurate and clear definition with some mention of brand awareness being linked to a logo or other form of
recognition.

Award [0] if candidates refer to brand awareness being awareness of a brand or similar tautological
response.

(b.i) Using information from Table 2, construct a fully labelled

break-even chart for SF, to scale, for the new watch
(show all your working).
 [4]

Markscheme
Supporting calculations

6000000
BE point is
(contribution)

Contribution of the new watch is $160 − $40 = 120

6000000
BE point = = 50000 watches
120

Award marks as follows:

[1] for both appropriately labelled axes – y-axis must include both costs and revenue. The x-axis can be any
suggestion of quantity: units- new watches.
[1] for accurately drawn and labelled total cost line.
[1] for accurately drawn and labelled total revenue line.
[1] for indication of break-even point. OFR applies from part [x].
Award a maximum of [2] if the chart is not neat, not drawn with a straight edge, or is not to scale.
If a candidate produces a table rather than a chart, award [0].
(b.ii) Using information from Table 2, calculate the margin of safety
(show all your working).

[2]

Markscheme

Margin of safety = 88 000 watches − BE point (50 000) watches = 38 000

watches.

Award [1] if the candidate demonstrates how to calculate the margin of safety but makes a mathematical
error.

Award [2] if the candidate demonstrates how to calculate the margin of safety and produces the correct
answer.

Accept OFR.

(c) Explain one advantage for SF of introducing the new watch.

[2]

Markscheme

The new watch will create a new market opportunity for SF at a time of
falling sales due to growing online competition. This market opportunity
could lead to a new positioning of SF’s watches in a higher price bracket and
increased sales.

The new watch will allow SF to use up some of its spare capacity, as the
current margin of safety is 38 000 watches, and possibly in the future allow
the new watch to be produced at lower cost, thus reducing its high retail
price.

Award [1] for an advantage, with an additional [1] for application to SF.
12. [Maximum mark: 10]
Flip Shoes (FS)

Flip Shoes (FS) produces shoes for musical performers and actors, focusing mostly on
the entertainment industry. The business uses batch production and operates in
a niche market. With the creation of more television and film series, FS’s sales have
increased significantly, and its market share is also increasing. The business has
two managers and a limited workspace. The managers have noted that the
business is currently experiencing diseconomies of scale.

The mean sales of pairs of shoes per month in each year for FS are shown in Table
3.

Table 3: Mean sales of pairs of shoes per month in each year for FS

(a) Describe one feature of batch production.

[2]

Markscheme

Involves production of a group of identical products. Products are

made as specified groups or amounts within a given time frame.
 Customers are offered customized products but using a range of
standardized options.
This method of production requires careful planning, as the
components for the products need to be interchangeable.

Accept any other relevant feature.

Award [1] for a partial description which may refer to the idea that similar items are manufactured in
groups with some variation. Award an additional [1] to include a full description of some reference to the
idea that the group of products move through each manufacturing stage together until completed.

(b.i) Describe how the mean sales of pairs of shoes per month for FS
could have been calculated.

[1]

Markscheme

The mean sales per month could have been calculated by adding together
the total sales for the year and dividing by 12.

Award [1] for a correct answer.

Candidates are not expected to word their description exactly as above.

(b.ii) On the graph, plot the mean sales of pairs of shoes per year
since 2014 (show your labelling clearly).
 [2]

Markscheme
 Award [2] if both axes are clearly labelled, sales data clearly plotted, and line graph drawn connecting all
points as shown in the diagram

Award [1] if one of the above elements is missing.

Award [0] if two of the above are missing or the plotted points on the diagram are so poorly presented that
it is hard to verify accuracy easily

(b.iii) On the graph you plotted in (b)(ii), construct a line of best fit
through the mean sales data. [1]

Markscheme

Award [1] for a correct line of best fit drawn with a ruler.

(b.iv) On the graph you constructed in (b)(iii), draw (extrapolate) a

value for mean sales in 2022 and 2023 from the line of best fit.
 [2]

Markscheme

From the graph, the extrapolated value of mean sales for 2022 is 11.7, or
1170 shoes, while for 2023 it is 13.3, or 1330 shoes.

Award [1] for each correct extrapolated value, up to a maximum of [2].

Allow OFR but note below;

If the extrapolated line is not accurately drawn but is a straight line and the candidate has correctly and
accurately produced an extrapolated value, then apply OFR.

Do not award a mark if the extrapolated value has been created by inaccurate use of a ruler or the line of
best fit has been extended inappropriately.

(c) Explain one diseconomy of scale that FS could experience. [2]

Markscheme

A possible diseconomy of scale occurs when the unit costs of production

increase over the long run. Sales at FS are growing at a dramatic rate and,
with a small number of managers and limited workspace, coordination and
communication challenges may lead to rising unit costs as the scale and
sale of production of shoes increases.

Award [1] for a response which may include an application of a diseconomy of scale to FS with an
additional [1] for a clear theoretical explanation. For [2] there must be some indication in the theoretical
explanation that the diseconomy of scale will lead to an increase in unit costs.

13. [Maximum mark: 10]

Medias Calentitas (MC)
Medias Calentitas (MC) is a cooperative that produces luxury woollen socks. MC’s socks
have unique patterns, and they are knitted with luxury cashmere* wool. MC’s
machinery, valued at $100 000 on start-up, has a useful life of 10 years and an
estimated residual value of $30 000.

MC has set a target profit of $47 000 for 2025. The demand for MC’s socks is price
inelastic.

Selected financial information for MC is shown in Table 1.

Table 1: Selected financial information for MC

* cashmere: a type of luxury wool obtained from some breeds of goat

(a) State two features of a cooperative. [2]

Markscheme

The main features of a cooperative include:

An aim is to serve the members of the cooperative/members with a

common interest.
A cooperative is a type of corporation.
A cooperative has a board of directors or trustees.
Members of the cooperative have limited liability (accept the
cooperative has limited liability).
Cooperatives have democratic or democratically spirited
management.
Legal existence is separate from the members themselves.
Membership is usually open and voluntary.
 Surpluses/profit are distributed among the members except when
needed for finance.
The organization will not end if a member dies or withdraws.
All owners have equal voting rights.
There is no maximum to the number of members.
A cooperative is owned and run by its members.
For profit social enterprise.

Accept any other relevant feature. Accept the word ”owners” if used in the same
context as “members”.

Award [1] for each relevant feature identified up to [2].

(b) Using straight-line depreciation, calculate MC’s total annual

depreciation expense for its machinery (show all your working). [2]

Markscheme

Depreciation = (historic value – residual value) / number of years of useful

life

(100 000 – 30 000) / 10 = $7000

Award [1] for working and [1] for the correct answer with $ sign, up to a maximum of [2].

N.B do not penalize more than once for sign/unit omission in any one question part (b),(c)(i), (c)
(ii). Allow BOD if other signs e.g. £ or € etc. used in error.

Accept if sign is present in either the working or final answer.

(c) Using Table 1, calculate:

(c.i) the number of pairs of socks MC needs to sell to achieve an

annual target profit of $47 000 (show all your working);
 [2]

Markscheme

Target profit level of output = (fixed costs + target profit) / contribution

(70 000 + 47 000) / 10 = 11 700 units

Contribution = current price $40 minus variable cost per unit $30

MC will have to sell 11 700 pairs of socks to achieve a target profit of $47 000.

Award [1] for working and [1] for the correct answer, up to a maximum of [2].

Deduct [1] if the words units/socks absent.

(c.ii) the price MC must charge to achieve a target profit of $47 000,
assuming it will sell 9750 pairs of socks per year (show all your
working). [2]

Markscheme

Price = (target profit + fixed costs + unit variable cost × quantity) / quantity
Price = (47 000 + 70 000+(30 × 9750))

9750

Price = $42

$42 is the price MC must charge for a target profit of $47 000 with sales of
9750 pairs of socks per year.

Award [1] for working and [1] for the correct answer with $ sign, up to a maximum of [2]. Accept if sign is
present in either the working or final answer.

(d) Explain one advantage for MC of the demand for its socks being
price inelastic. [2]
 Markscheme

If MC’s price elasticity of demand is inelastic, a price increase will result in a

proportionally smaller change in quantity demanded of socks. An
advantage is that MC can increase its price and still make sales to reach its
target profit.

Award [1].

Application mark:

Alternatively, MC should produce and sell 11 700 pairs of socks to reach its
target profit, however this is not possible as MC’s maximum production
capacity is 11 000 pairs of socks a year. The only alternative for MC to reach a
target profit of $47 000 is by increasing its selling price from $40 to $42. An
inelastic demand is then a crucial advantage to MC.

Accept any other relevant advantage.

If the candidate uses wrong figures own figure rule (OFR) applies.

Award [1] for identifying or describing the advantage for MC and a further [1] for a suitable application
with respect to MC. Award a maximum of [2].

[2] cannot be awarded if the response lacks either explanation or application.

14. [Maximum mark: 10]

Dan, a young entrepreneur, is planning to start his own small business making
hand-made wooden garden benches – Beautiful Benches (BB).

Table 2: Forecasted sales revenue for BB for the first four months
of operation, starting 1 January 2021 (all figures in $)
To be competitive, BB offers its customers credit. They pay 50 % when they buy a
bench and 50 % one month later.

Table 3: Selected forecasted financial information for BB for 2021

(all figures in $ and per month unless stated otherwise)

Dan was advised to pay close attention to BB’s working capital cycle.
(a) Define the term working capital cycle. [2]

Markscheme

Working capital cycle is the period of time/interval between the actual cash
paid for costs of production and the actual cash received from customers. It
is the time period when net current assets is converted into cash. [2]

N.B.: no application required. Do not credit examples.

 Award [1] for a basic definition that conveys partial knowledge and understanding but omits reference to’
time period’ or ‘cash’.

Award [2] for a full definition that conveys knowledge and understanding similar to the answer above.

(b) Prepare a monthly cash flow forecast for BB for the first four
months of operation. [6]

Markscheme

Please note: Candidates do not have to split “cash revenue” and “credit cash
revenue” or cost of sales and costs of sales on credit.
 N.B. Allow candidate own figure rule (OFR): if a candidate makes an error in one row and carries it through
the remainder of the forecast that is only one error. This provision includes both mathematical errors and
conceptual errors (for example, if a candidate has the rent in the incorrect month then candidates should
only lose [1] for that error.

Award [1] if the candidate conveys some understanding of what a cash flow forecast is, but otherwise the
forecast is largely inaccurate, incomplete, or illegible.

Award [2–3] if a cash flow forecast is drawn, but either it is not in a generally accepted format or it is
untidy, and/or the forecast contains three or more errors, which could include, in addition to number
placement problems and mathematical errors, conceptual errors (using the word “profit” rather than “net
cash flow”) or omissions, such as not having a line like “closing balance” or totals.

Award [4–5] if the cash flow forecast is drawn essentially correctly and neatly in a generally accepted
format, but there is one error for [5] or two errors for [4]. Award [6] if the cash flow forecast is drawn
accurately and neatly in a generally accepted format and is error free.

If the candidate provided a heading of total inflow/outflow without using another heading above of inflow
or outflow – do not penalize as an omission.

If the candidate omitted both headings of outflow/inflow but does include ‘Total’ Cash Outflow/Inflow
headings do not penalize.
Missing any of highlighted headings = one error

Substituting the term “net profit in the cash flow forecast for “net cash flow” is inaccurate and [1] should
be deducted.

If the candidate has only one row for all cash outflows or inflows, subtract [1] from the total mark
awarded.

Full working is not expected.

(c) Explain one strategy that BB could use to significantly improve

its forecasted cash flow for January 2021. [2]

Markscheme
It is expected that candidates identify the main figures/categories that
contributed to the negative cash flow. Clearly the options are either to
reduce the cash outflow or increase the cash inflow. Candidates should
provide concrete examples as application. There is no need to reproduce a
new cash flow. It is expected the relevant terminology is used. As generally
total revenue is increasing, apart from February, it is not expected that
candidates suggest to increase total revenue inflow using marketing etc.

Increase inflows:
Candidates may suggest that BB should not give credit for the first months
of operation. This will increase the inflow by a $1000.

Dan can possibly ask the bank to give a loan in the first months of
operation instead of the 4th months. $3000 will help BB to significantly
reduce the initial negative cash flow.
Increasing the price of benches will increase inflows. However, this may
reduce competitiveness.

Reduce outflows:
Dan can reduce his own salary of 1500, especially in the first month or so.
Own salaries and admin are the most excessive/large outflow that
contributes to the negative cash inflow. A smaller self-reward can
significantly reduce the outflow and therefore the net cash flow.

Dan can also negotiate his rental payments. Instead of paying a large sum
of 1200 in January, monthly instalments of $400 will significantly reduce the
outflow in January Dan can also ask for at least one month’s credit from his
landlord.
Do not accept an option of not buying the machinery/tools.
Accept lease the machinery for a considerably lower fee per months.
Generic comments like reduce donation, utilities etc will not make a
significant impact. Hence not really applicable.

Award [1] for a relevant generic strategy identified or described and [1] for any additional explanation in
context to BB.
 [2] cannot be awarded for the strategy if the response lacks either explanation and/or application.
Explanation needs to cover the effect the strategy is designed to produce. It is not enough just to say ‘reduce
Dan’s salary’,

For example: For an identification or a description of the strategy like reduce cash outflow/ increase cash
inflow without explanation or application [1].

For explanation of the strategy with no application [1].

For explanation of the strategy and application [2].

15. [Maximum mark: 10]

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)

[Source: © International Baccalaureate Organization 2019]
(a) State two methods of primary market research. [2]

Markscheme

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].

(b) Using the information provided and in Table 1, calculating X

and Y, construct a profit and loss account for Enjuice. [5]

Markscheme

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].

(c) Using the information provided and in Table 1, calculate the

gross profit margin (no working required). [1]

Markscheme

440

2880
× 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.

(d) Explain one strategy that Enjuice could use to increase its gross
profit margin. [2]

Markscheme

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].

16. [Maximum mark: 10]

Roscas

Roscas produces and sells sugar donuts. Monthly fixed costs are $15 000, monthly
sales revenue is $70 000, and total variable costs per month are $25 000. To
increase its productivity rate, Roscas wants to buy a new high-efficiency machine
that produces chocolate-filled donuts. The finance manager has forecasted the
following information.
Table 1: Forecasted information for the production of chocolate-filled donuts

Table 2: Forecasted cash flow for the new machine

(a) Define the term productivity rate. [2]

Markscheme

Productivity rate is a measure of the efficiency of production and can be

defined as the rate of output to input of production. It is also a measure of
the added value of the business.

Award [1] for a basic definition that conveys partial knowledge and understanding.

Award [2] for a full definition that conveys knowledge and understanding similar to the above and refers to
inputs and outputs or similar words such as resources and production.

N.B. No application required. Do not credit examples.

(b) Using the information provided above and in Table 1,
calculate the total contribution per month for the production of
20 000 chocolate-filled donuts (show all your working). [2]

Markscheme

Total contribution = contribution per unit x number of units = 3 × 20 000 =

$60 000

OR

Total contribution = total revenue – total variable costs = 100 000 − (2 × 20

000) = $60 000

Award [1] for correct working and [1] for the correct answer.

Award up to a maximum of [2].

Working should include some reference to the contribution calculation.

Award a maximum of [1] if $ sign is omitted.

(c) Using the information provided above and in Table 1,

calculate the monthly profit if Roscas sells sugar donuts and
chocolate-filled donuts (show all your working). [2]

Markscheme

Profit = sales revenue – total costs

Monthly profit = (100 000 + 70 000) − (15 000 + 1000) − (25 000 + 40 000) =
$89 000

Award [1] for correct working and [1] for the correct answer. Award up to a maximum of [2].

Award a maximum of [1] if $ sign is omitted, however do NOT penalize more than once if repeated in any
question part i.e. part (b)(i) and (b)(ii).
 Award [1] if profit for only one of sugar or chocolate is provided.

Award [1] to incorrect answers where there is a single numerical error in what is otherwise correct
working.

(d) Using the information provided above and in Table 2,

calculate the payback period for the new machine (show all your
working). [2]

Markscheme

2000−1920

700
× 12 = 3 years and 1.37 months or 42 days

Award [1] for correct working and [1] for the correct answer.
Award up to a maximum of [2].
Accept any other method of calculation.
Accept answer discrepancies due to decimal rounding.

(e) Using the information provided above and in Table 2, calculate

the average rate of return (ARR) for the new machine (show all your
working). [2]

Markscheme

ARR = ((total returns − capital cost/years of usage)/capital cost)) × 100

Total returns = $3 330 000

Net return per annum = 3 330 000−2 000 000

5
= $266 000
 ARR = 266 000

2 000 000
× 100 = 13.3 %

Award [1] for correct working and [1] for the correct answer.
Award up to a maximum of [2].

Award a maximum of [1] if % sign is omitted.

Do not penalize if workings are left in 000’s.

17. [Maximum mark: 10]

PB Ltd

Phoebe Bowen, a young entrepreneur, started her own clothing company, PB Ltd,
on 1 January 2019. On the same day, PB Ltd purchased fixed assets for $20 000. The
estimated useful life of the assets is six years.

At the end of 2020, Phoebe’s newly appointed accountant said that Phoebe had
omitted the depreciation of the firm’s fixed assets from the accounts. Table 1
shows selected financial information from the final accounts of PB Ltd for the years
ending 31 December 2019 and 31 December 2020.

Table 1: Selected financial information from the final accounts of PB Ltd for
years ending 31 December 2019 and 31 December 2020 (all figures in $000s)
(a) Describe one disadvantage of using the reducing/declining
balance method of depreciation. [2]

Markscheme

The main disadvantage of the reducing balance method is the choice of an

accurate/realistic percentage with which to depreciate the assets.

Secondly, the value of the asset with reducing balance is never fully written
off by the business.

Award [1] for stating an appropriate disadvantage and [1] for an appropriate description (application not
required), up to a maximum of [2].
(b) Using the reducing/declining balance method of depreciation,
calculate PB Ltd’s annual depreciation of fixed assets for 2019 and
2020. Use 5 % as the depreciation rate (show all your working). [3]

Markscheme

Depreciation allowance in $

[3] Marks for correct figures of the depreciation allowance/yearly depreciation for each year – max 2
marks.Working is shown or clear. It is not necessary to show net fixed assets.

Subtract [1] for any omission or for a mistake in the method or the actual calculation or if the working (for
one or both years) is not presented.

(c) Using the selected financial information in Table 1 and your

answer from (b)(i), prepare a balance sheet for PB Ltd for 31
December 2020. [5]

Markscheme

B/S for PB Ltd for the end of 2020. (All figures are in $)
Accurate presentation refers to the correct heading, sub-heading and to the inclusion of all and only the
relevant figures.

Allow OFR.

The presentation of the B/S can be done in one column.

Award [0] if the B/S does not reach a standard described below.

Award [1] if the B/S is not accurately constructed, and/or the calculations within and between the various
components are not presented or largely incorrect. However, there is limited evidence of a general
understanding
of the format. More than four mistakes/omissions are evident.

Deduct 1 mark for each irrelevant addition of figures/irrelevant heading/omission which can
includes the overall heading.

Award [5] if the B/S is accurately constructed in the expected IBO format. All the relevant headings of each
component/parts are used and correctly classified.

Do not penalise for internal order of classification. All and only the relevant figures are presented. No extra
irrelevant figures that belong to the P/L are included. The calculations under each part/component of the
B/S are
correct and well presented.

To get full marks the candidate has to present the format in full as presented in the IB programme. For
example, the presentation, calculation of working capital, the subtraction of LTL to arrive at Net Assets.

For full marks candidates must use the depreciation to arrive at net fixed asset. Ignoring the net fixed
assets/depreciation should be rated as 1 mistake as the account will not balance for another deduction.

N.B. If the candidate does not follow the IBO format award up to [2] marks.

Deduct 1 mark for each irrelevant addition of figures/irrelevant heading/omission.

N.B. The values in table 1 assume that Phoebe has included the depreciation in the P/L which leads to the
calculation of given retained profit. If a student does not make this assumption but tries to recalculate
retained profit do NOT penalize but apply OFR to the extent possible. The BS will not balance (minus 1 mark)
Mark all other calculations and headings as normal.

If candidates start the B/S with Fixed assets of 19000 (because they have already deducted the depreciation
for 2019) and then proceed to deduct just 2020 depreciation then allow this.

Accept Capital Employed as an alternative definition of Total Assets minus Current Liabilities heading.

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