12 markseasy
(b)
Define‘opportunity cost’.
Business
13 questions · 72 marks · ≈ 72 min
Define‘opportunity cost’.
[case-study] EQR owns 150 cafes. It sells a range of drinks, including coffee. Being ethical is important to EQR. The Managing Director has been analysing EQR’s statement of financial position. The business has the objective to increase its 6% market share. The Managing Director plans to grow the business by selling franchises for $85,000. She is also considering ways to increase added value.
Outline two ways EQR could increase added value.
Define‘specialisation’.
[case-study] Izaak owns a small fish restaurant. He employs two chefs (cooks) and three workers who serve in the restaurant.
Izaak has been trying to increase added value to improve profits. Izaak has been looking at the financial performance of his business. An extract is shown in Table 2.1. Izaak has received a number of complaints about food and service. He knows he must improve quality but cannot decide on the best way to do this.
Extract from income statements ($000)
Last year Current year Revenue X 300 Cost of sales 180 150 Gross profit 120 150 Expenses 90 Y Profit 30 15
Outline two ways Izaak could increase added value.
State two factors of production.
Define'division of labour'
[case-study] Tom wants to leave his job to become an entrepreneur. He and his sister plan to start a window cleaning business. Tom has been told that new businesses are at a greater risk of failure than established businesses. Tom has to decide whether a partnership is a suitable form of business organisation for the new business. He has calculated the business will need $700 as start-up capital. Tom knows that every decision he makes will have an opportunity cost.
Outline two possible opportunity costs of starting up the window cleaning business
Explain how each of the following can help Jerome increase added value:
[case-study] After identifying a gap in the soft drinks market, Jerome developed a low sugar drink. He borrowed $5 000 from family and friends to start-up a business and to provide working capital. Jerome operates as a sole trader. To promote his product, Jerome handed out free samples in the town centre. In the first year, Jerome’s business sold 10 000 units. This is 200 units more than his break-even output. Jerome is considering ways to increase added value.
Extract:
Sports Safety Equipment (SSE)
SSE manufactures sports safety equipment in country Z. It is a public limited company which has been successful for over 30 years. The main product SSE manufactures is safety helmets for different sports, such as bicycle riding, cricket and skateboarding. SSE has one large factory making the safety helmets. The factory uses flow production. The production workers each specialise in one task on the production line. SSE’s raw materials are imported. SSE sells its helmets in several other countries and is planning to expand into many more. It will need to carry out market research before entering new markets in other countries. Each country has different sports that are popular and the style of helmets varies from country to country. SSE plans to build its own factories in its most important markets in other countries and will need to choose a suitable source of finance. The Human Resources Director has decided to use internal recruitment for the managers of the new factories. There will need to be effective communication between the managers of the new factories and SSE’s head office in country Z. Most of SSE’s sales in country Z are through sports equipment shops. Customers like to try on the helmets to check they fit correctly. SSE currently sells its helmets in other countries through its website. SSE is also increasing its product range. The latest new product being developed is a children’s cricket helmet.
Appendix 1 Extract from SSE’s website
If you want the best protection when playing sport then buy an SSE safety helmet! We supply a wide range of safety helmets for you when playing sport. Whatever the sport - SSE produces a helmet for you. You can order directly from this website by entering your head measurements below. Get the perfect fit for you!
Appendix 2
Email from SSE’s Managing Director to SSE’s Finance Director To: Finance Director From: Managing Director
Date: 1 September 2023
Re: Demand for SSE’s products
Demand for SSE’s products in country Z is forecast to increase. Our government has imposed import tariffs on safety helmets. We may be able to increase our prices. The exchange rate in country Z is expected to fall. However, other countries have introduced import quotas on safety helmets. We will have to consider all the likely effects of these changes.
Explain two advantages of using specialisation when producing SSE’s products.
Refer to the following insert when answering the question.
Do you think the most important purpose of business activity is always to add value? Justify your answer.
Extract:
GHI Cosmetics
GHI is a medium-sized manufacturer of beauty products based in Country Y. The business was established 20 years ago and has grown steadily. It now employs 200 people in its factory and head office. GHI specialises in mid-priced organic skincare and makeup products. All items in the product range are packaged in brightly-coloured recycled plastic containers and are targeted at environmentally conscious young consumers.
GHI uses a range of social media channels, which include popular podcasts that provide guidance on the application of makeup products. These are shared widely, and GHI makes use of feedback and viewer comments to improve existing products and develop new ones. It also shares new product launches with online followers.
The beauty industry has become increasingly competitive in recent years, with many new entrants focusing on natural and sustainable products. GHI's sales have grown slowly over the past two years (see Appendix 1). The CEO is considering expanding the product range to include a line of vegan hair care products to boost sales and attract new customers. She is also looking for a suitable celebrity to act as the face of its brand.
GHI currently sells its products through department stores and specialist beauty retailers. In some larger outlets, brand representatives are employed to offer advice and demonstrations to consumers. It is investigating the possibility of selling directly to consumers through its own website and social media channels to increase profit margins.
The government of Country Y has recently introduced new regulations requiring all cosmetics companies to list full ingredients on packaging and reduce waste. GHI is evaluating the potential impact on its production costs and manufacturing processes.
Appendix 1: GHI Financial Data
| Year | Revenue ($m) | Profit ($m) | Units sold (000’s) |
|---|---|---|---|
| 2021 | 38.5 | 4.2 | 1,540 |
| 2022 | 40.1 | 4.4 | 1,604 |
| 2023 | 41.8 | 4.5 | 1,672 |
Explain two ways GHI adds value to its beauty products.
Refer to the following insert when answering the question.
Extract:
LMN Logistics is a large tertiary sector business based in Country X. It provides warehousing and distribution services to well-known retailers across the country. The company has been operating for 15 years and has enjoyed steady growth. However, increased competition in Country X has meant that LMN’s profit has not increased as much as its shareholders had hoped.
LMN Logistics Financial Data
Year Revenue ($million) Profit ($million) Operating costs ($million)
2021 85 12 73
2022 92 14 78
2023 98 15 83
LMN is considering expanding its operations to include international shipping services. This would require significant investment in new equipment and staff training. The company's management team is divided on whether this expansion is the right move.
The company currently employs 500 people across its 10 warehouses. LMN prides itself on its efficient operations and use of technology to track shipments and manage inventory.
Recent economic challenges in Country X have led to increased fuel costs and a slight downturn in retail sales. However, there has been growth in e-commerce, which presents new opportunities for logistics providers.
Email from LMN's HR Director to the CEO
To: CEO
From: HR Director
Date: 15 September 2024
Subject: Staff Training for Expansion
If we decide to expand into international shipping, we will need to implement a comprehensive training programme for our staff. This will include:
Initial estimates suggest this training will cost approximately $500,000 and take 6 months to complete.
Please consider this information when making the final decision on expansion.
Best regards, HR Director
Consider the advantages and disadvantages of the following two methods LMN Logistics could use to add value to its services:
Which method should LMN Logistics choose? Justify your answer.
Refer to the following insert when answering the question.
Extract:
EcoTech Solutions (ETS)
ETS is a medium-sized technology company based in Country X that specialises in developing eco-friendly smart home devices. Founded in 2010, ETS has grown steadily and now employs 250 people. The company's main products include energy-efficient thermostats, water-saving shower systems, and solar-powered garden lights.
ETS currently sells its products primarily through its website and a network of independent retailers in Country X. The company has been profitable for the past five years, with revenues reaching £15 million and profits of £2 million in the last financial year. However, rising costs of raw materials and increasing competition in the domestic market have put pressure on profit margins.
The Board of Directors is considering expanding into neighbouring countries to increase sales and spread risk. They believe there is growing demand for eco-friendly home technology in these markets. However, this would require significant investment in marketing, distribution, and possibly new manufacturing facilities.
ETS prides itself on its eco-friendly ethos and has won several awards for its innovative products. The company uses locally sourced materials where possible and has implemented a recycling programme for its products. However, the proposed expansion could potentially increase the company's carbon footprint.
The Human Resources Director has suggested that if the expansion goes ahead, they should use a mix of internal promotions and external recruitment to staff the new operations. She believes this approach would provide opportunities for existing staff while also bringing in new expertise.
As ETS considers this strategic decision, it must weigh the potential for growth against the risks and challenges of entering new markets. The company also needs to consider how to maintain its commitment to sustainability while expanding its operations.
Consider the advantages and disadvantages of the following two options for ETS to add value to its products.
Which option should ETS choose? Justify your answer.
Refer to the following insert when answering the question.