UFP PAPER 1 MARK SCHEME

Section 1: 15 Multiple Choice questions

1) Business enterprises in the private sector of the economy primarily exists to:

a. Grow

b. Survive

c. Make a profit

d. Make changes to society

2) Which of the following is not a marketing objective

a. Growth of Market size

b. Increase Brand Loyalty

c. Increase in labour efficiency

d. Improvement in Market Share

3) Financial efficiency ratios assess the financial efficiency of:

a. A Business overall profitability

b. Inventory Control

c. A Business Cash Flow

d. The Accuracy of business budgeting

A firm floats on the stock exchange, its original share price is 234p with initial shares
4) of 16 million. Its share price today is 212p. What is its market capitalization?

a. £339.2m

b. £33.9m

c. £37.44m

d. £35.93m
5) The marketing mix consists of 7Ps. Four of those are listed below

a. Process, people, place, prospects

b. Promotion, price, physical, people

c. People, politics, personnel, process

d. Pricing, production, process, place

A firm generates a profit of £740,000 with Fixed costs of £305,000 and total sales of
6) 120 units. What is the contribution per unit?

a. 6166

b. 3625

c. 360

d. 3750

A firm’s revenue for 2015 is £399m. They achieved operating profit of £57.4m.

7) Calculate their profit margin

a. 18.2%

b. 19.9%

c. 19.1%

d. 14.4%

8) The Boston Matrix identifies the rising star as

a. High share of slow growth market.

b. High growth market with low market share

c. High growth market with high market share

d. Low share of a stable market

9) A Business mission statement should primarily state:

a. The target market of the business

b. The Profit predictions of the business

c. The revenue predictions of the business

d. The purpose of the business

10) Why is profit important, in the long term, to any business?

a. It Shows positive cash flow

b. It Shows it has been successful

c. It ensures its expansion potential

d. It ensures its market dominance

11) Price elasticity of demand is calculated with which formula

a. % change in quantity demanded / % change in price

b. % change in demand / % change in income

c. % change in price / % change in demand

d. price / demand *100

12) In the short term any business should have

a. A Steady market growth

b. An Expanding market share

c. A Positive Cash flow

d. An Excess Profit
 13) Which of the following is best identified as a financial objective for a firm?

a. Cost minimization

b. Quality of product

c. Increased brand awareness

d. Falling labour turnover

Figure 1 From the financial accounts of a company

Revenue £19 million

Non current liabilities £ 6 million
Capital Employed £ 17.4 million
Operating Profit £ 3 million

14) Gearing ratio for the company i

a. 34.5%

b. 15.7%

c. 17.2%.

d. 26.7%

15) Qualitative market research includes

a. Primary, secondary and internal data

b. Historical financial figures from the firm and its competitors

Information and opinion formed from key research across primary/secondary

c. processes

d. Quality data gathered online from secondary resources

Section 2: 40 Marks Short answer questions

The balance sheet snapshot in Figure 2 present key financial information on a firm. Use the
information to answer Question 16.

Figure 2 Balance Sheet Snapshot

 £’000s

Non Current Assets 780

Inventories 90
Receivables 135
Cash 15
Current liabilities 220
Non current liabilities 275
Share Capital 185
Reserves 500

16. Based on the data in Figure 2, calculate the firm’s current ratio and gearing. Show your
workings.

Marks for this question: AO1 = 2 and AO2 = 3

Examples of how the assessment objectives might be met in this question include:

- demonstrate knowledge and understanding of relevant issues such as current ratio and
gearing (AO1)

- be applied to the context of the given data (AO2).

Answer: Current ratio 1.09:1 and Gearing: 28.6% (5marks)

Gearing: 275 / (685 + 275)*100 = 28.6%

If incorrect answer given students may receive marks for the following content

Current assets: 90+15+135 =240 (1 mark)

Correct statement of gearing formula (1 mark)

Correct statement of current ratio (1 mark)

Total equity: £685

This indicative content is not exhaustive; other creditworthy material should be awarded marks as
appropriate.

[5 marks]

17. Part tech start-up, part traditional cottage industry, ‘Wool and the Gang’ (WATG) is a knitwear
company. WATG’s designs are being modelled on London Fashion’s catwalks and it is clear that
the business is now entering the growth stage of its product life cycle.

Analyse how their marketing mix might change in response to this development.

As WATG enter the growth stage of the product life cycle sales will be rising strongly. The four
main aspects of the marketing mix are product, price, promotion and place. Place might change
 as WATG begins to distribute its products through more channels – that is, not just through its
own shop and website but through high street department stores such as John Lewis Partnership.
Price might change if WATG is trying to grow fast. It might change its pricing strategy from one
of price skimming (which means charging high prices) so that prices fall. This is because new
competitors might be entering their market. In terms of product WATG might start to extend its
product range to include more types of clothing and more colours of wool. The purpose of
promotion might also change from that at launch because WATG will now need to build repeat
custom and remind shoppers rather than just building awareness of the new brand. It might now
start to offer deals for repeat or multiple purchases in order to build sales volume, trying to
ensure that customers continue to order after their first purchase.

[6 marks]

18. The CEO of an airline company would like to plan how finances are spread throughout the
business functions.

Explain a type of budget Variance that may arise in an airline business

Suggested answer content:

A sales budget is a realistically prepared estimate of future level of sales in revenue or units of
output over a specific period of time. For example: It could be used for an airline to make sure they
are planning on ticket prices, plans for flights and cash flow.

ONE point from:

• It helps to plan for purchases.

• It can assist in fixing selling price.

• It assists with cash flow forecasting.

• It permits sales budget variance analysis to be undertaken.

(4 Marks)

19. A business is analysing the outcomes of its new chocolate bar release. Option one uses slightly
more expensive raw materials that are fair trade. The selling price will be £3.45 for the
expensive chocolate bar with variable costs of £1.90. The cheaper alternative will have a sales
price of £2.99 and variable costs of £1.41. Both have fixed costs of £5,000.

Calculate the difference between the breakeven points for the options.

Marks for this question: AO1 = 2 and AO2 = 2 Answer = 61 or 60 (4 marks)

£5000 / 1.55 = 3225.8 [1 mark]

£5000/ 1.58 = 3164.6 [1 mark]

BE = FC/(SP – VC)

If no valid calculation: award 1 mark for correct formula (above)

(4 Marks)

20. Most large supermarkets in the UK have started thinking about how they can make their
business more ethical.

Ethical objectives are the moral guidelines by which a business states that it operates. For example,
how and from where its sources its supplies, how it packages its products, its wages policy etc.

ONE point from:

• By improving profits.

• By gaining a competitive advantage.

• By improving sales volume and revenue.

• By generating and maintaining a good image and reputation.

[5 marks]

(5 Marks)

21. A Business has been financed through an owner’s savings, credit cards and money borrowed
from friends and family. The business wishes to expand and is looking at taking a long term
loan from the bank.

Explain two reasons why borrowing more can harm the competitiveness of the organization.

Examples of how assessment objectives might be met in this question include:

• demonstrate knowledge and understanding of relevant issues such as debt/borrowing/gearing

(AO1)

• be applied to the context of a business that wishes to expand using further borrowings (AO2)

• analyse how borrowing may affect competitiveness (AO3)

Possible responses:

• borrowing further money affects cash flow in the short and long term

• the retailer may be exposed to rising interest rates, can they afford to borrow more

• further borrowing now may lead to the business not being able to respond to changes in demand/
increase in competition later on and a clear need to borrow at a future date

• any profits made by the business may need to pay off large debts rather than re-invest in training,
technologies, R&D and new products

• is the company in a position to borrow, it may already be highly geared, pay back of this may affect
decision making and longer term strategies

NB// the indicative content is not exhaustive and other creditworthy material should be awarded
marks as appropriate

(6 Marks)

22. An investor is considering buying shares in a business and uses operating profit and debt to
capital ratios as their usual measure. They are looking at two businesses below in Figure 1.

Referring to Figure 1 below, use calculations to advise the investor on which business would be best
to invest in. [5 marks]

Business A 2016 Data (£m)

Revenue 4,550

Operating Profit 390

Share Capital 120

Debt 75

Business B 2016 Data (£m)

Revenue 9,777
Operating Profit 797
Share Capital 275
Debt 155
Marks for this question: AO1 = 1, AO2 = 3 and AO4 = 1

Answers (4 marks)
Business A is 75:120 converted to 0.625:1 debt to capital ratio [1 mark]

Business A has operating profit margin of 8.6% [1 mark]

Business B is 155:275 converted to 0.56:1 debt to capital ratio [1 marks]

Business B has operating profit margin of 8.2%

Therefore: Business B is the better option due to better debt to capital ratio (1 mark)

TOTAL = 5 marks

NB OFR might apply here for an appropriate / logical recommendation

(5 Marks)

23. Sony have been competing in a games console market with Xbox and Nintendo for the last ten
year releasing products at the same time as its competitors and in limited quantities.

How might Sony benefit from using penetration pricing?

Suggested answer content:

Penetration pricing is a specific marking strategy sometimes used by business that want to introduce
a new product or service into the market. It involves setting an initial price low to attract customers
and then over time increasing it after the product or service has been established.

ONE point from:

• It will initially cause a fall in average production costs

• It attract customers to the newly introduced games console

• It can cause a rapid increase in the demand for the games console

• It should initially increase the market share of the business that employs the strategy

(5 Marks)
 Section 3: 25 Marks long answer questions

Lacking the Golden Touch?

Sortimer Ltd has designed and made luxury jewellery since 1921 and sells its products through its shop located in a
wealthy area of London. The company’s chief executive is Megan Sortimer. The business operates in the niche
market for luxury jewellery selling individually designed products. Sortimer Ltd charges high prices for its products
and targets high income customers. It has developed a strong brand name within its niche. The company offers
individual appointments, advice and 60 days’ trade credit for its ‘favoured’ customers. The mass UK jewellery market
is three times the size of the luxury jewellery niche market. The mass market is forecast to grow by 2.1% on average
in 2016 and 2017. This market includes highly competitive retailers such as Goldsmiths, which has an 8% market
share. The luxury jewellery niche market grew at 5% per annum from 2012 to 2015; faster growth is expected when
incomes rise. The directors are considering the case for and against entering the UK’s mass jewellery market.

Figure 2: Financial data for Sortimer Ltd, 2014 –2015

2014 2015

Sales Revenue £28.0 million £24.2 million

Unpaid customer accounts as a percentage of sales, 31 December 9.7% 19.8%

Value of stock (inventory) of precious metals, stones and jewellery on £16.2 million £18.8 million
31 December
Cash balance on 31 December (£3.90 million) (£6.88 million)

Average period of time allowed by suppliers for payment 18 days 11 days

Net profit margin 17.85% 16.45%

Increase in rental charges for property in London 5.6% 5.9%

Sortimer Ltd’s financial performance has been declining for several years. It has not controlled its costs effectively
and its negative cash-flow position became even weaker between 2014 and 2015. Its products have become less
popular and the directors have not agreed on the actions to be taken. One director questioned the company’s policy
of setting high prices. He noted that platinum rings had an average cost of £1000 and an average selling price of
£1500. He proposed cutting prices to increase sales (currently 100 per year). Megan pointed out that the price
 24. Analyse the reasons why Megan argued that increasing the price of platinum rings by 10%
would increase the company’s profits. (9 Marks)

Level The student will typically demonstrate: Marks

A good response overall that focuses on many of the demands

of the question.
Provides an answer to the question set that:
3  demonstrates a good knowledge and understanding of issues in 7–9
the question
 demonstrates analysis which is well-developed and is applied
effectively to the context.

A reasonable response overall that focuses on some of the

demands of the question.
Provides an answer to the question set that:
2  demonstrates a reasonable knowledge and understanding 4–6
of issues in the question
 demonstrates analysis which is developed and is applied to the
context.

A limited response overall with little focus on the demands of the

question.
Provides an answer to the question set that:
1  demonstrates a limited knowledge and understanding of issues in 1–3
the question
 demonstrates analysis with little development and with mainly
descriptive application to the context.

9 mark analytical questions: AO1 = 3, AO2 = 3 and AO3 = 3

Possible lines of application will be recognising and using factors in the scenario which affect
pricing the decision for the rings:

• The company faces inelastic demand for this product as PED is -0.8

• The company sells individually-designed luxury products in a niche market

• The company sets high prices for all its products

• A price rise may strengthen the company's brand image as a provider of luxury jewellery

Good application may be awarded for any of the following:

• Manipulating data in support of arguments such as:

• As PED = -0.8 and increase in price of 10% will only reduce demand by 8% therefore increasing
revenue from selling the rings

• Original revenue = £1 500 x 100 = £150 000, new revenue = £1 650 x 92 = £151 800

• For developing arguments which are consistently in context.

Possible lines of analysis will focus on the possible benefits of increasing the price of these rings:

• Increasing price can increase revenue when demand is inelastic as consumers do not respond
significantly to higher prices.

• PED is inelastic and so a price rise will have a smaller effect on demand.

• The company will be selling fewer rings so its costs should fall.

Good analysis is shown when the overall answer provides a response to the question set
explaining why this decision improves financial performance:

• The outcome will be higher profits because consumers' buying decisions are not affected greatly by
the price - so a rise in price leads to a relatively small fall in demand and the result is higher revenue
as nearly as many rings are sold at a higher price which should lead to higher profits.
 25. To what extent do you think that Sortimer Ltd should continue to operate in this luxury
jewellery niche market or sell its products in the mass UK jewellery market? Justify your decision.

[16 marks]

16 mark evaluative questions: AO1 = 4, AO2 = 2, AO3 = 4 and AO4 = 6-*#]

The student will typically demonstrate: Marks

An excellent response overall that is fully focused on the

demands of the question.
provides an answer to the question set that:
 demonstrates a depth and range of knowledge and understanding
that is precise and well selected in relation to issues in the
4 question 13–16
 demonstrates analysis throughout which is well developed, is
applied effectively to the context and considers a balanced range
of the issues in the question
 makes judgements or provides solutions which are built effectively
on analysis, show balance and have a clear focus on the question
as a whole throughout.

A good response overall that focuses on many of the demands

of the question.
provides an answer to the question set that:
 demonstrates a depth and range of knowledge and
3 9–12
understanding of issues in the question
 demonstrates analysis that is well-developed, applied effectively
to the context and considers a range of issues in the question
 makes judgements or provides solutions which are built on
analysis, show balance and address the question as a whole.
 A reasonable response overall that focuses on some of the
demands of the question.
provides an answer to the question set that:
 demonstrates a limited knowledge and understanding of a range
of issues in the question or a good knowledge and understanding
2 5–8
of relatively few issues in the question
 demonstrate analysis which is developed, applied to the context
and considers some of the issues in the question
 makes judgements or provides solutions which are built on
analysis, but lack balance and are not fully focused on the
question as a whole.

A limited response overall with little focus on the demands of the

question.
provides an answer to the question set that:
 demonstrates a limited range and depth of knowledge and
1 understanding of issues in the question 1–4
 demonstrate analysis with little development, mainly descriptive
application to the context and considers a limited number of
issues in the question
 makes judgements or proposes solutions which have limited links
to analysis or limited focused on the question as a whole.

Relevant answers may include the following: • A niche market is a relatively small and identifiable
segment of a larger market.

Possible lines of application will be identifying and using factors from the scenario which relate to
the niche market:

• The niche luxury market is growing at a faster rate than the wider UK jewellery market

• The company's sales fell in 2015 (by £1.9 million).

• The market for luxury jewellery grew at 5% in 2012-15 and faster growth is forecast

• The mass UK market contains some large competitors such as Goldsmiths which has 8% of the
market.

Good application may be awarded for any of the following:

• For combining relevant arguments such as the company is suffering falling sales in a market which
grew rapidly during 2010-14.

• Manipulating data in support of arguments such as:

• The company's profits from the niche have fallen substantially between 2014 and 2015 from
£4.998 million (£28m x 0.1785) to £3.981 million (£24.2 million x 0.1645).

• The company's sales fell by 13.57% in a market that was growing at an average rate of 5%.

• Some products are receiving high profit margins - platinum rings are 50% against an average of
16.4%.

• For developing arguments which are consistently in context.

Possible lines of analysis:

• Niche markets which are growing relatively quickly may attract the attentions of larger
competitors.

• Customers in a niche market may be more uniform and easier to understand than those in a mass
market.

• The company may lack the resources to compete successfully in the mass market.

• The company may not be widely known outside its niche and may struggle to establish a customer
base against larger competitors.

Good analysis is shown by candidates having a clear focus on the question such as the following:

• A chain of argument such as one showing how the company's strengths relate to the market niche
in which is operating rather than the mass market.

• The development of a theme such as considering the forecast success of the niche market and the
potential that this may offer to the company for growth in the future.

• A combination of arguments addressing both sides of the question.

Ideas for evaluation might include:

• The niche market looks attractive in terms of potential and fits the company's strengths - it doesn't
need to leave, its problems appear internal (especially indecisiveness) and not related to the market.
The company should stay in the niche market and focus on higher margin products such as platinum
rings.

• Making such a move would damage the company's brand name and lose it many high price sales.

• The wider UK market for jewellery is more price competitive and contains large competitors -
Sortimer Ltd would not necessarily fare well here.

• The wider UK market is three times as large and sales are increasing at 2.1% per year offering a
tempting target for the company.

• The best approach may be enter the wider using a different brand name to avoid damaging its
operations in the luxury market.