Sources of Finance (Cambridge (CIE) A Level Business): Exam Questions

Great Resources (GR)

GR is a business partnership that creates educational resources. It sells direct to schools and teachers via its own website.

Sanjay, Rukmal and Boris are entrepreneurial teachers who formed the GR partnership. One year ago, they identified a gap in the market to supply interactive, digital resources. GR’s website is subscription only. An online marketing campaign, which used penetration pricing, attracted 250 subscribers in the first six months of operation. The start-up costs were financed with a $5000 bank overdraft, which is GR’s only debt.

Reviews for GR’s products in teaching journals are positive but cash flow is poor. Many customers have taken advantage of a recent sales promotion for one month’s free membership and posted positive reviews. Unfortunately, few have then taken out a regular subscription.

As revenue has not increased as much as the entrepreneurs had hoped, they must now consider alternative promotion methods. They have researched possible promotion methods and decided to advertise in an educational newspaper. The newspaper has a readership of half a million people.

Expert Materials (EM) is a large national company that also advertises in the newspaper. EM is GR’s closest competitor. The EM brand is well-known and trusted in the educational resources market. Table 1.1 shows some marketing data.

Table 1.1 Marketing data

Child Play (CP)

Su is a sole trader who started a business called CP which operates a play area for children. The play area is inside a building and includes toys and other play equipment. Customers book on CP’s website for each hour that they would like to use the play area. CP is two kilometres away from the nearest city which has a large population.

Su does not pay for any promotion and she relies on recommendations and reviews from previous customers. Su currently charges a price of $10 an hour for a group of up to 5 children. Only one group can book CP for each hour. Demand is greater than supply so Su may increase the price to $15 per hour. She has completed some market research to see if this is a good idea. Her findings are in Table 1.1.

Table 1.1: Market research about prices for CP

Su is also thinking about expanding the business by opening a café targeted at parents with children.

The café would be located at the entrance to CP’s play area. There are many other cafés in the city centre two kilometres away. Su believes that product differentiation is essential for the profitability of the café.

Su plans to use CP’s working capital as the source of finance to open the new café. The café will need to earn revenue quickly, so she plans to open it in four weeks. She will need quick and low‑cost promotion methods if the café is to succeed.

Snappy Box (SB)

SB is owned by Ralph who is a sole trader. The business prints photographs. Ralph has one shop on the main street of city D. Customers bring their saved digital photographs into the shop and these are printed on high-quality paper.

SB uses a large printing machine that can print on almost any size of paper to produce different sized photograph prints. The process is very capital-intensive and most customers request a batch of photographs to be printed.

SB is the only shop in city D that prints photographs. However, recently a number of online competitors have started to offer low-priced photograph prints to customers. Ralph has noticed that his sales have decreased significantly because of this competition. Ralph estimates the demand for his photograph prints has a price elasticity of demand of –4.

SB already has a low profit margin and Ralph is struggling to compete with the online retailers. However, Ralph has an idea to introduce job production into his shop. He could stop printing photographs and instead focus on framing individual photographs for customers. These frames will be made for any sized photograph or picture and can be made from a variety of materials chosen by the customer.

Ralph will need specialised equipment to allow him to make the frames. The equipment would cost $10000. He has identified two possible sources of finance for this equipment.

The first possible source of finance is for Ralph to lease the equipment from the company that produces it. The lease would be for five years at a fixed cost of $400 per month.

The second possible source of finance is for Ralph to sell the photograph printing machine for at least $10000, to purchase the equipment to make frames.

Van Man (VM)

Obi is a sole trader who operates a van service. He used to be employed by a similar business but realised that he likes to be in control. Obi used all of his savings to start his business so that he did not have to go into debt.

He owns three vans which can carry furniture, packages and other large items. He has eight full-time employees who drive the vans and move items. Customers can hire a van with two employees to move these items from one place to another. The cost per day of providing a van with two employees is $170. The prices of the service are shown in Table 1.1.

Table 1.1: Price of hiring one van (including two employees)

Demand for Obi’s service is growing fast. To supply this demand he needs a new van and he is investigating sources of finance. He has a choice of two vans. The details of the vans are in Table 1.2.

Table 1.2: Van details

UFilters (UF)

UF is a public limited company selling to an industrial market. It manufactures air conditioning units. UF produces two sizes of air conditioning units, medium and large. Most of its air conditioning units are sold for use in warehouses and computer server rooms. The units are expensive compared to competitors but UF believes its units are of a higher quality. Market research suggests that there is a growing demand for small air conditioning units to be placed in offices. To produce a new size of unit would require spending $180000 to purchase new machinery.

UF relies on customer recommendations for new orders. However, some customers have been dissatisfied with the service received. UF has received several complaints, including:

• engineers turning up late or not at all

• poor communication from UF

• little choice in the size of units supplied

• appointment times are not always convenient and can be difficult to change.

Sylvie, the Marketing Director of UF, is concerned about the sales data (Table 1.1) as sales have fallen 10% on the previous year.

Table 1.1: Selected sales data for UF, 201

Sylvie is considering two options to increase sales (see Table 1.2).

Table 1.2: Options to increase sales

UPlane Components (UC)

UC is a private limited company providing engine parts for commercial aircraft. It uses batch production in factory A and flow production in factory B. As part of UC’s commitment to corporate social responsibility (CSR), it provides a training scheme for the long-term unemployed, based in factory A.

UC’s products are sold to aircraft engine manufacturers. Demand for aircraft engines has increased by 45% over recent years. The aircraft engine manufacturers want inventory just when needed and are demanding a reduction in prices.

In 2017, UC opened factory B which is 5km away from factory A. Factory B has a high level of automation, resulting in low unit costs for the parts produced there. Production is capital intensive. UC has a plan to automate factory A. The production workers are not happy about this proposal and have asked for more details. The workers’ representatives have asked for a meeting with the human resource manager.

In December 2019 a fault was discovered in one of the engine components supplied by UC and produced in factory A. UC had to recall 2000 parts at a cost of $200000. This has had an impact on part of its triple bottom line and UC is unlikely to meet its targets. Table 1.1 shows some financial data for UC.

Table 1.1: Financial data for UC

Amjit, the human resource manager, believes that the fault was caused by the negligence of Jack, one of the production supervisors. Jack claims that he was made to work overtime to try and meet production targets. This caused him to become tired and make a mistake in one batch of parts. Amjit wants to dismiss Jack.

Energy Solutions (ES) ES is a public limited company in country X. The business was set up in 1980. For 25 years most of ES’s revenue came from coal mining. Although ES still owns many coal mines, the business now specialises in hydraulic fracturing, known as fracking. This is a process used to extract gas from underneath the ground.

The government of country X encourages firms like ES to grow. The growth of ES has led to economies of scale and lower unit costs.

ES considers the effects of fracking on all the stakeholders of the business. Fig. 1.1 is an extract from a recent newspaper article about fracking.

Fig. 1.1: Extract from a recent newspaper article about fracking

Despite the complaints from some external stakeholders, ES plans to increase the number of fracking sites in country X. This will require ES to buy licences from the government of country X. Each licence costs $50m and ES will require both internal and external sources of finance to fund this purchase.

ES employs over 1000 people. Every worker benefits from a profit-sharing scheme (see Table 1.1) as well as their basic pay

Table 1.1: Profit-sharing scheme at ES