Define the term niche market.

Explain two benefits to RV of the decision to adopt e-commerce.

Calculate the payback period if RV chooses Option 2 (show all your working).

Explain one disadvantage to RV of using the payback period method of investment appraisal.

Recommend whether RV ’s directors should choose Option 1 or Option 2.

A niche market is a small market segment. The products are usually specialised, aimed at satisfying specific market needs for a well-defined segment of the population.

Candidates are not expected to word their responses exactly as above. If a candidate uses the word smaller rather than small, accept.

Award [1] for some understanding.

Award [2] for a clear definition.

PLEASE NOTE: This content is not included in the syllabus for 2024 exams onward. Related parts of this multi-part question may be used.

Benefits must be to RV not just to customers – a benefit to a customer can only be rewarded if the answers goes on to explain how this benefit also helps the business.
For example, stating that a website allows the customer to view the business products 24x7 (or to place orders from the comfort of their own home) is on its own not rewardable. The candidate would need to go on to state that this situation may lead to increased orders for RV bicycles for the response to be rewardable.

Benefits may include:

• Lowering costs – RV can reduce the need for employing staff to handle orders or take phone calls.
• Providing abundant information – There are limitations to the amount of information that can be displayed in a physical store. It is difficult to equip employees to respond to customers who require information across product lines. E-commerce websites can make additional information easily available to customers. Most of this information is provided by vendors and does not cost anything to create or maintain. Will also help overcome problems that RV faced e.g. RV received an increasing number of customer complaints that phone lines were often engaged and calls not returned.
• Being open 24x7, which may increase orders as customers can order anytime.
• Making the business more visible – currently 98 % of customers are within 5 miles of RV’s business.

Accept any other relevant benefit.

Award [1] for stating a benefit to RV from adopting e-commerce and an additional [1]for its explanation with reference to RV. Award a maximum of [2] per benefit.

Mark as 2 + 2. Maximum award: [4].

The payback is:

Payback formula = $\frac{\mathrm{initial} \mathrm{investment}}{\mathrm{net} \mathrm{cash} \mathrm{flow} \mathrm{per} \mathrm{year} }$

=$\frac{\$3 500 000}{\$600 000}$

= 5 years and 10 months OR 5.833 years

OR

$\frac{\$3.5}{\$0.6}$

= 5 years and 10 months OR 5.833 years

Award [1] for correct formula (with or without figures)
OR
Award [1] for correct figures but incorrect final answer

(e.g. $\frac{\$3.5 }{\$0.6}$= 5.5 years).

Award [2] for correct answer with working.

One disadvantage is that the payback method fails to take into account the time value of money and adjust the cash inflows accordingly. [1]
Though the forecasted net returns each year are $600 000, the inflation in the country is forecast to remain in the 2–3 % range for the next three years. Therefore, the real value of the annual $600 000 will be less in years 1 to 3, thus overstating the return on the investment.

Also, the payback analysis fails to consider inflows of cash that occur beyond the payback period [1] – in this case we are not told the life of the investment so we cannot see how much the net returns will be for the life of the investment [1].

Award [1] for a disadvantage of the payback method and [1] for its application to RV.

Refer to Paper 2 markbands for 2016 forward, available under the "Your tests" tab > supplemental materials. 

Option 1 advantages: 
RV will have lower production costs as production costs are lower in China. This option will help the business deal with the low-priced imports.

It will allow RV to concentrate on design and marketing, which may enable it to improve its designs and marketing and, thus, increase sales.

Option 1 disadvantages:
The Chinese factory uses batch production, which will affect RV’s ability to produce bicycles that fit their customer’s demands. Currently, RV can meet customer demands because the business uses job production.

RV will no longer have control over production and quality standards may deteriorate.

Transport issues from China will mean that RV will not be able to deliver bicycles to customers within 7 days of receipt of their orders. RV’s advertising slogan will need to change as the business will no longer hand make orders in the USA.

Option 2 advantages: 
RV will have lower production costs because it will no longer need expensive, skilled labour. Lower costs will help the business deal with the low-priced imports.

Production will remain in the USA and it can retain job production.

RV will likely not have delivery time issues.

Option 2 disadvantages:
Will need to make existing skilled employees redundant which will incur redundancy costs.

Require an investment of $3.5m at a time when the business is making losses (since 2017) – this may require external finance which will, incur interest charges, raising unit costs.

The payback period is also more than 5 years which is relatively long.

Will their customer base trust the new production technique which uses glue rather than welding?

Candidates may assume that using glue rather than welding means lower quality. Accept that assumption.

Accept any other relevant evaluation.

Marks should be allocated according to the paper 2 markbands for May 2016 forward.

The table below should be followed (along with the markbands on page 3). These mark awards in the table below should be viewed as maximums. That is, just because a candidate has one argument for Option 1 and one argument against does not mean that they will automatically get a 4. One strong argument for one side and merely a weak or nominal argument for the other side might result in a 3.

Most candidates choosing question 4 earned at least one mark and often two marks for defining niche market.

Many candidates could explain two benefits of adopting e-commerce and many applied their response to the stimulus.

Most candidates choosing question 4 answered (c)(i) correctly.

Many candidates could not explain a disadvantage of using the payback period method of investment appraisal.

Many candidates knew the expectations of the ten-mark question and did a solid job. Candidates often made detailed use of the stimulus.