| Date | May 2022 | Marks available | 4 | Reference code | 22M.2.HL.TZ0.3 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 3 | Adapted from | N/A |
Question
Carol’s Designs (CD)
Carol Rodríguez is passionate about design. She runs Carol’s Designs (CD) with two assistants, making and selling party dresses directly to consumers through her website. Customers provide their style preferences and measurements. Then, Carol emails a computer-designed drawing for the customer’s approval. CD uses job/customized production.
An emerging talent in dress design, Carol decided to use e-commerce because she could not afford the fixed costs of an expensive physical location and traditional promotional techniques. Through her website, she promotes and sells her designs to a large audience and collects valuable information and opinions from her customers. The business-to-consumer (B2C) approach, essential for her business growth, requires regular website updates.
E-commerce sales have steadily increased worldwide, and Carol’s dress orders have increased too. However, CD regularly misses delivery deadlines and is often short of cash. Carol’s bank suggested that she find a partner. She approached Juan Pérez, an engineer and business angel, about becoming a 50 % partner in CD. Juan thinks Carol needs to delegate design and focus on the operation of the business.
CD uses social media marketing. Alexia Bros, a famous actress, ordered a dress for this season’s cinema festival, and Carol uploaded pictures of Alexia wearing her newly designed dress. Recently, however, some negative comments, including customer complaints about delays in delivery times, have appeared on social media. Carol did not have time to reply to these complaints. She is planning to hire a social media marketing manager.
Define the term fixed cost.
Explain one advantage and one disadvantage for CD of using a job/customized production method.
Explain one advantage and one disadvantage for CD of forming a partnership.
Markscheme
Fixed cost is defined as those costs that do not vary through output or quantity produced.
Award [1] for a basic definition that conveys partial knowledge and understanding. e.g. fixed costs do not change.
Award [2] for a full definition that conveys knowledge and understanding similar to the answer above. e.g links directly to output.
Output can also be sales for retail businesses.
N.B. No application required. Do not credit examples.
Job/customized production refers to the production of a single or exclusive item specially designed for each customer.
Advantages:
- One benefit to CD of using a job production approach is that CD can design an exclusive dress for each client considering personal styles and preferences, resulting in high consumer satisfaction and thus increased sales for her business.
- As exclusively designed items, CD can charge high prices for the dresses.
- As all dresses are entirely designed and produced by CD and her assistants, job production can be highly motivating for them, as they can take pride in their designs and creations.
Disadvantages:
- One cost to CD of using job production is that it is labour intensive resulting in high unit costs. This is implied since Carol only has two employees, Carol and her assistants design and make the dresses as a whole by hand. Added value is high, so customers should be prepared to pay a high price for the dresses.
- Job production is time-consuming. It will take time for Carol to design and make each ordered dress. Customers will have to be prepared to wait for their dresses. Carol could lose potential clients if they have to wait too much for her to finish other orders. The stimulus mentions that recently, some customers have complained about her delivery times.
Accept any other relevant advantage / disadvantage.
N.B. The response must reflect the advantaqe / disadvantage to CD and not customers.
Mark as [2] + [2].
Award [1] for each correct advantage / disadvantage identified or described and [1] for a relevant explanation with application to CD. Award up to a maximum of [2].
[2] cannot be awarded per advantage / disadvantage if the response lacks either explanation and/or application.
For example: For an identification or description of an advantage / disadvantage with or without application, award [1]. For explanation of an advantage / disadvantage with no application, award [1].
For explanation of an advantage / disadvantage and application, award [2].
Advantages:
- Juan as a business angel will inject some money to the business. Carol will be able to raise finance and solve her cash-flow shortages.
- Carol will be able to delegate some of her tasks and concentrate on the operations of the business, to meet deadlines and the increasing demand of dresses.
- Juan may bring new ideas for the operational side of the business.
Disadvantages:
- Carol will have to share all her decisions with Juan. As Carol is a designer, and Juan is an engineer, they may have a totally different approaches on how to run the business and conflict may arise. Juan has already suggested that Carol be less involved with design and more on operations. However, it could be argued that Carol’s design skills underpins the brand.
- Carol will have to share profits with Juan who will own 50 % of the business.
- Juan has no knowledge of the dress business so may have little to contribute.
Accept any other relevant advantage / disadvantage.
Award [1] for each correct advantage / disadvantage identified or described and [1] for a relevant explanation with application to Carol. Award up to a maximum of [2].
[2] cannot be awarded per advantage / disadvantage if the response lacks either explanation and/or application.
For example: For an identification or description of a disadvantage with or without application, award [1]. For explanation of a disadvantage with no application, award [1]. For explanation of a disadvantage and application, award [2].
Examiners report
A small minority still confused fixed costs with fixed assets. Whilst many candidates gave examples of fixed costs, no credit was given for these, as is the case with any examples in definition questions. There continued to be the perennial problem of confusion between price and cost — see later under teaching guidance.
A few candidates got quite inventive by saying job/customized production was personalized and hence motivating for employees; and then stated a few lines later that it could be boring i.e., contradictory responses. Many also tried to use e-commerce to argue both for and against job production. Whilst there may be some relevance to CD it has no direct relevance to the production method.
There were many misconceptions regarding partnerships including:
- sharing revenue
- limited liability — there are in fact limited partnerships, but these are not the norm
- some stated that unlimited liability was a disadvantage ignoring the fact that as a sole trader Carol already has unlimited liability.
Many also used profit sharing as a negative but in reality, few people would enter into a partnership unless the long-term benefits would realize greater overall profits than currently being realized. Finally, the term "business angel" is a generic one and not to be confused with application. The fact that Juan is an engineer however would classify as application.
