Costs of production

Which would be variable costs for a building firm?

A Administrative and legal expenses

B Bricks and roof tiles

C Business rates and buildings insurance

D Cement mixers and tools

Which of the following would be fixed costs of a fruit farm?

A Farm workers’ wages

B Plant food and fertiliser

C Rent and rates

D Seeds and seedlings

Text 1 Zara

Zara is a global fashion brand based in Spain. Zara is best known for the speed and frequency it can get its new clothing ranges into its online shop and 2270 stores. Approximately 50% of Zara’s clothes are manufactured in Spain; the rest come from other European countries, or from Asia and Africa. Like most firms in 2020, Zara experienced a fall in sales. Zara’s global sales revenues in 2019 were €19 954 million, but in 2020 these fell to €14 129 million. However, during this period Zara’s online sales increased by approximately 75%, as consumer buying habits changed in favour of e-commerce.

Zara can get new clothing designed, manufactured and delivered to its stores within 15 days. It does this by buying fabric in large quantities from suppliers in Europe, which helps keep its variable costs low. This means that it is delivered quickly to its factory in Spain, where it can then be made up into the new designs.

Zara’s highly responsive supply chain is central to its business success. This means it can change its clothing designs on average every two weeks, while competitors change their designs every two or three months.

Explain one production process a business may use when making its products.

Explain one method that a business could use to ensure the quality of its products.

Analyse one reason why keeping variable costs low may reward Zara’s owners.

Calculate the percentage decrease in Zara’s sales revenue between 2019 and 2020.

Show your workings

Answer........

Explain one possible advantage to a business of selling its products via e-commerce.

Identify two roles of the procurement function in a business.

Evaluate the importance to Zara of having reliable suppliers in the supply chain for its clothing.

Which of the following would be a variable cost for a restaurant?

A Advertising fees

B Buildings insurance

C Chef’s salary

D Fruit and vegetables

Text 2

Ricardo Costumes and Props (RCP)

Alessia and Natalia own Ricardo Costumes and Props (RCP). The business operates as a partnership. RCP makes a range of costumes and props that it sells to UK and EU theatres, schools and amateur dramatics groups.

Last year, RCP’s costumes and props were used in two very successful films. RCP’s reputation grew rapidly and its revenue increased from £1 600 000 in 2019 to £2 000 000 in 2020. More financial data for RCP in 2020 is shown in Table 1, below.

Despite being profitable, RCP’s bank overdraft is getting bigger every month. Alessia and Natalia realise that they need to carefully consider RCP’s cash flow position.

Alessia and Natalia need to update the laser cutter and 3D printer they use to make some of the props. The total cost of these machines is likely to be over £100 000. Alessia and Natalia are unsure how to finance the purchase of the new machinery. Natalia has suggested they try and sell the old machines and use the money to buy new ones. Alessia thinks it might be better to gain extra capital by finding a new partner to join the business.

State one reason why cash is important to a business.

Explain one use of a cash flow forecast in a business.

Identify two variable costs which a business may incur.

Calculate RCP’s net profit for 2020.

Show your workings.

Answer £........

Analyse one way Alessia and Natalia could use the data shown in Table 1 to improve their net profit margin.

Analyse one advantage to RCP of selling its old machines to finance the purchase of the new machinery.

Analyse one disadvantage to RCP of selling its old machines to finance the purchase of the new machinery.

Recommend whether RCP should finance the purchase of the new machinery by selling its old machines or by taking on a new partner.