GCSE Business Studies – Bowton Spice Bazaar Revision Guide

Tips for the Exam

Remember context is key when it comes to the case study paper. You should always develop your analysis

(explanations) in the context of BSB

Explain – Use Point, Because, Therefore or Point, Therefore, Therefore

Discuss, Recommend, Choose – On the one hand, on the other hand conclusion. Perhaps use Point,

Because, Therefore, However…

Section 1 Introduction

The evidence says Chloe had to close her restaurant because of poor cash-flow.

Cash-flow – is the flow of all money into and out of a business. It is important because if you do not have

enough money you don’t have enough to pay your bills. Most businesses will forecast cash-flow to identify

when they might experience cash flow problems.

Poor Cash-flow is a Problem because:

It means there is not enough cash in the business to meet its day to day expenses. There is a lack of

working capital.

The business may not have the money needed to buy supplies (eg the food for the restaurant)

Staff may not get paid on time which may lead to poor motivation or they may leave

Creditors may take legal action to recover any money they are owed. The business may be

declared bankrupt and have to cease trading

Factor Impact on Business in Bowton / Chloe’s Business

Recession In a recession many people face falling incomes and consumer confidence will be low. As a result some people may have less disposable income to spend on luxuries (such as a meal out). Businesses selling these products may see a fall in demand with falling revenue and profit as a result.

Rising Unemployment Those who are made unemployed will have lower disposable incomes and therefore less money to spend (see above). Some businesses may benefit if they are looking for workers as there will be more potential people to employ

Increase in VAT If VAT rises businesses will have to increase prices and therefore may see a fall in demand. (competitors will be affected as well). This will especially affect luxuries like a restaurant as people’s money will go less far.

Rise in World Food Prices If food prices rise the cost to a restaurant of providing a meal will increase. This will reduce profit margins and ultimately profit unless prices can be increased. The problem is with the economy in a recession any increase in prices is likely to see a fall in demand.

Falling Bowton Population If the population of Bowton falls there will be less potential customers for business to sell to reducing demand for Chloe’s restaurant and revenue and profit is likely to fall. This may reduce demand generally in the local economy – downward multiplier effect

Impact on Cash-flow

All of the things in the table are likely to have harmed Chloe’s cash-flow. The recession, unemployment.

VAT and population changes are likely to have reduced revenue meaning that cash inflow may be lower

than forecast. The rise in world food prices is likely to have increased cash outflows

The EU

The evidence mentions the EU. The EU is a group of countries (28 including the UK, France, Germany and

Spain) that have agreed to cooperate to make trade as easy between countries as within a country. The

EU operates as a single market – there is free trade between members.

The single market means:

No protectionist measures on trade between member states (tariffs, quotas, embargos etc)

Elimination of border controls

Free movement of labour (people can work in any member state without restriction)

Mutual recognition of qualifications

Making taxes, industrial and economic laws the same

Common standards - labelling, environmental, safety

Advantages of the EU to Business Disadvantages of the EU

Easier to sell to a Larger Market (BSB can

export easily to Europe without tariffs and

other restrictions)

Economies of Scale (from above)

Free Movement of Labour (means

businesses such as BSB can find workers with

the skills they need)

One Product Fits All (If BSB’s spices meet the

EU standard they can be sold in any of the 28

countries without being changed)

More Competition for UK Business (It is easy

for foreign spice makers from the EU to sell

in the UK)

More competition is bad for inefficient

producers as they may lose market share

and have to close

Competitive Market

Chloe and Ade have decided to start a business called BSB which imports and sells spices. There are

however a number of other businesses doing this in the UK which means the market is competitive.

For BSB this means they will need to be very efficient. It may affect their ability to charge high prices and

may reduce their profitability unless they are very good

For consumers this is good as they have a large amount of choice and prices should be lower. Quality

should also be higher as firms compete for their custom.

How can BSB change its competitive environment?

BSB operates in a competitive market this means there are lots of alternatives for customers to choose as a

result it needs to make sure it is efficient and does not charge too much.

Strategy Explanation / How it might work for BSB

Potential Drawbacks

Developing, and selling new products

If BSB can supply spice blends that its competitors don’t supply and that are superior it will have a unique selling point and may be able to gain more customers.

This relies upon it being able to develop appropriate spice blends that are superior to its competitors.

Reducing Prices

If it cuts prices customers may choose it over a competitor.

It will gain less profit per pouch. If sales don’t rise profit will decrease. Customers may cut prices in response leading to a price war in which only the customer benefits.

Increasing Advertising / Promotion

This will raise awareness and persuade people to buy its products.

This costs money. If sales do not rise sufficiently the cost of the promotion wont be covered and BSB will make less profit.

Taking over or merging with a competitor

It will have a bigger market share and will benefit from economies of scale.

It is a new business and this is not likely to be an option at this time. If merging control of the business may have to be shared.

Section 2 Setting Up

BSB is located in a factory on the Bowton Industrial Estate. They considered leasing but decided to take

out a mortgage a buy a factory instead.

Mortgage – Is a long term loan used to finance the purchase of property. It is a secured loan as the

property is used as collateral (if you can’t meet repayments it can be taken)

Leasing – This is where an asset is rented rather than purchased

Mortgage Leasing

Advantages

BSB will own the factory and the value of the building may increase over time

It is normally cheaper to buy a factory in the long term

Interest rates are normally lower than other forms of loans as it is a secured loan

Advantages

Less initial finance is needed to rent the factory.

No interest has to be paid so not affected if interest rates rise

Disadvantages

More money is needed upfront as BSB would have to put a deposit down on the factory

The loan has to be repaid and interest has to be paid on the money borrowed. Interest rates are currently low but if they rise repayments may increase affecting BSB’s cashflow and profitability

Disadvantages

BSB would never actually own the factory (the asset)

It would probably work out more expensive over time than buying the asset

A good time to buy property? – probably because interest rates were low at this time which would

reduce their loan repayments. Property was also cheap due to the recession. On the other hand it was a

risky time to set up a new business as the economy was still not doing very well

Specialist Machinery – Sources of Finance

The specialist machinery would need to be financed. They would have a number of possible options:

Owners Capital – they could finance the purchase with any capital they had invested in the business. This

would be a cheap option but it is likely they wouldn’t have had enough

Loan – they could have borrowed money from the bank. This would have to be repaid over time with

interest. If interest rate rise they could have problems. Especially as they have already borrowed to buy a

factory

Lease – they could rent the machines. This would be cheaper in the short term and they wouldn’t have to

pay interest but this would be more costly in the long term and they would never own the asset.

Hire Purchase – this is similar to leasing only the firm will actually own the asset when the last payment is

made. It buys the asset in instalments but interest rates can be very high

Section 3 Sales

The evidence talks about how in the first year (2012) BSB was glad of any orders. The economy was still

struggling at this time and as a new business many people would not have been aware of the BSB brand.

Objectives

In the first year their objectives would have likely to have been to survive and breakeven as many new

businesses fail in the first 12 months. They would also have been trying to raise awareness of their brand.

In the second year objectives would have likely changed as they are more established. They might now be

aiming to make a profit so as to provide an income and return for the owners.

After this objectives might have changed to increasing their market share, expanding the product range

and as we find out later expansion. Making a good/maximum level of profit will be important as this can

be retained to finance any expansion plans.

Added Value

The evidence seems to suggest a number of ways by which BSB adds value.

Added value = the difference between the price of the finished product/service and the cost of the inputs

involved in making it

Adding Value = the process or the things a business does to ensure it has added value

The key benefits to BSB of adding value include:

• Profit – by definition if a business is adding value it is making a profit

• Charging a higher price

• Creating a point of difference from the competition (USP)

• Protecting the business from competitors trying to steal customers by charging lower prices

How does BSB add value?

BSB adds value through branding. Customers are prepared to pay more for a branded product because

they trust/value the product more which means it can charge a higher price and make more profit.

BSB adds value through celebrity endorsement. Demand will be higher for the product. People will be

prepared to pay more for the spices because it has been endorsed by a celebrity. So they can sell the

spices for a higher price and make more profit.

BSB adds value by selecting/roasting/blending/packaging the spices. It imports the spices and then

processes them so that people are prepared to pay more for the finished product. As a result it can charge

more than what it costs to buy the spices and make more profit.

BSB’s Customers

The case study provides information on BSB’s customers. These include supermarkets, retailers,

wholesalers and people all over the word via the internet.

This is good for BSB as they are not having to rely on one or two customers to buy their product. This

means that if one or two retailers stop buying they still have lots of other sources of revenue. Whilst their

main market seems to be the UK it is good that they also sell to other countries over the internet. They

may consider selling more to other countries as this spread the risk. If one market declines or suffers from

a recession they still have other markets to sell to.

Figure 3 Total Revenue for BSB

Revenue is income from sales. (revenue and profit are not the same thing!)

Revenue = Price x Quantity Sold

What has happened to revenue from 2012 to 2013? - it has increased from £600,000 to £1,900,000

What has happened to sales of Punjabi Masala? - be careful!!! You might be tempted to say they have

fallen from 10% to 8%. In fact they have gone up from £60,000 (10% of £600,000) to £152,000 (8% of

£1,900,000)

Make sure you can work out simple percentages like this using the pie charts. Use the figures in your

explanations / answers.

Section 4 – Production at BSB

Section 4 shows the layout of the factory and how the spices are produced.

Factory Layout

The factory appears to be laid out in an efficient manner. This is important to maximise productivity

(output per worker) and to minimise costs.

Productivity – means they can produce more quickly so as to meet orders and ensure customer

satisfaction. It also means more profit if they can sell what they produce.

Low Costs – are important so as to maximise profits.

Just in Time Production / Stock Control

Some spices are bought on a just in time basis when BSB only requires a small quantity of the spice.

Just in Case Production / Stock Control

Other spices which BSB uses in large quantities are bought in bulk. This is what is known as just in case

stock control.

Just in Time Production

Is a method of production that aims to

keep stock levels at the bare minimum

(usually zero). The aim is that stock s of

spices arrive in the factory immediately

before it is used.

Stock will be ordered in large quantities

and reordered when stocks get low.

BSB uses this method of stock control for

one big reason:

Purchasing Economies of Scale

It will get a discount when it buys spices in

bulk. This reduces the average cost of

producing a pouch of these spices. As a

result they can charge a lower price and

be more competitive or they can make a

higher profit margin

Methods of Production

There are three main production methods these are job, batch and flow. BSB will use Batch Production.

Batch Production - This involves making similar or identical items in batches. One type of spice blends is

produced for a while and then production is changed to another type.

Advantages:

• Batches can be made to meet specific orders

• It may be possible to use specialist machines to lower costs

Disadvantages:

• It takes time to switch production. Machinery may need to be set up.

• It is necessary to hold stock of materials and finished goods. There are costs to stockholding and if

stocks cannot be sold or cannot be sold quickly enough the spices may perish and be wasted

Specialisation & Division of Labour

Specialisation - This is where businesses, individuals and whole economies concentrate on making just a

few products or doing a specific job

Division of Labour - This is an extension of specialisation where jobs are broken down into a series of small

steps.

Specialisation and BSB

BSB specialises in Spice Blends – This is what they are best at doing although there is always a risk that if

the demand for spice blends falls (unlikely) that they will be unprofitable

Workers Specialise - Workers at BSB specialise in doing specific jobs. This includes Chloe and Ade.

One problem with over specialisation is that workers may be unable to do other jobs in the business. BSB

may ensure some workers are multi-skilled and are trained to do different jobs. This gives BSB more

flexibility as it will be able to move workers around to where they might be needed.

Skilled and Unskilled Workers - BSB uses both skilled and unskilled workers to make its spices

Skilled workers: - These are necessary to do specialist jobs in the business. Without them the overall

quality of the spice blends may be lower and the business may be less efficient. Skilled workers:

Can do specialist jobs

Need specialist training

Will be paid more

May be in short supply

May not be available locally (need to relocate)

Unskilled Workers: - Some jobs require less skill and therefore do not need a skilled worker. This is

especially the case when using some machines where the specialist machine reduces the need for a worker

to be particularly skilled. Unskilled workers:

Cannot take on more skilled tasks

Require less specialist training

Will be paid less than skilled workers

Are probably in plentiful supply in the local area

May need more supervision than skilled workers if covering semi-skilled roles

Organising Production

Ade spends most of his time organising production. This is very important to BSB. Production seems

efficient with the production process divided up into parts and tasks are grouped together. There seems to

be a logical flow to production in the factory.

Lean Production – is a Japanese approach that aims to use as few resources as possible. Waste and stocks

are kept to a minimum and workers are encouraged to think about ways to improve productivity. Whilst

BSB uses JIT (sometimes) it is not clear if production is lean

Quality – Quality Assurance and Quality Control will be important to BSB

Quality Control – is a system of checking the quality of finished goods. This is important because:

Poor quality goods may not be able to be sold (waste of money)

Customers will not be happy if they receive poor quality goods and they may buy from somewhere else in the future

Production may be disrupted if the quality of materials produced at an early stage of the process is not good enough for them to be used later on.

Quality Assurance – are the systems a business has to make sure products are of appropriate quality. This

prevents the problems above from occurring and should save the business money as less products will be

rejected or returned.

Section 5 - Buying Spices

BSB and Globalisation

Globalisation – an expansion of world trade in goods and services leading to greater international

interdependence. BSB is a global business because:

It buys spices from other countries eg Cardamom from India

It sells spice blends in other countries via the internet

BSB benefits from globalisation because:

it can source spices that couldn’t be grown in the UK.

It has more potential customers.

The prices it pays for its spices are lower as they can be grown in countries with lower wage costs.

It can buy from the lowest price country / grower

Competition

BSB buys it spices from several different producers in different countries. This is good as it should mean it

has to pay less for its spices as it can switch to buying from another producer / country if prices rise. This

helps keep good profit margins

Changing Prices of Spices

The evidence suggests that the prices BSB has to pay for spices change regularly for two main reasons:

1. Changes in Demand

2. Changes in the Exchange Rate

This is awkward for BSB as it will make it difficult to plan and forecast effectively. It may ultimately affect

its profitability.

BSB may be able to cope with any increases in price by doing the following:

Increasing its prices – This may lead to less sales but cost increases are likely to be affecting its

competitors as well

Buying from different suppliers – this may be especially important if exchange rates change as BSB

may buy from a country with a more favourable exchange rate. BSB may be reluctant to do this

though as it may have built a relationship with its current suppliers and it is vital that it can rely

upon them to deliver on time.

Exchange Rates and BSB

The value of the £ will have a large impact on BSB

Buying Spices

BSB imports spices, a change in the value of the £ will affect the amount BSB has to pay for its spices. For

example BSB has ordered some Cardamom and the £ has risen from £1= INR70 to £1 = INR80. How might

this affect BSB?

Imagine BSB has placed an order for Cardamom costing INR112,000

What will the price of Cardamom be in £s if £1 = INR70?

112000/70 = £1600

What will the price of Cardamom be in £s if £1 = INR80

112000/80 = £1400

An appreciation (increase in value of the £) will be good for BSB when importing prices as it will be cheaper

to buy its spices. In this case it will pay £200 less for the Cardamom order.

Selling Spice Blends

BSB also exports (sells spices to customers around the world over the internet). An appreciation of the £

will be bad for BSB when exporting spice blends as the blends will have to be priced more highly in foreign

currency to get the same amount of £s this means less foreign people may buy them as they are more

expensive (less competitive)

How will a rise in the value of the £

against the rupee affect BSB?

It will be cheaper for BSB to import its

spices . This means its costs/ the costs to

make its spice blends will be lower and it

will have higher profit margins / make

more profit. It may be able to cut prices to

be more competitive

However

However its competitors may also have

lower costs and may be able to cut prices

If it exports spice blends to India these

may be less competitive as they will cost

more in INR

Section 6 - The Moroccan Special

BSB has developed a new spice blend the Moroccan Special it has received an enquiry about an order for

10,000 pouches to be delivered in 2014.

Definitions and Calculations for 10,000 pouches. Learn and practise these!

Break Even – Is the level of output where total revenue = total costs

Revenue – This is income from sales. 2x10,000 = £20,000

Fixed Costs – These are costs that do not vary with output. In this case £5000

Variable Costs – These are costs that vary directly with output eg raw materials such as spices. The

variable cost per unit in this case is £1 (20p+5p+70p+5p). The total variable costs are £1x10,000 = £10,000

Total Costs – These are fixed costs plus variable costs. = £10000+£5000=£15000

Average Costs – The cost of making one unit of Moroccan Special. (TC/Output) = £15000/10000 = £1.50

Profit – Total Revenue minus Total Costs = £20,000-£15,000=£5000

Margin of Safety – The difference between the break even level of output and the actual output

Gross Profit – Revenue minus Variable Costs = £20000-£10000= £10000

Net Profit – Gross Profit minus Expenses (FC) = 10,000-5000= £5000

Gross Profit Margin = Gross Profit/Revenue x100 = (10000/20000)x100 = 50%

This means for every £1 of spice blend sold 50p or 50% is gross profit

Net Profit Margin = Net Profit / Revenue x100 = (5000/20000)x100 = 25%

This means for every £1 of spice blend sold 25p or 25% is net profit

Break Even Analysis

You will have to do this. You need to know how to draw/interpret a chart and how to calculate break even

using a formula so learn it!

Benefits of Breakeven to BSB

Banks may ask for breakeven analysis to be considered and demonstrated before issuing a loan or finance

BSB may need a loan/overdraft to purchase materials. Helps BSB to see if it is worth accepting an order,

they can see if the Moroccan special order will be profitable. Helps BSB to estimate the future level of

output they will need to produce and sell in order to meet given objectives in terms of profits.

Limitations of Breakeven to BSB

Break-even forecasts are predictions/estimates. The revenue figure may not be accurate if BSB has to

change the price it sells the goods at. The costs figures may not be accurate if the variable costs rise or fall

eg if the cost of spices rises or falls or fixed costs change. It does not take into consideration the state of

the economy or economies of scale. If the exchange rate changes, the costs may change or if new

technology is introduced or if health and safety regulations change.

Calculating break-even

It is possible to calculate the break–even output without constructing a table or

drawing a chart. This is done using the following formula:

Break Even = Fixed Costs = 5000/1 = 5000 pouches

Contribution

where

Contribution = Selling Price minus Variable Costs (per

unit) =2-1 =£1

Implications of the Order

Accepting a large order such as this will have implications for BSB. The most obvious one being they break

even on 5000 pouches of Moroccan Special and 10,000 pouches will generate them profit of £5000.

In the short term they will have to finance the purchase of the materials etc to fulfil the order and this has

cash flow implications. Hopefully they will have sufficient cash within the business to cover this. If not

they may need to use their overdraft facility or could purchase the spices using trade credit. If suppliers

allow them BSB would get the spices immediately and would have (typically) 30 days to pay.

Section 7 - Future Developments

The case study identifies an opportunity for BSB to expand and grow. This section provides lots of scope

for the examiner to ask some big questions.

Should they move to larger premises?

Advantages Disadvantages

Struggling to meet demand in current factory. Expansion will enable them to make more spice blends and potentially make more revenue and profit

Interest Rates are currently low so it is cheap to borrow

It is a good time to expand as the economy is coming out of recession

Economies of Scale – with more output they will be able to produce each spice pouch at a lower average cost. This means higher profit margins or they could cut prices to be more competitive. It is likely they will benefit from purchasing economies (bulk buying spices) and marketing economies (spread advertising and distribution costs over more units)

It will be costly to build the new factory

They may need to increase borrowing to build the new factory. This involves interest and the risk of being affected by rising interest rates

Risk - the current increase in demand may be temporary and expansion is a risk as It relies upon them being able to sell the extra amount they produce

Ultimately if they relocate and demand isn’t high enough they may experience cash flow problems and be forced out of business

BSB must be careful of diseconomies of scale. Bigger firms can be more difficult to manage and communication may suffer. If this happens average costs may increase

Conclusion Yes provided demand is likely to remain high. OR Wait to see if demand remains high as it is too risky at present It may depend upon :

How much they need to borrow – do they have retained profit to use as well? If they have lots of retained profit they may not need to borrow that much. The evidence suggests they are profitable.

The rate of interest

What is expected to happen to interest rates

What is expected to happen to the economy

If they expect demand for their products to continue to increase.

Social Costs and Benefits of New Factory

Social Costs – are the costs of business activity to the environment or community

Social Benefits – are the benefits of business activity to the environment or the community

To what extent will the new factory benefit Bowton and its people?

Benefits

Create jobs in the factory this may reduce unemployment locally

Create jobs / benefits local businesses if local firms are employed to build the factory

Benefit local businesses that supply the factory with products or services

Mulitplier Effect – if jobs are created there will be more demand /spending in the local economy which will benefit local retailers

Costs

Potential environmental impact if built on a greenfield site

May lead to a fall in house prices of people whose houses are near the new factory

Pollution, Congestion, Noise etc

Conclusion Yes because – BSB may locate factory somewhere else if they are not given planning permission. This may lead to job losses and may harm the local economy It depends upon:

How many new jobs are created

Are local firms used to build the factory

Where the factory is

The environmental impact Yes provided BSB considers the environmental impact / costs of the new factory.

Other Really Important Stuff

Economies of Scale

These are the fall in average costs as the business gets bigger and produces more output. The main types

can be remembered using the mnemonic Really Fun Mums Try Making Pies and are as follows:

Risk-Bearing Economies – This is where a firm can afford to sell a range of products into many different

markets. As BSB becomes a bigger firm it may be able to sell to shops in many different countries. This is

good as if demand falls in the UK it has other markets to sell to

Financial Economies – This is where banks are able to lend more money at lower rates of interest to bigger

firms. As an established firm with more output and sales BSB may be able to borrow at lower rates of

interest for its new factory compared to when it started out

Managerial Economies – This is where a large firm can employ specialist managers who have expert

knowledge. Also if BSB opens its new factory and expands output its managerial costs wont increase

proportionately. Eg if it doubles its size it wont need double the amount of managers.

Technical Economies – This is where a large firm can operate more advanced machinery than smaller firms

which reduces average costs as productivity is increased. BSB may be able to benefit from this when using

machinery in its new factory. Also the law of increased dimensions means that if its new factory is twice as

big it will be less than twice as expensive to run

***Marketing Economies *** - VERY IMPORTANT – This is because the cost of a promotional campaign is

pretty much a fixed cost. A larger firm will need to spend less per unit advertising its products than a

smaller firm. The evidence suggests this is important for BSB. As BSB has more output and sales of spices

the marketing costs have been spread over more sales reducing the average cost (cost per pouch)

***Purchasing Economies*** - VERY IMPORTANT – This is where a large firm buys its supplies in bulk and

so gets them a lower unit price. BSB buys some spices in bulk that it uses regularly and this reduces the

average cost of producing pouches of these spices. This is a one reason why BSB does not use JIT stock

control for some spice blends.

Economies of Scale and BSB (see above as well)

It is likely you will get a question on economies of scale and BSB. You might also refer to economies of

scale (and diseconomies) when discussing the expansion plans.

Diseconomies of Scale – This is where average costs can rise as a firm increases its size as bigger firms can

be more difficult to manage

Impact of Rising Interest Rates on BSB

Interest rates currently in the economy are low. If interest rates were to increase it is likely to have an

impact on BSB.

BSB is likely to have taken out loans when starting the business and has a mortgage it used to

purchase its new factory. A rise in interest rates will increase loan repayments and reduce its profit

BSB is looking to build a new factory. It is likely they will have to borrow more in order to do this.

Again this could raise loan repayments and may make financing the new factory unaffordable

If interest rates rise consumers may be paying more back on their mortgages (less disposable

income) and may save more and spend less. This could reduce the demand for BSBs spices.

However / It depends upon

Is BSB highly geared? (does it have lots of loans?) If it has high levels of borrowing it will be

affected a lot by a rise in interest rates. If it has relatively low levels of borrowing it wont be

affected that much?

Does BSB have a fixed rate mortgage? If it does it may be protected from rising rates for a period of

time

It may not be affected that much as people don’t borrow to buy spices and its products are

relatively cheap