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Stuart and Pippa own a dry cleaning and launderette business called SP Dry Cleaners (SP) - OCR - GCSE Business - Question 17 - 2019 - Paper 1
Question 17
Stuart and Pippa own a dry cleaning and launderette business called SP Dry Cleaners (SP). The pie charts below show the monthly variable costs for SP in 2017 and 201... show full transcript
Worked Solution & Example Answer:Stuart and Pippa own a dry cleaning and launderette business called SP Dry Cleaners (SP) - OCR - GCSE Business - Question 17 - 2019 - Paper 1
Step 1
Explain what is meant by 'variable costs'.
Answer
Variable costs are expenses that change in direct proportion to the level of production or service output. They vary with business activity; for example, costs for materials, labor, and utilities that are directly linked to the production process will increase or decrease as production levels rise or fall. In the context of SP Dry Cleaners, variable costs would include expenses such as water, soap powder, wages for staff, and any other costs that fluctuate based on the volume of dry cleaning operations.
Step 2
Step 3
Analyse one change in SP's dry cleaning chemical costs between 2017 and 2018. Refer to Pie charts 1 and 2 in your answer.
Answer
From the pie charts, we can observe that in 2017, the dry cleaning chemicals made up 15% of the total variable costs, which were £4400. This means they cost £660 in 2017 (0.15 × 4400).
In 2018, the pie chart shows that dry cleaning chemical costs have decreased to 5% of the total variable costs, amounting to £275 (0.05 × 5500).
This shows a significant reduction in spending on dry cleaning chemicals, decreasing by £385 from 2017 to 2018. This change could highlight a shift in SP's operations, possibly moving towards more efficient or cost-effective cleaning solutions that have lowered overall costs.
Step 4
Calculate SP's Average Rate of Return (ARR) on the purchase of HD Sewing.
Answer
To calculate the Average Rate of Return (ARR), the formula used is:
Assuming the initial investment in HD Sewing is £1000 and the average annual profit generated from this machine is £200,
Thus, SP's ARR on the purchase of HD Sewing is 20%.
Step 5
Analyse one reason why SP should buy HD Sewing.
Answer
One reason SP should consider purchasing HD Sewing is that it enhances operational efficiency. The equipment may allow for faster processing of garments, thereby increasing throughput and potentially leading to higher revenues. Moreover, HD Sewing could offer advanced features that improve quality, reducing the likelihood of returns and customer dissatisfaction. An investment in better technology can also help SP compete effectively in the market, attracting more clients due to quality and reliability.
Step 6
Analyse one reason why SP should buy Fast Stitch.
Answer
SP should analyze the opportunity to buy Fast Stitch because it’s likely to offer a cost-saving advantage. If Fast Stitch is more economical in terms of operation and maintenance compared to existing equipment, it may reduce the overall variable costs for the business. This could improve profit margins and free up resources for other investments in the business, helping to ensure long-term sustainability and growth.
Step 7
Recommend whether SP should buy HD Sewing or Fast Stitch to expand their business.
Answer
SP should conduct a detailed comparison between HD Sewing and Fast Stitch before making a purchase decision. If HD Sewing offers superior efficiency and quality improvements while justifying its initial investment through future profit margins, it could be the better option. Conversely, if Fast Stitch demonstrates significant cost savings and operational advantages with a lower purchase price, it may be more suitable for SP's current financial and operational needs. Ultimately, the decision should align with SP's long-term business goals and operational strategy.