EDEXCEL GCSE BUSINESS · PAPER 1
Exam Practice: Business Options
Business options · Making the business effective · Lesson 1 of 4 · 16 marks · 25 minutes
Name Date
Answer all questions. Use the context of the business in the question where one is given.
Question 1 DEFINE [1 mark]
Define the term 'unlimited liability'.
Question 2 STATE [1 mark]
State one type of business ownership that has limited liability.
Question 3 OUTLINE [2 marks]
Outline one disadvantage to a franchisee of operating a franchise.
Question 4 EXPLAIN [3 marks]
Explain one benefit to an entrepreneur of setting up a private limited company rather than operating as a sole trader.
Question 5 JUSTIFY [9 marks]
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SOURCE Chloe has worked in restaurants for ten years and wants to open a burger restaurant. She has £40,000 of savings. Option 1: Start her own independent burger restaurant with her own name and recipes. Option 2: Buy a franchise of a well-known burger chain, which charges a £25,000 initial fee and royalties of 6% of revenue. |
Justify which one of these two options Chloe should choose.
Answers
Check your answer only once you have written one.
Question 1 [1 mark]
When the owner of a business is personally responsible for all of its debts, so their own possessions can be used to pay them.
▸ Owner personally responsible for all debts / personal possessions at risk 1 mark
Question 2 [1 mark]
A private limited company (Ltd).
▸ Private limited company / Ltd 1 mark
Question 3 [2 marks]
The franchisee must pay royalties to the franchisor (1), usually a percentage of revenue, which reduces the profit the franchisee keeps (1).
▸ A disadvantage identified, e.g. royalties / initial fee / lack of independence / reputation damaged by others 1 mark
▸ Developed: the effect on the franchisee 1 mark
Question 4 [3 marks]
The owner has limited liability (1). If the company fails, the owner can only lose the money they invested in it (1). This means their personal possessions, such as their house and savings, cannot be taken to pay the business's debts, so starting the business is less risky for them (1).
▸ A benefit identified, e.g. limited liability / easier to raise finance / continuity 1 mark
▸ First linked point of explanation 1 mark
▸ Second linked point of explanation 1 mark
Question 5 [9 marks]
Option 1 gives Chloe full independence: she can choose her own menu, prices and design, and keep all of the profit with no royalties to pay. Her ten years of restaurant experience means she understands how to run a kitchen. However, nobody knows her brand yet, so it may take a long time to attract customers, and she must pay for all her own advertising, which increases the risk of failure. Option 2 gives her a brand customers already trust, so she should attract customers from day one, and she gets training, supplies and national advertising. But the £25,000 fee uses more than half her savings, and the 6% royalty is paid on revenue, so she pays it even in months when she makes little profit. She would also have to follow the franchisor's rules and could not use her own recipes. On balance Chloe should choose Option 2, because the burger market is very competitive and a known brand greatly reduces the risk of failing in the first year. However, this depends on whether she can still make an acceptable profit after paying 6% of her revenue in royalties.
▸ AO2 (Application, 3 marks): uses Chloe's context - her experience, £40,000 savings, the £25,000 fee, 6% royalties Level 1-3
▸ AO3a (Analysis, 3 marks): chains of reasoning about each option Level 1-3
▸ AO3b (Evaluation, 3 marks): a justified choice with a supported judgement, e.g. "it depends on" Level 1-3