OCR CASE STUDY A293: PRODUCTION, FINANCE AND THE EXTERNAL BUSINESS ENVIRONMENT BOWTON MOUNTAIN FESTIVAL

Section 1- Introduction – The festival! *Basic information about the festival BMF happens every year in August In 2016, 10,000 people attended 20% from EU countries Lasts 3 days and there are lots of different stands and parties Also includes; lectures, exhibitions, concerts, films and bike races. *Social costs Drunk people Badly behaved people on streets Noise Litter *Market segments Under 30 year olds High income (above EU average) Pursuit enthusiasts

Section 2 - Review Of The Bowton Economy *Council expenditure cuts = less grant in future, less support eg policing during festival *Economic growth in the area = Higher disposable income = more likely to spend on luxuries like a festival *Less growth in EU = less festival goers from EU *Gap between rich and poor has grown = less wealthy are less likely to go *Fluctuating pound = Importing goods may cost more- eg T-shirt supplies *Increased income tax = Less disposable income - but depends on size of increase *Reduced accommodation prices = more people from further away *Rising interest rates = more people will save = less customers. People may not use credit card to buy tickets

Section 3 – Financing The Festival In 2017 the company will need £350,000. Calculate how much extra the company will need to borrow (ie taking into account grant and sponsorship) Costs- £350,000 Grant- £30,000 Sponsor - £50,000 Borrow - £270,000 Advantages Disadvantages Sponsorship Can get lots of businesses to sponsor the event – don’t have to pay back Unethical sponsors make your image look bad Grant Know exactly how much money they are getting and don’t need to pay back Government might cut it Matched-funds Need to put a bid in Share issue Don’t have to pay back the money Have to pay dividend and loss of control Increased ticket price Increased revenue Customers might stop coming – depends on elasticity of demand

Section 4 – Festival Costs Actual cost - 2016 Actual cost - 2017 Film - £14,000 Film - £24,500 Administration - £168,000 Administration - £189,000 Venue - £28,000 Venue - £31,500 Speaker fees - £70,000 Speaker fees - £94,500 Policing - £0 Policing - £10,500

Section Five – Festival T-shirts Production Batch Flow Advantages Disadvantage Disadvantages Less boredom for employees because they are working on more than one type of product High storage costs Goods are produced in bulk to and so unit costs are reduced High set up costs  Business can make and offer a variety of products and so more choice for customers Time is wasted when switching between products Goods are produced cheaply as unit costs are lower Standardised products Workers do not feel motivated Machinery could break down Time is saved Batch – one type of product then switched to make different product Flow – Constant output of same item

Section Five – Festival T-shirts Ethics *Explain business ethics A businesses acting in a moral way and supporting the world *What unethical practices does the Chinese supplier do? Low wages Non renewable sources used Not meeting health and safety standards *What are the implications of BMF using an unethical supplier? Ruined brand image Reduction in customers

Section Five – Festival T-shirts Economies And Diseconomies Of Scale Economies of scale – Lower cost per unit due to increased output. For BMF they could enjoy purchasing economies as they could purchase T-shirts in bulk. They could also gain from marketing economies as they grow – the advertising cost will be spread over more customers. Diseconomies of scale – Increased costs when a business gets too big – communication and management problems

Economies of scale – Chinese supplier *Technical economies - from moving to larger premises, or using more technologically advanced equipment - produce items more quickly and reliably and at a lower unit cost = higher profit margin. *Managerial economies - from employing specialist managers who become expert at overseeing one particular function - maximise efficiency. *Purchasing economies - from receiving discounts from suppliers for buying larger quantities of materials *Marketing economies - from market research, advertising, selling and distribution costs being spread across a greater output – lowering unit costs. *Financial economies - by being able to raise capital eg a loan at a lower cost in terms of interest rates - due to having more assets to offer as security. *Risk-bearing economies - from diversifying into a number of different products / markets, which reduces dependence on one market.

Section Five – Festival T-shirts Quality Control Explain what is meant by quality control Checking the products quality and design specification at the end of production Give examples of how quality control could be implemented by BMF regarding the production of t-shirts Check the sizing and the quality of the design on the t shirt What are the pros and cons of quality control - Some products slip through the “net” Is less hassle than TQM and therefore cheaper

Section Five – Festival T-shirts Sources Of Finance For The T-shirts Definition Advantages Disadvantages Overdraft Drawing money that you don’t have from an account Can get money quick and easy Interest is charged on a daily basis so can be quite expensive Trade Credit Buy now, pay later No interest if paid back in time May have to pay premium price for the privilege No guarantee that the supplier would offer it Bank Loan Money from the bank that has to be paid back with interest Large sum of money can be borrowed and the payment can be spread over many years Interest has to be paid and this can increase costs and lower net profit

Section Five – Festival T-shirts Break-even Break even output: June- 380 t-shirts July- 860 t-shirts August- 1220 t-shirts September- will make a loss Break-even forecast: Advantages Disadvantages Measure profit and losses at different levels of production Assumes that sale price is constant at all levels of output Predict effect of price changes on profits Assumes production and sales are same Predict effect of cost and efficiency changes on profitability Takes time and could change easily making it quickly out of date

Section Five – Festival T-shirts Cash Flow Cash flow - Money going in and out of a business List ways in which BMF could improve its cash flow position Cut expenses without compromising on quality Raise income, eg through increasing sales What the pros and cons of BMF using a cash flow forecast. They can spot months when they could run out of money and this then helps the business to avoid bankruptcy Try out varied prices into their forecast and see what effect it has Might not be accurate, eg sales are only a prediction Doesn’t take in extra unknown cost Variable costs are harder to calculate

Section Six – The Festival Field What type of market are the retailers of outdoor pursuit products operating in? Competitive Explain one way in which competition between businesses may affect consumer choice. Price of goods and a wider variety of products Explain one way in which competition between businesses may affect prices charged. Lower prices to increase customer base . Smaller businesses may not benefit from economies of scale and so prices could be higher. Explain one way in which competition between businesses may affect profits. Lower profit as they may lose customers to their competitors and would have to keep prices low and this affects profit margins Explain one reason why national chain retailers are able to sell at lower prices than Spirit of Adventure. Economies of scale mean their costs are lower so they can decrease their prices and still make profit. Explain two costs associated with holding additional stock. 1. Storage 2. Interest to pay back if you spend more money than you have State two ways in which Spirit of Adventure might fund the purchase of this additional stock. Overdraft, Loan, trade credit