1. OCR GCSE BUSINESS STUDIES A293/01/CS Production, Finance and the External Business Environment PRE-RELEASE CASE STUDY

2. Section 5 Festival T-shirts

4. Please complete this worksheet while watching the presentation

6. Lesson objectives
To be able to demonstrate an understanding of job, batch, process and flow methods of production
To be able to calculate, explain and interpret fixed, variable, average and total costs
To be able to analyse and discuss the need for, and use of, finance
To be able to calculate, interpret and analyse cash flow forecasts

7. Starter What do these 4 T-shirts have in common?
All Glastonbury festival t-shirts

8. The big question

9. Collectors items BMF Ltd sells a ‘Festival T-shirt’ each year.
A new design is created for each Festival.
The T-shirts have become very popular and are seen as something of a ‘collectors item’ among outdoor pursuits enthusiasts.

10. Where are the t-shirts sold?
BMF Ltd believes that the T-shirts help to support a positive image for The Festival.
The T-shirts are sold through The Festival website before, during and after The Festival weekend and at event venues during the festival.

11. Discuss if The Festival t-shirts be sold at cost price in September?
The big question….
Discuss if The Festival t-shirts be sold at cost price in September?

12. For an answer first look for facts in the case study
What month is The Festival in?
What makes the t-shirts special and saleable all year round?
Where can BMF Ltd sell The Festival t-shirt all year round?
How much are t-shirts sold for in September?

13. Discuss if The Festival t-shirts be sold at cost price in September?
Fact 1: The Festival is in August
Fact 2: The t-shirts are a collectors item
Fact 3: BMF Ltd could sell The Festival t-shirts after August on their website
Fact 4: In September the t-shirts are sold for £5 which was the purchase price from the Chinese supplier
Your conclusion therefore is:
No – they should sell them for more – to make no profit at all in not the aim of the business

14. T-shirt production

15. Production method
In previous years, the T-shirts were supplied by a company in China.
The Chinese supplier uses flow production to make standard T-shirts in very large quantities.
Some of these T-shirts are then printed with The Festival design, using batch production.

16. Production methods Flow production is used when making the t-shirts
Batch production is used when printing the t-shirts
What is flow production?
What is batch production?

17. Videos on how t-shirts are made

18. Video on production methods

19. This is where products are made in huge quantities which is mass production
Products are produced on a continuous production line in a factory 24/7
It is a very capital intensive automated system, this means there are lots of machines on the production line
Flow production

20. Batch production
This is the production method used when a business wants to make more than one item at a time
Goods are made in batches, and can be switched over to make something different on the same production line
Bread factory also makes crumpets and tortillas
Denby pottery makes a variety of pottery items and designs on the production line, video here
Furniture makers may produce a run of one design of chair before switching to make something else

21. Economies of scale

22. Quoted prices from Chinese supplier
Why do prices go down as volume goes up?
Quoted prices from Chinese supplier

23. Why do prices go down as volume goes up?
This is called economies of scale or EOS for short
As the Chinese manufacturer makes more t-shirts the average cost of each item goes down
What does the average cost man?
From the spec: analyse and discuss the importance of size of business and scale of production – economies and diseconomies of scale

24. Bigger Means Lower Average costs
EOS
Economies of scale (can we say EOS for short) occur when unit costs or average costs fall as a result as an increase in the level of output of the business.
The more the business makes the cheaper it gets per item to make
ANY EOS question should be about how getting bigger means a firm can lower its average costs.
They are like shoes – you need both to be comfortable.
Bigger
Means
Lower
Average costs

25. Video

26. Types of economies of scale
Production / technical Economies
Purchasing / bulk buying Economies

27. Types of economies of scale
Production / technical Economies
Large scale producers can employ techniques that cannot be used by a small scale producer
A large firm could use computers and technology to replace employees on a production line
Able to transport bulk materials
Mass production means that unit costs are lower
Purchasing / bulk buying Economies
Bulk buying – being able to buy goods in bulk lowers the average unit price

28. Bulk-buying / purchasing economies
As businesses grow they need to order larger quantities of production inputs e.g. t-shirt material
As the order value increases, a business obtains more bargaining power with suppliers
It may be able to obtain discounts and lower prices for the raw materials e.g. cotton thread

29. Production / Technical economies of scale
Businesses with large-scale flow production can use more advanced machinery e.g. The Chinese t-shirt supplier
This may include using mass production techniques, which are a more efficient form of production
A larger firm can also afford to invest more in research and development

30. Video 2

31. Financing the t-shirt costs

32. Financing the t-shirts
In previous years, BMF Ltd has financed the purchasing and selling costs of the T-shirts using an overdraft.
This year it is considering either asking its supplier for trade credit or taking out a bank loan.
What is an overdraft, trade credit, and bank loan?

33. Overdraft
In the graph in Jan and Feb the business would need to borrow from an overdraft until there was an income in March
Some months a business may need extra cash until it has a better month trading.
An overdraft may be organised by the bank which is short term lending of smaller amounts of money
Very high charges and interest rates for an overdraft
Once its arranged on an account a business can dip into it or pay it back as they see fit
If the business goes over this amount the overdraft will be “unauthorised” and the business will be charged heavily

34. Pros and cons of an overdraft to BMF Ltd

35. Pros and cons of an overdraft to BMF Ltd
Easy to arrange with the bank for a few days to cover shortfalls of cash on the cash flow
Very expensive method of finance for BMF Ltd
Short-term finance, not ideal for large amounts or over long periods

36. Trade credit
When one business trades with another they will sometimes need to “buy” goods with trade credit
The seller gives the buyer 30, 60, 90 days to pay
The buyer then has time to sell the goods in their own shop before they have to pay for them
The wholesaler may give the buyer a discount when they use cash instead
Buy Now pay later

37. Pros and cons of trade credit to BMF Ltd

38. Pros and cons of trade credit to BMF Ltd
BMF Ltd will never run out of t-shirts to sell
BMF Ltd can sell the t-shirts first THEN pay the supplier so they won’t have to raise finance for the goods
The t-shirt supplier may charge a higher cost for the t-shirts because of the credit arrangement
This is the first year that BMF Ltd has asked for trade credit so the supplier may say no

39. What is a bank loan?
A bank loan is money lent from a bank to a business on an agreed payment schedule, for example each month
Interest is charged on the money loaned, for example 7% on top of what is owed

40. Pros and cons of a bank loan to BMF Ltd

41. Pros and cons of a bank loan to BMF Ltd
Can borrow just the right amount of money that they need, over the length of time that suits them
No loss of control of the business, or loss of profit in a profit share
Might be hard for BMF to secure the loan – they may need to offer collateral or security in assets to the bank
Have to pay back the money loaned with interest
May have an arrangement fee to pay
If interest rates up the cost of borrowing may also go up

42. Cash flow forecast

43. Cash flow forecast
BMF Ltd has produced a cash flow forecast related to the sales of The Festival T-shirts.
The cash flow forecast is based on the assumption that T-shirts will be made in China.

44. This is the cash flow forecast for BMF Ltd
Its is a business document which plots the possible inflows and outflows to BMF Ltd over the coming year
It is a prediction of the future
It will help BMF Ltd plan their cash needs for the coming year
It does NOT show profit
Notice the cash flow is a forecast of what MIGHT happen in 2017

45. Cash flow forecast is a prediction
Cash flow is a budget – for cash inflows and outflows in a business
Its a forecast because it looks at what might happen to cash in BMF Ltd over the next year

46. Cash Flow
Cash flow is the relationship between the money flowing into a business and the money flowing out
What do you think the cash inflows and cash outflows of BMF Ltd might be?
Cash inflows to BMF Ltd
Cash outflows to BMF Ltd

47. Cash Flow
Cash flow is the relationship between the money flowing into a business and the money flowing out.
Wages
Advertising
Venue
Speaker fees
Policing
Administration
Sales revenue
Shareholder investment
Grant from council
Sponsorship money
These are just ideas, add or remove as you see fit
Cash inflows to BMF Ltd
Cash outflows to BMF Ltd

48. Cash flow forecast uses
Cash flow is day-to-day running of a business budget
Shows where BMF Ltd will have a shortfall of cash (not enough to pay bills)
Allows BMF Ltd to organise short-term cash borrowing to cover the shortfall
Which months might BMF Ltd have a cash shortfall?
Example cash flow forecast

49. What months might BMF Ltd have a cash shortfall?
If you look at the cash flow forecast balance carried forward at the foot of the forecast
In June and July the two months before The Festival is run the business is in negative cash flow
Note negative numbers are shown in brackets not with a minus sign
How can BMF Ltd improve their cash flow in June and July?

50. How to improve BMF Ltd’s cash flow
Reduce waste and economise
Cut costs
Arrange an overdraft
Reduce credit given to customers buying tickets (immediate payment required)
Discount and promote tickets to encourage more revenue
Use a cheap supplier
Organise trade credit with the supplier
Which of these solutions will increase inflows and which will decrease outflow?

51. Inflows and outflows Inflows of cash into the business
Outflows of cash from the business

52. Inflows and outflows Inflows of cash into the business
Arrange an overdraft
Discount and promote tickets to encourage more revenue
Outflows of cash from the business
Reduce waste and economise
Cut costs
Reduce credit given to customers buying tickets (immediate payment required)
Use a cheap supplier
Organise trade credit with the supplier

53. Why trade credit is a genius idea
If BMF Ltd arrange trade credit with the Chinese supplier and get 90 days terms – they could have the t-shirts in June but not pay for them until September – when BMF Ltd have made plenty of revenue through sales to cover the costs of the t-shirts and easily pay the supplier - genius

54. Sales and costs

55. Sales and costs
The table below shows expected sales and costs of the Festival T-shirts in 2017, and the prices that will be charged, if BMF Ltd continue to use the Chinese supplier.

56. How much will the t-shirts cost in total? Hint: Total sales x cost
Costs
How much will the t-shirts cost in total?
Hint: Total sales x cost

57. Cost of the t-shirt from the Chinese supplier
5000 x £5 each =
£25,000

58. How much profit will BMF make in June July and August?
Hint: Profit = TR- TC

59. Profits
June £6,000 - £3,000 = £3,000
July £14,000 - £7,000 = £7,000
August £28,000 - £14,000 = £14,000

60. How much profit will BMF make in September?
What conclusions can you make from this profit figure?

61. Profits September £2,500 - £2,500 = 0 Conclusions:
BMF Ltd should buy 200 less t-shirts this year or sell what is left after The Festival for a small profit at £8
The t-shirts are sought after by collectors which must give them some value, they are not in a rush to sell them – they won’t perish or spoil so they should hold out to sell them for some profit.

63. You will need the cash flow to answer the following questions
This is the cash flow forecast for a business called Bromley Furnishings:

64. Past paper question 1
Taken from the 2015 A293 legacy paper OCR

65. Answers to past paper question 1
(i) Bromley Furnishings needs £2000 to finance the negative cash flow in the month of March.
(ii)
Overdraft
Trade credit
Discount to debtors for early payment

66. You will need this cash flow diagram for the next question

67. Past paper question 2
[6]

68. Answer to past paper question 2

69. Past paper question 3

70. Answer to past paper question 3

71. If BMF Ltd wants to improve their cash flow, should they use the new UK supplier?
If BMF Ltd want to finance their cash shortfall should they arrange an overdraft with the bank?
Should BMF order the same amount of t-shirts next year?

72. No because this will push up their costs and increase the cash outflow
They could arrange an overdraft but this will be expensive, they should perhaps organise trade credit with the Chinese supplier, which won’t cost they anything at all.
No, they seem to have 200 left over at the end of The Festival which they end up selling for no profit

73. Glossary
Flow production; This is the production process where items being manufactured are produced in a constant flow, for example coca cola
Batch production; This is where a few items are manufactured at a time, then the batch is changed to make different items. For example a bakery making sausage rolls, then cooking pizza slices
Overdraft; This is a short term loan of funds by a bank to a business, which might be used to cover a shortfall in cash flow, it is very expensive and should only be used rarely
Trade credit; Trade credit is the practice of a supplier giving goods on the understanding that they will be paid by the customer in 30,60 or 90 days.
Bank loan; Money given by a bank to a business in return for interest payments, around 7% apr
Cash flow forecast; This is the management of cash flowing in and out of a business

74. Resources written by Sarah Hilton for revisionstation.co.uk