Pete's Plumbers Case Study Questions
Read the case study below and answer the questions.
Pete Burnes has his own plumbing company based in Friern Barnet, North London. He set up as a sole trader ten years ago and has been doing well. He employees six staff and has recently moved from doing smaller commercial and residential work to working on larger commercial properties and for businesses in the city. He has decided to turn his business into a private limited company as he feels it offers more security for him and his family.
Pete has been making a healthy profit and has used his retained profit to invest in new machinery. To purchase a new van he had to take out a secured bank loan which he has been paying back at a rate of £100 per week for the last two years. He finds that his overheads are low and after some early hiccups his cash flow is positive.
Pete gained a number of his new clients through word of mouth recommendations. However as he is looking to expand his business he is considering promoting it using other means, he has been speaking to a small agency about doing a series of above the line adverts in local newspapers and on the radio to increase his client base.
As the owner of the business Pete is used to making all the decisions however this has recently changed as he feels that he wants to delegate some of his authority. To this end he is considering employing a full time administration manager who will be able to sort out all the bookings for projects and the paperwork enabling him to be more involved in the projects and operational side of the business.
Pete has had some recent concerns with his business as he is finding that he is being increasingly undercut by other building firms who are feeling the squeeze of competition from an influx of European builders. Some residential building work has also began to slow down as interest rates have increased and people have less money to spend on home improvements and small building projects.
Scroll down for the questions.
Questions
What does “above the line” advertising mean? (2 marks)
2 marks - content
1 mark - makes a reference to the use of different media
2 marks - refers to the fact it is a way of informing the customer about the product
Pete is currently earning £19,800 per month in revenues and paying out £7500 in salaries, £400 for his bank loan, £400 in petrol and £4000 in materials and other costs. What is his profit per month? (3 marks)
marks
Content - 1 mark
Application - 2 marks
Content - 1 mark - identifies the correct figures - 19800 and £12300
or gives a definition of profit, or states the equation for profit = total revenue - total costs
Application
1 mark - puts £19800 and £12300 together
2 marks - correctly calculates profit = 7500
What benefits would there be for Pete to conduct market research into his new commercial clients? (5 marks)
5 marks
Content - 2 marks
Analysis - 3 marks
Content
1 mark - definition of market research or identifies one benefit
2 marks - defines market research and identifies one benefit or identifies two benefits
Analysis
3 marks - good analysis of the benefits
1-2 marks - limited analysis of the benefits
Possible answers include
Market research enables Pete to understand what the customers want and therefore better meet their needs
Market research allows him to assess the competition
Market research will help him meet the needs of his new market
It can help him create a USP.
Pete is feeling the squeeze on his profits analyse the methods that he can use to differentiate his product offering from competition (7 marks)
7 marks
Content - 2 marks
Application - 2 marks
Analysis - 3 marks
Content
1 mark - defines the term differentiation or identifying one way that Pete can differentiate his product
2 marks - identifies two ways can differentiate the product or one way and a definition
Application
1 mark - limited application to the case
2 marks - good application to the case
Analysis
3 marks - good analysis
1-2 marks - limited analysis
Possible answers include
Pete could differentiate his product by giving it a USP to make it stand out from the competition
Pete could offer additional services to his clients e.g. painting and decorating as well as plumbing
Pete could stock products for his clients e.g. dishwashers and sinks and offer a one stop installation service
Pete could differentiate his service by being open longer hours.
Pete is considering employing an advertising agency to create a campaign for him, evaluate the benefits to Pete of employing an advertising agency. (8 marks)
8 marks
Content - 2 marks
Application - 2 marks
Analysis - 2 marks
Evaluation - 2 marks
Content
1 mark - Identifies one benefit
2 marks - Identifies two benefits
Application
1 mark - Limited analysis
2 marks - Good analysis
Analysis
1 mark - Limited analysis
2 marks - Good analysis
Evaluation
1 mark - Limited evaluation
2 marks - Good evaluation
Possible answers
An advertising agency would provide specialist advice that Pete doesn’t have
An advertising agency would have good media relationships
An advertising agency would have past success in conducting campaigns
The use of an agency could increase the success of the campaign
It would be expensive for Pete and may reduce his profits.
Pete experienced cash flow problems when he first set up his company. Define the term cash flow. (2 marks)
Content - 2 marks
1 mark - state that cash flow is money going out and coming in
2 marks - identify that the money coming in is inflows and going out is outflows
Pete is looking at zero budgeting, explain one advantage of zero budgeting to Pete’s company.
3 marks
Content - 1 mark
Application - 2 marks
Content
1 mark - either explains the term zero budgeting or states an advantage
Application
1 mark - Limited application to the case
2 marks - Good application
Possible answers
Zero budgeting is where all departments start with nothing and have to negotiate their budget
Zero budgeting would mean that Pete would have tighter financial control over his business.
Pete took out a loan to buy his van. Analyse the advantages and disadvantages of using an external source of finance for Pete. (6 marks)
6 marks
Content - 2 marks
Application - 2 marks
Analysis - 2 marks
Content
1 mark - Defines the term loan or identifies one advantage / disadvantage
2 marks - Either identifies two advantages / disadvantages or identifies one advantage / disadvantage and gives a definition of the key term
Application
1 mark - Limited application to the case
2 marks - Good application
Analysis
1 mark - Limited analysis
2 marks - Good analysis
Possible Answers
A loan is an external source of finance usually borrowed from a bank which is paid back monthly with interest
An advantage of a loan is that you can choose a fixed interest rate so you know how much the monthly payments will be
A loan may be secured on property if Pete doesn’t have a good credit record
If Pete fails to pay back his loan then the bank can take his property and personal possessions
Pete has to pay back interest on the loan making it more expensive than an internal source of finance.
Pete has been feeling pressure from competition to decrease his prices, evaluate the impact of decreasing prices and advertising on Pete’s profitability (9 marks)
9 marks
Content - 2 marks
Application - 2 marks
Analysis - 2 marks
Evaluation - 3 marks
Content
1 mark - Defines the term profitability or gives one example of how decreasing prices can impact profits
2 marks - Defines key term and one example or two examples
Application
1 mark - Limited application
2 marks - Good application
Analysis
1 mark - Limited application
2 marks - Good application
Evaluation
1-2 marks - Limited evaluation
3 marks - Good evaluation
Possible answers
By lowering prices Pete will be decreasing his profit margin
Profit = total revenue - total costs
If Pete lowered his prices he may increase his business therefore earning more revenue and overall profit
The impact of a decrease in price would depend on the elasticity of demand for Pete’s service
As Pete is providing an essential service you would expect elasticity of demand to be inelastic therefore by lowering price he will not increase revenue as much.
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