EC Coffee is a small business operating near a railway station. Azeem, its owner, is reviewing external factors before selecting an option to open later eac...
Question 1 Report
EC Coffee is a small business operating near a railway station. Azeem, its owner, is reviewing external factors before selecting an option to open later each evening. Inflation has increased the prices paid for milk, coffee beans and electricity. In the previous year, EC Coffee's annual electricity bill was £18 000. The supplier has told Azeem that the bill will rise by 15% next year. Some commuters have also reduced their spending on premium drinks because their household bills have increased. Azeem wants to protect cash flow and profit, but he does not want to lose regular customers to other cafés in the market.
(a) Define inflation. [2]
(b) Calculate the expected annual electricity bill for EC Coffee next year. Show your working. [3]
(c) State two external factors, other than inflation, that could affect EC Coffee. [2]
(d) Analyse how rising inflation could affect the profit of EC Coffee. [5]
(e) Discuss whether opening later each evening is the best option for Azeem. [4]
Answer Details
(a) Inflation is a sustained rise in the general level of prices, reducing the purchasing power of money. [2 marks]
(b) Increase in electricity bill:
\[15\%\text{ of }£18,000=£2,700\]
\[£18,000+£2,700=£20,700\]
The expected annual bill is £20,700. [3 marks]
(c) Two external factors are, for example, changes in interest rates and a competitor opening nearby. Consumer tastes, employment law, technological change and exchange-rate changes are also valid. [2 marks]
(d) Inflation raises ingredient and electricity costs, increasing total costs. If EC Coffee keeps prices unchanged, profit margin per drink falls. If it raises prices, customers whose real incomes have fallen may buy fewer premium drinks. Lower sales revenue then reduces total profit and may leave less cash for wages, marketing or expansion. [5 marks]
(e) Opening later may attract commuters and increase sales revenue. However, staffing, lighting and security costs may increase, while evening demand is uncertain because customers are cutting spending. A sensible response is to trial later opening on selected busy days before committing permanently. [4 marks]
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