‘A’ LEVEL MANAGEMENT OF
BUSINESS QUESTIONS AND
ANSWERS
1ST EDITION
TURN- UP COLLEGE
Page 2
PUBLICATION STAFF
Publishing Director
Sam Madzingira
Copy Proof Reader
Curriculum Development Unit Zimbabwe
General Editor
C.K Mhuri
Contributors
Mr. E. Madzingira, Mr. Tadu
Text Printers
Chiedza Muchena, Crystabell Mudzingwa, Artwell Ncube
Publisher
Turn-Up College Zimbabwe
Office 28, N0. 131 Trade Centre Building
13th /14th AV Bulawayo
ISBN 978 0 7974 4553 6
Turn -Up College ‘A’ Level Management revision book
Page 3
Copyright © by Turn-Up College
First printed 2007
Re-printed 2008; 2010, 2011
All rights reserved; Printed in Zimbabwe, no part of this book may be reproduced, stored
in a retrieval system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without prior written permission from the
publisher or a license permitting restricted copying in the Zimbabwean Copyright Act.
This study material has been provided in good faith. It is illegal to reproduce it. Should it
be reproduced, we will take legal action against that person and anyone else connected
thereto. For further information contact Turn -Up College 28 Trade Centre, 131 Fort
Street, between 13 and 14th Street, P.O. Box 2759, Bulawayo.
Turn -Up College ‘A’ Level Management revision book
Page 4
Foreword
I had the opportunity of discussing this book with several educationists, teachers and
students when it was in the process of making, and I felt at once that it was likely to
prove unusually useful. It gathers together a great deal of information which must
otherwise be delved for in many books and all this is arranged judiciously and on
practical lines. The authors’ outlook might be described as one of liberal commonsense
clarity, simplicity of expression, and examination - skills - focused. Our study packs are
there to offer a canvas for Zimbabweans to showcase their best ideas to help transform
the country into a knowledge- based society where citizens are free to express their
creativity, knowledge and ingenuity. We have set challenging objectives, but we believe
that only by striving to achieve the highest, can we elevate ourselves above the elements
which tend to hold our country back. However, if your see anything where you feel we
may have failed to deliver, and where we may have failed on issues such as content,
depth, relevance and usability, please let us know by using the contact numbers
(09) 61226/61247, 0773 247 358; or Box 2759 Byo; email at turnupcollege@yahoo.com.
We are here to listen and improve.
In my days as a teacher and as a student I should have welcomed this book warmly
because:
(i)
It approaches the syllabus wholistically
(ii)
It uses simplified expression
(iii)
It has an in-depth coverage of content
(iv)
It provides examination skills at the earliest stage of studying
(v)
It provides local, international and commonplace examples; illustrations and case
studies.
(vi)
It provides intelligent questions and answers of the examination type on a chapter
by chapter basis
(vii) Last but not least, it provides a clear platform for self-evaluation as one prepares
for the final examinations.
I have no doubt that learners and educators would as well find this book to be the best. It
is certainly a manual for success. Every one would find it worthy to have his own copy. I
should not be surprised if the Turn-up College Study Pack became the best resource in
school and out of school.
Sam Madzingira
Director
Turn -Up College ‘A’ Level Management revision book
Page 5
Table of contents
Chapter
Page
‘A’ LEVEL MANAGEMENT OF BUSINESS QUESTIONS AND
ANSWERS ......................................................... 1
PUBLICATION STAFF ............................................ 2
Acknowledgements ......................................................... 7
CHAPTER 1 ........................................................ 8
Business and its Environment. .................................... 8
1. Structured Questions ................................................. 8
Essay Questions ..........................................................15
CHAPTER 2 .......................................................25
MARKETING ......................................................25
Structured Questions ....................................................25
2. Essay Questions ......................................................29
CHAPTER 3 .......................................................40
People In Organization ...........................................40
3. Structured Questions ................................................40
Essay Questions ..........................................................48
CHAPTER 4 .......................................................55
PRODUCTION ....................................................55
4. Structured Questions ................................................55
5. Essay Questions ......................................................60
CHAPTER 5 .......................................................71
Finance in Business ...............................................71
6. Structured Questions ................................................71
9. Essay Questions ......................................................76
CHAPTER 6 .......................................................89
Accounting .........................................................89
7. Structured Questions ................................................89
8. Essay Questions ......................................................92
CHAPTER 7 ..................................................... 100
INFORMATION FOR DECISION MAKING .................. 100
Structured Questions .................................................. 100
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9. Essay Questions .................................................... 106
CHAPTER 8 ..................................................... 119
DATA RESPONSE QUESTIONS .............................. 119
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
DATA
DATA
DATA
DATA
DATA
DATA
DATA
DATA
DATA
DATA
RESPONSE
RESPONSE
RESPONSE
RESPONSE
RESPONSE
RESPONSE
RESPONSE
RESPONSE
RESPONSE
RESPONSE
QUESTIONS .................................. 119
QUESTIONS .................................. 121
QUESTIONS .................................. 123
QUESTIONS .................................. 125
QUESTIONS .................................. 126
QUESTIONS .................................. 128
QUESTIONS .................................. 130
QUESTIONS .................................. 132
QUESTIONS .................................. 134
QUESTIONS .................................. 135
Turn -Up College ‘A’ Level Management revision book
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Acknowledgements
The Director of Turn- Up College would like to express his gratitude to members of
Turn-Up Enterprises and other outsiders, whom through their effort, made the publication
of this study pack a success. Also not to be forgotten is my secretaries Chiedza Prisca
Muchena and Crystabell Mudzingwa who typed the manuscript. My gratitude also goes
to the editorial team who attempted to perfect the module. I also extend my thankfulness
to all the writers whose resources have been used as a basis for the production of this
module.
We have taken every effort to try and get hold of the copyright holders of any
information we have reproduced without acknowledgement. We will appreciate the help
from anyone to enable us contact the copyright holders whose permission we have not yet
obtained.
S. Madzingira
Turn -Up College ‘A’ Level Management revision book
Page 8
CHAPTER 1
Business and its Environment.
1. Structured Questions
1.
Despite the advantages of large firms, many small businesses are very
successful. Give three reasons that justify this statement.
[6]
Answer
Reasons might include: Personalized services
Tailor- made products
Convenient opening times
Closeness / proximity to customers
Subcontracted by large firms etc.
2.
(a)
(b)
Explain the term “de- integration.”
Why do firm “de- integrate.”
[3]
[4]
Answer
(a)
De- integration refers to the process of a firm or group reducing the scope of
its activities. It may take different forms such as de-merging, divestment,
contracting – out and management buyouts.
Reasons for de-integration
Raising finance
Saving management time and expertise
Increased efficiency
Defensive reasons for example to avoid take over as a result of poor
performance.
(b)
-
Suggest two possible reasons for the government’s privatization policy.
3.
[4]
Answer
-
4.
To relieve the government from financing the parastatals.
To improve efficiency
To empower the citizens of the country economically etc.
(a)
Distinguish between the public sector and private sector of an economy.
[2]
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(b)
Explain why some goods and services are provided by the public sector in
your country.
[3]
Answer
(a)
Public sector – government ownership and aims at improving social welfare.
Private sector – individual ownership and aims at maximizing profit.
(b)
Reasons might include: -
To aid affordability to every citizen
For strategic reasons.
To ensure continued supply of the product.
To ensure continued finance as government is the only body that fund
industries like ZESA etc.
(a)
Define diseconomies of scale.
Explain two different types of economies of scale from which a large retailer
might benefit.
[3]
5.
(b)
[2]
Answer
(a)
Diseconomies of scale are an increase in the cost per unit as a result of
increased scale of production.
Managerial economies of scale, technical economies of scale financial
economies of scale marketing economies of scale. Risk bearing economies of
scale.
(b)
6.
State and explain three ways in which governments could encourage
businesses to invest.
[6]
Answer
Ways might include:
Tax holidays
Subsidies
Building factory shells
Providing land at affordable rent
Finding markets by farming links with other countries.
7.
How might prospects of small businesses be affected by a very low level of
economic growth?
[4]
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Answer
-
Low economic growth results in reduced business activity.
Demand is reduced
Reduced incomes of the people
Reduced employment levels
Reduced availability of inputs. Etc.
8. How might a fall in the external value of a country’s currency cause inflation?
[5]
Answer
-
9.
A reduced value of a country’s currency results in exports being cheaper while
imports become expensive. Imported raw materials become expensive
leading- to increased production costs. This leads to Cost- Push – Inflation.
(a)
(b)
Define the term “free market economy.”
[2]
State three legal controls which affect the way in which business operates.
[3]
Answer
(a)
A type of economy where individuals can own resources, and price
mechanism determines what to produce and for whom to produce.
Legal controls might include:
- Restriction on share capital to be raised by a company
- Restrictions on location
- Restriction on the levels of pollution.
- Restriction on number of hours of worked per day for example 8 hours.
(b)
Explain why a producer of televisions might be worried by the possibility of
an increase in the rate of interest.
[5]
10.
Answer
(i)
(ii)
(iii)
Interest rates reduce borrowing, as cost of borrowing is high. This leads to
increased cost of production.
Customers cannot but, TV on credit, as interest will increase the price finally
paid.
TV producer cannot acquire inputs on credit from suppliers as interest charges
are too high
11 a) Why do firms need objectives? [4]
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a- They help define an organisation and its environment thus justifying their
existence to the government, customers and society at large.
- They help in coordinating decisions and decision makers.
- They provide standards for assessing organisational performance.
- Help to reduce conflicts in decision-making if all employees know the objectives.
b- State and explain three ways in which the objectives of a private enterprise might
differ from those of a public sector enterprise.
[4]
A- Private sector enterprises is profit oriented i.e. high sales volume and lower unit
costs of production.
- Public enterprise provides goods and services to improve the society’s standard of
living and quality of life.
- Private sector enterprises are competitive and have to be market oriented and all
policies aim to satisfy the consumers.
- In public enterprises, social responsibility figures prominently.
12 a) Explain two possible threats resulting from switching from a central planning to
an economy based on market forces to manufacturers.
A- Protection from external competition will no longer exist, market forces eliminate
the barriers for other more efficient producers who can charge lower prices for
their products.
- Government’s subsidies and non-tariff protection will no longer exist so firms
find it difficult to sell at low prices.
- Share of the market is reduced as many other competitors are free to enter the
market and provide goods.
b. Explain two possible opportunities resulting from this change:
- In order to compete efficiently there would be greater motivation to streamline
production and learn new manufacturing techniques and management methods to
contribute to improve overall productivity, efficiency and reduce cost.
- There are greater opportunities to enter into joint ventures and diversifying
markets at lesser risk and greater scope for expansion in production.
13 State four major objectives of the state. Give two examples of situations in which
one or more of these objectives might conflict with each other.
A (i)
To ensure economic growth.
(ii)
To keep inflation low and under control.
(iii)
To ensure full employment to keep unemployment between 2-5%.
(iv)
Promote social goals and society’s welfare through provision of essential
social services.
To maintain a stable price level, the state may set high interest rates in order to cut
consumption expenditure; however, high interest rates would increase business
costs thus reducing business profits and economic growth.
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Providing social services cost tax payers’ money and this could be in form of
higher personal or corporate taxes. High taxes would lower the disposable income
and lower standards of living as well as business costs increasing.
14 Why would a government wish to control the activities of a multinational firm?
[4]
A- To minimise costs imposed by the MNC in areas like balance of payments costs,
industrial dominance and technological dependence.
- To ensure that foreign investors bring with them the advanced technology and
market that is conducive to growth.
- To ensure the provision of Industrial experience and managerial expertise and
training of local entrepreneurial talent.
- To ensure that there is no over exploitation of natural resources and labour.
15
(i)
A.
-
Explain why a firm might wish to integrate:
Vertically with another firm? [2]
Vertical integration can be forward/backward
There is better control of suppliers’ distributors and possible cost savings.
Forward expansion could result in the addition of ne markets for products.
-
Horizontally with another firms? [2]
Concentration of strengths to the firm.
Taking advantage of economies of scale.
The ability to act more quickly.
Exploitation of a possible market niche.
(ii)
16 a) Give two examples of government intervention in industry which may influence
business decision making. [2]
- Control of monetary and fiscal policies to regulate business growth through
financial and tax incentives, grants in training, research and development, low
interest rates.
- Direct government intervention in industry- through provision of direct products
making other firms being unable to compete.
- Price and incomes policies have impacted on costs of production.
b)
A -
Why might the owner of a small business not wish to expand his business? [4]
Smaller number of employees provide for easier co-ordination and control of
efforts towards the achievement of organizational goals.
Government regulations for small enterprises are less stringent and more flexible.
There is greater ability for the owner to control the operations and activities of a
small enterprise.
There is simplicity of operations due to lack of many departments or a
bureaucratic system.
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-
Closer contact with customer can he easily established thus responding quickly to
customer needs.
Greater flexibility in operation.
17 A business analyst wishes to compare the size of two manufacturing companies.
What are the methods of comparisons used by the analyst? [4]
A- Physical assets owned.
- Size of staff employed.
- Financial capitalization.
- Market share
- Growth in financial profit or markets.
b. Explains three effects on ageing population could have on a manufacturer of
consumer goods.
A. Change in purchasing power –majority of ageing population have retired and
depending on pension or children financially.
- Change in taste- a manufacturer need to develop different product specifications
to suit different markets.
- Change in the type of products needed.
18 a) What is franchise? [2]
A- Is a form of licensing by which the owner/supplier of a product, service method
obtains distribution through affiliated dealers.
- It gives the franchisee the right to use, distribute or market the franchise product
or service by using the franchisor’ name, reputation and selling techniques.
b)
[3]
A-
Why would a firm prefer to sell a franchise rather than conduct business directly?
-
It allows opening a business under the beneficial umbrella of an established well
publicised company image.
The layout and décor, inventory, equipment and systems, all have been evolved
and proven over time.
Consumers re already familiar with the chain and its reputation, this head start
gives the firm immediate business on opening day.
The franchisee obtains capital and necessary training in operations.
19 a) Why might a conflict of objectives exist between the management and workforces
of a company? [3]
b) Suggests two ways of minimising this conflict [2]
A a) Objective of the management centres towards the economic betterment of the
company i.e. economic performance measured by profit and loss figures
- Workforce’s objectives centres on betterment of the self i.e. better wages, training
and working conditions.
- Conflict arises in pursing these objectives, e.g a production manager may require
workers to work more overtime in order to meet the increased orders.
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-
b) -
Workers are unwilling to work so much overtime since it decreases the time
available for their social activities and intruding in their private time.
Production manager works towards improving the economic performance of the
company while the workers sought to satisfy their social needs.
Enforce greater management-workforce formal and informal communication and
increase participation of the workforce in decision making.
Recognise the source and nature of the conflicts
Seek mutual understanding and try to reach a compromise
Managers should participate in formal gatherings and becomes a member of the
workforce to find out the source of dissatisfaction.
20 a) Why might the government of your country encourage firms who wish to export?
[4]
A.
It earns a country foreign currency and enables importation
Exporting enables firms to enlarge production and enjoy economics large
scale.
Exporting is a means of geographic diversification
Poor demand dramatically can be compensated by high demand in
overseas markets
Variety of products are brought into a country
Better relations with trading partners.
b.
State three ways which in which such encouragement might be given.
A - Establishing cordial international diplomatic relations is important in encouraging
export/ many export bureaucracies and procedures can be simplified and made
more convenient.
- Government can grant export subsidies- to reduce the real production cost and
more competitive prices on the world market.
- Government gathers and discriminates information to keep producers informed to
the threats and opportunities overseas.
21 Why might an organisation experience a reduction in profitability following
introduction of information technology?
A. This may be so in short run as overhead costs increase.
- Increase in overheads is caused by consultancy costs incurred in the process
deciding which system to purchase, costs of installation of the system, costs of
training existing staff to operate the system or of employing more highly skilled
staff.
- Cost of maintenance of the system and its constant updating.
- Resulting costs of running a manual system as a back up in case of breakdowns.
- In the longer term, advantages are coming from installation of IT will greatly
offset some of these costs e.g efficient data processing, communication systems,
sales and marketing procedures both increase sales revenue and reduce overheads
in terms of storage and administrative buildings and staff.
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Essay Questions
1.
Assume that Clinton Ltd is a multi – national company that wants to
establish a branch in your country.
Evaluate the advantages and
disadvantages to Clinton locating the branch in your country.
[25]
Answer
Advantages may include:
·
Availability of skilled labour
·
Availability of good and well-developed infrastructure.
·
Potential and committed workers in Zimbabwe.
·
Predictable climatic conditions .etc.
Disadvantages may include:
·
Economic instability with inflation above 1000%.
·
Government’s policy of indigenisation.
·
Population dwindling as people move to other countries.
·
Departure of skilled labour to neighbouring countries.
·
Currency (i.e. local currency losing value.
·
Strict government intervention etc.
These points should be well developed with a lot of amplification.
2.
Discuss the external economic constraints that might limit the future of
businesses in your country.
[25]
Economic constraints may include:
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·
High inflation rate – business people cannot borrow as creditors or lenders of
finance are reluctant to lend.
·
Unpredictable exchange rates, when a currency continuously loses value, foreign
markets tend to shun the products, it becomes expensive to import.
·
High unemployment reduces demand for business products.
·
Government control on prices makes it difficult for businesses to charge a price that
will bring a reasonable profit.
·
Shortages of raw materials and of poor quality may make businesses produce
products of poor quality and poor demand for products.
3.
(a)
Explain, giving examples the following terms:
(i)
Opportunity Cost
(ii)
Social Costs.
[10]
(b)
Discuss whether businesses should continue to manufacture products
from the factory that pollutes the local environment.
[15]
Answer
(a)
(i)
(ii)
b)
Opportunity Cost- it is the cost in terms of the next best-foregone
alternative. E.g. if the government is deciding between opening a new
factory and putting up a recreational facility in a certain area, the
opportunity cost of opening a factory is the benefit that would have been
gained by a recreational – facility that is foregone. Putting up a
recreational facility makes the community to forego the business that a
factory could have brought.
Social Costs – combination of private costs and external costs. E.g.
putting up a factory brings pollution to the society plus private costs that
include wages, fuel, and building material. Private costs are borne by the
businessperson while external costs are costs to society that emanate from
the business person’s activities e.g. pollution, congestion.
Answers should acknowledge the need to control pollution and at the same time
recognize that businesses are essential for a county’s success. Therefore, answers
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Page 17
should give reasons why businesses should continue to operate and suggest
strategies of dealing with pollution.
Reasons why businesses should continue operating
· To create employment.
· To contribute to the economic growth of the country. GDP.
· To stimulate the economic activity of the country.
· To reduce dependency on imported goods.
· To attract more investment and to reward entrepreneurs for their talent.
· However, companies should try to reduce levels of pollution so as to attract more
customers.
Dealing with pollution
·
·
·
4.
As a way of ploughing back to the community that gives them business.
Businesses can employ advanced equipment that businesses can invest a lot of
funds into controlling pollution.
Government can also increase taxes on pollution. For example carbon tax.
To what extent should businesses take the interest of stakeholders into account
when making decisions?
[25]
Answer
Answers could include:
· Explanation of what stakeholders are and who they are for a chosen business for
example a shoe manufacturer – stakeholders are customers, community,
competitors, suppliers government etc.
Evidence of some companies not considering stakeholders interest
·
·
·
·
·
Increase in prices.
Merging to reduce competition.
Staff dissatisfaction.
Community fear over the amounts of pollution from firms.
Impact on public image and reputation and eventually on long term profits?
·
On the other hand, the business is in the private sector and aiming to make (shortterm) profits so should it be concerned with stakeholder’s interests?
Evaluation might include:
Short-term profits might be increased by focusing just on the interest of shareholders, but
these decisions could damage the image / reputation of the business and lead to
stakeholders opposition and this might reduce profits in the long term.
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Assess conflicts between objectives of stakeholders.
5.
Discuss the possible advantages and disadvantages to a shoe manufacturing
company; taking over another shoe manufacturing firm.
[25]
Answer
Answers should show a sound judgment by considering both advantages and
disadvantages.
Definition: Horizontal integration
Advantages
· Scope for economic of scale – give examples, bulk buying at low cost.
· Could close one site and raise capital leading to new site having better buildings.
· Reduces competition – scope to raise prices.
· Synergy – two organizations coming together may generate more ideas and mutual
benefits.
Disadvantages
· Diseconomies of scale – communication already poor.
· Problems if operating on both sites.
· Co-ordination problems.
· Conflicts of interest between management.
· Human problems for example which staff to make redundant. Will the staff from
one company have authority over others.
· Cost of purchases and cost of rationalization / reorganization.
· Loss of control with new partner.
6
(a)
(b)
Explain any three elements of the business external environment. [5]
Discuss how technology change might affect u businesses in your
country.
[20]
Answer
a)
Answers should choose any of the following elements and briefly explain them;
(i)
Physical
(ii)
Economical
(iii)
Social
(iv)
Technological
(v)
Legal
(vi)
Political etc.
b)
Answers might; include:
A discussion of how technological; change might affect business such as:
·
·
Recruitment of new staff that has knowledge of how technology is used.
Training and retraining of staff to update handling skills.
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·
·
·
·
Retrenchment of staff as technology replaces need for labour.
Change in the quality of goods hence, increased market share.
Increased efficiency leading to reduced prices.
Improved goodwill as a result of updated technology for example quality
7
(a)
(b)
Explain the advantages and disadvantages of being a small business
in a clothing industry.
[10]
Evaluate the view that” government should not support small
businesses”.
[15]
Answer
a) Advantages of being a small business.
· Clothes can be made to customer specification due to customer contact.
· Personalized services.
· Customers feel they are given attention.
· Flexibility.
Disadvantages.
· Too much competition from larger manufacturers.
· Reduced efficiency.
· Loss of economies of scale.
· Difficulties in raising funds.
· Difficulties in employing highly skilled staff.
b)
Government should support small firms because.
· Small firms contribute to the gross national product of the country.
· Small firms absorb idle resources.
· Small firms contribute to the employment levels of the country.
However,
· Small firms do not attain economies of scale.
· Small firms do not have the capacity to withstand competition.
· Small firms tend to remain small so as to enjoy government aid.
8
(a)
b)
Discuss how the business objectives might differ from those of the
state.
[10]
Evaluate how businesses might respond to fluctuations in exchange
rates.
[15]
Answer
·
·
Businesses might be out to maximize profits while the state is out to increase social
welfare of the people.
Businesses might be concerned with growth and as a result increase pollution while
government may be concerned with reducing pollution.
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·
·
Businesses may be worried with increasing chances of survival while government
is concerned with increasing availability and affordability of goods.
Businesses may be worried about reducing competition by forming some mergers
while government will increase competition by coming up with anti – monopoly
policies.
Answers might consider that:
b)
An appreciation or revaluation of a county’s currency compared to the value of other
courtiers currencies.
Effects
Exports become expensive and hence, businesses will find it difficult to penetrate foreign
markets. Demand for the firm’s products will be reduced.
Imports become cheaper and local businesses will suffer when demand shifts to imported
goods.
Depreciation / devaluation of a currency. This is when the currency loses value against
other countries’ currencies.
Effects
Exports become cheaper and hence, businesses gain from increased demand.
Imports become expensive and hence demand shifts to local products.
Therefore, depending on the elasticity of demand for exports and imports fluctuations in
exchange rate benefit businesses.
9.
(a)
(b)
Analyse the advantages and disadvantages for private limited
company of converting to a public limited company.
[10]
Discuss why public limited companies find it difficult to satisfy the
interests of both shareholders and other stakeholders in the business.
[15]
Answer
Advantages might include:
· Increased chances of raising funds through sale of shares to the public.
· Increased chances of managerial economies, bulk-buying economies etc.
· Increased efficiency.
Disadvantages might include.
· Accounts are published exposing information to competitors.
· Too much formality in the formation of the public limited company.
· Risks of takeover are increased.
· Decision making takes longer bureaucracy
· Dilution of equity.
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b)
Answers should choose at least three stakeholders and show how each
stakeholder’s interest conflicts with shareholders’ interest for example government
and shareholders. Shareholders want higher profits to be paid out as dividends
while the government requires profits as taxes.
Shareholders and suppliers
Suppliers want to increase cost of material and to be paid promptly while shareholders
want to extend creditors payments period to improve liquidity.
Shareholders and customers
Customers require a cut in the price to aid affordability but shareholders require prices to
be increased to increase profits and dividends.
10.
Examine the factors a multinational clothing manufacturer might consider
when deciding where too locate a new factory your country.
[25]
Answer
Answers should highlight the strength and weaknesses of the writer’s country as an
investment destination.
Strengths might include:
· Availability of skilled and hard –working workforce.
· Availability of raw materials to make clothes.
· Government policy that attracts or supports foreign investors. For example tax
holidays.
· Absence of a national dress code that can discourage customers from buying
foreign clothes.
· Flexibility of the Zimbabwean nation when it comes to clothing.
Disadvantages
· Economic hardships facing the country. For example inflation BOP deficit.
· Not too many people can afford clothing. Since it is a developing country.
· Currency fluctuations rather too high.
· Competition is already too high
11 a) What do you understand by “free market enterprise.”? [10]
A
a)
Requires a discussion of the concept of free market enterprise and
its .
underlying principles.
- It is an economic system in which the decisions of individual households and
firms exert major influence over the allocation of resources.
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-
Price mechanism decides what to produce through the forces of demand and
supply.
Consumer preferences and relative difficulty of producing the goods or
production costs determines the allocation of society’s resources.
Price system apportions raw materials thus more inputs to the most productive
(profitable) firms/Industries.
Price system carries out the distribution process by rationing goods on the basis of
preference and relative incomes.
b) Under what circumstances do you think that governments should provide financial
assistance to business? [15]
A - If they contribute to the economy’s growth.
- Financial assistance promotes project of strategic value to industrial development.
- Financial schemes armed at encouraging further development and technical
improvement of the operations of the small companies.
- To encourage research and development.
- Provide technical innovation and training of local Research and Development
personnel.
- To encourage training and upgrading of workforce to increase their productivity
and competitiveness.
- Funds are provided to encourage upgrading, mechanisation automation or
computerisation of operations in local firms.
12a)
A a)
-
What is the importance of profits in a business? [10]
Part (a)should discuss the use of profits as a measure of success and (b) should
show that profit maximization is not valid in the real business world considering
other objectives of the business.
Profit is of prime importance because only from profit can come the financial
resources to support other socially inclined objectives.
It provides a measure of how efficiently the firm’s resources are being used or
relative success of the firm against others in the same industry.
Performance of the top management of a firm is assessed by the profit earned and
measured against capital employed.
It is a source of dividends for the shareholders or owners and provides the revenue
to pursue objectives.
Profits provide internally generated capital for the expansion of the business and it
is not expensive.
Profit ensures job security and thus high morale for the workforce.
Profits can make the firm to survive.
Pursuit of profit provides an incentive to management to succeed and a spur to
greater effort.
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b) “All firms seek to maximise profit.” How valid is this statement in line with business
behaviour? [15]
A Since businesses operate in a world of scarce resources, the economic efficiency of
business is a matter of top priority and should be the sole mission of business.
- However, in real life business have shown that profitability is not and cannot be
the sole criterion of a firm and its management.
- Businesses have other goals like;
- Sales- customer creation and satisfaction.
- Social objectives- to support not only higher education but also reduction of air
and water pollution.
- Growth objectives- expressed in terms of increased profits, sales, market share or
production.
13 Evaluate the influences on businesses of Government economic policy. [25]
The answer should discuss the fiscal policies implemented by the government and its
effects on business.
A fiscal policy can influence private consumption and investment by changing the
type of taxes levied.
Indirect to direct taxes will increase consumption and an movement from taxes on
companies would increase investment and improved profitability.
Government can stimulate savings through the rate of interest and income
tax concessions.
Government can stimulate private investment by giving subsidies,
generous investment or depreciation allowances in tax assessment.
Spending can be influenced by budget policy- reducing taxation will
increase disposable income.
14 a) In what ways can the use of tariffs by a government to reduce the level of imports
harm or help domestic producers? [15]
b)
What are non-tariff barriers and why have governments been trying to reduce
them in recent years? [10]
The answer for (a) requires a discussion of the ways in which the level of tariffs
may help or harm in giving undue rotation against foreign competition (b)
requires an explanation of the term and its components and also a comment on
agreements in recent years arguing for free trade.
A a) Tariffs make imported goods to be expensive and thus limit those items which can
be imported profitably.
- They help domestic producers to compete with foreign manufacturers and their
import especially of the industry is in its early stages of development.
- Tariffs on imports give domestic producers time to learn efficient methods of
production
- Tariffs protect domestic producers from foreign competitors and give time for its
domestic labour force to acquire the necessary technology skills.
- It prevents dumping-where foreign producers export their products and charge
much lower price than those changed in their home country, thus a tariff will
make them expensive. However, granting protection to infant industries may
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b)
make the infant industries to demand retention of their protected status even when
they are now able to meet foreign competition.
The incentive to innovate and be more productive will be greatly reduced when
the domestic market is protected from efficient foreign market.
Permanent tariff barriers would be required to protect a weak industry that will
never be able to compete on an equal footing in the international market.
Non-tariff barriers
Quotas- fix the minimum amount of a commodity to be imported.
Embargoes total ban against the imports of the goods.
Exchange control- restrictions on foreign exchanges and its convertibility.
Custom procedures- can be stringent to make imports of foreign products
difficult.
Industrial standards- products that do not meet the set standards of quality
and production will be banned from entering the country.
General Agreement on Trade and Tariffs (GATT) argues for free trade.
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CHAPTER 2
MARKETING
Structured Questions
1.
Explain three ways in which the Production Department is influenced by the
activity of the Marketing.
Marketing Department will detect:
2.
-
Quality of raw materials to be used
-
Quality of product to be produced for each segment.
-
Level of output for each segment
-
Timing of production for each segment
Demand for a particular product is price inelastic. What is the significance of
this for a firm when considering a change in the price of its product?
[5]
Answer
When price is inelastic, an increase in price will not affect demand. Demand does not
change as a result of a change in price.
Significance
The firm should increase price because this will result in an increase in revenue.
A decrease in price should be discouraged, as it will reduce revenue.
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3.
(a)
(b)
What are the elements of a product’s marketing mix?
Draw a typical product life cycle.
(a)
2.1.1 Answer
Price, product, promotion and place.
(c)
Typical Product Life Cycle.
[2]
[2]
maturity
growth
Sales
&
profit
Introduction
decline
sales
profit
Time
4.
Under what circumstances might a “full cost mark up” pricing method be
the most appropriate one for a marketing manager to use?
[5]
Answer
-
When competition is very low.
When it is easy to apportion fixed cost too products.
When a firm is producing a single product.
Points to be explained to maximum marks.
5.
Briefly distinguish between niche and mass marketing.
[3]
Answer
Mass marketing is undifferentiated marketing where product, are designed with mass
appeal and promoted to all types of consumer.
Niche marketing is designing product to appeal to consumer with certain characteristic
in section of the total market.
6.
(a)
(b)
Define the term “market share”.
Explain any two factors that influence pricing decisions.
Answer
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(a)
Market share – percentage of total number of customer served by a company.
(b)
Factors affecting pricing decisions:
Cost of production
Availability of substitutes
Nature of product
Customer’s perception
Level of competition.
-
7. Outline how the market for soft drinks might be segmented in your country. [5]
Answer
Ways of segmenting might include:
Segmenting by:
(i)
Income
(ii)
Geography
(iii)
Age
(iv)
Personality
(v)
Use
(vi)
Occupation
8.
Explain the term “market penetration”
[4]
Answer
It is a marketing policy, where the product is sold at low price. This approach aims for
high volume and high market share. Market penetration pricing policy is the opposite of
the skimming pricing policy.
9.
A soft drink manufacture based in America is planning to establish a factory
in your country. Suggest an appropriate marketing mix the manufacturer
should adopt.
[6]
Answer
Marketing Mix elements;
Product – firm needs to research if soft drink is suitable for US,
Distribution – need to find agent or distributor perhaps deal direct with major retailers
could open own retail outlets.
Price – competition policy, determined by distribution channel.
Promotion – way to attract trade mainly such as credit, extra products, sale or return.
May involve consumer advertising and promotion.
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10.
Account for the shape and position of the sales and profit lines in a product
life cycle.
Answer
Introduction
Sales are low because the product is not yet known.
Profits are negative because of start up costs.
Growth
Sales begin to increase because product is now known.
Profits begin to be positive because sales, are increasing.
Maturity
Sales and profits level off because of competitors.
Decline – sales and profits decline. Profits decline because of rising Sale effort.
11
A firm is “production oriented.” And another is consumer oriented.” How would
you exert the marketing strategies of the two firms to differ?
[5]
A. A firm that is production oriented is one that is organised on the principles of
specialisation and would believe in mass production of goods to achieve
economies of scale.
- Consumers have little choice and management stress to improve production
efficiency and to lower prices in the belief that profiles result from lower
manufacturing costs.
A- Consumer oriented firm would focus primarily on satisfying consumers’ needs.
The firm identifies and offers products that will satisfy customers. Marketing
research should identify customers’ needs and the research and development
departments should produce a product that will meet these needs so that the
product will sell itself.
12
How useful are the concepts of demand and supply to a firm? [4]
A- It helps firms to set prices e.g setting a low price will mean a higher possible
turnover in terms of customers.
- A firm may decide to set high prices to lure lesser but more discerning customers.
- Concept of supply can help firms to select a certain market for example to cater
for the mass market or to a selected niche.
- The supply factor may be determined by the number of restaurants serving a
particular group of customers and the firm’s intention to compete in which
market.
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13 a) What is meant by market segmentation? [2]
A- It is the process of subdividing a large undefined market into smaller groups of
consumers with similar needs, characteristics or behaviour. It enables marketers to
allocate marketing resources to satisfy the needs of a well defined group of
consumers.
b)
A-
Why is market segmentation important to the success of a firm? [3]
It helps to provide guidelines for product development.
Provides guidelines for developing separate marketing campaigns to separate
target groups.
It guides the product’s positioning relative to a consumer needs and competition
Improves the allocation of marketing resources
Permits a better identification of marketing opportunity.
Q14 How might price elasticity of demand be important to a firm attempting to
increase its market share? [4]
A- It determines whether pricing policies can be changed effectively to increase
market share.
- If products are price inelastic, decrease in prices do not increase the demand by a
great amount.
- For products which are price elastic, a decrease in price even though marginal
could result in substantial increase in demand and sales thus increasing market
share.
15 a) What is price discrimination? [2]
A- It refers to the sale by a single firm of the same commodity to different buyers at
two or more different prices for reasons not associated with costs
- It depends on the different elasticities in different markets.
b) How might this pricing approach be used by a public transport company? [2]
- When setting fare prices for the different groups of passengers travelling on its
vehicles
e.g. fare for average adult passengers and a lower prices for students or the
elderly.
- The different costs incurred in operating the transport are not considered.
2. Essay Questions
1.
Evaluate the usefulness of he Boston Matrix to a manufacture of shoes
Answer
·
Highlight the Boston Matrix using he diagram to explain the technique.
·
An interpretation of the diagram is required.
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·
Answers should go on to show how Boston Matrix is linked to the product life
cycle.
·
Appropriate strategies should be highlighted e.g. if a product is at introduction
stage it is a question mark so advertise it so that it becomes a cash cow.
·
Answers should go on to highlight the strengths and weaknesses of he Boston
Matrix.
2.
A multinational company is about to launch a new camera in your country.
Discuss a marketing strategy the company might use to achieve a successful
launch.
[25]
Answer
Answers can consider any of the following strategies
·
MNC to carry out a R & D research to find out the needs of customers.
·
MNC to price the camera reasonably to reflect quality and to wade away
competition.
·
MNC to distribute the camera in shops where the target market will
access it e.g. Photo Inn.
·
MNC to promote the camera effectively for example through advertising
or sales promotion.
3.
·
MNC to take into account the local Government’s policy e.g. taxes.
·
MNC to find a local agent to research on market. Etc.
Evaluate the usefulness of the product life cycle to a company when deciding
on the future product mix of its business.
[25]
Answer
·
Interpretation of data may give firm ideas about discontinuing products or
introducing new ones. E.g. products in decline to be eliminated and new
products introduced. Product life cycle helps firms to decide on the
appropriate product mix and make decisions as to what pricing,
promotion and place to adopt at each stage. Candidates can come up with
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their own examples of product and show how the marketing mix can
change as the product goes through the stages of a product life cycle.
·
Answers might suggest extension strategies for promising products e.t.c.
4. A firm is building a new factory to produce tinned foods.
Evaluate a
marketing plan that this firm could introduce to attract new customers. [25]
Answer
Answers should include;
·
Explanation of marketing plan – detailed report containing marketing objectives,
budgets, strategy.
·
Product to be developed to appeal to customers for example tinned food to be free
from poisons.
·
Promotion - to be adequate and to reduce elasticity of demand.
·
Place- firm to locate itself to be able to deal with the expansion of this market
sector.
·
Plan needs to be evaluated i.e. likely chances of success or factors that might limit
its success.
·
5.
Are the company’s marketing objectives clear and are budgets sufficient?
To what extent do you agree with the statement that” setting a high
promotion budget, business could guarantee their future success”
[25]
Answers should consider the benefits and limitations of having a high promotional
budget to the success of a business.
· Can the firm afford a promotion campaign?
·
Will it always lead to increased sales?
·
What factors will influence the success of this business?
·
What about advertising elasticity of demand?
·
How important is an integrated marketing mix?
·
Why re the other aspects of the marketing mix such as price likely to be
important factors, in the success of this business too?
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·
Apart from marketing, what other factors could determine he success of
businesses such as Spart wise.
6.
(a)
Examine the factors, which determine how businesses price their
products.
(b)
[10]
Discuss how other elements of the marketing mix might be affected by
a business pricing decisions.’
[15]
Answer
a)
(b)
Factors might include;
·
Cost of production.
·
Availability of substitutes.
·
Need to make a profit.
·
Quality of the product.
·
Activities of competitions etc.
Answers can consider the strategies a firm can use when prices are increased or
reduced;
·
Product – increase product quality if price is increased. Reduce quality of product
price is reduced.
·
Promotion – informative advertising can be used to communicate a reduction in
price.
·
Sales promotion can be used to support price.
·
Good publicity enables a firm to charge any price.
·
Place – price charged affects the place of distribution. For example a high price
should be accomplished by selective distribution.
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7.
Assume a business has decided to lower its prices for all its products.
Evaluate other changes to the marketing mix that the business might need to
adopt.
[25]
Answer
Answers should discuss the relationship of price with other elements of the marketing
mix.
Product
·
A product that is perceived to be of high quality should always be highly priced to
reflect quality. Therefore, if a product’s price is reduced the materials used for the
product must also be of lower quality.
Promotion.
·
Reduce expenditure on advertising, as this cannot be covered by revenue gained
from sale. Sales promoting. E.g. buy one get one free, can be used.
·
Public relations can also increase sales.
Place
8.
·
Widely distribute the goods as the price is reduced.
·
Mass marketing is appropriate for products of reduced prices.
Discuss the factors a firm should take into account when selecting the most
appropriate distribution channel for a new product.
Answer
Answers should discuss factors such as;
·
The nature of the product, i.e. perishables or non –perishable goods.
·
Technical complexity.
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·
Size
·
Value.
·
Objectives e.g. profit / sales targets.
·
Quality aspects.
·
Niche or mass marketing.
·
Existing distribution channels used by the business.
·
Domestic or overseas markets etc.
9.
(a)
Explain the difference between mass marketing and niche marketing.
[10]
(b)
To what extent might sales forecasts be useful for a business such as
Bata.
[15]
Answer
a) Mass marketing is a strategy of designing and selling with mass appeal. The plan
is to sell the product to as many consumers as possible so prices are often quite
low and profit margins too. I there is no market segmentation.
Niche marketing tends to concentrate on more groups of consumers who want
something different or have something in common. Prices and profit margins can be
quite high. A certain market segment or niche is chosen.
b) Answers should analyse how forecasting might assist businesses. The answer
should include an evaluation of why sales forecasting might not aid the business
greatly.
Forecasting may assist in:
·
Clarifying what is likely to sell in the next few years.
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·
Helping firms to identify how many staff to employ (manpower
planning).
·
Helps firms to employ the right number of employees to meet forecasted
budgets and plans.
·
·
Cash shortages or surplus can be determined.
2.1.2 BUT
Forecasts may be mis- leading, if there is a recession.
definite and can be wrong.
Forecasts are not
Q10 What is the value of market research to a business? [25]
Helps firms to discover potential sales volume for a newly launched or improved product
- To avoid wastage of resources and avoid production of a product which does not
attract a large enough market
- Provides valuable information in making a decision in committing resources in a
new direction
- Understanding what motivates the customers to purchase can play a major role in
developing the product and devising the advertising campaign.
- Information gathered reduces the uncertainty of marketing in a dynamic
environment.
- The more information a firm has on its market, the better equipped it is to identify
and satisfy its customers needs.
- However, the cost incurred in gathering information and the firm must decide if
the benefits from further research warrant the additional cost.
- The result of research can only help in decision making if they are interpreted
correctly and applied conscientiously.
- Most firms spend huge sums collecting data which does not have a significant
impact on decision making or worse is not even relevant.
11a)
With the aid of appropriate examples show how important packaging is to the
success of a product? [15]
b) Show how packaging relates to other elements of the marketing mix? [10]
Part (a) requires a detailed description of how packaging helps to promote product and
parts (b) requires an explanation of the role of packaging in supporting the other elements
f the marketing mix.
A a) Packaging provides convenience, protection and ease of use. In addition
packaging provides a competitive edge for another wise standardised product
category.
- Product differentiation enabled by a distinctive package and by packaging
improvements overtime.
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-
It reinforces a possible brand image thus giving the product personality.
Establish an association with product benefit.
Provide consumers with information on ingredients and size.
b) - Packaging helps identify the product especially when the colours, logos and
designs
on the package are used as themes in advertising
- It provide a unique promotional opportunity providing a constant reminder of the
product
- Packaging prompts the memory of the customer
- Packaging can be used to extent the life of the product by revitalizing interest n
the product itself
12 Why might demand for a firm’s product fall and what action could it take in response
to such a situation? [25]
Explain briefly the various reasons for a products decline and the strategies to remedy
the fall should be discussed.
A- The declines of sales are a result of more intense competition with competitors
bringing a better product.
- Technological advances which make a product absolute or changes in consumer
needs
- Strategies- Repositioning to secure new market segments
- Advertising to ensure market position by attempting to differentiate the product
from a greater number of competitors.
- Changes made to packaging or product design.
- Totally redesigning the product or withdrawing it.
- Withdrawal can be followed by a harvesting strategy to milk the brand for
additional profits by withdrawing all marketing expenditure.
- Modifying the product will aim to reintroduce the product.
- It requires formulation of a new marketing mix as product is treated as a new
product.
- Distributors need to be convinced to stock the new brand as sales have been
declining.
- Consumers should be given coupons or price promotions to induce trial as many
consumers were lost during decline.
13 a) What is the importance of “branding” in a firm’s marketing strategy? [15]
b) Why is the success of a new product difficult to predict? [10]
Answer for part (a) should explain benefits of branding in a firm’s and how benefits
are obtained. Art (b) discusses the reasons why a new product will fail.
A a)
-
Branding ensures positive brand identification by the target segment.
Can create a strong image.
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b)
Ensures in store recognition.
Helps position the product relative to competition.
Ensures distribution and shelf position.
Differentiates the product from rivals.
Facilitates self-selection.
To segment the market.
To reduce the amount of persuasive selling effort required.
A new product may fail due to:
Inadequate market research.
Misleading market research findings.
Defects in the product.
Activities of the competitors.
Insufficient or inappropriate marketing efforts.
Distribution problems.
Unexpectedly high costs.
Inadequate Sales force.
14 a) Why do firms develop new products? [10]
b) How might value analysis be used to assist the development of new products?
[15]
The answer for part (a) should explain the importance of new product to a firm, and
part (b) should discuss on the use of value analysis.
A a) Developing new products has greater beverage profits than any other growth
strategy
- Growth relies on new products –firms can occasionally depend on market growth
for sales gains
- Products in the decline stage need improvements and line expenses are developed
- Optimisation of the situation faced by any particular firm usually calls for certain
types of new products and activity designed to yield these products can be vital to
the firm.
b) Value analysis is method which allows a comparison of the cost of a potential
purchase and the benefit it promises.
- The appraisal notes the cost of the design, materials, components, production
processes and similar factors.
- The analysis may include suggestions for some alternative approaches that could
be more economical.
- Value analysis is an approach to cost reduction in which components are carefully
studied to determine if they can be redesigned or standardized or made by cheaper
methods of production.
- The team responsible for introducing a next product will examine the high cost
component and components tat are over designed in that they will last longer than
the product itself.
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-
The team will decide on the optimal product characteristics that is serving the
purpose but at low cost.
15 a) Why do you feel that price is important as an element of the marketing mix? [8]
b) Who should make the pricing decision in a business, the accountant or the
marketing director? How the approach to pricing decision might differs?
A a) - Price is important as it determines total revenue which is price x quantity and it
also helps to determine profit.
- Greater consumer price sensitivity makes price to be important.
- An increase in the purchase of private brands and generic has created a downward
price pressures on national brands.
- An increase in the price of new product introductions requires constant reevaluation of the prices of existing products.
b) If financial parameters are the basic concern of the firm, the accountant with his costoriented outlook may be more appropriate in making pricing decisions.
- Cost oriented pricing objectives rely on the internal company criteria rather than
external market driven criteria for pricing.
- The company establishes an objective of recouping costs and obtaining a
predetermined target return on investment.
- The company my also maintain sufficient price margins to finance advertising and
sales promotions.
- The objectives require cost as the basis for establishing price and the accountant who
is in a position to understand more clearly the finances of the company can set a price
to achieve the objectives.
- In the case of basis of consumer responses, demand-oriented pricing objectives may
be set.
- The marketing director can set price levels because he/she will be in a better position
to recognise price sensitivities of consumers.
- The marketing manager is in better position to appreciate the consumers’ price
awareness, price expectations and consumer price responses.
- Consumer responses to prices in various segments are established.
- Profits can be maximized if companies introduce different brands to different
segments with prices geared to the price sensitivities of each segments.
- Separate product lines can be established and prices set to meet the needs of each
segment.
16 a) Why has marketing become more important in organizations in recent years? [12]
b) Using examples, show how the characteristics of a business which is market oriented
differ from one which is product oriented?
A a) Marketing activities include market research, product development, sales
forecasting, advertising and promotion, pricing; sales and distribution.
- Most societies are developing and consumers have more disposable income to
meet their basic necessities.
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-
Organisations conduct market research to determine the wants and desires of
customers and then create products/services to meet these wants and desires.
Since consumers have different wants, the practice of market segmentation
becomes important.
To achieve economies of scale some firms have entered into the overseas market
thus carrying out international marketing research products development,
distribution and promotion as the company becomes functionally more important.
b) Product oriented firm is organised on the principles of specialisation and believes in
mass production of the goods so as to achieve economies of scale.
- The firms focuses primarily on its firm’s resources and products and aims to
achieve production efficiency and lower prices in the belief that profits result
from lowered manufacturers costs.
- Market oriented from focus primarily on satisfying consumers’ needs.
- Marketing research should identify customers’ needs and the research and
development department will produce a product that will meet these needs so that
the product will sell itself.
- Marketers need to identify their target market then identify what these consumers
want.
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CHAPTER 3
People In Organization
3. Structured Questions
1.
(a)
(b)
State three possible barriers to effective communication within a
business.
[3]
Explain how management could attempt to eliminate on e of the
barriers you have identified in part.
[4]
Answer
(a)
(b)
2.
Noise, jargon, lack of feedback, in consistent words and action, etc.
Managers should ensure feedback so that they are assured that workers really
understood what is being communicated.
Faulty communication devices should be repaired. This will also ensure that
effective communication is attained.
(a)
(b)
What do you understand by the term “Hawthorne effect?”
[2]
State and explain any two features of a formal structure of an organization.
[4]
Answer
(b)
Hawthorne effect – by Elton Moyo, workers can be motivated by
allowing teamwork, formation of informal groups.
Features of formal structures might include:
Chain of command, span of control, decentralization, delegation,
authority, etc.
(a)
(b)
Distinguish between a job description and a job specification.
[2]
Evaluate the importance of training employees in an organization. [4]
(a)
3.
Answer
(a)
A job description – gives information about the job and job title, subordinates,
superiors, etc.
Job specification – gives details of the expected personal skills to be able
perform in a specified job.
(b)
Advantages of training
To develop workers in order to enable the to progress.
To impart skills
To motivate employees.
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BUT (Disadvantages of training)
-
It might be costly
Can lead to labour turnover.
4.
(a)
(b)
In what ways may the grapevine turnover be useful to managers? [3]
If change is evitable, why then do employees resist it?
[4]
Advantages of grapevine
(a)
-
Spreads information much faster
Order communicated in ways easily acceptable to workers.
Helps interpret management thinking to the group.
Provides vital feedback on work experiencing feeling and morale.
(b)
-
Fear of the unknown
Fear to lose friends
Fear to lose job
5.
Evaluate the usefulness of a functional organization structure?
[4]
Advantages
Specialization leads to efficiency
Improved communication
Improved chances of promotion.
However
Workers can lose sight of organizational objectives.
(a)
Why is conflict inevitable in a large organization?
[3]
“Conflict is not always detrimental.’ What might be the possible benefits of work
group conflict?
[4]
6.
(b)
Answer
7.
(a)
-
Dependency of activities
Need to share resources
Differences in objectives
Competition among department
(b)
-
Grievances can be revealed and acted upon.
Improved communication
Improved motivation
(a)
(b)
What do you understand by term “performance appraisal.”
Explain the importance of performance appraisal.
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[2]
[3]
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Answer
(a)
A process of assessing a worker’s job or performance in relation to the desire
performance.
- Providing information for making promotion and salary decisions.
- Giving employees’ feedback on their performance.
- Giving employees and supervisors a chance to plan their activities and
appraise / evaluate themselves.
- Motivation of workers,
(b)
8.
Evaluate the advantages and disadvantages of employing people for short
periods of time.
[6]
Advantages
-
Fresh ideas from new employee.
Complacency is reduced
Rejuvenated workforce
Disadvantages
-
Loyalty is not ensured
Motivation is difficult to monitory
Commitment is not ensured
Job insecurity – Maslow
-
9.
(a)
(b)
What is a decentralized organizational structure?
[2]
Explain any two disadvantages of a decentralized organizational
structure.
[4]
Answer
(a)
managers.
(b)
-
Structure where authority to make decisions is given to lower level
Prepares low – level managers for promotion.
Increases flexibility of the business.
Decisions are made at the scene of action.
Managers feel more involved in their work because of increased productivity.
Senior management have more time for strategic planning.
10.
(a)
Why is it important for an organization to have a well – motivated
workforce?
[5]
(b)
How are workers’ perceptions of financial and non- financial rewards an
important influence on their motivations?
[4]
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Answer
Improved quality
Improved productivity
Improved worker loyalty
Improved sales and profits
(b)
Perceptions on type of motivation depends on the nature of the workers. Some
workers (Theory X) prefer financial incentives while some workers (Theory Y) prefer
non- financial incentives.
11.
Outline the factors that influence the span of control within an organisation. [4]
A. Span of control is the number of subordinates that a supervisor can effectively
lead.
Factors which influence span of control:
- Quality of supervisors.
- Type of business concerned.
- The degree of direct access allowed to subordinates.
- The seniority and quality of subordinates.
- Stability of operations and importance of activities.
12 a) Distinguish clearly between the functions of staff and line managers [4]
b)
Why is there often conflict between these two groups? [3]
A a) In a line organisation, top management delegates authority to middle management
who in turn redelegate to lower management.
- Staff authority is the right of one member of an organisation to offer advice to
other members.
- Line authority is the right of a manager to demand accountability from
subordinates or others or performance of assigned responsibilities.
- Line authority encompasses the set of rights and expectations associated with the
traditional superior- subordinate relationship.
- Staff authority gives specialist advice and service to line superiors and this
performs two supporting roles.
- The flow of authority is upwards.
b) Since both line and staff functions co-exist there is a tendency for conflicts to arise.
- Line personnel feel that staff personnel are intruding in their lines authority and
that they do not understand the ‘real work’ of the organisation.
- Technical jargon used staff people might not be easy to understand especially by
the staff people thus making communication difficult.
- Both must work together co-operatively for the organisation to be effective and
efficient.
13 a) What is meant by the term “Management By Objectives (MBO)”? [4]
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b) Explain how such an approach may be used to motivate a workforce. [4]
A a)
-
MBO is a technique which involves employees at lower levels in the organisation
in the process of goal setting which is different from traditional approach in which
the superior establishes goals for his or her subordinates.
Manager and subordinates meet to discuss objectives for subordinate which are in
agreement with overall organisational goals.
Manager and subordinate jointly establish attainable objectives for the
subordinate.
Manager and subordinate meet at a later time to evaluate the subordinates’
relative success in attaining the objectives.
b)
-
By involving subordinates in goal setting, subordinates may be more committed.
The commitment leads to increased job satisfaction since the individuals know
exactly what is expected and in what direction to channel activities.
With increased satisfaction, employees will be motivated to higher performance.
Specific goals increase performance and difficult goals of accepted result in best
performance than easy goals.
14 a) What is worker participation?
A- It means allowing workers to participate in the affairs and decision at the
workplace. Autonomous workgroups, quality circles, and work-improvement
teams are examples of such trends.
b) Why do many firm’s wish to find successful ways of promoting worker
participation? [4]
A Better organisation and interpersonal communication?
- Improve teamwork and co-operation by all within the organisation.
- Lead to better worker satisfaction with their job and the organisation.
- Enhance the overall effectiveness of the organisation.
14 a)
b)
What is meant by autocratic management? [2]
Outline the benefits which may result from employing a participative style
of decision-making within a business [6]
A a)
-
It is a traditional view of a leader or manager where power is in the hands
of one authority whose word is law.
Orders are issued and expected to be obeyed without question.
Little or no discussion takes place with the subordinates.
b) Participants lack sufficient information to solve a problem by them this is where
specialisation of skills and knowledge is well-defined.
- The problem is unclear and help is needed to clarify the situation, advice and
opinions are sought among participants.
- Acceptance of the decisions by the participants is necessary to achieve successful
implementation of plans and decisions.
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-
Adequate time is available to make better decisions; participants are called more
time to give inputs in reaching a decision.
15 a) What is induction training? [2]
- It refers to training curses for new employees; these courses provide information
on the organisation and are meant to orientate new employees to the company and
its policies.
b)
-
-
-
16
What should the objectives of induction training be? [4]
New employee to be acquainted with the organisation, its policies, practices and
general objectives as well as where the new entrant’s job into the organisation and
its importance to the organizations as a whole
It generates a personal interest in the organisation, an enthusiasm for the job and a
general sense of loyalty
Indicates the more personal and specific aspects of a new comer’s employment
such as names and status of the senior members of the organisation, who the
recruit’s immediate supervisors and managers are and what authority they enjoy
Examples are the terms of the contract of employment, remuneration and
promotion policy, welfare and recreation facilities and working procedures.
Besides strike action, what other ways might the workforce use to bring pressure
on management for better working conditions?
A. Collective bargaining- it is the discussion procedure whereby union
representatives negotiate with management representatives set the terms and
conditions for a specified number of years.
Conciliation- if a dispute arises concerning a collective agreement which binds both
parties, the two parties can refer to a third party who may be a conciliator or
arbitrator. The conciliator’s note is to use his influence to gain concessions from both
parties to resolve the dispute.
Arbitration-voluntary arbitration, both parties agree to have their difference settled
by an arbitrator. In some cases, arbitration may be made compulsory when the
minister of Labour exercises his power and directs that the dispute be subject to
arbitration on the interest of the public.
17
What is the importance of job evaluation “in the management of a firm? [4]
Job evaluation is the comparison of jobs by the use of formal and systematic
procedures to compare their relative work in the organisation.
It is important when organisations wish to establish internal equity among
the different jobs in the organisation.
After jobs are formally evaluated they are grouped unto classes, families
or grades and within each class jobs are arranged in order of importance
and ranges of pay are established with the aid of wage surveys.
Job evaluation process permits both external and internal pay comparisons
as well as means of making individual pay level decisions.
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-
Job evaluation based on a job analysis, job classes pay grades and a pay
structure can be established.
Communication of pay policies can ensures that each employee perceives
the method as fair and equitable.
18 a) State three things you would look for if you thought morale in a fir was falling [3]
b) Explain why the management of a firm would wish to maintain a high level of
morale among its employees.
A a) Low morale results in job dissatisfaction and lowered productivity
- Absenteeism is high and burden increases.
- Decreased effort and lateness.
- Complaints and regret advice.
- Quitting the job.
- Seek transfer from present post.
b)- To reduce absenteeism and staff turnover to make staff more receptive to new ideas
and schemes implemented by top management.
To have a highly cooperative, trainable and flexible in operational requirements
thus resulting overall higher productivity for the firm.
19
-
-
-
How relevant are the ideas of F.W. Taylor to present day management? [6]
Taylor’s studies proposed for scientific management.
The efficiency techniques of scientific management such as time and motion
studies have made it aware that the tools and physical movements involved in a
task can be made more efficient and rational.
The stress on scientific selection and development of workers has made us
recognise the importance of both ability and training in increasing worker
effectiveness.
Work design encouraged managers to seek the “one betray” of getting a job done.
Scientific management pointed to the way of professionalisation of management.
20 State and explain two reasons why a firm might prefer to appoint a new company
accountant by internal promotion rather than recruiting externally. [4]
A- It affects the morale of existing employee and the satisfaction of ego needs and
self- actualisation of the employed individuals.
- Workers reduce their contribution to the organisation when they feel that their
prior efforts will never be rewarded and recognised in some way meaningful such
as promotion.
- It deteriorates the sense of loyalty employees have towards the organisation.
- Employee turnover will be high and company will incur high costs of recruiting
new staff and train.
21.
What applications do you consider McGregor’s X and Y theory has in the work
situations? [6]
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‘According to theory X model views subordinates as by nature, disliking work,
lacking in ambition, irresponsible, resistant to change and preferring to be led than
to lead. According to theory Y, manager views employees as willing to work,
willing to accept responsibility, capable of self direction and self control and
capable of imagination and creativity.
Theory X assumptions can cause managers to be overly directive and control
oriented in their approach to people at their work.
Theory Y managers delegate authority, allow subordinates to participate in
decisions and offer greater job autonomy and task varieties.
A
-
22
Herzberg distinguished between ‘hygiene and motivating factors. Why did he
consider the distinction important? [5]
A. Hygiene factors referred to the basic requisites for the workers to be wiling to
work or basic needs of employees.
- Without these factors employees would not work at all but more of these factors
would not make them work any harder than they are already working.
- Motivating factors are those that make a difference in employees’ performance.
- One hygiene factor for an employee can be a motivating factor for another.
- Differentiating these hygiene and motivating factors would determine the
effectiveness of policies and incentives implemented to improve productivity and
work quality.
- Wrong incentives could be expensive let alone backfire on management.
23
What contribution to greater motivation of workers might be made by:
(i) Quality circles? [3]
- These are a group of employees within the same work unit who meet regularly to
discuss ways of solving particular problems they have chosen in their workplace
so as to improve their own work, company efficiency and operations.
- Members draw satisfaction from participation and assist the company in
improving the product and also methods of production
- Workers are motivated by being made responsible for the solution and
improvement of particular work activities
- Workers participation in decision making is increased, this helps to generate
interest in their work and improve their willingness towards contributing to
organisational goals.
- Involving workers in quality control help increase their commitment to their job.
ii)
-
Effective budgeting? [3]
Budgeting requires input from all departments in the organisation thus involving a
high degree of workers participation.
It facilitates interaction among employees not only within a department but also
across different departments.
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-
iii)
-
It enables socialization which helps in establishing rapport among employees
thereby enabling employees to satisfy social needs.
Work Study? [3]
May propose on the job training whereby employees are rotated to perform
different tasks of that they gain exposure to other functions within the company.
It helps in improving the employees’ knowledge of the company and the
importance of various functions and departments within the organisation.
Work-study eliminates boredom since job tasks are rotated and the employee is
constantly exposed to different tasks.
Workers are constantly learning new things in their work thus fulfilling their need
for self actualisation.
Essay Questions
With reference to theories of motivating. Discuss the extent to which workers can
be motivated by financial rewards.
[25]
Answer
Answers should support the use of financial incentives and highlight the methods of
financial rewards such as, bonuses, commission, piece rate system, measured day work
etc.
Theories to support the use of financial incentives should be examined such as, F.W
Taylor, McGregor’s Theory X.
Answers should also highlight the need for non –financial incentives and mention the
methods of such incentives such as, job rotation, job enrichment, job enlargement, job
design etc.
Theories to support the use of non – financial incentives should also be observed such as;
Maslow’s Pyramid of needs, Hezerberg’s Two-factor theory.
2.
Evaluate the importance of effective delegation for successful management.
[25]
Answer
Answers should highlight steps to effective delegation and go on to outline the strengths
and weaknesses of delegation.
Advantages of delegation might include:
· Prepares subordinates for managerial posts.
· Motivational effect
· Relieves managers to concentrate on major roles.
· Quality decisions are made.
· Quick decision-making.
Disadvantages of delegation
· Costly - mistakes.
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·
3.
Superior remains responsible for subordinates’ faults.
(a)
Outline the importance for a business of effective communication.[10]
(b)
[15]
How might a business overcome barriers to effective communication?
Answer
Answers should highlight the importance of effective communication in a business such
as:
· Quality of decision-making is increased.
· Staff motivation.
· Speed of reaction to changes in the market is increased.
· Co –ordination between departments will be enhanced.
· Improved problem solving by all organization.
· Improved management.
· Communication ensures a business to become open in order to interact with all of
its stakeholders.
b)
·
·
·
·
·
·
4.
Answers to include:
Ensure the message is clear, precise and adequately detailed.
Keep communication channel as short as possible.
Build feedback into communication.
Use simple language.
Establish trust between senders and receivers
Make sure the physical environment is appropriate for messages to be heard or
received other ways.
Assume two companies are deciding to merge. Evaluate how the managers
might deal with the Human Resources Management problems that are likely
to occur.
[25]
Answer
Answers could include.
· Problems of labour turnover, staff redundancy, motivation, manpower planning
recruitment, appraisal etc.
· Why there are problems to this business and needs to be addressed.
· Possible suggestions, workforce plan essential. New approaches to motivation
seem essential e.g. job enrichment.
· Communication improvements.
· Effective recruitment of new staff essential.
· Bonus payments based on results or appraisal.
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5.
Evaluate how communications between management and staff might be
made more effective within an organization.
[25]
Answer
Definition of effective communication.
Methods to improve communication with meetings, groups, newsletters, IT. Etc.
Analysis of how these could improve effective communication.
BUT
May be time consuming, cost of its access all staff, communication overheard if widely
used staff not used to 2 –way communication better communication may need a change
of culture and leadership style.
May lead to reduced quality.
Provides little security over pay.
Cannot be used if each product is different.
6.
Discuss the advantages and disadvantages for a firm of introducing a
decentralized management structure.
[25]
Advantages might include:
· Quick and better decision making taken at the scene of action.
· Offers training for junior managers and prepares them for more challenging roles.
· Decisions in response to market changes become quick and flexible since head
office will not have to be involved all the time in decision making.
Disadvantages
· Co –ordination by top managers becomes difficult.
· Loss of control and ineffective communication may lead to inconsistence relating
to organization policy.
· Decisions may pursue manager’s interests instead of corporate goals.
7.
(a)
Outline the problems that might arise from a poorly motivated
workforce.
[10]
(b)
Critically examine the schemes managers might use to widen
employee participation in the workplace.
[15]
Answer
a)
·
·
·
·
·
·
·
Problems might include:
Poor quality of goods.
Low levels of production.
High absenteeism
High labour turnover.
Damage to machinery and costly mistakes.
High industrial disputes.
Poor communication.
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b)
·
·
·
·
8.
Answers should give the strengths and weaknesses of the following schemes.
Quality circles
Management by objectives
Work improvement committees
Work excellent committees.
Evaluate how each of the following might affect the success of a business.
a)
Marketing.
b)
Human Resources Management.
[25]
Answer
a)
Marketing.
· Proper research and development will result in approved products.
· Proper promotion increases sales and profits.
· Proper pricing increases market share.
· Proper distribution ensures that the products are widely accepted by customers.
b)
·
·
·
·
·
9.
Human Resources Management.
Proper recruitment ensures skilled staff is recruited.
Proper motivation leads to improved working relations.
Proper training ensures good quality of goods.
Proper remuneration ensures good staff is retained and hence, reduced labour
turnover.
Proper health & safety measures reduce legal costs.
(a)
Analyse how managers might assess the effectiveness of training
within a business.
[10]
(b) Evaluate the role of informal groups to business efficiency.
[15]
Answer
(a)
·
·
·
·
·
·
·
(b)
Answers should highlight the measures a manager might use to assess
effectiveness of training such as:
Level of motivation of workers.
Level of productivity.
Number of customer’s complaints.
Quality of products.
Level of industrial disputes.
Level of morale among workers.
Skill levels.
Advantages of informal groups.
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·
·
·
·
They help members to communicate.
Perpetuate commonly held social and cultural values.
Provide social satisfaction, status and security.
Helps members solve personal problems.
Disadvantages of informal groups
· Grapevine is a channel of rumour and gossip.
· Resistance to change.
· Conformity forces people to live the group.
· Conflicts may arise leading to demotivation.
10 a) Discuss the likely causes of high labour turnover
b) How might management reduce labour turnover
[12]
[13]
The answer for part (a) should state and explain the case of high labour turnover and part
(b) high lights the importance of communication in managing labour turnover.
A a)
b.
-
Lack of status.
Poor work conditions.
Poor relationship with peers.
Lack of security
Poor relationships with subordinates.
Poor or hostile relationship with supervisor.
Lack of adequate or motivating supervision.
Ambiguous or absolute company policy and poor administration.
Actual or perceived poor career prospect.
Lack of opportunity to advance.
Lack of interest in the job.
Increase of communication between the employees and their manager or
supervisors.
Proper channels to air grievances should be set up to the mutual benefits of all parties.
Management should understand the needs of the dissatisfied workers.
Unions should appreciate the company’s need for lower costs and good learning in order to
provide continued employment.
Management should consult workers through tier union about the ever widening range of company
problems.
11 a)
What are the main responsibilities of the Personnel department within an organisation? [10]
b) How might the performance of a Personnel Department be assessed? [15]
Part (a) should discuss the role of the personnel department and (b) the methods used to evaluate the
effectiveness of the Personnel department’s efforts
A a)Main responsibility
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-
-
-
-
Employee resourcing- i.e. acquisition and organisation of employees, forecast the organisations
labour requirements for its future as well as to ensure that sufficient labour of various types is
available in order too achieve the organisation’s overall goals.
This covers recruitment and selection.
Employee training and development.
Training can be formal or informal, induction/orientation of new staff on the job or off the job
training. The aim of training would be to ensure that the company’s employees possess the
necessary skills, knowledge and aptitude to perform their job requirements effectively.
Performance appraisal- which is done in order to determine employees pay, promotion and
development.
Health, safety and welfare issues- within the legal framework, the personnel department on behalf
of the company have a legal obligation to maintain a safe working environment and failure to
carry out the responsibility could render the company to criminal prosecution.
Remuneration issues- it implements pay policy as well as designing pay schemes that are able to
recruit and retain staff. Maintaining employee/industrial relations- it negotiates with employee or
trade unions over pay and working conditions as well as dealing with staff grievances and
maintaining discipline within the workforce.
Indicators of effectiveness
Productivity as measured by employee performance, low rates of absenteeism and turnover.
Quality of work life- as measured by-employee job involvement, satisfaction, stress and accidents.
Legal compliance as measured by costs of fines for legal violations, costs of contracts lost for noncompliance and the value of community goodwill and general reputation.
Data should be gathered in all of these areas and should be used a s general indicators of how well
the entire personnel department is doing.
b)
-
12.
A.
-
Discuss the factors which influence an individual’s performance at work. [25]
Factors affecting job performance
Ability- in terms of skills required or experience.
Interest in doing the job.
Opportunity to advance.
Clearly defined goals.
-
Certainty about what is expected- job responsibilities and levels of authority.
Feedback on how well the individual is doing.
Rewards for performing well.
Power to get resources to do the job- mobilisation of resources.
13 a) What might be the causes and consequences of poor industrial relations among
workers? [12]
b)
What action could be taken by managers to improve industrial relations among
production line workers? [13]
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A a)
-
Conflict of interest- as workers wish to satisfy their needs, they vary in the
manner they try to satisfy them thus leading to conflict.
Informal groups- dissatisfaction from one or two members can affect and
influence morale of other members.
Informal groups in conflict affect the ease with which activities are carried out in
an organisation.
Perception of unfairness in terms of remuneration promotion and recognition.
b) To improve industrial relations among workers:- Greater interaction among workers and socialisation, in order to foster rapport
among them and increase their understanding of each other’s needs.
- Socialisation can be facilitated by organising company functions such as sporting
events, trips to foster together among workers.
- Sensitive information pertaining to individual workers such as performance
evaluation, remuneration, bonuses should be made confidential.
- Standardise the measurement of good performance as this makes it easy for
workers to measure themselves against others and would have lesser grievances
when one worker was rewarded.
- Managers should practice a standardised set of policy when dealing with
workers to avoid the arousal of feeling that there is discrimination or unfair
treatment
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CHAPTER 4
PRODUCTION
4. Structured Questions
Operations Management (PRODUCTION)
Structured Questions
Explain any two methods used to monitor and ensure quality of products.
[4]
Answer
Methods might include:
T&M
Quality circle
Zero deficts
Quality assurance
Production Engineering
Bench making
Define the term “work study”.
2.
(a)
[2]
(b)
Explain one way of using the results of work-study to improve productivity.
[3]
Answer
(a)
Systematic measurement of working methods and timings with the aim of
identifying best practices and realistic output targets.
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(b)
Piece rate system of payment
Change in tactory layout
Change in equipment
What I meant by the term “value added” when applied to production?
[2]
(b)
How would you assess the productivity of a shoe manufacturer using the concept
of “value added.”
[4]
3.
(a)
Answer
(a)
Value added – it is a concept that describes the process of adding value to inputs
so that the same inputs can be sold at a higher price.
(b)
Skin, leather and threads are put together to produce a shoe that is these inputs are
added value to and a shoe is produced. Inputs bought at $500 000 for example Finished
goods that is a Shoe is produced and sold at $2 000 000.
4.
Describe any two types of plant layouts found in manufacturing firms.
Answer
[4]
Product lay out (line layout) – machinery and equipment lined up according to the
sequence of operations performed on a product in flow production.
Process layout (group layout) – grouping machines/ processes of a similar nature
together.
Combined product/ process layout – a combination of the product layout and process
layout.
5.
Define the term lean production.
Answer
Lean productions are all the activities aimed at reducing waste and improving quality.
Activities include Just In Time, Cell production and Flexible Specialism.
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6.
Explain the terms “fixed cost” and ‘variable cost’ and give two examples of
each.
[4]
Answer
Fixed costs are costs that do not vary with out. These costs are fixed/ constant at
whatever level of output.
Examples: rent, depreciation, etc.
Variable costs are costs that change as output changes. Variable costs increase as output
increases, fall as output falls.
Examples: Wages, direct material costs, electricity, etc
7.
Woodwise is a company that manufacturers chairs. The company is
operating at full capacity. Woodwise is contemplating sub- contracting to
meet increased demand. Outline the factors that Woodwise might consider
before it can subcontract.
[6]
Answer
8.
Quality produced by the subcontracted firm may be low.
Capacity of subcontracted firm may be low.
Costs of subcontracting
Relief on company’s resources especially workers as it is already operating at
full capacity.
Explain what ‘value analysis’ is and how it might be used by production
managers.
[6]
Answer
Value analysis balances economic manufacture, aesthetics and function, taking a
multi- disciplinary approach.
Costs are reduced while value to customer is not reduced.
Explain the term “buffer stock’. What factors might a company consider
when determined the level of buffer stock?
[3]
9.
-
Supplier reliability
Storage space
Usage rate
Lead time
Changes in the prices of inputs.
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10.
What do you understand by the term “quality”? Explain how a company
might investigate and monitor the level of quality of its production.
[5]
4.1.1 Answer
Quality is not an absolute but is fitness for function as perceived by the customer.
Ways of investigating quality:
Control charts
Sampling employee training
Ways of monitoring quality:
-
T&M
Quality circle
Zero deficts
Bench marking
11a) What is meant by “marginal cost”? [2]
b) How might this concept be used in the pricing strategy of a firm? [4]
A a)
Marginal Cost is cost of producing an additional unit. Total cost of producing
additional quantity less total cost of producing current quantity gives the marginal
cost. Marginal costs are always marginal variable costs since fixed costs do not vary.
b) The use of the concept depends on the pricing objective i.e. profit based or sales
based.
- Profit maximization objective is used when a firm designates high profit as a goal
and firms will price the product where marginal cost equals marginal revenue
- Sales based are oriented toward high sales volume or expanding its share relative
to competitors.
- Firms opting for this objective will price its product where marginal revenue is
lower than marginal cost.
12 a) Why might a distinction between fixed and variable costs are of importance in
determining:
(i) Pricing policy?[13]
(ii) Whether to discontinue production of a product? [13]
A (i) Fixed costs are costs which do not vary with the level of activity in the short run.
Variable costs are costs which respond proportionately to changes in the volume of
output or level of activity.
A firm may use the concept of fixed and variable costs under breakeven analysis to
determine the price of a product given a target profit and a chosen level of output
Example: Fixed costs are
=
$10 000 000
Variable costs
=
$50 per unit
Chosen level of output=
240 000 units
Target profit
=
$300 000
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Break even analysis can be used to calculate the price that needs to be set to
achieve the target profit of $300 000. Total contribution of $100 000.00 plus 300
000 should be obtained from 240 000 units of output.
The firm has to charge a price of $504 + 54,20 = $104,20 to achieve the profit
target from its chose level of output.
(ii)
Using breakeven analysis, a firm may decide whether to discontinue
production of a production. Assume:
Fixed costs of the firm
=
$5 000.00
Variable cost per unit
=
$1
Selling price
=
$5/unit
Planned output
=
200 000 units per year
Each unit is sold for $5 but variable costs amount t $1 per unit. Each unit sold
contributes $4 to fixed costs which are $500 000. Beak even output is $125 000 units.
A margin of safety for the firm may be calculated as output minus break even output.
Profit is $4 x 75000 units= $300 000. The firm measures this profit against the
targeted profit. If it is lesser, the firm can decide to drop the product.
13 a) What is meant by the term “economic order quantity.”? [2]
b) State and explain two factors which you would expect to be taken into account
when deciding how much of a product to order. [4]
A Economic order quantity is the optimal quantity to reorder an item that minimises the
total variable costs incurred in buying and maintaining that particular item in
inventory.
b) Two factors that must be considered in deciding how much of a product to order
include inventory procurement costs i.e the costs of placing an order, receiving an
order and of handling received merchandise and costs of maintaining an item in an
inventory- insurance costs and interest on invested capital.
14. State and explain factors management should consider whether to make or buy some
components.
A. Financial status of the company- if financially strong an appropriate decision may
permit substantial improvements in the manufacturing operations.
- Volumes required for economic production- if a firm is still small, the volume of
requirements for any one part or material may be too small to keep an efficient
plant busy.
- Possible benefits resulting from coordination- if the firm manufactures the
products it needs, promptness of delivery and adjustment to emergencies may be
easier to achieve.
15.
The following information relates to a company producing one single product.
Fixed costs $50 000, Direct material costs $5 per unit; Direct labour costs $9 per
unit, Variable overheads $2 per unit selling price $20 per unit.
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(i)
Using the above information:
Show the minimums number of units of the product which the company must
produce and sell in order to break even..
Fixed Cost
Contribution per unit
Where contribution per unit is
= Selling price- variable costs
50 000 =
500 00
20-16
4
=
12500 units
Break ken even output
ii)
=
The profit if sales where 25 000 units
Margin of Safety
=
25 000- 12 500 units
=
12 500 units
Profit
=
=
12 500 x 4 (contribution per unit)
$50 000
16 Explain the advantages and limitations of Critical Path Analysis as a control tool for
management. [5]
Advantages
- Allows managers to experiment without spending vast amount of time, money or
resources.
- Allows “what if analysis”.
- Allows continuous up- date of the network once the project has started,
- Can be computerised.
- Probabilities can be built in.
- It is proactive rather than reactive.
Disadvantages
- Costs time and money if applied incorrectly.
- Only as accurate as the data input.
Can result in on-site human resistance to the recommended changes.
5.
1.
Essay Questions
(a)
Discuss the suitability of flow production techniques.
(b)
Evaluate the usefulness to a food manufacture of lean production
methods.
[15]
Answer
a)
Suitability of flow production techniques.
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·
·
·
·
b)
Where individual products move from one stage to the other as soon as they are
ready, without having to wait for any other products.
Where there is a large ready market.
Where demand for products is high and consistent.
Where standardized products are produced.
Answers should give the strengths and weaknesses of lean production methods.
Advantages might include.
· Production is done with minimum resources.
· Wastage of resources is eliminated from original stock ordering through final
customer service.
· Quality output with few resources is produced.
· Cuts out anything in the production process that adds complexity, cost and time
while not adding value to the customer.
However
Lean production is usually difficult to implement.
2.
(a)
(b)
Briefly explain the costs of holding stock.
[10]
Analyse the possible impact on a business of lowering stock levels.
[15]
Answer
a) Costs of holding stock might include
· Insurance
· Warehouse rent.
· Obsolescence.
· Opportunity cost of cash tied up.
· Damage.
b) Effect of lowering stock levels
· Reduced stocks reduce sales.
· Profits are lost.
· Markets are lost
· Production delays
· Loss of bulk buying discounts.
· Cost of cash tied up
3.
(a)
Why is it important for businesses to aim for the efficient management
of stocks.
[10]
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(b)
Outline and discuss any two techniques a business might use to manage
stocks.
[15]
Answer
a)
Answer need to give a balanced account of both costs of holding stocks and the
costs of not holding stocks.
Costs of holding stock might include, insurance, warehouse rent, damage,
obsolescence, and opportunity cost of cash tied up.
Costs of not holding stocks;
·
Loss of orders / production delays.
·
Loss of bulk buying discounts.
b)
Answers should discuss the relative strengths and weaknesses of at least two
methods of improving stock.
Management methods may include.
·
Just in time method.
·
Economic order quality
·
Two bin system.
4.
(a)
(b)
Answers(i)
Explain the following terms:
(i)
Contribution.
(ii)
Variable costs.
(iii)
Fixed costs
Evaluate break – Even analysis as a decision making model.
Contribution
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[16]
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·
Revenue less direct costs.
·
Ignores indirect costs
·
Contribution contributes to indirect costs and eventually profits.
·
Used for assessing dropping products, new products, and special orders.
(ii)
Variable costs
·
Costs that change with output.
·
As output increases, variable costs also increase, for example wages, direct
material costs.
(iii)
Fixed costs – costs that do not change as output changes.
Fixed costs remain fixed as output changes also called indirect costs for example rent,
depreciation.
b)
Answers should highlight the strengths and weaknesses of break-even analysis
Strengths
Provides useful guidelines to management.
On break – even points, margin of safety and profit at different levels of output.
Chart could be amended to show the possible impact on profit and break even point of a
change in price.
Limitations
It assumes that fixed costs will remain the same throughout the year, but fixed costs are
likely to change at different level of output. Neither variable costs nor selling prices are
likely to be linear. Discounts, overtime pay and special delivery changes contribute to
non – linearity. It assumes that costs can clearly be classified into fixed and variable cost,
yet some costs are semi - variable.
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The technique is appropriate for single product firm, multi –product firms will be forced
to draw several charts.
5.
“Product quality guarantees a successful business”. To what extent do you
agree with this statement?
Answer.
Answers should consider the role of product quality in helping a business achieve
success. Answers should highlight the limitations of emphasizing too much on quality.
Strengths
·
It saves on costs associated with complaints.
·
Easier to create customer loyalty due to consistency of the product.
·
Longer product life cycles due to repeat purchases.
·
Less advertising will be necessary.
·
A high price – premium could be charged for such goods &services.
·
Scrap of finished goods can be reduced or eliminated.
BUT
Maintaining quality is costly and can lead to rigidity and waste of resources.
6.
Analyse the factors a firm might consider when deciding to operate a just –
in –time production system.
[25]
Answer
Answers might consider factors such as:
·
Production staff must be multi – skilled and prepared to change jobs at short notice
·
Relationships with suppliers have to be good as they must always be prepared to
supply the components as when required with a very short lead-time.
·
Accurate demand forecasts will make J.I.T system a much more successful policy.
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·
Quality must be everyone’s priority.
·
Good employee – employer relationships.
7.
(a)
b)
Define the following terms:
(i)
Capacity utilization
(ii)
Labour intensity
[10]
Examine the ways a firm can use to increase capacity utilization. [15]
Answer
(i)
Capacity utilization.
·
It is a process of forecasting demand and then deciding what resources will be
needed to meet that demand.
·
A firm operating at full capacity utilizes all the capacity i.e. 100%
·
A firm operating at 80% capacity utilization is operating 20% below full capacity.
(ii)
Labour intensity
·
A firm uses a high level of labour input compared to machinery.
·
A firm that uses a lot of machinery as compared to human labour is said to be
capital intensive.
·
Choice between labour intensity and capital intensity depends on financial
resources and need for training labour.
b)
Answers should describe and comment on the following ways of increasing
capacity.
·
Sub contracting.
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·
Scheduling overtime work.
·
Shifting existing personnel from area of low demand to area of high demand.
·
Adding or removing capacity by physical expansion
8.
Analyse how value analysis can assist a firm in the development of a new lap
top.
[25]
Answer
Answers should define value analysis and go on to explain the usefulness of value
analysis.
Definition – it is a process of analyzing whether a new product or new design can be
made more efficiently without affecting its appeal to customers.
Usefulness of value analysis
·
Can suggest ideas that allow the product to be made more cheaply and still appeal
to customers.
·
Suggestions of different types of materials to be used in the product that cuts costs
and not appearance.
·
Involves teamwork between departments.
·
Involves comparison with competitors’ best products in the market.
BUT
The value of value analysis depends in its ability to coming up with a product, which is
cheaper to produce than the original design and still offer customers good looks and value
for money.
9.
(a)
b)
Distinguish between productivity and production.
[5]
Evaluate the various strategies a firm can use to raise productivity.
[20]
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Answer
a)
Production is the measured quantity of output that a firm produces in a given
period of time while productivity is a measure of a ratio of output to any of the
firm’s inputs usually labour and capital. A firm that has become more productive
is efficient since productivity is a measure of efficiency
b)
Strategies used to raise productivity.
·
Training of staff to raise skills level.
·
Purchase of more technologically advanced machines.
·
More efficient management i.e. purchasing correct material.
·
Division of labour etc. These strategies should be evaluated.
10.
Analyse the quantitative and qualitative factors that will influence the
location of firms.
Answer
Quantitative factors might include:
·
Site costs
·
Regional incentives e.g. tax holidays.
·
Transport costs
·
Revenue generation.
Qualitative factors
·
Infrastructure
·
Environmental and planning considerations.
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·
Management preferences e.g. quality of life i.e. some managers may prefer to
locate near schools for their children, sport facilities and shops.
·
Clustering the benefits of businesses in the same industry locating in the same area
is quite high.
·
State and public opinions e.g. government may decide to divert business away from
some area and attracting them to others to ensure development takes place across
the country.
11 a) Why is it important for firms to have an accurate costing system? [9]
b) Briefly explain the absorption method of costing and discuss the circumstances in
which it is (i) appropriate. (ii) inappropriate. [16]
A.
-
Costing should be accurate so that the following can be achieved.
To calculate the profitability of the product.
To provide data for price setting.
To control expenditure by comparing actual expenditure with anticipated
expenditure.
To provide data for decision e.g to decide on alternative causes of action.
For inventory or stock valuation.
b) Absorption costing is when all manufacturing costs are charged as product costs
regardless of whether or not they may change in relation to production levels.
It is appropriate when:
- Managers maintain that inventories should carry a fixed cost component because
both variable and fixed manufacturing overheads are necessary to produce goods.
It is inappropriate
- It does not differentiate between the fixed and variable costs so managers where
accustomed to looking at operations from a break-even analysis and flexible
budget viewpoint find that the absorption statement fails to go along with costvolume- profit analysis.
- When firms want to taken an additional contracts utilizing spare capacity.
12 a) Explain the essential features of the technique of network analysis [10]
b) Assess the usefulness of this technique as an aid to project control [15]
A a) Network analysis is a method of discovering the best sequence of jobs in order to
achieve a total project in the shortest time
A project is analysed in its separate steps or activities and represent them on paper by
a diagram
- Arrows connecting the steps are numbered with the tie value of each operation.
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-
All parallel chains of activities are also dawn in the diagram and the alternative
ties to complete the project can be calculated.
The path which takes the longest time is the critical path because it is the shortest
time in which the project can be completed.
b) It helps management to know what jobs have to be done and when. It helps in the
efficient use of men and material and it minimises expensive delays in a project.
- It permits the manager to exercise control by determining the overall effects of a
delay in the completion of a task.
- It makes it possible to figure the effect on the schedule of a reallocation of
resources from one task to another.
- It improves communications- the network diagram provide a common frame of
reference for all the different parties involved in a project such as designers,
managers, extractors and employees.
- Managers are provided with an opportunity to compare different methods of
reducing the project goal.
- By identifying critical tasks, network analysis allows managers to apply their
attention where it is most needed.
- In a complex project, the critical path may change a number of times as estimates
prove inaccurate.
13 a) How might a firm set “standard costs” for the production of one of its products?
[10]
b) How and to what extent is budgeting control a useful management tool? [15].
A a)
-
b.
-
Standard costs are predetermined costs- a prediction of what costs ought to be if
reasonably efficient methods of production are used and if performance matches
expectations.
Standard costs helps in making a comparison between actual costs and expected
costs.
The standard for labour will be the expected wage rate per hour multiplied by the
expected number of hours required to produce each unit.
The standard cost of materials will be based on expected price of materials x by
the expected amount of material usage per unit of output.
Overheads per unit of output will be based upon an assumption about the level of
activity since the overhead costs per unit will vary with the level of activity.
The value of standard costing is dependent upon accurate estimates of: future
prices of labour materials and overheads, the quantity of inputs required to
produce each unit of output and the level of activity.
Major benefits of budgeting control
It forces management to plan ahead and anticipate the future on a systematic
basis.
It provides management with realistic performance targets against which actual
results can be compared with responsibility accounting.
Budget plays an important role in controlling the acquisition and use of resources.
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-
It coordinates the various segments of the organisation and makes each manager
aware of how the different activities fit together.
It serves as a communication device with which the various managers can
exchange information concerning goals, ideas and achievements.
It motivates management in form of the goals to be achieved especially the selfimposed budget estimates.
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CHAPTER 5
Finance in Business
6. Structured Questions
1.
Explain briefly what additional considerations might be made by a bank
before granting a company an overdraft.
[5]
Answer
2.
Sound business plan
Collateral security
Guarantee by company
State of economy
Competitors
Previous banking history
What advantages does the use of index numbers bring to decision making?[3]
Answer
-
3.
Simplifying complex numbers
Simplifying raw numbers
Putting different numbers onto comparable basis.
Allowing perception of change over time
Facilitating forecasting
Allowing aggregation
Explain the term “internally generated finance
Answer
Funds generated by the firm through:
Company savings
Retained profit
Depreciation
Sale of assets
Sale and lease back
Factoring etc
NB: These are funds not obtained from third party foe example sale of new equity or
loans.
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Suggest possible sources of finance a firm might use for an expansion
program.
[4]
4.
Answer
Internal Sources
-
Retained profits
Dividend retention
Sale of existing fixed assets.
External Sources
5.
New mortgage on land / premises. Consider gearing
Debentures/ loan stock. Gearing implicated
Certain forms of venture capital
Loans or grants from the government.
Discuss how any organization might attempt to minimize the disruptive
effects to its operation of any major expansion.
[10]
Answer
6.
Strategic and tactical planning
Financial planning
Human resource planning
Operations management
Marketing activities.
Discuss the likely implications for the hotel industry of an increase in direct
taxation.
[8]
Answer
-
Increase in tax leads to reduce disposable income which in turn reduces
demand.
It may also reduce employment levels.
Increased taxes would reduce spending on leisure (a luxury).
-
However it is necessary to investigate the particular market segment, the price elasticity
of demand and the relative size of the tax increase.
7.
(a)
(b)
Define the term gearing.
[3]
What is the importance of gearing to any stakeholders of a firm?
[4]
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Answer
(a)
Gearing (sometimes called leverage) is a measure of the financial risk of the
company for potential lenders.
Shareholders – high gearing reduces amount of dividend paid to ordinary
shareholders.
But it also reduces chances of dilution of equity.
(b)
Creditors: high gearing brings insecurity it as it increases risk of non payment. This will
reduce willingness of creditors to advance further loans.
8.
Distinguish between a money market and a capital market.
[4]
Answer
9.
A money market is a market for short –term finance
Instruments used include – Treasury Bills, overdrafts, LCDs, etc
Capital market is a market for long-term finance.
Instruments used are; shares, debentures, mortgages, long term, loans etc.
Distinguish between debt and equity finance.
[3]
Answer
Debt is borrowed long-term capital for example debentures, preference shares,
mortgages.
Equity is owned capital. This is capital owned by shareholders. It is also called
shareholder’s funds. Raised through the issue of ordinary shares.
10.
(a)
(b)
In capital budgeting, what is meant by the term leasing?
Evaluate leasing as a source of finance.
[2]
[5]
Answer
(a)
Leasing is a form of long –term hire of fixed assets such as buildings, vehicles or
equipment.
(b)
Advantages and disadvantages of leasing
Advantages of leasing
- Improves liquidity as cash is not tied up
in assets
- Maintenance and other services are
usually provided
- Temporary replacement may be provided
for faulty vehicles or equipment
Disadvantages of leasing
- The business is committed to payments
over a long period
- Payments may be higher than for outright
purchase
- Equipment cannot be used as security for
loans.
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11a) What does the return on capital employed ratio tell you? [2]
a) What uses would you expect the management of a firm to get from the use of this
ratio? [5]
A a)
-
The return on capital employed is the net profit after tax achieved by the
company divided by the average investment on total assets
This ratio tells the effectiveness of employing all resources available (whether
they are from ordinary or preference shareholders, creditors or bankers).
b) The return on capital employed could be compared with ratios of previous years to
get a picture of the profitability of the company. If the ratios continue to fall year after
year, management has to take corrective action to reverses the poor performance.
- If the company has been consistently earning a rate of returns below forecasted rate of
returns or the industry average management should review its operations.
12 What contributions do discount houses make to the efficient operation of business?
A- Discount houses deal in short term funds.
- Commercial banks and other financial institutions deposit funds with discount
houses on an overnight basis.
- The discount houses then invest the funds in short term financial instruments such
as treasury bills, or other short-dated government securities, bills of exchange.
- The discount houses enable banks to maximise their returns on short term funds.
- It contributes to the development of an active secondary market for short term
purposes and facilitating the issue and sale of treasury bills and government
securities.
13 a) A major cause of business failure is “overtrading.” Explain this term. [4]
A a)- Refers to the poor financing of the firm, so much that the capital of the firm is
stretched to the maximum and is not adequate to finance all areas of operations.
- This is so when new operations are undertaken in spite of inadequate financing.
- Management may decide to take out a risk, hoping that returns on such-operations
will be adequate and timely enough to pay for the financing undertaken for the
project.
- Overtrading can also be on non-financial resources e.g when a firm spreads
inadequately skilled manpower over new operations or lack of managerial
expertise in operating new enterprises.
b) How and why does it occur? [4]
- Management had either taken the risk hoping that returns will be timely and adequate
enough to finance its present and new operations. Returns will not materialised and it
affect the firm adversely to such an extent that it is forced to liquidate.
- management overrated the firm’s capabilities in areas of finance, production,
distribution and managerial expertise so much that it made a bad judgement and
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overstretched its resources badly affecting the firm and forcing it to declare
bankruptcy.
14 Why do companies publish annual accounts? [3]
A. Companies are required to publish annual accounts to inform their shareholders
and the public, some of whom could be shareholders of their financial and
operating performances.
- The requirements seeks to protect the financial interests of the shareholders who
are not in a position to have all the information necessary to make investment
decisions, nor have the ability to make decisions concerning the daily operations.
15 Explain how the stock valuation methods a firm chooses might affect its reported
profit [4]
A. FIFO refers to taking value of stock according to the buying order as the cost of
sale i.e. the assumption is that the oldest stock is being issued first.
- The method increases the cost of raw material or stocks and the reported profits
will most probably be inflated as the stocks used sold are those purchased earlier
at a lower cost.
- On the other hand if costs of stocks have gone down an inflated loss will be
reported.
LIFO-Assumes that the last items of stock purchased are the first to be issued or sold
and
thus the stock remaining is valued at the cost of the earlier purchases.
- If cost of stocks purchased increases, the reported profits will be lower as the
stocks used are those recently purchased at a higher cost. If prices of stocks fall,
profits will be inflated.
16. A company uses a depreciation method for its fixed assets based on historic costs.
What difficulties might be faced during a period of inflation? [3]
A. In inflationary periods, depreciation based on historic costs will undervalue the
actual cost of depreciation expense.
- This is due to the fact that the depreciation expense incurred is not increasing at
the inflation rate.
- Assuming an operating expense of depreciation, net profits will be overstated in
the profit and loss statement due to higher costs of goods sold and a lower
depreciation expense.
- The Balance Sheet will show a book value of the asset due to depreciation rate
distorted by the inflationary rate.
17 Why might production managers be anxious to ensure that a sufficient allowance for
depreciation is made against the plant and machinery under their control? [4]
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A Depreciation is the allocation of capital expenses across the useful life of an asset.
It accounts for the loss of value, and allocate the cost of asset overtime.
The production manager would want to ensure sufficient allowance to reflect
correctly the amount of operating expenses incurred during every financial period as
well as to plan for adequate funds to replace the asset at the end of its useful life
- Depreciation is also important to prevent obsolescence of the assets where
technology has allowed more efficient and effective assets to be introduced
perhaps even at a lower cost.
9.
Essay Questions
1.
(a)
Using the information in the table below, calculate financial efficiency
ratios.
Table 1.
31 / 12 / 2000
31/ 12 /2001
Debtors
16
23
Stocks
120
180
Annual Sales
200
250
Turnover
[10]
b)
Evaluate any two ways in which a business might improve its finance
efficiency.
[15]
Answer
Ratio may include debtors’ collection period, creditors’ collection period, stock turnover
ratios.
Debtors collection period = debtors x 365
Sales
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2000 = 16 x 365
200
1
= 29 days
2001 = 23 x 365
250
1
= 34 days
b)
Answers should evaluate any of the following ways:
·
Reduce debtors’ payment period to increase cash inflow though this can be
discourage customers.
·
Increase creditors payment period but this can leads to poor credit worthiness of am
bus.
·
Debt factoring.
·
Leasing.
·
Rights issue of shares etc.
These should be outlined and their weaknesses examined.
2.
(a) . Using the information given below, calculate the current gearing ratio.
Comment your results.
Fixed Assets
$55 000
Current Assets
$15 000
Capital Employed
$60 000
Long term Loans
$15000
[10]
(b)
Evaluate possible methods a firm can use to finance the purchase of a
machine.
[15]
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Answer
Answers should explain the need for gearing. Calculations should be done.
(a)
Gearing = Debt
Equity
= 15 000
45 000
=1:3
Or
Gearing =
Debt x
100
Capital employed
=
15 000
x 100
60 000
= 25%
Gearing shows the relationship between debt and equity.
A firm that relies too much on-borrowed funds is said to be highly geared. While a
firm that relies a lot on equity finance is said to be lowly geared. This company is
lowly geared as only 25% of capital employed is borrowed. Over 50% highly geared
less than 50% lowly geared.
b)
Answer should evaluate a minimum of three long-term sources of finance.
Such sources may include;
·
Debentures shares
·
Preference shares
·
Leasing
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3.
·
Hire purchase
·
Mortgage. Etc.
·
Ordinary shares or rights issues
(a)
Define the following terms;
(i)
Debt factoring.
(ii)
Working capital
(iii)
Equity
[10]
Answer(a)
(ii)
·
(i)
Debt factoring
·
A method of raising short –term finance.
·
A firm sells its bills receivable to a factoring house.
·
Factoring house gains cash and the discount.
·
Firm gains immediate cash.
Working capital
Capital that is used for the day today operations of he business rather than for long
–term investment. Current assets les current liabilities. if too small business may
face liquidity problems.
(iii) Equity – finance belonging to owners of he firm. For example ordinary share
capital general reserves.
b)
·
Answer should consider the following:
Cash management – change the strange ways of getting rid of surplus cash attend
of year. Pay off trade creditors or short- term loans by reducing cash and current
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liabilities –it will not reduce cash shortages but will improve management, reduce
stocks, debtors e.g. through discounts.
4.
(a)
Why might profitable businesses have cash flow problems.
(b)
Evaluate three methods managers might use to improve the cash flow
of a business.
[10]
[12]
Answer
Answer should highlight that profit is different from liquidity. Profit is not
a)
prepared on cash terms.
·
Credit sales or purchases.
·
Non-cash items such as depreciation, profit /loss on sale of assets.
·
Profits might be high while there is no cash received.
·
Accruals / matching concept used to calculate profit etc.
b)
4.
Answers can evaluate any of the following:
·
Reduction of stocks.
·
Reduction of debtors’ collection period.
·
Increase of creditors’ payment period.
·
Cash management.
·
Debt factoring.
·
Overdraft.
·
Trade credit etc.
(a)
Explain the following terms:
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(ii)
Overtrading
(iii)
Overdraft
(iv)
Liquidity.
[10]
(b)
(i)
Distinguish between:
Capital Expenditure and revenue Expenditure. Give examples to explain your
answer.
Long –term and short-term sources of finance.
(ii)
[15]
Answer
Overtrading – is a situation of excessively rapid growth with insufficient
(i)
working capital.
A business, which is fundamentally sound, might have
difficulties in raising sufficient funds to repay its debtors as they fall due.
Overdraft – short-term loan –it is an unofficial form of borrowing where
(ii)
interest is charged on a daily basis.
Liquidity –it is to do with the amount of cash available to meet short-term
(iii)
obligations. Measured using the current asset ratio and the acid test ratio.
(b)
(i)
Capital Expenditure – expenditure for the ratio purchases of assets that
last more than one year (fixed assets) e.g. machinery.
Revenue Expenditure - spending on all costs and assets that will last less than one
year such as wages. Salaries, telephone etc.
(ii)
Long –term sources –to finance the purchases of fixed assets for
example debentures.
(iii)
Short-term sources – to finance working capital needs for example debt
factoring.
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6.
(a)
Why do business need finance?
[10]
(b)
Evaluate leasing as a method of raising finance.
[15]
Answer
a)
Answers might include;
·
Finance is needed to start up the business.
·
For expansion.
·
A business will need finance to provide for working capital requirements that is
day-to-day operations.
·
To finance export.
·
Special situations e.g. an extra ordinary order from a customer.
b)
Answers should consider both advantages and disadvantages of leasing:
Advantages might include:
·
Lease payments will be greater in the long run.
·
There is no need for a deposit. Etc.
Disadvantages.
·
Payments will be greater in the long –run.
·
Payments are out going.
·
The lease agreement may place restriction on the use of certain products.
·
Leasing does not benefit the leasee, as he cannot enjoy residual value. Etc.
7.
(a)
Outline any three types of internal sources of finance.
[10]
(b)
Evaluate the role of gearing in choosing a source of finance.
[15]
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Answer
Types of internal sources of finance might include;
a)
·
Retained profits.
·
Sale of assets.
·
Reduction in working capital.
·
Sale of shares to existing shareholders.
·
Reduction in debtors.
·
Reduction in stock.
Answers to consider the strengths and limitations of gearing.
b)
Strengths might include;
·
No dilution of equity hence, more borrowed capital can be obtained.
·
Less risky structure hence attracts investors.
·
Interest on loans is an expense for tax purposes.
·
Lenders have no voting right at annual general meetings etc.
Disadvantages.
·
Increase risk for shareholders.
·
There is increased risk of company failure due to high interest payments; more
assets are pledged reducing control over the assets.
8.
(a)
Outline the factors influencing the choice of finance.
[10]
(b)
Evaluate the sources of finance for unincorporated businesses.
[15]
Answer
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a)
Factors might include;
·
Legal structure and the desire of owners to retain control.
·
Time period for which finance is required.
·
Amount required.
·
Gearing ratios.
·
Risky ventures.
·
Size of business.
b)
Answers might consider;
Brief summary of what unincorporated companies are: for example these are Sole traders
and Partnerships.
·
Cannot sell shares to the public.
·
Unlimited liability reduces investor’s confidence in these firms.
·
Hence, sources available for use by unincorporated companies might include:
(i)
Bank overdrafts, bank shot term loans.
(ii)
Trade credit.
(iii)
Borrowing from friend.
(iv)
Owners’ capital.
(v)
Retained profit.
(vi)
Grants etc.
9.
(a)
Distinguish between money markets and capital markets.
[10]
(b)
Distinguish between debt and equity finance.
[15]
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Answer
Money markets are markets for short –term securities. The instruments mature
a)
in less than one year. For example treasury bills, NCDs and bankers acceptance.
Capital market – market for long-term securities such as debentures, preference
shares and ordinary shares. They mature after one year. Used to finance expansion
of corporate business.
b)
Debt and equity finance.
·
Debt is borrowed capital while equity is owned capital.
·
Debt finance is temporary while equity is permanent.
·
Debt finance increases the risk of a company while equity finance is less risky.
·
Debt finance in dividend payment etc.
10.
Evaluate the possible sources of finance for incorporated companies.
[25]
Answer
NB: Answers should explain the term “incorporated companies”.
NB: Examples of such companies include public limited and private limited
companies.
·
Sources of finance for such business may be divided into short –term and long-term
sources.
·
Short term sources are meant to finance working capital needs for example debt
factoring, trade credit, short-term loans etc.
Long-term sources might include an evaluation of:
·
Debentures
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·
Shares
·
Long term loans e.g. mortgages.
·
Preference share etc.
11 In what ways would accounting information when prepared for internal management,
different from that compiled for the use by other interested parties? [10]
A. In this question the students should identify the differences between internal and
external users giving examples of both groups. Having identified groups such as
management, employees, owners, creditors, government and consumers there should
ensure a discussion of the information needs of the different parties.
- For certain external purposes information is mandatory in order to comply with either
the Companies Acts or the Accounting profession’s Statement of Standard
Accounting Practice.
b) What kind of information would a supplier require of a new customer ordering $1
million worth of raw materials on a regular basis? [15]
A. The question requires an application of the general comments made in the previous
section to the needs of a supplier of high value equipment.
- The supplier will be interested in assessing the degree of risk involved and the
customer’s standing
- Its current net asset positioned could be obtained from the Balance sheet and its past
trading record by analysing the Profit and loss account.
- A great deal of attention will be placed on the funds flow statement to assess the
ability of the company to generate sufficient funds to avoid working capital problems.
- The application of various ratios would be appropriate especially the liquidity ratios.
12 a) What does an accountant understand by the term ‘liquidity’? [5]
A- It is the ability to meet bills and claims as they fall due. In order to do so the firm
must have sufficient current assets i.e cash or assets which can be converted
quickly to cash to meet current liabilities?
- A number of ratios can be applied to test the level of liquidity e.g the current ratio
and the acid test ratio.
b. Outline a method by which a firm might predict future liquidity problems and explain
how these may be averted. [20]
A- The method required is a forward Cash flow forecast.
- The student can illustrate by a table to present or describe an opening cash
position, projected revenue, expenditure, borrowing, etc and the resultant cash
position. This will indicate the likely cash needs of the business available for
investment.
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-
13
items:
a)
b)
c)
The second part of the question requires a discussion of the various forms of
raising short term finance and/ or delaying payment.
This should include overdraft arrangements, stock reduction, delaying, payment to
creditors, debtor payment encouragement and growing popularity of factoring. If
the liquidity problem is seen as long –term then a description of restructuring the
company’s capital should be included.
Explain the problems an accountant might face in dealing with the following
Valuation of fixed assets. [9]
Valuation of stocks. [9]
The provision of bad debts. [7]
Valuation of fixed assets
Accountants will have to consider (i) the allocation of costs of fixed assets over
their useful lines (ii) the manner of depreciation and (iii) the costs to be accounted
for in depreciating the asset(s)
- The accountant may face problems with these allocations in that he may be ensure
of (i) the bases and methods to be used for calculating depreciation charges (ii)
the useful life of the assets to be depreciated and (iii) if any the costs involved in
reassessment of useful economic lives of assets and changes in depreciable
amounts in consequence of the revaluation of assets.
- In order to solve the above problems the accountant should take note of:
(a) The bases and methods of calculating depreciation charges should be appropriate
to the nature of the respective assets and their expected use in the operations of
the business.
(b) Depreciation rates should be reviewed annually and adjusted so that they will
reflect the most recent estimates of the useful lives.
(c) When a depreciable asset has been devalued, with a corresponding adjustment of
the amount of which the asset is carried in the accounting records.
A a)
-
b)
-
-
The valuation of stocks
First there is the problem of stocks being purchased at different point in time at
different unit prices. Different methods of determining cost (LIFO and FIFO and
AVCO) are available.
Use of the different methods, during a period of riving/changing prices will result
in very different cost of goods sold, closing stocks and gross profits.
Accountants have to abide by the rule of ‘lower of costs or
Net realisable value (NV) when valuing closing stocks in the Balance sheet.
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-
It follows the principle of conservation which aims to ensure that accountants
anticipate no profit but provide for all likely loses in order to be safe.
If market value (NRV) of stocks falls below the costs NRV’s used and loss
recognised
NRV is the expected selling price less cost incurred to make the sale.
C)
Provision for bad debts.
A debt is considered bad only when there is certainly that the debtor is unable to
pay.
The matching principles require firms to consider a debt that is created in one
period as an expense for that same period.
Provision for bad debts is made to estimate the likely percentage of current debts
going bad in the future in order to reflect true picture of the current financial
statement.
Provision can be made on previous experience or with comparisons with other
trade competitor or even on the record of trade debtors’ payments records.
Experience may not be available or information pertaining to trade competitors
may not be available.
14 a) Explain clearly the difference between a positive and negative variance. [6]
a) What is budgeting control? How and to what extent is it useful? [19].
A a) Variance is the measure of the difference between a planned financial
performance and the actual results achieved. Favourable or positive variance arises
when the actual cost is less than the amount planned. In contrast, an unfavourable or
negative variance exists when the actual cost exceeds the amount expected.
b) The control phase of budgeting consists of three major steps
- Company the actual financial performance with the budget estimates.
- Identifying any significant variances.
- Deciding what management action to be taken.
Budgeting control provides feedback necessary to evaluate the financial results on the
basis of management by exception:
:
Favourable variances will be investigated to determine whether corrective action
can be taken to improve future performance.
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CHAPTER 6
Accounting
7. Structured Questions
1.
(a)
(b)
What is a budget?
Assess the usefulness of budgets to an organization.
[2]
[5]
Answer
(a)
(b)
2.
A budget is a formal quantitative statement of the resources set aside for
carrying out planned activities over given periods of time.
Advantages of budgets
- Budgets convey on formation on a key organizational goal – profit.
- Budgets establish clear and unambiguous of standards performance for a
set time period – usually a year.
- Budgets are means of co-ordinary the activities of the organization.
The profits a company makes have been low for several years. Explain why
shareholders might be concerned at a decision to borrow more capital.
[3]
Answer
Borrowing means interest has to be paid. Since profits are low this will have a large
effect on dividends and could remove them altogether. This will be higher gearing.
3.
Outline the main contents of published accounts.
[8]
Answer
The following published accounts can be discussed.
Profit & loss account – contains the profits and loss, trading activities.
Balance Sheet – contains the current and fixed assets, net worth of the business current
and long –term liabilities.
Cash flow statement – shows the sources and uses of finance. Shows the cash inflows
and outflows.
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4.
(b)
(a)
Define the term “investment appraisal”.
[2]
What are the advantages of net present value over payback period as method of
investment appraisal?
[4]
Answer
(a)
(b)
-
Determining which project to choose.
NPV – takes into account time value of money.
Considers all the cash flows
Cash also use profits.
Payback – only considers cash flows up to payback
- Ignores cash flows that come after payback
- Ignores time value of money.
Why would the analysis of a company’s own accounts be inadequate for the
decision making process to management?
[4]
5.
Answer
6.
(a)
(b)
Answer
(a)
(b)
7.
Company accounts can be window dressed.
Company accounts are historical in nature, hence cannot be used for decisionmaking.
Company accounts do not incorporate non- quantitative data such as level of
skill of workers.
Explain the term “depreciation”.
[2]
Explain the effect on a business of not depreciating its fixed assets. [4]
Depreciation is the loss of value of fixed assets. It is the wear and tear of an
asset.
- Need to make a provision
- Failure to charge historic cost, less residual value, over useful life can
overstate profit
- Can lead to overstated value of asset.
Explain the purpose and the effective on company accounts of depreciation.
Answer
-
To avoid overstating profits and value of asset.
The effect of charging depreciation does not affect the cash flow of a
company as depreciation is a non- cash item.
Depreciation spreads the cost of an asset throughout its useful life – matching
concept.
Depreciation has the effect of understating profits as it is treated like an
expense in the Profit and Loss Account.
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8.
With the aid of an appropriate example sketch a cash flow forecast with cash
balances each month.
[5]
Answer
Cash flow forecast shows the forecast Cash inflows and outflows.
Example Cash flow Forecast For 3 months
Balance b/d
Jan
200
February
500
March
500
400
200
800
500
1000
200
700
300
500
500
500
800
(100)
Receipts
Sales
Loan
Total Cash
Payments
Purchases
Balance c/b
9.
The following is an extract from Wisebuy Ltd accounts at 30 /07/06
Stocks
Debtors
Cash
Current Liabilities
Capital employed
(a)
$ 6 000
$ 40 000
$ 1000
$ 32 000
$175 000
Analyse and comment on the liquidity of this business.
Current assets ratio
= Current Assets
Current liabilities
=
=
Acid test ratio
6 000 + 40 000 + 1000
32 000
1,47 or 1,5 : 1
=
Debtors + Cash
Current liabilities
=
40 000 + 1000
32 000
=
1.28 : 1
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COMMENT
Wisebuy Ltd will not face any problems in meeting short – term liabilities because both
ratios reveal a healthy liquidity position.
The current ratio lies within the required range of 1.5 – 2 and the acid test ratio is also
within the required range of 0,5 – 1.
8.
1.
Essay Questions
Examine the differences between financial and management accounting.
[25]
Answer
Difference might include:
·
Management accounting is concerned with internal reporting while financial
accounting is mainly concerned with external reporting
·
Management accounts seek to support management decisions making while
financial accounting deals with the provision of stewardship function of managers.
·
Management accounting emphasizes the control and decision making function
while financial accounting relate to the stewardship function of management and
also it is a means of ensuing the accountability of the controllers to the owner of the
enterprise. Etc.
2.
(a)
(b)
Explain the following terms:
(i)
Double entry
(ii)
Prudence
(iii)
Accruals /matching concept.
Evaluate he usefulness of balance sheets.
Answer
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a
(i)
Double entry –is the dual aspect of recording in accounts.
Each
transaction is recorded twice in the books of accounts. One as debit and
the other as credit. Example sold goods for cash. Double entry requires
that cash be debited and sales be credited.
(ii)
Prudence – also called conservation.
It means the least favorable
position. Losses are overstated and profits are understated. The need for
prudence is a result of manager’s being required to estimate when drawing
up accounts e.g. accrued expenses, depreciation etc.
(iii)
Matching concept – matching revenue earned in an accounting period
with expenditure incurred. Hence, increase income of a particular period
is matched to the costs of the same period.
b.
Answers should highlight the uses of a balance sheet and limitations of balance
sheets; balance sheets show much of businesses but only; a snapshot is shown,
balance sheet ignore, qualitative factors etc.
3.
(a)
Explain why firms need to depreciate their assets.
(b)
Distinguish between the straight lie and the reducing balance methods
of depreciation.
[5]
[20]
Answer
a)
Depreciation –is loss of value of assets due to wear and tear. It is charged to
spread the cost of an asset through its useful life.
b)
-
It is a non – cash item.
-
Treated as an expense in the profit and loss account.
-
Reduces the value of an asset.
Straight line method.
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·
Also known as equal instalment method
·
A constant amount of depreciation is subtracted from he cost of each year.
·
Calculated as cost less residual value over the expected life in years.
·
It is unrealistic to assume that the asset will lose value at a constant rate each year.
·
Useful to depreciate machinery.
Reducing balance Method.
·
Also known as diminishing balance method.
·
Reduces the value of an asset by a constant percentage of the net book value.
·
Depreciation is greater in early years but falls with the asset’s useful life.
·
Can be used for depreciating vehicles.
4.
(a)
Explain the purpose of a company’s Balance sheet and profit and loss
account.
(b)
Discuss the usefulness of published company accounts to both
managers and shareholder.
Answer
a)
[10]
Balance sheets.
·
Used to show the net worth of a business.
·
One component of the final accounts.
·
Shows assets and liabilities.
·
Liquidity of a business can be assessed
Profit and Loss Account.
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·
Statement showing profit or loss from trading activities.
·
Shows the profitability of a business
·
Expenses are subtracted from the gross profit.
·
Incomes from non –trading activities are shown.
·
Drawn for the whole year.
b)
Answers should highlight the strengths and weaknesses of published account
(i.e. Balance sheet and profit & Loss accounts).
Uses:
·
Report to the external world on the trading, practices of the firm.
·
Help to assess potential and hence make investment decisions etc.
However:
Can be drawn in a misleading way (window dressing).
·
Ignore qualitative data.
·
Can be affected by the various accounting policies.
(5)
Evaluate the benefits to businesses of introducing budgets managed by Heads
of Departments.
Answer
Answers could include:
·
Definition of budgets.
·
Motivate staff and HODs they seem to be problems for businesses in area.
·
Allow better-cost control –problems for businesses at present.
·
Give targets -could improve performance if budgets are tied with performance.
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However.
·
Budgets can instil rigidity in HODs.
·
Sticking too much on budgets can prevent firms from taking up initiative.
·
Budgets stifle creativity. Etc.
6.
A firm has just purchased new machinery. Advise its management on how to
depreciate the new machinery. Justify your answer.
[25]
Answer
Briefly define depreciation.
Briefly explain the two methods of depreciation.
Briefly explain why firms need to depreciate their assets e.g. to spread the cost of an
asset.
Explain the two methods of depreciation, straight line method and reducing
balance method.
Finally, choose the straight line method as the machine is likely to be used consistently
through the life of an asset, evaluate the usefulness of depreciation e.g. a lot of guess
work is involved, depreciation is a non – cash –item.
7.
(a)
Outline the main contents of published accounts.
(b)
Discuss why the owners of a private limited company might wish to
convert it into a public limited company.
[10]
[15]
Answer
a)
Published accounts include profit and loss account and balance sheet.
·
Explain briefly the aims of each account.
·
Explain the main contents of each account.
·
Profit and loss account –trading account to give gross profit, profit and loss account
to give net profit.
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·
b)
Balance sheet –list of assets, list of liabilities and net worth of a business.
Advantages of public limited companies.
·
Ability to raise capital through sale of shares to public
·
Economies of scale.
·
Mass production.
·
Increased chances of growth.
However
·
Prone to take over.
·
Diverse between ownership and control.
·
Loss of personal touch with customers. Etc.
8.
Evaluate two investment appraisal techniques.
[25]
Answer
Answers can include the evaluation of any of the following techniques.
·
Average rate of return (ARR)
·
Payback period.
·
Net present value
Answers should give numerical examples of projects and use those values to calculate
Average rate of return.
Net present value
Payback period.
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Answers should go on to give strengths and weaknesses of each investment appraisal
technique.
Answers should also consider the fact that quantitative techniques ignore qualitative
factors such as the level of motivation of workers changes in the environment.
9.
Briefly explain how a cash flow forecast is drawn. Evaluate the usefulness of
a cash flow forecast to a business of your choice.
[25]
Answer
Cash flow forecast.
·
Gives balances of cash at the beginning of a period.
·
List of receipts of cash from e.g. sales, sale of assets, donations etc.
·
List of payments i.e. for purchases, wages, rent etc.
·
The difference between total cash received and opening cash and the payments.
·
This difference is called closing balance of cash.
Uses of a cash flow forecast.
To determine cash shortages in advance to secure ways of reducing cash shortages.
To determine cash surplus to find ways of investing those surpluses.
10.
(a)
Explain the following
(i) LIFO
(ii) FIFO
(b)
Explain how the results of LIFO and FIFO will affect the final
accounts figures.
Answer
(i)
·
LIFO – Last in first out.
Stock bought recently is sold first.
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·
This changes stock at most recent prices.
·
Stock issued carries most recent prices.
(ii)
FIFO – first in First out
·
Stock issued according to order they were put into warehouse.
·
First stock bought is first to be issued.
·
Stock is at outdated price.
i)
LIFO
Understates profits because cost of sales is at recent prices. Closing stock values are
outdated as they are stock bought earlier therefore, balance sheet value are unrealistic.
ii) FIFO
Overstates profit because cost of sales is of outdated prices. Balance sheet values are
quite realistic as they bear current prices
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CHAPTER 7
INFORMATION FOR DECISION MAKING
Structured Questions
1.
Explain the terms Total Float and Free Float.
[2]
Answer
Total Float – the delay an activity may suffer from scheduled, which does not threaten
the minimum project duration provided nothing else on the path is delayed.
Free float – the delay which an activity may suffer from scheduled which does not
threaten the EST of the immediately following activities.
2.
Suggest possible sources of market research information and appropriate
techniques of collection a firm can use.
[8]
Answer
Possible Sources – bought in data from Market Research companies government
statistics, local authority statistics, local population and existing members, etc.
Possible techniques – questionnaire, telephone survey, personal interview, use of
primary or secondary data, field or deskwork.
Limitations
Cost
Time
Accuracy
Sample size
Simple frame etc.
3.
How might market research results a firm to determine the viability of
project.
[8]
Answer
-
Potential demand
Information about competitors
Prices and price elasticity of demand
Likely frequency of use
Range of complementary services required.
Demand for these demographic distribution of potential users.
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4.
A business is considering investment in a new factory.
(a)
State what is meant by “Pay Back Period.”
(b)
Calculate the Pay Back Period from the following evidence.
Initial Investment
Net Return Year
(c)
400
400
400
500
600
1300
1700
Explain why Pay Back Period may not be a good way of deciding whether to
invest in this factory.
[4]
Answer
(a)
(b)
(c)
5.
1
2
3
4
5
6
7
$2000
$
$
$
$
$
$
$
[2]
The period of time in which the initial capital will just be repaid.
Total capital required = $2000
After 4 years
= $1700
Required
= $300
This is 300/ 600 of years = 6 months
Payback Period is 4 years = 6 months
Because payback is long and therefore there is risk/ uncertainty / time value
of money/ returns after year 5 are very much higher.
Distinguish between desk and field research.
[2]
Answer
Desk research (secondary) uses available information from firm’s figures for example
sales, or competition or government and other sources of statistics.
- Field research (primary) collection of raw or original data done specifically for the new
(or existing) product in question.
6.
State and explain any three method of presenting data.
Answer
Methods of presenting data may include;
Bar charts
Pie Charts
Line graphs
Tables
Histograms
Histiriograms
Cumulative frequency curves
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7.
Give two reasons why data may be presented in a misleading way.
[2]
Answer
Reasons might include:
8.
Window dressing
Lack of knowledge
Inaccurate research results
To attract investors
To evade tax
To mislead competitors
Explain the following terms as used in network analysis.
(i)
Dummy activity
(ii)
Critical Path
[6]
Answer
(i)
Dummy activity is necessary to maintain the logical inter- relationship of
activities.
- It is represented by a broken line in the network diagram.
- Dummy activities have no resource requirements.
Critical Path is the path that gives the minimum project duration. It is said to
be critical because all the activities on this path should not be delayed if the
project is to finish in time.
(ii)
9.
A firm has a choice between two projects, A and B. The initial investment are as
follows:
Project A $40 000
Project B $60 000
The probability of success for project A is 0,5 with a cash inflow of $80 000. if it
fails, the inflow will be $40 000.
The probability of success for project B is 0,6 with a cash inflow of $100 000. If it
fails, the inflow will be $40 000.
(a)
(b)
Represent the above information on a probability tree diagram.
[2]
Which project would be more acceptable? Give reasons for your
recommendation.
[4]
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Answer
0,5
(a)
80 000
Pay off
0,5
40 000
A
016
100 000
B
Cost A = $40 000
B = $60 000
014
40 000
Project A = ½ (80 000) + ½ (40 000) – 40 000
= 40 000 + 200 000 - 40 000
= $20 000
(b)
Project B = 6 (100 000) + 4 (40 000) – 60 000
10
10
= $16 000
Project A should be chosen because it has a higher expected value.
10.
Explain how network analysis might improve the management of the
company’s cash flow.
[8]
Answer
-
-
Focuses how much cash is needed and when it is needed.
Ensures that materials / equipment are only purchased when required thus
freezing cash from being tied up in these assets.
Workers are paid and employed as and when needed.
Float can be used to improve management of projects and thus assist in
overall cash management.
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11.
Why is it unwise to make decisions basing on quantitative factors only.
[3]
Answer
Non- quantifiable variables are ignored for example.
Competition
Skills of the workforce
Level of motivation
Also quantitative information might be incomplete and misleading.
12a)
b)
State and explain the nature of two different methods of sampling [4]
In what circumstances might each of these be the preferred method? [4]
A a)
-
Random sampling (simple)
This method ensures every individual in the target population an equal chance of
being drawn.
This is done by using a random number table to generate the desired number to
sample between and the number of names on the list.
-
Stratified Sampling
- The target population can be divided into segments with different characteristics.
The information about the segments can be used to design the sampling plan.
- Specifically, separate sampling pans can be drawn for each of the stratum.
b) Random sampling have many nice properties especially simplicity but may not be the
most efficient procedure.
Stratified sampling- certain segments of the population may be considered key areas
for marketing strategy and a researcher may want a relatively large number of sample
points in these segments, while at the same time other strata may be sufficiently
important potentially that they cannot be totally ignored.
- Stratified sampling ensures adequate representation of key subgroups of the
population
- Costs of sampling across strata may be quite different.
13
A
Outline two ways in which a firm producing a new product might research its like
market. [4]
Consumer demographic and consumer life style are two possible ways which firm
producing new product might research
Consumer demographics are statistics that are used to describe the population
size, gender, age, location, housing and mobility, income and expenditure,
occupation and marital status.
Consumer life styles describe both social (like reference group and culture and
psychological (like personality and attitude) characteristics of the consumers.
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14
An expanding overseas hotel chain wishes to determine whether there is scope to
build a large hotel in your country. State and explain the value of three sources of
information the firm should consumer.
Ai)
Government and its ministries- information on approval to release land to build
the total. Approval is required from the Ministry of construction. Information is
required on the tenure of the land, possible site for building and legislature
concerning architectural and safety standards.
ii)
Statutory bodies- Zimbabwe Tourism Promotion Board –data is obtained that
gives unbiased information and prediction, allowing the chain to make estimates
regarding to unit arrivals, hotel room rates, occupancy rates and number of hotel
rooms already on the market.
iii)
Travel agencies- tour agents will be able to supplement the information given
before with direct inputs on the daily scene.
15
Distinguish clearly between bar charts and histograms.
A. Bar charts are graphic presentations of statistical data. They allow for quick
understanding of numerical information where the height of the bars represents
the relative of the measuring unit.
- Histograms are also a form of bar charts, however, unlike bar charts which
graphically show information without time references, histograms present
statistical data on a time continuum i.e. data which is measurable across the
histograms allow for quick and meaningful comparison of information across time
periods.
16
-
How might knowledge of statistical probability enable managers to perform their
functions more efficiently? [5]
Probability is the likelihood of an event happening.
Objective probability- is based on trials and past data and refers to situations that
are repeatable.
It is useful in statistical quality control where a 100% inspection procedure is not
practical due to prohibitive costs, and unacceptable delays.
Statistical inference can be used where by inspection of a small sample can be
used to draw conclusions about the bath as a whole.
Subjective probability- is based on personal judgement.
Probability in relation to business success is subjective.
Probability is used in decision making techniques e.g decision trees.
Statistical probability in decision trees allows, quantification, logical thinking,
planning and new ideas are thrown up by the analytical process.
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9. Essay Questions
1.
For a project to be completed, the following activities should be under taken, B,C
follow A, E , follow B, D followed C, G follows E, H follows F
I follow G and D.
The project is completed when H and l are finished.
a)
Draw a network diagram of this project showing all earliest start times and latest
finished times.
[10]
b)
Identify the critical path and state the minimum project duration.
[2]
c)
Evaluate the usefulness of this technique for managing a building project.
Paths: ABFH =
24 days
ABEI =
19Days
ACDI =
15Days
The critical path is path ABFH. The duration of the project is 24 days.
b)
Uses of network analysis.
·
Facilitates planning and co –ordination of large projects.
·
Identify critical activities, which determine the overall duration of the project.
·
Identify activities, which cause bottlenecks and delays.
·
Determine when resources or components are needed.
·
Reduce costs by eliminating waste.
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Limitations
·
Too complicated to use.
·
It cannot solve production problems by itself.
·
Requires skilled and motivated staff especially when attempting to make up for
lost time.
·
Only experienced managers can identify the cheapest option for switching
resources from non –critical activities. Etc.
2.
Evaluate the usefulness of decision trees when deciding between alternative
courses of action.
Answer
Answer should;
·
Draw a decision tree diagram and use it to explain how a decision is reached using
decision tree analysis.
Explain the advantages of using decision trees such as:
a)
It is a useful analytical tool for clarifying the range of alternative courses and their
possible outcomes.
b)
Sets out options clearly.
c)
Encourages a quantitative approach showing the expected values of each option
by multiplying probabilities by economic outcomes.
However;
·
Calculation is complicated.
·
By giving an exact result, it can mislead business users to believing that the precise
process without risks and uncertainty. Etc.
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3.
The following are the cash flows for a company that is planning to purchase a
machine.
Year 0
$(200 000)
1
$60 000
2
$70 000
3
$100 000
4
$150 000
5
$160 000
a)
For the proposed machine, calculate:
(i) The payback period.
(ii) The average rate of return.
b)
(iii) Comment on your results.
[10]
Evaluate net present value method of investment appraisal.
[15]
Answer
a
(i)
Payback period
= 2 years + 70
x 12
100
= 2 years 8 months.
(ii)
Average rate of return = Average profits
x
100
Initial investment
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Average profit
=
60 000 +700 000 +100 000 +150 000 +160 000
5
=
\ ARR profits = 108 000
108 000
x 100 =
54%
200 000
b)
Answers should give the strength and weaknesses of the Net present value
method of investment appraisal.
Strengths might include:
·
Takes into account the time value of money.
·
Consider all the cash flows throughout the life of an asset etc.
Weaknesses.
·
Difficult to compute
·
Discount factors are based on guesswork. Etc.
4.
Evaluate sources of information a firm might use to decide whether to enter
the fashion market.
[25]
Answer
Methods may be split into secondary research and primary research methods.
Primary research methods.
·
Observation – i.e. the firm must observe the general fashion trends in the country.
This method is good for getting behaviour related data.
·
Survey method – good for getting information on attitudes and views survey
methods might include:
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(i)
Telephone
(ii)
Face to face interviews.
(iii)
Questionnaires
These methods should be looked at from the point of view of their strengths and
weaknesses.
5.
Evaluate the usefulness of linear programming blending techniques in
improving management decision-making.
[25]
Answers should consider the following:
Strengths and weaknesses of linear programming.
Strengths might include:
·
Useful in solving practical problems concerning production.
·
Applicable.
6.
Evaluate the usefulness of any decision making model.
[25]
Answer
Answers should give a detailed discussion of he strength and weaknesses of any of
the following decision making models. i.e.
Decision trees
Linear programming
Break – Even analysis
Network analysis
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Good answers will give numerical examples and use the numerical examples to show
how a chosen decision tree might help managers choose a decision.
The following are the forecasted net cash flows in million dollars of Tatty
7.
Limited
End of year
Option Au- factory extension
Option B – New Factory
0
(5,0)
(60)
1
2,5
40
2
2,5
30
3
2,5
30
10% discount factors
Year1
0,91
2
0,83
3
0,75
a)
Calculate for both options
(i)
The average rate of return.
(ii)
The net present value (at10% discount).
[10]
b)
How useful might these results be to Tatty Ltd.
[5]
c)
Assume that Tatty decides to build a new factory. Evaluate the advantages and
disadvantages to Tatty of locating the factory in your country.
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Answer
a) ARR = Average profits x 100
Initial investment
Option A
Option B
Average profit = 2,5 +2,5 +2,5
3
40 + 30+30
3
= 2,5
=33
ARR =2,5 x 100
5
1
=50%
33 x 100
60
1
=56%
Net Present Value
Cash flow
Year
Discount
Present
Factor
Values
0,91
2,2752,075
1,875
Cashflow
Discount Present
Factors
values
40
0,91
36,4
30
0,83
24,9
30
075
22,5
1
2,5
2
2,5
0,83
3
2,5
0, 75
(i) NPV
6,225
-5, 000
83,8
1,225
60,0
23,8
NPV =Present Values – Initial investment.
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b)
Advantages
·
Skilled labour.
·
Supportive government policies.
·
Political stability.
·
Good infrastructure etc.
Disadvantages.
·
Unstable currency.
·
Poor economic conditions. Etc.
8.
(a)
Distinguish between desk and field research.
[10]
(b)
Evaluate any two techniques of he survey method of collecting data. [15]
Answer
a)
Desk research – is secondary research.
Data has already been collected and stored.
Data maybe suitable for a different purpose.
Secondary research is cheaper.
While
Field research is called primary research.
Suitable for collecting raw and unprocessed data.
Field research is more costly in terms of time and research as compared to desk research.
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b)
Answers should consider the advantages and disadvantages of any of the
following methods of survey of collecting data.
·
Personal interviews.
·
Postal survey.
·
Telephone survey.
·
Panel survey.
·
Group interviews.
9.
Evaluate any three methods of presenting data.
[25]
Answer
-
Answers should identify any three data presentation methods briefly explain
them.
-
Answers should also highlight the appropriateness of each method to a given
situation.
-
Answers should go on to explain the strength and weaknesses of each method.
Methods to be evaluated might include;
·
Tables- these are suitable for presenting a wide range of data.
·
Line graphs – used when time is one of the variables.
·
Bar chart – used when the absolute size or magnituded of the results need to be
presented and compared.
·
Pie charts - visually useful to show the relative importance of segments of the
total.
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10.
(a)
b)
Evaluate the usefulness of the following methods of analyzing data;
(i)
Mean
(ii)
Median
(iii)
Mode
(iv)
Range
Why is data presented in a misleading way?
[10]
Answer
a)
Answers should outline the strengths and weaknesses of each of the methods e.g.
(i)
Mean
Advantages
·
Includes all the data in its calculation.
·
Widely used and understood.
Disadvantages
·
It is affected by one or two extreme cases.
(ii)
Median
Advantages
It is less influenced by extreme figures.
Disadvantages
·
When an observation has an even number, then the median is estimated.
·
It cannot be used for further statistical analysis.
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(iii)
Mode
Advantages
·
It is easily observed and requires no calculation
·
It is easily understood and the result is a whole number. Etc.
Disadvantages
·
(iv)
Does not consider all of the data.
Range
Advantages
·
Gives the highest figure and lowest figure for stock holding purposes.
Disadvantages
·
b)
·
Can be distorted by an extreme value.
Answers might include;
So as to attract potential investors e.g. presenters tend to overstate profit figures so
as to paint a bright picture about the firm, to win potential investors.
·
Insufficient knowledge on how data should be presented. This usually happens
when firms do not have enough funds to hire experts in the field of data
presentation.
·
Insufficient data. Due to financial constraints, insufficient data can be collected
leading to misleading results.
·
To mislead competitors. This is done to divert the attention of competitors from
their core business.
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11
Machines Ltd is about to choose between the three projects
Project A, B & C
Project
A
B
Initial Cash out lay
Year O
$10 000
$10 000
000
Yr
1
$1, 000
$4 000
2
2,000
3 000
3
3, 000
3 000
4
5
6
3 000
3 000
3000
C
$10
$3 000
3 000
3 000
2 000
-
3 000
2 000
-
Present value of $1 receivable at the end of a number of years at 10%
Years 0
1
2
3
4
Pv of $1
0,91
0,83
0,75
0,68
5
0,62
6
0,56
a) What is the Net cash flow for project C? [2]
b) (i) Calculate Net Present value of each project using discounted Cash flow
method.
(ii) On the basis of your calculations in b (i) which project should be selected?
(iii)Suggest and explain four factors that might be taken into account when
making an investment decision. [8]
(iv) State three different methods of financing the purchase of capital
equipment. [3]
A a)
Net cash flow for Project C
Year 0
1
3
2
3
3
3
4
3
5
2
6
1
-10
Net cash= $15000 -$10000
Net cash flow= $5, 000
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1. Project A
Discount
Year
-
-
-
d)
Cash
Flow
$’000
-10
1
2
3
3
3
3
NPV
Project C
Cash Pv
Cash
Flow
Flow
$’000 $’000 $’000 $’000
0
1,0
-10
-10
-10
-10
1
0,91
0,91 4
3,64 3
2
0,83
1,86 3
2,49 3
3
0,75
2,25 3
2,25 3
4
0.68
2,04 2
1,36 3
5
0,62
1,86
2
6
0,56
1,68
1
10,4-10
9,74-10
=+0,4
-0,26 =
$400
-$260
Project C should be chosen as a it has the highest NPV.
c.
Cash
Factor
Project B
Pv
Pv
$’000
-10
2,73
2,49
2,25
2,04
1,24
0,56
11,31-10
+1,31
+$1 310
One factor to take account of is the firm’s belief in the future. It must take into
consideration forecasts about demand, costs, inflation, taxation etc in order not
create a picture of the future market.
A second factor is the alternative is projects available. This is where the various
investment appraisal techniques can be used to decide which one is most
profitable given due consideration to the cash flows.
Another factor is the investor’s attitude to risk- investment decisions are often on
a lager scale, therefore it is important to recognize the firm’s attitude to risk and
project uncertainty.
The final factor is finance- is the finance available internally or must the firm use
extend sources? The cost of the finance is not only problem as one must also consider
how it affects the firm’s gearing and its liability to future interest payments.
Capital equipment can be financed by:
1) Outright purchase- using internal funds or a term loan from the bank.
2) Leasing-paying for the use f the equipment but without buying it.
3) Hire Purchase-wing a finance company where payment is made over a period
time by a deposit plus instalments.
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CHAPTER 8
DATA RESPONSE QUESTIONS
1. DATA RESPONSE QUESTIONS
1.
Siyalamukela Hotel Ltd
Siyalamukela Hotel is situated at the Beitbridge Border Post. Most of the customers are
foreign tourists from South Africa. However, the hotel has conference facilities used by
local business.
A rise in the exchange rate for the country’s currency has recently affected the hotel’s
profits.
Gumede, the Managing Director, employs three managers, one for each of the functional
areas:
·
Finance
·
Marketing
·
Catering
Gumede has delegated authority over budgets and managing of staff to each of the
functional managers. He looks after the buying of stock and customer care. Once a year
he and other managers discuss the ways of managing working capital.
Gumede’s accountant has advised him that the business is currently holding too much
working capital as revealed by the extract Balance Sheet below.
Extract from Siyalamukela’s Balance Sheet as at January 2006 ($000)
8.1.1 Current Assets
Stock
Debtors
Cash + Bank
400
400
1000
Overdraft
Trade Creditors
200
400
8.1.2 Current liabilities
The Hotel’s employees receive a low basic wage together with extra payments given by
customers are encouraged to name the member of staff that they found most helpful; the
member of staff will then receive a further bonus from the business. Many of the staff are
unhappy with their pay, as it is only the employees who deal directly with the public who
can receive the additional payments. Another hotel in the city has introduced high
monthly salaries for all their staff. This other hotel is attracting staff away from
Siyalamukela Hotel. Gumede is thinking of introducing the same payment system at
Siyalamukela Hotel.
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(a)
Explain the following terms:
(i)
Exchange rate (line 7)
(ii)
Working capital (line)
[3]
[3]
(b)
(i)
(ii)
[8]
[4]
(c)
Evaluate two ways Gumede can use to improve the management of working
capital.
[6]
(d)
Would you advise Gumede to change to a salary only based pay system at
Siyalamukela hotel. Justify your answer.
[6]
Calculate the two liquidity ratios.
Briefly explain the significance of your results.
Answer
(a)
(i)
Exchange rate – rate at which one currency exchanges with the other
currencies. For example 1 Pula = Z$30 000.
(ii)
Working capital is the money needed to finance day-to-day
operations. Calculated as Current Assets – Current Liabilities
(b)
(i)
Current Ratio = Current Assets =
Current liabilities
1800 = 3:1
600
Acid test ratio = Current Assets – Stock = 1400
Current Liabilities
600
= 2,3:1
(ii)
(c)
Siyalamukela does not suffer from liquidity problems though it is holding
too much cash which is lying idle. This is shown by the two ratios far
exceeding the required standards.
Ways might include: - investing surplus cash in short –term profitable activities
like Treasury Bills, Reducing creditors, paying workers in advance instead of
holding too much cash.
(c)
Answers should discuss the advantages and disadvantages of a salary based
payment system.
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2.
DATA RESPONSE QUESTIONS
Siyazama Ltd
Siyazama Ltd is a small firm that manufactures a range of shoes. This firm started
operating in June 2001 and recently it has been hard hit by competition form some
other small emerging shoe manufacturers. Competitors have lowered prices to
increase their market share. Siyazama is trying to cut costs to improve its
competitiveness.
The Finance Manager, Rudo Ncube, has proposed that they acquire a new
machine, which will improve both the speed and the quality of production. The
machine costs $300 000. It will be depreciated over a five-year period. It is likely
to have a residual value of $20 000. The following are the estimated net cash
inflows of this investment:
Year
0
1
2
3
4
5
($300 000)
$120 000
$140 000
$180 000
$160 000
$120 000
1.
Explain the following terms
(i)
Quality
(line ----)
(ii)
Depreciation (line ---)
[3]
[3]
(b)
(i) Using the straight line method, calculate the annual depreciation of the
new machine.
[4]
(ii)
Explain why Siyazama Ltd have to charge depreciation on their
assets.
[2]
(iii)
Calculate the average rate of return (ARR) of the investment in the
new machine. Briefly explain what your result means.
[4]
(c)
Analyse the problems Siyazama Ltd is likely to be facing as a small firm. [6]
(d)
Evaluate the impact of new technology on any two-stakeholder groups of
Siyazama Ltd.
[10]
Answer
(a)
(i) Quality is not an absolute term, but it describe as the degree to which a
produce meets specified standards.
(ii)
Depreciation is the rate at which a fixed asset loses value. It is the rate of wear
and tear of an assets.
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(b)
(i)
Straight-line method = Cost – Residual Value
Life of an asset
= 300 000 – 20 000
5
= $56 000
(ii)
-
Reasons might include: To spread the cost of an asset throughout its useful life.
Matching concept i.e. To match the cost of an asset with the revenue it
generates.
For prudence i.e. To avoid overstating the value of an asset and profits
generated.
-
(ii)
Average rate of return = Average Profit x 100
Initial cost
Average profits = 64 000 + 84 000 + 124 000 + 106 000+ 64 000
= 442 000
5
= $88 400
Therefore ARR = 88 400 x 100 = 29,4%
300 000
The return from $300 000 invested is 29,4%
(c)
(d)
Problems might include; difficulties in raising capital, difficulties in fighting
competition, poor managerial skills, poor markets,
Stakeholders might include:
Government –
Workers
Customers
Competitors -
increased unemployment
retrenchment
improved quality
increased competition
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3. DATA RESPONSE QUESTIONS
Cosmetic – Special Company
Cosmetic Special Company manufactures a range of cosmetics using a batch production
system. Due to harsh economic conditions, sales and profits have fallen. This has reduced
the firm’s chances of attaining a return on capital employed of 20%. The marketing
director, Dox, has suggested that the price of lotion Pee, their main cosmetic, be reduced
by 12% to $1400. Which he believes will lead to a volume increase from 10 000 to 12
000 bottles per month.
Stock control has also proved to be a serious problem to Cosmetic Special Company.
There has been a building of stock in the business and this has led to the managing direct
looking at ways of improving efficiency. The company accountant has provided the
following information concerning the management of stock.
Opening Stock
Cost of Sales
Closing Stock
2000
10 000
4000
The managing director feels the business should simply focus on a much tighter control
of stock.
The company is planning to use Just – In – Time production.
(a)
Define the following terms:
(i)
Stock control
(ii)
Return on capital employed
[3]
[3]
(b)
Calculate the price elasticity of demand for Lotion Pee.
[4]
(i)
The production capacity of Lotion Pee is 15000 bottles per month.
Calculate the expected level of capacity utilization, following the
reduction in price.
[4]
(c)
Calculate one efficiency ratio from the data in the passage.
(d)
Analyse the factors that Cosmetic – Specialist Company have considered when
deciding to operate a Just – In –Time production system.
[12]
[4]
Answer
1.
2.
Stock control – is a management policy that to strike a balance
between stock out and holding too much stock.
Return on capital employed – profits generated from the total capital
used.
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(b)
PED = %
%
Q
Price
= 2000 x 100 = 20%
10 000
Therefore = 20 = 1,6
12
(ii) Capacity utilization = Current Production x 100%
Max production
= 12 000 x 100%
15 000
= 80%
(c)
Efficiency ratio is the stock turnover ratio.
Stock turnover = Cost of Sales
Average Stock
Average Stock = Opening Stock + Closing
2
= 2000 + 4000
2
= 6000
2
= 3000
Therefore Stock Turnover – 10 000 = 3 times
3000
(d) Factors might include:
-
Reliability of suppliers
Level of motivation of workers
Length of lead time
Amount of time the customer is prepared to wait for his order.
Degree of computerization of processes.
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4.
DATA RESPONSE QUESTIONS
.
Guxy’s Electrical Goods Ltd
Guxy’s Electrical Goods Ltd is a vibrant company that manufactures consumer electrical
goods. This company is based in Bulawayo and is owned by a young graduate called
Gugu Xaba. The owner wishes to expand the business and open more branches at various
growth points. This move has been seen as a positive response to government’s policy of
rural electrification. The main benefit would be lower unit costs – both land and labour
are cheaper at the growth points than in towns. Government policies are also in support of
firms locating at growth points.
Current Capacity utilization is 90%
Guxy’s Electrical Goods ltd would need to research the market in all the areas that it is
going to open some branches. Gugu Xaba has decided to interview a sample of 2000
people.
Sales revenue since 1995 has increased by 50%. The following are the financial results
for 2002:
Sales revenue
$500 million
Gross profit
$300 million
Net profit
$50 million
Capital employed
$130 million
(a)
(b)
Define the following terms:
(i)
Capacity utilization.
[3]
(ii)
[3]
Sample
Calculate the three profitability ratios for 2002.
[2]
(c)
(i)
Outline a suitable method of sampling Gugu can use.
[3]
(ii)
Explain whether secondary data might be useful to Guxy’s Electrical Goods Ltd
in researching the market.
[6]
(d)
Discuss the importance of Human Resources Management for the success of the
new factory.
[10]
Answer
(i)
(ii)
Capacity utilization – percentage / proportion of production capacity utilized
by the firm for example Guxy’s Electrical utilizes 90% of its production
potential.
Sample – it is the proportion of the population that is chosen to give
information when a research is carried out for example Guxy’s Electrical is
prepared to get information from only 2000 people.
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(b)
Net profit margin = Net profit x 100
Sales
= 50/500 x 100 = 10%
Gross profit margin = Gross profit x 100
Sales
= 300 x 100 = 60%
500
R.O.C.E. = Net profit x 100
Capital employed
= 50 x 100 = 38,5%
130
(c)
Sampling methods might include:
(i)
Quota sampling – to enable deliberate bias to take place.
Stratified Random Sampling – to ensure representation of various tastes and
opinions.
(ii)
(d)
Secondary data might be useful because it is cheaper and less time wasting
while at the same time it might not be useful because it is outdated and
might not fit the purpose for which it is collected.
Answers should discuss the roles of Human Resources Management such as:
- Recruitment, selection, staffing, health and safety, remuneration, motivation.
However, this department might be costly in terms of resources needed to keep it going.
5. DATA RESPONSE QUESTIONS
Bellerways Builders Ltd
Noah Nxumalo is the sole owner of Bellerways Builders Ltd. This company has been
contracted by the government to participate in the building of houses under Garikayi or
Hlalani Kahle Housing Scheme. It is believed that Betterways Builders Ltd will increase
its capacity utilization and profit margin per house as a result of this project. Rapid
expansion of Bellerways Builders Ltd is also expected to result from this sub contraction.
However, diseconomies of scale are also expected to arise.
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Noah is very concerned about the short time period allowed for the contract. The
government wants the job completed in 30 weeks. The network diagram below shows the
estimated durations for each activity of the contract.
D
E
A
8 WEEKS
6 WEEKS
10 WEEKS
10 WEEKS
C
G
F
4 WEEKS
6 WEEKS
B
8 WEEKS
(a)
Explain the following terms:
(i)
Diseconomies of scale (line ----)
(ii)
Subcontracting (-------)
(b)
Using the network diagram in the passage:
(i)
Identify the critical path and project duration.
(ii)
Explain the significance of the critical path for Noah Nxumalo.
[2]
[4]
(c)
Discuss the likely advantages to the government of subcontracting this project to
Butterways Builders Ltd.
[8]
(d)
Outline the likely diseconomies of scale Betterways Builders Ltd is likely to face
as a result of its expansion.
[10]
Answer
(a)
(i)
Diseconomies of scale – increase in per unit cost as scale of production
increase. Also said to be disadvantages experienced by firms when they grow too large.
(ii)
Subcontracting letting another firm produce on another’s behalf so as to
relieve the subcontractor of too much pressure.
(b)
(i)
(ii)
(c)
-
Critical path is BCDE
Project duration is 30 weeks.
Critical path will help Noah Nxumalo to concentrate efforts on the critical
path so as to finish the project in time. It will also help Noah Nxumalo to
channel more resources on the critical path so as to avoid delays since the
critical path has no float or leeway.
Advantages of subcontracting
Relieves government of pressure of doing construction it self.
Can gain from quality construction from Betterways.
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-
Can gain maximum benefits of constructed houses without giving a lot of
management time.
Creates employment for Betterways employees.
-
(d)
-
Poor quality houses
Co-ordination problems
Poor motivation of workers
Reduced contact or loss of personal touch with customers
High debts as a result of too borrowing to finance expansion therefore
gearing might increase.
6. DATA RESPONSE QUESTIONS
Fashionwise Ltd
Fashion wise Ltd, manufactures uniforms for nurses, domestic workers and factory
workers. The Managing Director has asked the Production Manager and the Marketing
manager to carry out research on the following options.
Option A
To introduce a new range of clothing which is a fashion item. The target market is the
youth (both young men and women). The forecasted Net Cash Flows for this market are
as follows:
Year
0
1
2
3
($50 million)
$25 million
$25 million
$25 million
10% discount factors:
Year 1
0,91
2
0,83
3
0,75
Option B
To extend the market for the existing product. This will mean either increasing capacity
utilization which is currently at 80% or subcontracting to meet demand. The forecasted
Net Cash Flows for this option are as follows:
Year 0
($100 million)
1
$80 million
2
$70 million
3
$70 million
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The managing director is keen to find out much more, so that he can propose ways of
raising funds to finance whichever option will be recommended.
(a)
Explain the following terms:
(i)
(ii)
(b)
Capacity utilization (line ---)
Cash flows
(line ---)
[3]
[3]
Calculate for both options:
(i)
The Average Rate of Return.
(ii)
The Net Present Value (at 10% discount)
[4]
[4]
(c)
How useful might these results be to Fashionable Ltd’s directors?
[4]
(d)
Evaluate three ways of rising financial the Managing director can use.
[12]
Answer
(a)
(i)
Capacity utilization – percentage/ proportion of production space
currently being used by a firm for example Fashionable Ltd currently utilize 80% of the
space available which means 20% is idle space.
(ii) Cash flows – these are inflow or outflows of cash as a result of carrying out a
certain business activity.
Option B
(b)
ARR = Average Profits x 100
Initial Outlay
Average profits = 70 + 70 + 80
3
= 220/3 = 73,3
ARR = 73,3 x 100 = 73,3%
100
(ii)
NPV =
Cash flows
80
70
70
Dis. Factor
0,91
0,83
0,75
Net Cash Flows
72,8
58,1
52,5
183,4
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Total
Less initial outlay
NPV
183,4
100,0
83,4
Option A
ARR = 75 = 25 x 100 = 50%
3
50
NPV = (0,91 x 25) + (0,83 x 25) + (0,75 x 25) – 50
= 22,75 + 20,75 + 18,75 – 50
= 62,25 – 50
NPV
= $12,25
(c)
These results will help managers of Fashionwise Ltd to choose option B because
both the ARR and NPV are higher than those of A. However managers of
Fashionable should note that these results are quantitative and might ignore the
qualitative information such as the level of motivation of workers.
(d)
Answers should consider and evaluate long –term sources of finance. Long – term
sources of finance might include;
Debentures
Shares
Mortgages
Hire purchase
Long- term loans
-
7. DATA RESPONSE QUESTIONS
Music Fair Ltd
Sipho and Sibongo own and manage a small music shop in city centre of Bulawayo. The
shop stocks radio cassettes VHS and DVDs. The owners have recently introduced
spiritual books and stationery items like diaries, pens and writing pads.
The following table shows the sales data for all the products sold in this shop, for first
three months of year 2006.
Sales ($000)
VHS
DVDs
Radio Cassettes
Stationery
January
5
10
4
0
February
3
15
2
6
March
2
20
1
10
Sipho and Sibongo are concerned at the decline of Radio cassettes and VHS. Sipho has
argued that they stop selling these two products and concentrate on stationery. On the
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other hand Sibongo has maintained that Radio cassettes and VHSs be maintained as they
make a positive contribution. He has also argued that penetrating the stationery market
may be a mammoth task for Music Fair Ltd. Music Fair has just employed an
experienced research assistant to research the market for stationery.
(a)
Explain the following terms:
(i)
Market research
(ii)
Contribution
(b)
(i)
March.
(ii)
[3]
[3]
Calculate the price elasticity of demand for VHSs between February and
[4]
Briefly explain the significance of your result for (i).
[2]
(c)
Analyse the factors that Sipho and Sibongo should take into account in deciding
whether to stop selling VHSs and Radio Cassettes and stock more of DVDs.
[8]
(d)
Discuss sources of formation that might help Sipho and Sibongo to make a
decision about whether to enter the stationery market.
[10]
Answer
(a)
(i)
(ii)
(b)
Market research – is the collection, analysis and presentation of data about
a market.
Contribution – is the revenue gained after covering direct costs. This
revenue contributes to the coverage of fixed cost.
PED = %
%
Q = 1/3 x 100 = 33,3
Q
20
20
= 1,67
(ii)
Factors might include:
(c)
(d)
The results show that demand for VHS is heavily affected by a change of
price. A s mall increase in price leads to a big change in quantity
demanded.
Risk involved in the new market for VHS.
Whether demand for DVDs is going to continue.
Competition in the new market
Costs of ordering the new DVDs
Sources of information:
Primary sources – therefore field research that is research in schools.
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Secondary sources – research in the newspapers, magazines.
8. DATA RESPONSE QUESTIONS
Mavuso PLC
Mavuso PLC was founded many years ago by a young lady called Mavis Vuso. Mavuso
PLC manufactures a range of designer clothes. It is well known for its African outfits
which are exported to over five African countries. This company is based in Harare, the
capital city of Zimbabwe.
Mavis has controlled the business using an autocratic leadership style. This leadership
has worked for Mavuso PLC as most of the workers lack experience. How, as the
company is slowly expanding as sales and profits are increasing, this centralized structure
no longer seems appropriate.
Profits have increased for this company as a result of rising disposable incomes in most
countries. However cash flow problems have also set in despite the increase in profits.
Mavis has been worried about this for some time. She has gathered some recent
accounting data to analyse the financial efficiency. The following data concerning the
firm’s financial efficiency has been presented for the past two years.
Credit Sales
Credit Purchases
Creditors
Debtors
31/12/2004
$100 000
$90 000
$40 000
$50 000
31/12/2005
$200 000
$80 000
$30 000
$40 000
Although the company has been able to increase output, quality levels have fallen.
(a)
Explain the following terms:
(i)
(ii)
Centralised structure
Autocratic leadership style.
(b)
(i)
(ii)
Calculate financial efficiency ratios for Mavuso PLC.
[6]
Evaluate any two ways in which the business might improve it financial
efficiency.
[8]
(c)
Advise Mavis on how she can deal with quality problems facing the company.
[5]
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[3]
[3]
Page 133
Answer
(a)
(i)
(ii)
Centralised structure – this a structure where all decisions refer back to
the top management. Lower level managers can not make decisions
without referring to the top managers.
Autocratic leadership style – leadership where the manager makes major
decisions without consulting their subordinates.
31/12/2004
(b)
Debtors’ collection period = Debtors x 3
Credit Sales
= 50 000 x 365
100 000
1
= 182 days
Creditors Collection Period = Creditors x 365
Credit Purchases
= 40 000 x 365
90 000
= 162 days
31/12/2005
Creditors’ Collection Period = 30 000 x 365
80 000
= 136 days
Debtors’ Collection period
= 40 000 x 365
200 000
= 73 days
(ii) (c)
-
Reduce stock through offering discounts
Offer discounts for prompt payment
Negotiate for longer payment periods
Thorough credit – policy.
Sell on cash basis.
Ways of improving quality might include;
Total quality management
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-
Zero defects
Production engineering
Quality circles
9. DATA RESPONSE QUESTIONS
Moneywise Ltd
Moneywise Ltd is a multi- product firm that has grown rapidly during the last two years.
The company has mainly three different units namely Grocery unit, Beverages unit and
the Fruits Unit.
The grocery unit specializes in breakfast cereals such as Pronutro, instant porridge and
soups in various flavours. The Beverages unit produces various cool drinks in flavours
such as orange, strawberry and mango. While the fruits unit produces tinned fruits such
as peach halves, mango in syrup and orange slices.
The popularity of the business has grown rapidly. Rapid economic growth has increased
consumer incomes in recent years and this has seen a substantial increase in demand for
Moneywise Ltd’s products. However, there are reports in the financial press that the
government is considering taking action to prevent inflation from rising too rapidly. The
predictions are that interest rates and direct taxes will rise and there will be reduction in
government expenditure projects such as hospitals and schools.
As with many small businesses, control over cash and working capital has proved to be a
problem. The bank has recently contacted the Managing Director of Moneywise to
inform him of the increasing overdraft. Also some customers have not paid their accounts
for several months so control over debtors is being lost.
An extract from the Accounts of Moneywise Ltd is shown below:
Extract of Moneywise Ltd accounts as at 31/12/2005
Stocks
Debtors
Cash
Current liabilities
Capital Employed
(a)
(b)
$14 000
$80 000
$2 000
$64 000
$350 000
Explain the following terms
(i)
Economic growth
(ii)
Direct taxes
[3]
[3]
(i)
[8]
Analyse and comment on the liquidity of this business.
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(ii)
(c)
Evaluate two ways in which the business could improve its cash flow
position.
[10]
Explain how the government policies aimed at reducing inflation will affect
Moneywise Ltd.
[6]
Answer
(a)
(i)
(ii)
(b)
(i)
Economic growth increase in per capital income. Increase in the standard
of living.
Direct taxes – taxes charged by government and collected directly from
the tax – pay. For example income tax, co-operation tax.
Current Ratio = Current Assets =
Current liabilities
96 000
64 000
= 1,5:1
Acid test ratio = Current Assets – Stock
Current liabilities
= 82 000 = 1,28:1
64 000
(ii)
Ways of improving cashflow = debt fact, trade credit, overdraft, leasing,
disposal of surplus assets.
Advantages and disadvantages of these should be considered.
(c)
Answers should consider the impact of the following on businesses.
Increased interest rates – reduce borrowing.
Increased direct taxes – reduces income of the people.
Reduced government expenditure – increased unemployment leading to reduced
demand Money wise Ltd’s products.
10. DATA RESPONSE QUESTIONS
Quality Drawing Ltd
Owen and Given started their drawing business – three years ago. At first, they drew
building plans for individual house owners. The business quickly developed a reputation
for excellent and accurate plans and this won Owen and Given a lot of customers in the
large construction industry. Due to overwhelming demand, ten workers were employed
last year. Three full time staff deals with administration, finance and maintenance of
drawing equipment. All of the other staff is temporary drawing staff who are employed
on a six monthly contract. This drawing staffs are under the direct and close supervision
of Owen and Given. All drawing staff is paid a weekly wage plus a bonus worked on any
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surplus on target number of plans. Recently there have been some complaints from
builders on the inaccuracies in drawings done by the drawing in absenteeism amongst
drawing staff and this has led to the cancellation of some orders from major construction
companies.
Owen and Given are considering buying an automated machine. The machine is
computer controlled. This would mean that none of the plans would be: hand made”
however plans drawn would always be of consistent quality.
The following are the likely costs and revenues associated with the use of the automated
machine.
Variable costs per plan
Annual Fixed costs of the business
Price paid for each plan
Total number of plans drawn
(a)
$0,70
$44 000
$4 per plan
15 000 per year.
Explain the following terms
(i)
Variable costs
(ii)
Fixed costs
[3]
[3]
(b)
Using the information in the passage calculate the number of plans Quality
Drawing Ltd should draw to break even.
[5]
(c)
(i)
(ii)
(d)
Suggest possible reasons for the low levels of motivation of
Quality Drawing Ltd
[4]
Discuss how the owners might improve the motivation of the drawing
staff.
[8]
Evaluate the contribution of computer technology in the overall success of
Quality Drawing Ltd.
[7]
Answer
(a)
(i)
(ii)
(b)
Variable costs – costs that increase with output. Such costs are called
variable cots because they vary with output.
Fixed costs – costs that does not change with output. Such costs remain
constant as output increases.
Break – even = FC
Contribution/ Unit
= 44 000
4 – 0,7
= 44 000
3,3
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= 13 333
(c)
-
Reasons for low levels of motivation.
Workers employed on temporary basis.
Workers lack job security
Workers are anxious about whether their contracts will be renewed.
Threat of automated machine on the jobs of workers.
(ii) Methods of improving motivation
Financial methods therefore bonus, commission, place – rate for example
Taylor’s theory.
Non- financial incentives for example job rotation job enlargement, job
enrichment, and theories Maslow’s theory.
(d)
-
Computer technology would benefit that;
Computer Aided design
Improved efficiency
Speed and accuracy
Reduced variable costs
Problems
-
Loss of jobs to workers
High costs of acquiring computers
Increased fixed costs.
Turn -Up College ‘A’ Level Management revision book