Business Studies Level N
Business Studies Level N – AK
Chapter 1 Business Activity
Term 1 Week 1: Chapter 1; Grid Qs 1-10, Top Qs, 1-9
Grid Questions
1. Enterprises exist to transform inputs into outputs of goods and services to satisfy consumers’ wants or
demand. This involves risk-taking and decision-making about why to set up, who will make decisions,
and how to organize the firm’s operations, size, and type.
2. The factors of production land, labor, capital, and enterprise are available in limited quantities, while
individuals’ wants are unlimited. This problem of scarcity forces businesses to choose between given
alternatives. The next best alternative that they give up is referred to as the opportunity cost. To solve this
economic problem, decisions about what, how, and for whom to produce need to be made.
3. Enterprises are able to produce goods and services and create job opportunities to raise the level of
employment and the standard of living. By investing in technology, they help the economy produce better
output and become more competitive in international markets. Enterprises are also able to increase social
coherence and improve the skills of entrepreneurs. Overall, the economy improves when many firms are
set up.
4. Ways of adding value to raw materials include:
- Raising the selling price but keeping the raw material costs constant (but will customers still buy?)
- Purchasing cheaper raw materials but keeping selling prices the same (but will customers notice a
reduction in quality?)
- Using raw materials more efficiently so the cost per item falls (but this might need more accurate
machines or more highly trained staff)
5. An entrepreneur is someone who takes the financial risk of starting and managing a new venture.
To be successful, an entrepreneur should have the following characteristics:
- Innovation
- Commitment and self-motivation
- Multi-skills
- Leadership skills
- Self-confidence and an ability to bounce back
- Risk taking
6.
- Lack of cash to pay for daily expenses and to carry operations
- Poor management due to having unskilled entrepreneurs
- Highly dynamic environment that causes changes in consumers’ tastes, level of technology, labor
market, and competition
- Changes in social and economic factors
- The legal framework
- The lack of accurate records
7. It is dynamic, requiring firms to adapt to external factors, including social, political, and economic,
and continuously change in order to survive.
8.
- Proper management of staff and business activities
- Proper financial planning and spending
- Appropriate choice and allocation of resources
- Taking risk by considering profitable opportunities
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Informing customers about products through marketing
Setting achievable objectives
9. Social enterprises are businesses with mainly social objectives that reinvest most of their profits into
benefiting society rather than maximizing returns to owners.
The three objectives of social enterprises are economic (make a profit), social (provide jobs), and
environmental (protect the environment) – which they form what is known as the “triple bottom line”.
10. It refers to the aims of social enterprises and it requires firms to consider their staff and workforce
(people), set environmental targets (planet), and set objectives and take actions that help the firm generate
profit.
Top Questions
1. A successful entrepreneur might still fail for the following reasons:
- If no sufficient information is recorded to operate the business.
- If the level of competition increases.
- If the business environment becomes highly dynamic due to technological or economic changes and the
business fails to respond to these changes due to lack of resource availability
- Due to lack of finance if the amount of capital has been wrongly calculated.
- If the number of customers or suppliers decreases.
2. A successful entrepreneur needs to be committed and fully self-motivated in order to set a new
business idea. Moreover, the entrepreneur needs to be self-confident in order to believe in the business
idea, and must have the ability to succeed and motivate employees.
3. Most newly established businesses face challenges during the first years of operation and are more
vulnerable to changes in the business environment. The grocer might have lacked the managerial
experience to run the business efficiently, or he might have faced competition from larger
businesses that were able to operate with lower costs.
4. Financial objectives such as making profit, and environmental objectives such as recycling materials to
conserve scarce resources
5. New small enterprises contribute to the creation of new job opportunities, thereby raising the
employment level, and they increase the national output by producing more goods and services.
6. Consumer goods such as family cars are bought by final consumers who use them for personal benefits,
whereas capital goods such as machines are bought by firms to produce other goods.
7. Added value is achieved through increasing the selling price, lowering the cost of raw materials, using
resources more efficiently, and improving quality.
8. - Sudden decrease in demand due to changes in consumers’ tastes
- New government laws
- Changes in demographics and social factors such as an ageing population
- Changes in technology
9. a) Value added = sales [(50×$4) + (120×$3) = $560] - costs of resources ($280) = $280
b) Yes, because they might be able to add more value to their jewelry and steal away her customers.
Moreover, since Lisa lacks managerial skills, her chances of survival might decrease.
c) If she is not multi-skilled, she will not be able to keep a record of her business finance and provide high
quality jewelry at the same time. Moreover, the chances of failing will be high if she is not creative
enough to provide a better jewelry collection than her competitors.
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Business Studies Level N
Term 1 Week 2: Chapter 2; Grid Qs 1-4, Top Qs 1, 2, 7, 11.
Term 1 Week 3: Chapter 2; Grid Qs 5,6, Top Qs 3-6, 8-10, 12, 13.
Chapter 2 Setting up a Business
Grid Questions
1. - The primary sector deals with extracting resources and includes fishing and mining.
- The secondary sector uses the resources to manufacture and process them and includes construction and
food processing.
- The tertiary sector provides services such as banks and insurance.
The composition of an economy is determined by the extent of business activity under each sector. For
instance, developing or low-income countries rely heavily on the primary sector, whereas developed
countries have a high level of industrialization.
2.
-
Unincorporated businesses do not have a separate legal entity from their owners and have
unlimited liability and pay income tax. They include sole traders and partnerships.
- Incorporated businesses are separate legal entities from their owners and they can sell shares and
have limited liability. They pay corporate taxes and include private and public limited companies.
Private limited companies can sell shares internally whereas public limited companies sell their
shares on the stock market.
3. The main features of each type of private sector businesses could be stated as follows:
- Sole trader: one person provides the permanent finance, has full control of the business, and is able to
keep all of the profits.
- Partnership: two or more people form a partnership to carry on a business together, with shared capital
investment and, usually, shared responsibilities.
- Private limited company: shareholders own a small to medium-sized business and usually are members
of the same family; this company cannot sell shares to the general public, and a Memorandum of
Association and Articles of Association must be completed.
- Public limited company: A large business has legal right to sell shares to the general public; share prices
are quoted on the national stock exchange, and a Memorandum of Association and Articles of Association
must be completed.
4. Limited liability is the condition by which the shareholders of a business are responsible for the debts
of the company only to the extent of their initial investment, without losing their personal assets. This
attracts investors into the business, but requires the company to control its debts, because in the event of
collapse, the shareholders might not be able to use their personal belongings to cover the debts.
5. A sole trader is set up because the owner does not like sharing profit and does not need to produce large
quantities. Also limited capital is needed to set up and the government regulations are less strict.
However, the level of risk is higher due to unlimited liability and business activities are limited.
Therefore, the factors are:
- The degree of flexibility and stability
- The extent of business activities
- The startup costs
- Government regulations
- Production level and risk involved
- Sharing profit and control
6. You have to consider the advantages and disadvantages of each structure.
Sole traders:
Advantages: Fast decision-making since there is only one decision maker
No need to share profits since there are no partners
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Easy to set up without legal formalities
Close relationships with customers and staff since the business is small and the owner is
the main decision maker who interacts with almost everyone
Entrepreneurs may refrain from setting up as sole traders due to the following disadvantages:
- Bad decisions can be more common, especially if the owner has poor managerial skills
- No continuity because the owner and the business are the same legal entity (i.e., if the
owner dies, the business ceases to exist.)
- Risk of losing assets due to unlimited liability
Partnerships:
Advantages of partnerships
- Specialization of each partner in a particular business management area
- Shared losses between partners
- Shared decision-making
- Privacy and few legal formalities needed
- More capital injected by partners
Disadvantages of partnerships
- Unlimited liability
- Shared profits
- No continuity in the event of the death of a partner
- Conflicts between partners
- Capital restricted to partners and banks (no shares)
Advantages of private limited companies
- Limited liability
- Owners and the business are separate legal entities
- Original owners retain full control over the business
- Additional capital can be raised through the sale of shares (only to friends or family
members)
- Higher status compared to sole traders and partnerships
- Continuity due to limited liability
Disadvantages of private limited companies
- Certain legal formalities are required to set up the business
- Shares are not sold to the public, thus limiting extra capital
- Less privacy than unincorporated businesses since financial accounts need to be inspected
- Reluctance of banks to lend due to limited liability and risk of failure while settling debts if
no guarantees are provided
- Difficulty selling shares since this is restricted to family members and friends
Advantages of public limited companies
- Limited liability for shareholders
- Separate legal entity
- Continuity due to limited liability
- Ability to attract more capital investment by being quoted on the stock exchange
- Access to more sources of capital
Disadvantages of public limited companies
- Loss of control due to the divorce of ownership
- Many legal formalities required to set up the business
- No secrecy or privacy since all financial information is disclosed to shareholders and the
public
- Conflicts as the directors are affected by the short-term objectives of powerful investors
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- Fluctuating share prices beyond the company’s control, leading to losses or the potential
for takeovers by larger, more competitive companies
Top Questions
1. a) Usually, the tertiary sector is more important than the primary sector in developed economies due to
industrialization and higher investment in technology.
b) Developing countries have limited resources that are mainly allocated to the primary sector, whereas
developed countries are industrialized with more important secondary and tertiary
sectors.
2. - Higher efficiency due to the profit motive
- Better quality due to high competition
- Higher government revenues from taxes
3. - Fear of loss of full control since the new partner will be involved in decision-making
- Unwillingness to share profits with partners
- Fear of conflicts in objectives
4. A joint venture is a collaboration between businesses on a project, whereas a franchise is the sale to
another business of a business idea or the right to use an existing good or service.
5. - Expansion is faster since the business is already known and established.
- Risk of failure is lower since the franchisor supports decision-making and pricing.
- Training is provided by the franchisor.
6. To stay in full control of the business and be able to make decisions without restrictions or interference
by the franchisor, in addition to keeping all the profit instead of paying an annual fee
7. Sole traders are in full control and they cannot be legally separated from the business entity due to
limited liability, whereas public limited companies have unlimited liability, hence continuity, and control
is handled by a board of directors, rather than the owners due to divorce of ownership.
8. - Public limited companies sell shares on the stock market, whereas private limited companies sell them
internally.
- Public limited companies are controlled by a board of directors, whereas private limited companies are
controlled by shareholders.
9. No, because multinationals might exploit the host country’s resources, threaten the existence of smaller
businesses due to high competition, cause more unemployment, and repatriate their profits.
10. - Legal documents needed and extent of privacy
- Additional amount of capital to be raised through selling shares on the stock market
- Willingness to accept the divorce of ownership
11. Limited liability, ability to sell shares, continuity
12. Training and resources are provided, risk of failure
is reduced, and decision-making is assisted by the franchisor
13. Since the operation is in a foreign country, the joint venture will allow the canned food manufacturer
to spread the risk and costs of expansion, gain better knowledge about the foreign country from the
business already operating in it, and become more familiar with the laws controlling business operations.
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Term 1 Week 4: Chapter 3; Grid Qs 1-9, Top Qs 1-4.
Term 1 Week 5: Chapter 3; Grid Qs 10-13, Top Qs 5-8
Chapter 4; Grid Qs 1-5, Top Qs 1-4
Chapter 3 Business Objectives
Grid Questions
1. Benefits of setting clear objectives include the following:
- There will be a sense of direction or focus.
- Workers will know what they are aiming to achieve.
- There will be a way of assessing ‘success’ or ‘failure’.
- Investors will be keen to invest in the business as it is likely to have a clear future strategy, because there
are clear objectives.
2. Common corporate objectives include:
- Profit maximization
- Profit satisficing
- Growth
- Increasing market share
- Survival
- Corporate social responsibility (CSR)
- Maximizing short-term sales revenue
- Maximizing shareholder value
3. Ethical businesses care about the morale of stakeholders and do the right things. Usually businesses
that adopt corporate social responsibility prepare a code of ethics that allows them to increase sales and
improve their image. However, they might need to change their production methods, resources, or
suppliers in order to act ethically. This process can be costly I the short run.
4. Corporate social responsibility is the concept that accepts that businesses should consider the interests
of society in their activities and decisions, beyond the legal obligations that they have.
5. There are certain factors that could influence the corporate objectives of a business and force it to
change its objectives. These factors include:
- Corporate culture
- The size and legal form of the business
- Public sector or private sector businesses
- The number of years the business has been operating
- Divisional, departmental, and individual objectives
6. Businesses need to change their objectives due to the following:
- Changes in the economic situation
- Changes in the organization of the business
- Changes of operations between the private and public sectors
- Changes in the ownership of the business
- Changes in the duration of operations
7. Internal stakeholders include employees, managers, owners, and shareholders. They work
directly with the business and aim to earn high wages, with financial health and success as their main
business interest. External stakeholders are not directly involved in the business but are affected by its
decisions and actions. They include customers, lenders and investors such as banks, suppliers, the local
community, and the government.
8. Suppliers provide the resources required by the business at the right time, and based on agreed
conditions.
Governments collect taxes and set laws against which firms must operate.
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Owners provide finance and ensure the firm operates ethically.
Consumers help the firm generate money through their purchases.
Managers organize resources and achieve objectives.
Employees help the business achieve its aims through working effectively.
The local community supports the firms that provide jobs and improve the economy.
Lenders provide finance to firms and care about getting paid on time.
Suppliers provide resources.
9. Rights of stakeholders towards firms:
Rights of customers:
o Receive goods and services that meet local laws
o Be offered replacements, repairs, and compensation
Rights of suppliers:
o Be paid on time
o Be treated fairly by the purchasing business
Rights of employees:
o Be treated within the minimum limits as established by law
o Be treated and paid in the ways described in the employment contract
o Be allowed to join a trade union
Rights of local community:
o Be consulted about major changes that affect it
o Not to have lives badly affected by the business’s activities
Rights of government:
o Produce only legal goods
o Pay taxes on time
Rights of lenders:
o Be repaid on the agreed date
o Be paid finance charges
10. A business tries to satisfy as many stakeholders as possible. However, it can always face conflicts in
meeting all the stakeholders’ wants at the same time. For instance, conflicts can occur due to mismatch
between business objective of making profit and the employees and shareholders’ demand for higher
payments. Moreover, if the business wats to make a profit and the government charges higher taxes,
conflicts might occur.
11. A mission statement is a statement of the business’s core aims, phrased in a way to motivate
employees and to stimulate interest by outside groups.
12. First, a mission statement id developed to set the scope of the business and explain why it exists, its
values, principles, and vision. Second, corporate objectives are developed based on the mission statement,
and a long-term strategy to achieve them and measure the firm’s performance is set. The strategy is
completed through using tactics.
13. The effective communication of objectives with staff increases their sense of belonging, boosts their
morale, and improves the overall business performance. Other stakeholders must also be familiar with the
business objectives to reduce the conflicts and reduce the constraints faced by firms. Management by
objectives may be used to better coordinate and motivate staff.
Top Questions
1. To achieve a five percent market share increase in the new outlet, within the first two years of
operation.
2. Measurable objectives give managers a clearer focus and the ability to quantify failures or successes.
3. Employees will have a clearer direction and sense of focus if they know what the objectives are. This
increases motivation and efficiency.
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4. To determine the overall objectives, motivate employees, and attract stakeholders
5. Business ownership might change from private to public limited and the new owners might decide to
make maximizing profit their new objective (internal constraint). The economic situation might
change from recession to boom, changing the objective from survival to increasing sales revenues
(external constraint). The degree of competition might change if many new rivals enter the market,
changing the objective from growth to increasing or maintaining market share (external constraint).
6. All the departments or business functions and employees will be involved in meeting the objectives and
become focused on achieving them, increasing coherence and limiting conflict.
7. a) The economic recession would lower sales and hence reduce business profits.
b) The cost of imported resources would increase, reducing the profit.
c) Customers who favor socially responsible businesses would be attracted and encouraged to buy the
company’s goods and services, helping the business achieve its objective of higher profit.
8. a) If the business production results in more waste, traffic, and damage to the environment, the local
community will be worse off.
b) The employees might not be paid fairly or might be working under unhealthy conditions or treated
unethically.
c) The business might delay or default on its payments to suppliers.
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Chapter 4 Size of Businesses
Grid Questions
1. Measuring the size of business could be made through different measures, these mainly include:
- Number of employees
- Revenue
- Capital employed
- Market capitalization
- Market share
2. The level of employment increases since new jobs are available, the prices of the goods and services
decrease due to high competition and the greater variety of products available to consumers. Moreover,
other firms can get more supplies of resources, and by expanding in the future, the economy’s exports and
international competitiveness improve.
3. A business could grow internally through expanding existing operations and opening new ones
(opening new branches, shops, or factories).
4. Advantages: - Full control and management by the owner
- Ability to adapt easily to the changing business environment
- Personalized services can be offered to customers
- Direct contact with employees and customers
- Higher motivation, as employees feel their work is recognized by the owner or manager due to
reduced hierarchy in the company
Disadvantages: - Limited sources of finance
- High risk of failure if the owner handles all the tasks alone, without hiring employees
- Little chance of diversification, which leads to slow expansion and less adaptability to changes in
demand
- Limited opportunities for economies of scale
5. Strengths and weaknesses of family businesses:
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Top Questions
1. a) A firm that is relatively easy to set up due to its limited operations and capital employed
b) Businesses run by family members
c) A measure of business size based on the value of business shares owned mainly by public limited
companies
2. Hairdressers provide customized services and require special skills and limited capital.
3. Advantages: less risk involved since profit is ploughed back to expand sales, open a new shop, or buy
new resources without losing control to other businesses as in the case of mergers and takeovers.
Disadvantages: by growing organically, the shop might not be able to raise more finance and might face
difficulties if management is inefficient.
4. a) Since Lefty’s caters to the needs of a limited segment or niche, it is better to remain small to be able
to adapt faster to changes in market conditions. Moreover, since demand is low, it is easier for Lefty’s to
diversify by remaining small.
b) If no other firm is able to cater to this niche market, the government should provide financial
assistance to Lefty’s. On the other hand, Lefty’s might not be eligible for government support
since it is a relatively small business, hiring few employees, and supplying goods that are not considered
necessities.
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Term 1 Week 6: Chapter 5; Grid Qs 1-9, Top Qs 1-14.
Chapter 5 Management and Leadership
Grid Questions
1. Managers are responsible for:
- Setting objectives and planning
- Organizing resources to meet the objectives
- Directing and motivating staff
- Coordinating activities
- Controlling and measuring performance against targets
2. Managerial roles according to Mintzberg are:
- Interpersonal roles:
o Figurehead
o Leader
o Liaison
- Informational roles:
o Monitor (receiver)
o Disseminator
o Spokesperson
- Decisional roles:
o Entrepreneur
o Disturbance handler
o Resource allocator
o Negotiator
3. Supervisors, workers’ representatives, directors, and managers
4. An effective leader is one who:
- Inspires action
- Is optimistic
- Have integrity
- Support and facilitate his/her team
- Have confidence
- Adopt two-way communication
- Is decisive
5. Leadership styles include:
- Autocratic leadership — keeps all decision-making processes at the center of the organization.
- Democratic leadership — promotes the active participation of workers in taking decisions.
- Paternalistic leadership — is based on the approach that the manager is in a better position than the
workers to know what is best for an organization.
- Laissez-faire leadership — leaves much of the business decision-making processes to the workforce;
this is a ‘hands-off’ approach and the reverse of the autocratic style.
6. Advantages of autocratic leaders:
- One-way communication saves time since no feedback is needed.
- Close supervision allows task completion on time since instructions are already given clearly.
- It features a fast decision-making process since the leaders make all the decisions.
Disadvantages of autocratic: - Workers do not feel valued because leaders do not share detailed
information with them or involve them in the decision-making process.
- There is no room for creativity because employees are told what to do rather than being encouraged to
think for themselves and suggest alternatives.
- There is low motivation and job satisfaction because employees are not involved in decision-making.
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Advantages of democratic leaders:
- Two-way communication allows leaders and workers to share ideas and make decisions that are more
informed.
- Employee participation is high, leading to a higher level of motivation.
- Leaders can focus on more important tasks since delegation is high and close supervision is not needed.
Disadvantages of democratic leaders:
- Discussions and feedback may be time consuming and cause delays in decision-making.
- Not all the decisions can be discussed with employees and not all the tasks can be delegated to them.
For example, strategic decisions about mergers and expansions must be made by top managers.
- Some employees might not be skilled enough to make decisions and others may not be willing to
participate in the decision making. This leads to demotivation.
Advantages of laissez-faire leaders:
- Employees are highly motivated because they feel trusted about completing the job.
- Employees have more flexibility in terms of how they will complete the tasks and allocate
their time.
- It allows employees to achieve their personal goals through self-discipline.
- It increases the sense of belonging because employees need to work as a team to achieve
the aims.
Disadvantages - Managers may become lazy and remote from decision-making.
- Workers may take advantage of the power given to them and use their business resources for personal
goals.
- The outcome may not be as desired if completed by unskilled workers.
- Managers may lose control and power to informal leaders.
7. Managers set their leadership style and lead employees based on their attitudes. Theory X is used with
lazy workers who dislike work and are only motivated financially and requires autocratic leaders with
close supervision. Theory Y is used with employees who love to take responsibilities and work hard, and
requires democratic leaders.
8. Autocratic leaders are needed when the workforce is unskilled, the task is serious and risky and needs
to be completed quickly, and when the business culture is not flexible. Democratic leaders are needed
when the employees are skilled and experienced and when the situation is not risky or serious, and when
the firm has time to complete the task and the business culture is flexible.
9. Emotional intelligence is the ability of managers to understand their own emotions, and those of the
people they work with, to achieve better business performance.
Emotional intelligence could be achieved through:
- Self-awareness
- Self-management
- Social awareness
- Social skills
Top Questions
1. The interpersonal role applies through leading the workers at the pharmacy and making sure they are
motivated. The informational role includes representing the pharmacy to external sources and making all
the necessary information about it available. The decisional role will include responding to change and
developing a plan to achieve the objectives.
2. The size of the workforce, the tasks involved, and the deadlines to meet
3. Good leaders are self-confident and able to convince others, whereas bad leaders are bad decisionmakers and fail to motivate others.
4. Inability to meet objectives since the employees will not be guided properly. This leads to demotivation
and an increase in conflicts between the managers and employees. In addition, bad leadership may
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increase the costs for the business due to inefficient allocation of resources.
5. Theory X managers do not use delegation as they believe that employees dislike work and need to
be closely supervised. On the other hand, Theory Y
managers involve their employees in the decision-making process and allow them to come up with new
ideas and work with minimum supervision.
6. Theory X workers are lazy, unskilled, and dislike working, whereas Theory Y workers are skilled,
willing to take on different tasks, and willing to work independently.
7. a) When many unskilled workers are supposed to deliver an outcome within a set deadline
b) When new ideas need to be generated, when the level of skills is high and when the task is not complex
8. Time-consuming, employees might lack the skills needed, and the manager might become lazy.
9. An appropriate leadership style adapts to the business environment and culture, tasks, and time frame.
10. To influence workers and give them advice
11. By not understanding their emotions and those of their employees, the manager will not be able to
understand the reasons why employees behave in a specific manner and they will not be able to assess
their performance.
12. An autocratic leader makes all the decisions, uses one-way communication, and does not trust
employees. On the other hand, a democratic leader delegates tasks, engages in discussions with
employees, and encourages their participation.
13. During competition, businesses are threatened and need to come up with new plans and ideas to win
back competition, and this requires creativity, skills, and collaboration between employees and managers.
14. EI increases teamwork, increases employee development through understanding their attitudes and
interpersonal skills, and increases their sense of belonging.
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Term 1 Week 7: Chapter 6; Grid Qs 1-9, Top Qs 1-6.
Term 1 Week 8: Chapter 6; Grid Qs 10-12, Top Qs 7-12.
Chapter 6 Motivation
Grid Questions
1.
-
Labor turnover decreases as the level of job satisfaction increases
The productivity or output level per worker increases
Customers will be more satisfied with the quality of customer service and products, leading to an
increase in sales
The levels of absenteeism and lateness to work decrease, resulting in a higher output level
2.
- The ability to access basic life requirements in terms of food, shelter, and clothing.
- The ability to be part of a social group or family.
- The ability to gain the respect of others.
- The ability to feel valued, useful, and appreciated at work and in life.
- The ability to improve as a person and in terms of the standard of living.
Since individuals perceive these needs differently, firms need to identify them in order to know how to
satisfy and motivate employees.
3. Content and process. Content theories such as those of Taylor, Mayo, Maslow, McClelland, and
Herzberg refer to internal factors that direct, sustain, and stop behavior. Moreover, they concentrate on
what motivates people based on their needs and goals. On the other hand, process theories include
Vroom’s theory and focus on how people are motivated by emphasizing their behavior.
4. The basis of Taylor’s theory was that employees will give a fair day’s work for a fair day’s pay and that
they are motivated by financial incentives. Put simply, find the best way of completing a task, train
employees to employ the best method and pay them according to their output — that is, piece work.
Taylor’s theory assumed that people work harder in order to earn more money. Such ideas of motivation
were believed to be more appropriate in a manufacturing environment where an actual measurable
product was made.
Conclusion:
- Workers are motivated mainly by pay.
- Workers should be given one repetitive task so they can learn to master it.
- Managers should give orders and closely control workers.
- Workers should be paid per item they produced – piece rate.
5. Maslow’s theory is based on successive human needs. He arranged these needs in the form of a
pyramid (see the figure below), with their order indicating the priority that they would take in the eyes of
most employees. He identified a range of needs that he believed applied to most employees. The basic
needs must be satisfied first, then a series of needs arranged in a hierarchy. Satisfying these in turn can be
used to motivate employees.
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Criticisms of Maslow’s hierarchy include:
- Not everyone has the same needs.
- It can be very difficult to identify the degree to which each need has been met
- Money is necessary to satisfy physical needs, yet it might also play a role in satisfying the other levels
of needs.
- Self-actualization is never permanently achieved — jobs must continually offer challenges.
6. Mayo’ Hawthorne experiment concluded that worker
participation is essential to achieve a high degree of job satisfaction. Moreover, he concluded that changes
in management approaches influence employees’ motivation significantly and that the employees reacted
more positively when given attention by their managers rather than when their physical working
environment changed and financial reward increased. Eventually, the employees developed a team spirit
due to these experiments, resulting in higher productivity and a positive increase in output. In addition, he
noted an increase in motivation when employees were consulted, given targets to achieve, and made
decisions that affect them. Mayo’s theory is applicable in many modern businesses that rely on teamwork
and delegation. Moreover, businesses have human resource departments involved in assisting employees
and increasing their participation, welfare, and sense of belonging. Therefore, his theory relies on
developing people — contradicting Taylor’s theory about financial rewards — and supports Maslow’s
higher levels of needs and Herzberg’s Theory Y.
7. He developed the two-factor theory referred to as satisfiers or motivators and dissatisfiers or hygiene
factors.
Motivators lead to job satisfaction and include achievement, recognition, interesting jobs, responsibility,
and career advancement. They inspire people to work harder and are intrinsic factors.
Hygiene factors are extrinsic factors surrounding the job that make people participate in an activity
because of its benefits. They lead to dissatisfaction if they do not exist and include company policies,
supervision, salary or pay, relationships with others, and conditions of work. They do not motivate but
prevent dissatisfaction.
8. Motivation is based on achievement, which is the need to meet any individual or organizational goal
set, authority, which is the need for power to influence others or control their work, and affiliation, which
is the need to have a friendly working environment where an individual likes and is liked by others.
9. There are three conditions to achieve motivation:
- There should be a positive relationship between performance and effort.
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- Good performance should be rewarded, and the reward must satisfy an important need.
Significant effort should be undertaken to satisfy an important need.
There are three principles that interact and result in a motivational force that increases employees’
satisfaction and decreases disappointment:
- Valence: This represents the emotional impact of outcomes or rewards on employees.
- Expectancy: This represents employees’ expectations/assumptions about what they can
accomplish.
- Instrumentality: This represents employees’ beliefs that they will earn a promised benefit by
completing a task. Employees should be given a guarantee that their efforts will pay off, and they
should be rewarded according to their expectations.
10. The most common payment systems are:
- Hourly or time-based wage rate
- Piece rate
- Salary
- Commission
- Performance-related pay and bonuses
- Profit sharing
- Fringe benefits
11. To answer this question, you need to know the advantages and disadvantages of each financial
reward.
Time-based pay:
Piece work pay:
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Salaries:
Performance-related pay:
Fringe benefits:
Commissions:
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Profit sharing:
12. Teamwork is based on completing tasks in groups and helps firms reduce their costs.
Involving employees in the decision-making process through worker participation cannot be used by
autocratic leaders and boosts employees’ motivation and help them increase their sense of belonging.
Training employees helps improve their existing skills and develop new ones.
Quality circles help increase creativity and workers’ involvement in the decision making process in an
informal manner.
Delegation and empowerment motivate employees by giving them additional responsibilities and
involving them in decision making.
Job enrichment is based on assigning additional tasks and responsibilities to workers. It also expands the
scope of the job through job rotation and job enlargement.
Using target setting and management by objectives to provide employees with feedback about their
performance against agreed goals.
Top Questions
1. a) The factors that shape the behavior of employees, channel it towards a goal, and maintain it.
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b) Because even though all individuals have similar needs, each satisfies and values them differently, and
the only way to know how to motivate each employee would be thoroughly understanding these needs.
2. a) higher level of absenteeism, higher labor turnover, bad relationship between employees and
employers, and lower labor productivity
b) by identifying individuals’ needs and using financial and non-financial motivators to satisfy them
3. a) Taylor believed that employees are motivated by money and require close supervision to make the
maximum effort.
b) Taylor’s theory is not highly applicable to modern businesses that do not rely on mass production. For
instance, employees may give more value to non-financial motivators than to financial ones, and they
might not necessarily dislike work. In addition, in modern businesses where technology is high, other
factors such as teamwork, status, and recognition count more.
4. a) Mayo’s Hawthorne experiment examines the effect of changes in the work environment on
employees and concludes that motivation is dependent on the type of job and supervision, in addition to
group relationships and morale.
b) First, a personnel department needs to b established to ensure that employees’ social and basic needs
are met. Second, employees need to be divided into teams, each getting enough attention from their
managers. Finally, social facilities and work outings need to be provided to the factory’s workers to
improve the bond between them and their managers.
5. Maslow’s theory has a great impact on modern businesses since it includes both financial and nonfinancial motivators. It also emphasizes various needs that correspond to the variety of job titles in
modern businesses at different levels or statuses.
6. a) Hygiene factors refer to the aspects of a worker’s job that tend to cause dissatisfaction, while
motivators refer to the aspects of a worker’s job that can lead to positive job satisfaction.
b) Hygiene factors relate to the work environment and their absence tends to lead to worker
dissatisfaction. The managers’ leadership styles (i.e., autocratic, democratic, or laissez-faire)
are shaped by these factors in terms of degree of supervision needed, company policies and culture,
relationships with others, working conditions, and level of pay. Therefore, the style
of leadership will be determined by the hygiene factors.
7. a) Time-based pay rewards employees based on the number of hours at work, whereas piece-work pay
links effort to rewards.
b) Piece-rate pay requires measurable output and provides employees with little job security. It also
discourages them from improving or from accepting change, since they might aim only to achieve a target
pay.
8. Job enrichment encourages employees to reach their full potential and ability, not just physically. This
allows them to achieve self-actualization.
9. Because, in smaller firms, the relationship between employees and their managers is stronger, allowing
for the identification of each employee’s needs and making it easier to satisfy them.
10. According to McClelland, motivation is determined by individuals’ experiences at three different
levels. Achievements eventually help employees reach excellence as they encourage them to focus on
challenging, rather than low-risk situations and tasks. Ideally, employees develop a sense of
accomplishment and become motivated.
11. a) Sales commission
b) Time-based pay
c) Piece-rate pay
12. Free company car, free access to hotel gym, family insurance
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Term 1 Week 9: Chapter 7; Grid Qs 1-7, Top Qs 1, 2, 4-6, 8-11
Term 1 Week 10: Chapter 7; Grid Qs 8, Top Qs 3,7
Chapter 8; Grid Qs 1-3, Top Qs 1, 2
Chapter 7 Human Resource Management
Grid Questions
1. The roles of Human Resource management are:
- Planning the workforce needs of the business
- Recruiting and select staff
- Appraising, training, and developing staff
- Involving managers in staff development
- Preparing contracts of employment
- Developing appropriate pays systems
- Improving staff morale and welfare
- Measuring and monitor staff performance
2. Recruiting the appropriate employees provides organizations with the best workforce available if they
are to meet their objectives and compete successfully. The workers need to be chosen so that they meet
exactly the needs of the organization in order to reduce the risk of conflict between their personal
objectives and those of the business.
3. Recruitment is the process of identifying the candidates needed for a job, defining the vacant position
(job description), describing the type of person needed for the vacancy, advertising the position, and,
finally, selecting the appropriate candidate.
Recruitment can be done internally by choosing from the existing employees and external recruitment
occurs by hiring candidates from outside the business.
Selection is the last stage in the recruitment process. It can be completed using interviews or tests used to
identify different skills such as employees’ ability to complete a particular task (aptitude test) and mental
capabilities and suitability for the job based on personality and intelligence (psychometric test).
4. job description is a detailed list of the key tasks and responsibilities required by the vacant job,
including:
- Job title
- Responsibilities and tasks a person is expected to undertake
- Place in the organizational chart in terms of hierarchy and people to whom the candidate would
report and for whom they would be responsible
- Work conditions
- The way the job would be assessed
- The way performance would be measured
A person/job specification determines what sort of a candidate will be needed for the vacancy. It provides
a description of the skills, qualities, and qualifications needed for the vacancy and helps in the selection
process by eliminating unqualified candidates who do not have a matching profile.
5. An employment contract is a legally binding documents (between employers and employees) that
includes details about:
- The tasks, job title, and responsibilities involved
- The expected number of working hours
- The duration of employment and validity of the contract
- The amount and method of payment
- The benefits such as paid holidays, sick leave, transportation, and other perks
- The termination of the contract by the employee or employer, including the notice period and the
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procedure to hand in incomplete work
Both the employer and employee benefit from preparing the contracts.
6. Dismissal occurs when the employer terminates the contract of employment due to some inappropriate
action by the worker, such as incomplete jobs, persistent absenteeism or lateness to work, dishonesty,
vandalism of property, violent behavior, theft, etc. Dismissal becomes unfair when it is not legally
regarded as justified because it is either based on discrimination or not backed up by proof of misconduct
or inefficiency. Redundancy is the decision to terminate a position because it is no longer done or needed
by the business.
A compensation is usually given to redundant employees when their job ceases to exist. Reasons for
redundancy include changes in technology, demand factors, organizational structure, downsizing, and
financial status.
7. By helping employees balance between work and life and have a higher morale and welfare, HR
managers are able to achieve greater motivation, creativity, loyalty, and lower labor turnover and costs.
This balance is achieved through the following:
- Follow health and safety laws to reduce injuries at work and improve employees’ health, both
mentally and physically
- Offer help and support to employees facing personal problems, such as divorce, persistent illness
of a member in the family, etc.
- Provide healthcare support to employees by giving them insurance or making it unacceptable to
work without precautions, especially in the case of doing a dangerous job
- Monitor the overall motivation level and take action to boost motivation if needed
- Encourage employees to have a balance between their lives and jobs to guarantee a healthier,
stress-free working environment
- Be equal and fair, allowing for diversity in the workplace.
8. Different training can be given to new and existing employees to help them develop new skills or
improve existing ones.
- Induction training is given to new employees to familiarize them with the culture, levels of
hierarchy, communication, and tasks. This helps them develop a sense of belonging faster and
increases their efficiency at completing tasks.
- On-the-job training is provided by co-workers and does not reduce or delay production since
employees learn while working.
- Off-the-job training is conducted by professionals outside the business. This lowers the quantity
produced, costs a lot, and might not be relevant to the business.
All training forms require appraisal to assess employees’ performance and the success of the training.
Top Questions
1. Since the supermarket is labor intensive, it will benefit from effective HRM as its employees will be
chosen carefully and will be receiving effective training. Moreover, HRM will manage employees’
performance effectively, motivate them by rewarding their hard work, and develop their skills. This
eventually allows the supermarket to achieve its objectives and gain a competitive advantage over
its competitors.
2. Internal recruitment refers to the process of filling a job vacancy from the existing workforce, by
appointing an employee from within the business, whereas external recruitment refers to the process of
filling a job vacancy by recruiting a suitable candidate from outside the business.
3. a) - When the business does not want to waste time familiarizing newly hired employees.
- When the business wants to motivate a hard worker who deserves promotion.
- When the business is not able to afford recruiting an experienced manager externally.
b) - When the business is looking for fresh, innovative ideas to boost its development.
- When the business wants to look into a large pool of candidates.
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- When the business is looking for candidates with a wider range of experience than current employees.
4. After identifying the need for the office manager, the school needs to provide a job description that
includes the exact nature of the job to be done. Then it should decide how to attract applications
from suitable candidates through developing a job advertisement, and deciding on whether
recruitment would be internal or external.
5. Staff development helps employees feel appreciated and valued by improving their skills and giving
them more responsibilities. This relates to Herzberg’s motivators as it allows employees to achieve more
fulfillment in their workplace.
6. In this case, on-the-job training would be recommended by the provider of the computer upgrade. It
would be more efficient to give employees instructions at work on how to use the upgraded computers.
This type of training does not interrupt the production process and is relatively cheaper than off-the-job
training.
7. a) On-the-job training takes place in the workplace. It is related to a specific job, unlike off-the job
training, which is carried out at a training establishment, outside the business.
b) On-the-job training is used when the business wants to save money on training, achieve higher
efficiency, motivate senior employees, and keep the production process uninterrupted. Off-the-job
training is used when more skills are required and when employees need to receive professional training
from experienced people.
8. In general, fashion is considered a luxury. In times of recession, incomes decrease, resulting in a lower
demand for fashion goods. As a result, sales decrease, which means that stores will have to make
employees redundant to maintain their profitability.
9. In the case of an unfair dismissal, the business needs to make sure it cannot be taken to court if a
dispute arises between the employee and the employer. Legal action might be taken by the employee
against the employer, and/or the business. Moreover, the firm would not want to face media or bad
publicity as this would harm its image and negatively influence its sales. Unfair dismissal might well
impact the morale of the remaining employees and require the business to financially compensate the
employees who lost their jobs.
10. - To avoid paying compensation to the employee, as redundancy could be expensive.
- To avoid the loss of the remaining skilled employees, as redundancies negatively affect their morale.
11. - Incomplete job
- Persistent absenteeism or lateness to work
- Vandalism of business property
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Term 1 Week 11: Chapter 8; Grid Qs 4-12, Top Qs 3-9
Chapter 8 Understanding Marketing
Grid Questions
1. Marketing objectives are important because they:
- Provide a sense of direction for the marketing department
- Allow for monitoring progress against targets
- Allow for management by objectives
- Form the basis of marketing strategy
2. They are usually related to the following:
- Sales revenue (value)
- Sales volume
- Customer awareness and ratings
- Changes in products
- Changes in market share
- Brand loyalty or identity
- New markets
- New products
- Customer satisfaction
And aim to achieve the following:
Identify the potential and current customers through market research
- Determine the good(s) or service(s) that the customers want to buy as well as the amount of
money they are willing to pay in return
- Communicate the information related to what the consumers want to other business departments
so that production takes place at acceptable cost and selling price
- Link the organization to its actual and potential/possible customers
- Sell the products to consumers and make a profit
- Ensure the coherence between marketing and other functional areas (i.e., production, operations,
human resources, etc.) to have an appropriate marketing mix (i.e., product, price, place, and
promotion)
3. Market orientation is an outward-looking approach basing product decisions on consumer demand, as
established by market research. On the other hand, product orientation is an inward-looking approach that
focuses on making products that can be made — or have been made for a long time — and then trying to
sell them.
4. - Local markets: In these markets, customers are clustered around and in the same community as the
business.
- National markets: In these markets, businesses have a broader reach of customers across the whole
country. This means that businesses may have more than one distribution system of warehouses to be able
to deliver to different geographical locations, depending on the country’s regulations.
- Regional markets: In these markets, businesses can cover a range of countries that share the same
characteristics, such as the Gulf Cooperation Council (GCC)
- International markets: In these markets, businesses cater to more than one country, depending on legal,
political, cultural, and economic differences.
- Global markets: Companies not only sell but also carry on production, planning, and promotion
worldwide, and use mass production.
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5. Market share is the percentage of sales in the total market sold by one business.
Market share is calculated by the following formula:
6. The market share may be inaccurate because the market may not be easy to define, the collected data
regarding the sales and the competitors may not be up to date, and accurate sales figures may be difficult
to obtain. Also, products and markets can change regularly (e.g., due to technology); therefore, new
studies may need to be conducted, making it difficult to keep track of the changes. also, the measure of
market share by volume may yield different results than that by value, making it difficult to interpret the
results.
Alternatively, the market growth is influenced by factors that might change it, including:
- Whether the economy is expanding or not: If an economy is expanding, its total output
increases, meaning that market growth is more likely. The opposite is true in the case of an
economic downturn or recession.
- Whether consumers’ income is increasing or not: An increase in real income is translated
into an increase in people’s purchasing power and demand for goods and services because
they have more money to spend. This results in a higher market growth.
- Favorable change in tastes and preferences: A favorable change in people’s tastes or
preference of domestic products results in market growth.
- Technological changes: Improvements in technology and innovation such as online
shopping can result in market growth.
7. An increase in market share means that the sales of a business account for a greater proportion of the
total sales in the market. If the market is declining, the market share could be increasing even if sales are
decreasing. In general, the growth of a market shows the rate at which sales are increasing. The extent of
the growth depends on the product and number of firms operating in the market. For example, a 1%
increase in car sales has a greater significance than a 1% increase in the vegetable market. Also, in wellestablished big markets, growth is slow due to having many businesses. When studying the market share,
it is important to bear I mind the total market size.
8. Benefits and limitations of mass marketing:
9. Niche marketing is about identifying and exploiting a small segment of a larger market by developing
products to suit it.
Advantages of niche marketing include the following:
- Small firms may be able to survive in market dominated by larger firms.
- Filling a niche can offer the chance to sell at high prices and high profit margins.
- Niche market products can be used by large firms to create status and image.
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10. Advantages of market segmentation include:
- Businesses can define their target market precisely and design and produce goods that are specifically
aimed at these groups, leading to increased sales.
- It enables identification of gaps in the market.
- Differentiated marketing strategies can be focused on target market groups. This avoids wasting money
on trying to sell products to the whole market.
- Small firms that are unable to compete in the whole market are able to specialize in one or two market
segments.
- Price discrimination can be used to increase revenue and profits.
11.
- The identification of a particular segment may be costly.
- In the case the segment is small, sales volume and value would be low.
- The marketing cost per unit sold is high if the segment is small.
- Firms may find it difficult to expand into a wider market if they only cater to limited segments.
- Segmentation increases the risk of failure if the marketing activities are not planned properly.
- Consumers may link the business to one segment, making it difficult for the business to produce a
different product.
- It requires high research and development, which increases costs.
- Businesses might misinterpret the similarities or common characteristics of the customers.
12. - Geographic differences: This segmentation is based on dividing the market in terms of the area or
the location (e.g., city, region, rural areas, districts, etc.) because people in different locations may have
different preferences and needs.
- Demographic differences: This segmentation is based on a population’s different characteristics based
on age (e.g., teenagers, adults and old), gender, and type of household (e.g., married couples, families
with children and single individuals).
- Psychographic differences: This segmentation is based on the mental status or intrinsic traits of people
and includes attributes such as culture, values, personality, attitudes, interests, and lifestyles (e.g., fulltime working mothers and surfers). Psychographic segmentation is common among brands targeting
middle and upper classes, where celebrities are employed to market the products.
- Behavioral differences: This segmentation is similar to the psychographic one but focuses more on the
specific reasons and reactions of customers when making a decision. For instance, their attitude towards a
brand and the way they use it may be a determining factor. Brand loyalty, volume of usage, and price
sensitivity fall under this type of segmentation.
- Socioeconomic differences: Customers can be segmented into groups according to their income levels
(e.g., upper, middle, and lower classes), occupation, and education. In addition, marketers also consider
the timing of purchase and the product type for this type of segmentation.
Top Questions
1. Marketing involves several functions such as researching the market to identify customers’ needs,
pricing, promotion, product packaging and design, and it is associated with other departments such as
human resources, finance, and operations. Its main aim is to satisfy consumers’ needs in a profitable way.
2. a) Consumer market
b) Producer market
c) Consumer market
d) Producer market
3. a) Market orientation is the approach adopted when a business researches the market first in order to
identify customers’ needs and then supplies the good or service that would satisfy them. However, a
business is product oriented when it develops the product that it
finds appropriate, produces it, and then tries to identify a market to sell it.
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b) Market-oriented firms are guaranteed to have an existing market for their good or service, which
minimizes the risk of not being able to sell since potential customers already exist. Moreover, they are
able to respond quickly to changes in the market and consumers’ preferences, and they have an incentive
to be market leaders with a competitive advantage over competitors.
4. Increase sales in order to exceed the costs involved, such as marketing costs. Set a brand image and use
advertising to make the brand more famous, or improve product awareness by creating an exclusive
image (e.g. brand) or developing a unique selling point (USP) (quick delivery service, high quality cotton)
in order to distinguish products from those of competitors and convince consumers to favor their products
over other brands.
5. a) Market size in 2017 = [(1 + 5 %) × Market size in 2016] = $2.94 million
b) Market size in 2017 = $2.94m
Market growth = ($2.94m - $2m)/$2m × 100 =
47%
c) Market share in 2016 = (70,000 ÷ 2,800,000) × 100 = 2.5%
d) Market size in 2014 = [Market size in 2015 ÷ (1 + 1.8%)] = 2 ÷ 1.018 = $1.96 million
6. Market size by value: $600 × 50 = $30,000
$30,000 ÷ 5 = $6,000
$6,000 × 100 = $600,000
Market size by volume:
50 ÷ 5 = 10
10 × 100 = 1,000 bookings
7. The business will be more successful when it makes its decisions using information about consumer
tastes and needs as it will reduce the risk of failing to sell its products.
8. a) The Soap Factory is using mass marketing as it does not aim at a particular group of customers, has
set very low prices for its soap, and is operating in a very competitive market.
b) The factory can differentiate its soaps by manufacturing them with unique scents and
odors, or by producing them in attractive shapes
and designs.
c) The Soap Factory would be able to increase its profits if it adopted market segmentation since this
would allow it to identify precise targets to sell its products to, increase sales because customer needs can
be closely addressed, reduce marketing and distribution costs, and implement price discrimination.
9. a) International market
b) Regional market
c) International market
d) International market
e) Local market
f) National market
10. A doll manufacturer can segment the market based on demographic characteristics, such as gender
(e.g., female), age (e.g., children), and type of household (e.g., families), and/or based on socioeconomic
differences, such as income levels (e.g., upper, middle, and lower classes).
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Term 2 Week 1: Chapter 9; Grid Qs 1-9, Top Qs 1-12
Chapter 9 Market Research
Grid Questions
1. Market research is needed in order to:
- Reduce the risks associated with new product launches
- Predict future demand changes
- Explain patterns in sales of existing products and market trends
- Assess the most favored designs, flavors, styles, promotions, and packages for a product
2. Primary or field research pertains to gathering information directly from sources for the first
time, and for a specific business purpose. It is, thus, based on new data. Alternatively, secondary
or desk research is based on readily available information or data that has been prepared by
sources other than the organization itself.
Primary research data collected has not been previously published and supports a specific need
that is relevant to the firm. The data is typically expensive to collect in terms of labor and time
costs. Secondary research used is second-hand information that has been published before.
Secondary data could be outdated and irrelevant since it was collected for a different purpose.
The research is initially conducted at a lower cost and faster rate.
3. Firms can use focus groups by inviting people to try or taste a product and, subsequently,
provide their feelings or views about it.
Panel discussions are based on grouping people and asking them to participate in a series of
discussions led by researchers to determine their attitude towards a new or existing product
Product reviews allow businesses to get feedback from customers about how they perceive
products.
Market researchers can record people’s behavior through observations.
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A business may conduct a variety of surveys which are basically questionnaires that help obtain
qualitative and quantitative data and require the use of samples.
A product is sold or tested over a selected small region to identify problems before distributing it
in bulk or across larger regions using test marketing and experimental methods.
Store cards and databases allow researchers to collect information about what exactly consumers
are buying, which facilitates targeting people based on their buying behavior.
4. - Random sampling: Every member of the population has an equal chance of being selected.
This random selection of members results in a better representation of the population’s views.
- Systematic random sampling: Every nth member of the population is selected until the required
sample size is reached. For example, every fifth email address is selected from a directory.
- Stratified random sampling: Under this method, a random group is selected and divided into
strata/
sub-sections of the population sharing common characteristics (e.g., age, occupation, gender).
Researchers identify the stratum and its actual percentage and subsequently make random
selections from the selected pools.
- Cluster sampling: The sample is selected not from the entire population but from a specific
group. For
example, members are selected from one region.
- Quota sampling: This sampling method is similar to stratified sampling but applied for
nonprobability samples. Here, researchers initially identify a stratum and its percentage of the
total population.
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- Convenience/judgment sampling: The sample is selected based on convenience. It is, hence, not
highly random since it is based on the easiest way of forming the sample.
- Snowball sampling: Researchers choose a small number of people and then ask them to suggest
other people to join the sample until the set size is reached.
- Ad hoc sampling: A quota or specific number is set (e.g., 50 teenagers), and researchers choose
any members to meet that quota.
5. The sample may be too small to represent the targeted audience and random sampling can be
time consuming and expensive. Also, the population may change between the sampling time and
the time of completing the research and the lack of accuracy in collecting data from samples may
lead to wrong decisions being made.
6. Internally, a business may retrieve the following:
- Previous annual records, such as previous financial statements
- Sales trends that are based on recording sales results over a specific period of time to
understand customers’ reaction to products: Sales results studies may be short term or long term.
- Stock movements that reflect the costs of the inventories acquired during a specific period of
time: This record includes the date and quantity of the stock purchased to determine whether
adjustments to inventories are required. The data helps determine the future stock required.
- Supplier and customer records, including their transactions, lists, and sales
Externally, the business may use sources prepared by other firms, such as the following:
- Competitors’ reports about a similar or new product
- Online information about customers’ feedback and preferences
- Social media platforms, such as Facebook and Twitter, which provide details about existing
and potential consumers. Bloggers may also be approached to further market a firm’s products in
a cost-effective manner.
- Articles from newspapers and magazines that may include valuable information regarding
products or changes in market trends
- Government publications related to taxes, price level, inflation rate, population size and
distribution, and legislation
- Economic and business surveys that help the business project sales and determine price and
competition levels
7. - A well designed and focused market research should result in higher sales and profits.
- The accuracy of data is an issue if the people do not give the correct information.
- The choice of the right sample is crucial to saving costs and achieving outcomes.
- A limited marketing budget prevents the firm from choosing a large sample due to the high
costs incurred.
- In order to improve cost-effectiveness and ensure that the money spent on market research is
not wasted, researchers must assess the returns or gains from spending on market research and
ensure that real benefits are realized. This requires planning in terms of the following:
- Set clear objectives
- Choose the most appropriate market research method to gather the maximum results
- Present data clearly
- Analyze results accurately o Right segmentation is crucial.
8. Raw data cannot be beneficial in determining market trends or assessing customers’ sales. The
reliability of this data depends on how up-to-date and how accurate it is. The presentation of data
can be done through:
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- Tables to present a mass of data in a precise way.
- Pie charts to clearly show proportions and percentages, such as market share.
- Line graphs to show changes in two variables and visualize trends.
- Bar charts to represent relative values through their height.
- Histograms to represent relative values through their area.
9. Researchers can use the mode, median, and mean as follows:
Top Questions
1. Advantages:
- Reach many customers
- Fast
Disadvantages:
- Unreliable answers
- Samples might not be representative of the entire market
2. a) Not beneficial, as the customers might not have access to the Internet.
b) Not beneficial, as consumers with low standards of living will not be have access to technology.
3. Stratified sampling draws a sample from a specified sub-group or segment of the population and uses
random sampling to select from each stratum, whereas in quota sampling, the interviewer selects an
appropriate number of respondents from each stratum.
4. - To know more about customers and develop a menu that satisfies their tastes.
- To collect data about the market and determine the level of competition.
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5. Data is reliable when it is free of bias and when the sample size used is significant and a representative
of the whole market.
6. Tables or bar charts to represent the number of satisfied versus unsatisfied customers.
7. Market research should be undertaken by the supermarket chain to identify customers and their needs,
to assess the alternative options available for the supermarket to meet these needs, and to determine the
effectiveness of the different marketing actions taken by the chain.
8. Market research should yield accurate and valid results in order to be effective, and should be free of
all types of bias. In addition, the interviewers should be well trained and the respondents should represent
a large portion of the population.
9. The market budget is influenced by the expected level of sales and profit.
10. a) Data from secondary research helps the chocolate manufacturer decide whether it will be
worthwhile spending money and time on primary research.
b) If the chocolate manufacturer is providing a completely new product or if the market for chocolate
does not provide previous data.
11. a) Information cannot be easily put into a number format.
b) Design bias in which the researcher fails either to consider statistics or to analyze results, and nonresponse bias when some groups do not respond to surveys in a significant way.
12. a) Information about market trends, customer needs and tastes, and competitors
b) Surveys through questionnaires or interviews and store cards to detect consumers’ purchasing behavior
and identify which shoes to provide
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Term 2 Week 2: Chapter 10; Grid Qs 1-15, Top Qs 1-17
Chapter 10 Product and Price in the Marketing Mix
Grid Questions
1. The 4Ps are the elements of the marketing mix: Product represents the aspects of goods and services in
terms of quality, package, design, reliability, function, and use. The price is the amount of money
charged for a good or service. The promotion is used to communicate the information about the product
with customers, including advertising and other forms of publicity. The place refers to where the product
will be available and how it will be distributed to customers. These elements are used to satisfy
customers’ requirements successfully.
2. Ways in which customer relations can be improved through customer relationship management:
- Use targeted marketing to indicate the product and services that the customer might need.
- apply customer service and support to build up customer loyalty.
- Provide as much information to the customer as possible. This includes the materials/quality/features
and service levels.
- Use social media to track and communicate with customers.
- Research the market to identify customers’ expectations.
- Use interactive communication to manage expectations by ensuring that negative feedback has been
considered and acted upon.
- Study competitors’ goods and services to provide better options and increase the value perceived by
customers.
- Increase follow up on sales to identify areas of improvement (i.e., collect and follow up on complaints).
- Invest in training, quality, and market research to ensure that only quality products with high value for
money are provided. Additionally, highly committed staff or employees need to be hired to strengthen
customer service.
- Increase customer engagement through effective communication to promote new ideas and increase
customer loyalty (i.e., by showing appreciation)
This will help build a long-term relationship with customers and increase their loyalty to the firm and
links the elements of the 4Ps to the 4Cs.
3. - Since the product satisfies a need or want, it represents a solution and value for customers.
- Price, which represents the amount of money paid for a product, expresses the customers’ perspective of
the cost of acquiring, using, and disposing of a good or service.
- Customers correlate the third element of the marketing mix “place” with convenience since it refers to
the availability of the product in the appropriate location, including the various channels of distribution
and transportation.
- Since promotion involves communication activities to inform or persuade customers to buy a product,
customers relate to building relationships with businesses by increasing their engagement and developing
and maintaining two-way communication.
4. The characteristics that determine the product. These include tangible, intangible, or a mix of the two
and need to be identified to allow the firm to increase sales and meet customers’ needs and wants.
5. The product development may involve the creation of a new good or service or the addition of new
characteristics that add value to customers. It is hence applied to existing and new products in order to
build a brand image, develop new ideas to allow the business to win a competitive edge in the market,
create a barrier that prevents competitors from entering the market and competing, maintain or increase
sales to expand the market share in highly competitive market, and successfully meet the advances in
technology.
6. Product differentiation refers to giving a product or service special features that make it different from
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competitors’ products by determining a unique selling point. This helps the business achieve the
following:
- better promote the product
- Charge a higher price
- Get free publicity from business media
- Achieve higher sales than undifferentiated products
- Increase customers’ satisfaction by making them more willing to identify with the brand
- Win a competitive edge
- increase brand loyalty
7. The product life cycle has three main uses:
- Assisting with planning marketing-mix decisions, such as new product launches and price or promotion
changes.
- Identifying how cash flow might depend on the cycle.
- Recognizing the need for a balanced product portfolio.
8. In the introduction, sales are usually low. In the growth stage, sales grow significantly if the promotion
is effective. At maturity, sales stop growing and doesn’t decline either. The sales are usually high and the
most profit is gained. Profit earned in this stage is often used to cover the cost of products in the
introduction and growth stage. The sales decrease in the decline stage, due to the change in consumer
tastes or market saturation.
The firm needs to identify which stage the product is at and then it has to adjust the marketing mix
accordingly. For example, it uses promotion to announce the launch of a new product, but stresses on
product differentiation at maturity to prevent the product from reaching the decline stage. Therefore,
marketing objectives change as the product moves from one stage to another.
9. Extension strategies are marketing plans introduced at the maturity stage, allowing the firm to prevent a
product from reaching the decline stage. They include lowering the price, improving the product by
adding new features, changing the package to change the image, increasing and varying the use of the
product, and introducing promotion. Subsequent extension strategies may be used. Extension strategies
lengthen the life cycle and improve the competitiveness and continuity of the business.
10.
11.
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12. When the quantity demanded and supplied are equal, the market is at equilibrium and all the items
produced will be sold, without having excess or shortage in quantities. No stocks will be idle. If the price
is set above the equilibrium level, the price should be reduced to reach the market price and the opposite
is true if the price is set below the equilibrium level.
13. PED calculates the responsiveness of the quantity demanded to a change in price. It is equal to:
An elastic PED has a value greater than one, whereas an inelastic PED has a value less than one. The
elasticity determines whether revenues would increase or decrease following a price change. An increase
in price increase revenues if demand is inelastic.
14. The price elasticity of demand (PED) measures the responsiveness of demand following a change in
price. There are two main business uses of PED:
- Making more accurate sales forecasts: If a business is considering a price increase, then an awareness of
PED should allow forecast demand to be calculated. For instance, if PED is believed to be −0.8 and the
level of sales is currently 10,000 per week, and the price is increased by 10%, demand will fall by
8% and this will give a forecast sales level of 9,200 per week.
- Assisting in pricing decisions: If an operator of bus services is considering changing its pricing
structure, then, if it is aware of the PED of different routes, it could raise prices on routes with low PED
(inelastic) and lower them on routes with high PED. This kind of analysis also underpins the strategy
known as price discrimination.
15. Pricing methods include:
- Mark-up pricing — adding a fixed mark-up for profit to the unit price of a product.
- Target pricing — setting a price that will give a required rate of return at a certain level of output/sales.
- Full-cost pricing — setting a price by calculating a unit cost for the product (allocated fixed and variable
costs) and then adding a fixed profit margin.
- Contribution-cost pricing — setting a price based on the variable costs of making a product in order to
make a contribution towards fixed costs and profit.
- Competition-based pricing — setting a price based upon the price set by its competitors.
- Penetration pricing — setting a relatively low price often supported by strong promotion in order to
achieve a high volume of sales.
- Market skimming — setting a high price for a new product when a firm has a unique or highly
differentiated product with low price elasticity of demand.
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- Psychological pricing — setting a price just below a whole number so the customer feels the product is
much cheaper.
Top Questions
1. The car is the product and its price is the amount paid by consumers. The dealer is the place and the
way it is advertised is the promotion.
2. a) It is easy for families to switch schools and it is difficult for schools to differentiate their basic
services.
b) Banks provide similar services, making it easier for people to switch their accounts from one bank to
another; therefore, CRM is very important to retain loyalty.
3. Extension strategies prevent a good from reaching the decline stage.
4. Change the package, add new flavors, increase the portion, develop a new fat-free or sugar-free drink.
5. The price is initially low and may increase during growth and be high at maturity. However, it
decreases when the decline stage is reached.
6. It is not a good predictor of what can happen to the 4Ps at each stage and to determine the length of
each stage. In addition, it is difficult to identify the stage which a product is at.
7. The cost of labor and the cost of raw materials
8. a) The demand will decrease, with no effect on supply.
b) The supply of taxi services decreases since there is competition.
c) The supply increases since the cost decreases.
9. Income level, fashion and tastes, and advertising
10. a) Demand increases.
b) Demand decreases due to having a cheaper substitute.
11. a) A favorable change in consumers’ tastes and an increase in incomes
b) An increase in the wages of boot-factory workers and an increase in taxes imposed on businesses.
12. At $0.45, 350 units will be produced and sold, without any idle items.
13. If 5,000 units are produced, unit cost = (30,000 ÷ 5,000) + 5 = $11
Selling price = ($11 × 150%) +11 = $27.50
b) TR1 = $20 × 600 = $12,000
TR2 = $21 × 540 = $11,340
Total revenue decreased by $660 following the increase in price.
15. a) Market skimming
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b) Penetration pricing
c) Contribution pricing
16. Promotion is heavy during introduction to raise awareness; it continues during growth so as to capture
sales and loyalty, and might become heavy at maturity to fight competition, or might decrease if customer
loyalty is low. It is much reduced at decline to save costs.
17. a) A business attempt to maintain or increase sales
b) A business can give special offers or promote new uses of sweatpants.
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Term 2 Week 3: Chapter 11; Grid Qs 1-10, Top Qs 1-12
Chapter 11 Promotion and Place in the Marketing Mix
Grid Questions
1. Promotion is the use of advertising, sales promotion, personal selling, direct mail, trade fairs,
sponsorship, and public relations to inform consumers and persuade them to buy. Therefore, effective
promotion increases awareness of products and can create images and product ‘personalities’ that
consumers can identify with.
Promotional objectives aim to:
- Increase sales by raising consumer awareness of a product
- Remind consumers of an existing product and its distinctive qualities
- Increase purchases by existing consumers or attract new consumers to the brand
- Demonstrate the superior specification of a product compared with those of competitors
- Create or reinforce the brand image or ‘personality’ of the product
- Correct misleading reports about the product or the business
- Develop the public image of the business
- Encourage retailers to stock and actively promote products to the final consumer
2. Above-the-line promotion is paid for media that includes advertising and targets mass groups of
customers. It can be used to inform consumers about a product or persuade them to buy it. Below-the-line
promotion is based on communicating with customers without paying for media space and includes sales
promotion, personal sales, direct mail, branding, and merchandising and targets specific market segments.
3. Branding is a part of the elements product and promotion. It is a strategy used to differentiate products
from those of competitors by creating an identifiable image and clear expectations about a product. This
can be done through giving the product a differentiated name, symbol, or design that allow the business to
increase its sales through clearly differentiating the product from others. It helps the business set higher
prices due to low elasticity of demand and increases consumer loyalty. Branding also facilitates the
release of new products under the same family or brand. Consequently, sales forecasts increase, attracting
more distributors and increasing brand recognition.
4. The package is used to protect and contain the product. It gives information and supports the image of
the product by making it easily recognizable. It is the first thing consumers see. Research has proven that
visually appealing products sell more. A package allows the business to achieve the following:
- Provide information needed in terms of product name, ingredients, size, nutrition facts, use, etc.
- Protect the goods and allow convenient transportation
- Attract customers through appealing designs, colors, and shapes
- Promote the product by supporting its image and facilitating brand recognition
5. How promotional strategies may vary over the life cycle of a product:
Introduction:
o Use informative advertising
o Use sales promotion (e.g. free samples)
Growth:
o Continue informative advertising and use persuasive advertising
o Use sales promotion (e.g. loyalty cards)
o Attempt to develop brand loyalty
Maturity:
o Emphasize the difference between this product and competitors through advertising
o Use sales-promotion incentives
Decline (assuming no extension strategy)
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o Use minimal advertising
o Use sales promotion
6. Place refers to how the product is distributed to the consumer. Therefore, place decisions are concerned
with how products should pass from manufacturer to the final customer. Several different channels of
distribution are available for firms to use. If the product is not available at the right time in the right place,
then even the best product in the world will not be bought in the quantities expected.
7. Wholesalers link producer and retailer, break large units into smaller units, and provide storage.
However, retailers sell directly to consumers providing storage and an outlet. Therefore, we can derive the
benefits of each as illustrated in the table below:
8. Direct channels are used when the cost of transportation is low, the product is perishable and large and
bulky, niche market, sold online, and when the producer wishes to keep full control over sales.
Intermediaries are used when the cost of transportation is high due to having customers spread over a
wide geographical area, and when the products are sold in mass and require to be conveniently available
in different locations.
9. It includes online advertising, catalogues, sales, dynamic pricing, social media, viral marketing, and ecommerce, online and mobile advertising, official website, and social media sites.
It improves the contact between customers and the business and allows to collect secondary market
research data, e.g. answer questions on websites. It also includes dynamic pricing by using online data to
charge different consumers different prices. It is relatively inexpensive when dividing the cost by the
number of customers. It allows companies to reach a worldwide audience for a small proportion of
traditional promotion budgets. Consumers interact with the websites and make purchases and leave
important data about themselves.
10. An integrated marketing mix means that decisions regarding the 4Ps should not be taken in isolation:
They should work together in order to fulfill the 4Cs and provide consumers a consistent message through
product design, promotion, price, and distribution.
Top Questions
1. To inform potential customers and encourage them to try the product for the first time.
2. To attract new customers, support the brand image, sell to other segments, and retain existing
customers
3. a) A range of activities used by businesses to communicate and interact with consumers to inform or
persuade them to change attitudes or
buying behaviors.
b) Above-the-line promotion such as advertising
involves marketing methods that communicate
with consumers using paid-for mass media,
whereas below-the-line promotion methods
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such as sales promotion communicate with consumers without paying for media space.
4. a) Television or beauty magazine advertisements
b) Viral marketing
c) Point of sale/sale promotion
5. In order to determine whether the methods used allow targets to be achieved and to identify future
expenditures on promotional budgets and future changes in sales and consumers’ responses after
promotion.
6. Introduction: promotion should build brand
awareness. Growth: promotion is aimed at a wider audience to inform or persuade them to buy.
Maturity: promotion is focused on differentiating the product from those of competitors.
Decline: promotion might stop or be cut.
7. a) Direct to better assist customers and provide a nice fancy décor or service to attract them and
convince them to buy.
b) Direct, because it is bulky and requires explanation and demonstration about how it works.
c) Retailer to distribute to different locations
d) Wholesaler to buy in mass and break the bulk for the retailer
8. Wider reach at relatively low cost, and accurate data can be kept about the number of visitors and
purchases. It increases sales as well as enabling consumers to shop at their convenience.
9. a) Wider target but could be expensive
b) Allows for interaction with customers but requires training of staff
c) Fast and relatively cheap, but cannot control comments or feedback
10. The 4Ps should be consistent with the 4Cs for the marketing mix to be integrated. The choice will,
therefore, depend on the type of product, the media to use in promoting the product, the price to set
(whether high or low), the types of customers to target, and the intermediaries to use when distributing
products.
11. It allows for rapid growth and expansion. It allows consumers to compare prices easily, allows for
global promotion, facilitates dynamic pricing and price discrimination, and allows the clothing retailer to
easily record customers’ responses.
12. Through viral marketing, allowing for informal consumer reports and reviews on products (tweets, or
Facebook images).
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Term 2 Week 4: Chapter 12; Grid Qs 1-12, Top Qs 1-4, 8, 9, 12, 13
Term 2 Week 5: Chapter 12; Grid Qs 13-16, Top Qs 5, 6, 11, 14
Chapter 13; Grid Qs 1-2, Top Qs 1
Chapter 12 Nature and Planning of Operations
Grid Questions
1. Operations encompass products and services and they focus on efficiency, quality, and production. The
operations is the process of converting input of factors of production, including land, labor, capital (and
intellectual capital) into goods and services. It is used by small and large firms and aims to boost
productivity to keep the costs of production low. The operations department depends on other business
departments, including human resources, finance, and marketing. If managed properly, operations should
result in a higher efficiency and effectiveness. 2. The production process is based on turning ideas into
finished goods or services, in the most efficient and effective way possible. It starts by identifying
customer needs. This can be achieved through market research to determine the initial idea and the
suitable product or service to provide. After deciding on the good or service to provide, operations
requires determining the resources needed. At this stage, operations determine the way land, labor, and
capital should be combined to yield the best outcomes, at the lowest possible cost. Additionally, operation
defines the best method of production that will yield the highest efficiency in terms of volume and
quality. Decisions about the inventory levels to hold in order to maintain production also need to be made
to ensure that production is running according to the plan. In the last stage, the final output, which can be
addressed to consumers (consumer goods or services) or businesses (components or industrial goods), is
delivered for sale (e.g., to retailers or wholesalers).
3. Operations efficiency measures the quantity of resources used in producing a given quantity of product.
Efficient producers use fewer inputs for a given quantity of output, so their unit costs are lower. On the
contrary, operations effectiveness is a measure of how well the final product meets the needs of customers
— for example:
 Function — how well the product does the job for which it is designed.
 Availability — how easy it is to obtain the product.
 Price — related to efficiency of production (costs).
 Value for money — a combination of price and function.
To summarize, efficiency measures the way resources are used (cost), whereas effectiveness measures
how well the product meets customers’ needs.
4. Productivity is a measure of the efficiency of transforming inputs into outputs. It is usually used to
determine the cost of production. An increase in productivity allows the business to become more
competitive. Productivity makes it possible for firms to reduce the selling price of products without
impacting profits, or maintain the same price and increase the profit margin by producing and selling
more units. In general, whenever productivity increases (more units per worker), efficiency increases as
well since the unit cost decreases. This applies to all the factors of production, not only labor.
5. There are four main ways in which productivity levels could be increased. They include:
- Improving the training of staff to raise skill levels
- Improving worker motivation
- Purchasing more technologically advanced equipment
- Adopting a more efficient management
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6. Productivity helps achieve efficiency. Labor productivity is the output per worker. It may be increased
by:
- Changing the way work is done to include processes that speed up production and increase
effectiveness, such as teamwork
- Training employees to reduce mistakes and speed up the work
- Improving management to become better at problem solving
- Increasing employee motivation by offering them more rewards or increasing their responsibilities
- Investing in equipment and technology so that employees have access to modern, more efficient
machinery, allowing them to produce more than those using outdated equipment
- Changing the business culture to include efficiency in all operations or production processes
Capital productivity is the output per machine. It may be increased by investing in the latest technology or
by better maintaining existing machines. This incurs high costs (machinery, training, and wages).
Therefore, managers should consider the available resources before choosing which method to use in
order to boost productivity.
In general, businesses benefit from increased productivity as it can reduce costs, provided that production
levels remain consistent with the general demand. However, employees may resist the increase in
productivity, especially if they do not wish to learn new skills or work longer hours.
7.
8. In marketing, added value allows firms to sell at higher prices and attract customers through providing
a good product design, efficient production, and running successful marketing campaigns. Moreover,
added value is achieved in operations through the conversion of consumers’ needs into products that can
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be provided efficiently and through setting quality standards and checking that they are maintained.
9. Operations planning involves preparing input resources to supply products to meet expected demand.
If the sales forecasts are reasonably accurate, then operations managers should be able to:
- Match output closely to the demand levels
- Keep inventory levels to a minimum efficient level
- Reduce wastage of production
- Employ and keep busy a stable and appropriate number of staff
- Produce the right product mix
10. - Marketing: ideas are collected through research and development to meet customers’ needs.
Production methods are determined based on customers’ willingness to pay and quality required, and the
location is determined based on customers’ buying patterns and cost constraints.
- Resources: the availability of land, labor, and capital facilitates the production process.
- Technology: CAD and CAM can be used to better design products and increase flexibility, allowing the
business to integrate design, production, marketing and inventory, and to increase quality consistency and
production planning flexibility.
11 Flexibility refers to the ability of businesses to adapt to changes in consumers’ demands. It increases
when process innovation is used, allowing to better match products to customers’ needs, and results in
faster operations planning and production. Volume flexibility refers to the ability of firms to operate
efficiently, effectively, and profitably over a range of output. In general, flexibility results in lower costs
in terms of labor and planning. However, flexibility is limited by factors such as lack of skills and lack of
technology.
12. Process innovation uses automation (CAD and CAM), robots, and improved workflows (delivery of
better services) to set new or improved production methods, resulting in a more consistent output, higher
productivity, and the ability to easily reproduce products. It occurs when the business adopts one or more
of the following elements:
Changes in the delivery process (online orders)
Changes in production methods and processes (replace labor with machines or robots)
The use of faster machines
The use of improved methods to track inventory (scanners and bar codes)
The use of the internet in tacking the delivery of parcels
13. Factors that will influence whether a business adopts one of the four production methods include:
- Size of the market
- The amount of capital available
- Availability of other resources
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- Market demand exists for products adapted to specific customer requirements
14. - Job production produces single, one-off items and requires highly skilled workforce
- In batch production, a group of identical products pass through each stage together and labor and
machines must be flexible enough to switch to making batches of other designs.
- Flow production is mass production of standardized products that requires specialized and expensive
machines, but can be very efficient.
- Mass customization is flow production of products with many standardized components but with
customized differences too. It requires flexible equipment to vary products.
15.
Batch production
Job production
Flow production:
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Mass customization:
16. A change from job to batch production results in higher costs of equipment, requires additional
working capital, and may result in staff demotivation.
A change from job or batch production to flow production incurs high cost of capital, requires staff
training, and requires the firm to conduct research to accurately estimate future demand as large quantities
will be produced. Moreover, quality standards might need to be reset and products might need
redesigning.
Top Questions
1. a) Capital intensive production involves a high level of capital compared with labor, whereas labor
intensive production incurs higher labor costs than capital costs.
b) - Relative price of capital to labor: If the cost of capital is higher, then the business would not shift to
capital intensive production.
- Technological development: The shift is possible if the production process can be mechanized.
2. a) Intellectual capital refers to the collective knowledge of individuals in a business or
the intangible assets of a business, such as employees’ skills, technology used, and information about
customers.
b) Intellectual capital in the form of employees’ skills and expertise, brand, company image, and unique
selling point give the business a competitive edge. They add to the quality of goods produced and add
value to the factor inputs through improving the production process, allowing firms to reduce costs and
increase the selling price.
3. Capital in the form of machinery, tools, and computers make a significant contribution to
the production process and give the business a competitive edge over rival firms. In addition, intellectual
capital helps the business add value by raising the quality of the goods and services provided.
4. a) Operations management is the transformation of inputs into outputs in an efficient and effective way
to satisfy consumer requirements and contribute to the profitability of the business.
b) Operations management is affected by advances in technology since they result in higher efficiency in
production. This includes the need to update existing machines or invest in new machines. This reduces
costs and increases productivity. However, if the business cannot keep up with technology, they might
lose customers to competitors who use better technology. Technology can also negatively impact
employees’ motivation if the business shifts to capital intensive production. In this case, production
decreases and costs increase.
5. Batch production is based on producing one product, based on different operations carried out before
moving to another batch or operation. It allows flexibility and requires employees to focus
on one operation at a time. Flow production results in a standardized output being continually
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produced in large quantities. Flow production
results in lower unit costs; however, interruptions might increase costs and delay production.
6. The move will involve the cost of new machines and technology. It will result in standardized
production with less flexibility. Moreover, a larger stock of materials will be needed, in addition to larger
warehouses to store the finished products. Employee motivation might be affected by
this change, and there is a potential that they might resist it. However, the extent of this move will depend
on the product type, the level of technology, and the extent of the market.
7. - Added value: Operations management joins all the resources efficiently and effectively to produce a
good or service. Therefore, it allows the business to add value through reducing costs, and increasing the
price.
- Reduced wastage: It helps the business produce more efficiently with fewer errors and less wastage of
resources.
- Improved production methods: Operations planning determines the most appropriate method of
production to use and helps better develop products and control inventory.
8. a) Productivity is the ratio of output to input of factors of production. For example, labor productivity
measures the output per worker.
b) Capital productivity can be increased by updating machines or using the latest technology.
Labor productivity can be increased by training employees.
9. - Orchestrating the resources to produce a good or service more efficiently, and adding value through
the transformation process
- Focusing on flexibility in terms of quality, speed, and costs of the production process
10. It is the conversion of inputs of land, labor, capital, and intellectual capital into outputs of goods or
services. This process is used by all the businesses, regardless of the sector in which they operate.
Eventually, the transformation should add value and allow the business to increase its profit.
11. a) (20 × $1,000) / 6,000 = $3.33 per unit
b) Company A: 200 per month (6,000/ 30)
Company B: 167 per month (10,000/60)
c) Company B, since labor productivity is 400 per month per worker, whereas in Company B, labor
productivity is 300 per month per worker
d) Company B workers might be paid more or be more skilled than Company A workers, resulting in a
higher productivity.
e) Labor: Increase pay or improve skills through training.
Capital: Invest in new technology or improve machinery maintenance.
12. Since less labor will be needed, motivation level decreases, as employees feel they might lose their
jobs. This results in lower productivity.
13. Quality is an important feature of products that firms can use to charge higher prices, as improved
quality adds value and increases customers’ satisfaction and repeat orders. Therefore, the production
process will need to be improved or changed if quality does not meet customers’
requirements.
14. a) Handmade pottery, fashion dresses, backyard landscaping
b) It allows for one-off products to be supplied to higher end markets based on customers’ requirements.
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Term 2 Week 6: Chapter 13; Grid Qs 3-7, Top Qs 2-7
Term 2 Week 7: Chapter 13; Grid Qs 8-13, Top Qs 8-14
Chapter 13 Location, Scale of Production, and Inventory Control
Grid Questions
1. Businesses consider qualitative and quantitative factors. Quantitative factors are measurable in
financial terms and will have a direct impact on either the costs of the site or the revenues from it and its
profitability, including sites and other capital costs such as building, labor costs (depends on whether the
business is capital or labor intensive), transport costs, and sales revenue potential. Certain location can
add status and image. Moreover, government grants and legal frameworks in which a business operates
influence its location. Other factors include the availability and proximity of resources, customers, and
markets, geographical factors such as climate, demographic factors which influence the availability of
labor, in addition to economic and political stability.
2. A local business sells its goods and services to its own community, city, or town, within a limited
geographical area and considers mainly the site cost, market proximity, the availability of resources and
labor, in addition to local government policies and regulations. A regional business serves adjoining cities
or states and involves differences in demand between different markets, which requires adjusting the
marketing strategy and channels of distribution. Nationally, businesses carry their operations throughout
the country and are influenced by the country’s culture and demand. National location may be extended to
include multiple manufacturing plants and different marketing mix strategies and require capital for
investment and marketing, as a wider market is targeted. Businesses become international when they
operate in more than one country due to cost reduction factors, including low wages, absence of rigidity
in government regulations, lower taxes, outsourcing, and government assistance, in addition to political
and economic factors.
3. Relocation is also influenced by demographic, political, geographic, and legal factors. The new
location should have lower costs of training, employment, and marketing. A business should consider
relocating where several suppliers of resources are available, where infrastructure is improved, where the
supply of labor is high and wages are low. Industrial inertia forces the firm to stay in the same location
because the costs of moving exceed the benefits from moving.
4. - Business objectives: If a business aims to expand, the scale of production increases. However, if
growth is not the objective, there will be no change in the scale.
- Cost reduction: The scale of production changes when it is possible to reduce unit costs.
- Product life cycle stage: The scale of operations depends on the stage in the product life cycle. For
instance, during the growth stage, investment in additional resources may be needed to increase output
and meet the rise in demand.
- Availability of finance: The availability and amount of finance determines the scale of operations. In
general, a business that has been in operation for several years has more financial resources available than
a newly established one. This allows it to expand its scale of operations.
- The nature and size of the market: The scale of production also varies among niche and mass markets.
For instance, mass production allows to achieve lower unit costs in the long run, whereas niche
production does not.
- The number and size of competitors: The higher the number of competitors and the availability of
substitutes, the lower the scale of production, since each firm’s market share would be relatively low
5. Economies of scale are reductions in a firm’s unit (average) costs of production that result from an
increase in the scale of operations.
6. Diseconomies of scale are the increase in unit costs following an increase in the scale of operations.
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They occur due to internal factors such as:
- Managerial diseconomies: controlling the different business activities and making sure that all the
employees are working towards the same business objectives may become impossible, especially if
thousands of workers are involved. Culture differences might also arise, making it difficult to coordinate
tasks.
- Communication problems: as the firm expands, the channels of communication become long and the
administrative procedures are costly and complex. This results in delays, as instructions from managers to
employees may get distorted.
- Employees’ morale might be low due to specialization and the loss of a sense of belonging in large
firms. This is mainly due to reduced contact between senior managers and employees. Consequently,
labor productivity decreases and leads to wastage of resources and higher costs.
External diseconomies of scale that occur following the increase in the number of firms in an industry
include the following:
- Shortages of labor: businesses start bidding for higher wages to attract new workers and retain the
current ones when the supply of labor decreases.
- Limited resources: raw materials become scarce when many firms locate within the same area
- Costly disposal of waste: pollution increases when firms are concentrated within the same area.
7. A firm achieves full capacity when it is able to produce the maximum output using its resources. If unit
or average costs decrease as the firm’s capacity increases, economies of scale are achieved. As capacity
increases and unit costs increase, diseconomies of scale set in. the lowest average cost determines the
minimum efficient scale and the optimum output level at which the firm should stop increasing its
capacity to avoid reaching diseconomies of scale.
8. Purpose of inventory:
There must be enough inventory to enable production to take place — but if there is too much inventory,
unnecessary costs are incurred.
- Raw materials are essential for the production transformation process. They are also held so that a
sudden order can be started on without waiting for more raw materials. This will help unexpected orders
to be met.
- ‘Work in progress’ are partly finished goods but are not yet ready for sale, such as an assembled car
with the wheels still to go on.
- Finished goods are ready for sale. Businesses hold them as a buffer stock so that customers can be
supplied immediately (e.g., goods in a retail store).
Benefits of holding inventory:
- Ability to meet demand — holding inventory means a business is in a position to supply a customer as
quickly as possible when an order arrives. Varying demand makes holding inventory essential for
flexibility.
- Ensuring production is not interrupted — holding inventory enables production and sales to continue
even if supplies of raw materials cannot be obtained for a while.
- Gaining a discount — economies of scale in transport or bulk buying of raw materials at a discount may
save more than the cost of holding inventory.
- Reducing inflation effects — buying raw materials before price rises or producing goods before costs
rise may produce savings or higher profit margins.
9. A firm should manage its inventories and avoid holding more or less than what is needed.
Holding too little stock:
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Holding too much stock:
10. Buffer inventory is the minimum amount of inventory a business holds to avoid stockout. The lead
time is how long it takes from ordering the supplies and receiving them. The reorder level is the level of
inventory left at which a business needs to place a new order before inventory drops below the buffer
level.
11. Lead time is one week, buffer is at 100 units and reorder is at 300 units.
12. Just-in-time production (JIT) operates with as low a buffer inventory level as possible. Raw materials
are ordered only when needed for production, efficient production methods minimize work in progress,
and finished goods are supplied immediately to customers, minimizing finished goods inventory.
JIT requires:
- A low reorder level
- A low order quantity
- A short lead time
- Reliable suppliers for delivery time and quality
- Accurate forecasts of customer demand
- An integrated production process
- Enterprise resource planning (ERP) systems to integrate suppliers, production, and customer demand
13. JIT may not be suitable for all firms at all times:
- There may be limits to the application of JIT if the costs resulting from production being halted when
supplies do not arrive far exceed the costs of holding buffer inventories of key components.
- Small firms could argue that the expensive IT systems needed to operate JIT effectively cannot be
justified by the potential cost savings.
- Rising global inflation makes holding inventories of raw materials more beneficial as it may be cheaper
to buy a large quantity now than smaller quantities in the future when prices have risen.
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- Higher oil prices will make frequent and small deliveries of materials and components more expensive.
Top Questions
1. The main factors are the proximity to customers, transportation facilities and costs, and the suitability
of the site where the supermarket will locate.
2. It may do so due to lower costs in other countries, including property rent and wages.
3. - It should locate where the market is large to attract more students.
- The location should be easily accessible by students and employees to raise competitiveness.
4. - Site cost
- Availability of resources and labor
- Infrastructure
5. A decrease in unit costs at every output due to external factors related to the industry, such as having
research and development conducted by specialized groups.
6. A reduction in unit costs as output expands due to factors related to the business itself. For example,
purchasing economies lower the costs of resources through bulk buying.
7. Efficiency increases, allowing the firm to lower its costs and prices and increase its profitability.
8. - The type of product, depending on whether it is perishable or can be stored for along period of time
- The costs incurred, in terms of warehousing, insurance, and staffing
- The forecast demand since this will determine the stock level needed to meet customers’ requirements
on time
9. Advantages:
- It reduces the stock levels of raw materials, components, and work-in-progress to a minimum, lowering
costs of storage.
- It ties less capital to stock since stock is only purchased when needed.
Disadvantages:
- Sudden orders might not be met.
- It cannot be used by small businesses due to high implementation costs.
10. - Accurate forecasts of demand are needed in order to avoid stock out.
- The latest information technology needs to be used to have clear records of stock and communication
with suppliers.
11. 200 units. The reorder level = buffer level (100) + inventory used during lead time (2 × 50).
12. Buffer inventory is the minimum level of stock that can be held to ensure that production continues
even when the delivery of supplies is delayed. Without buffer inventory, sudden orders might not be met.
13. Inventory control is used to reduce the inventory costs of raw materials, work-in-progress, and
finished goods, and to maintain an optimum level of inventory ensuring that production is carried out
without holding unnecessary stock, especially since the manufacturer relies on inventory to complete
orders and needs to plan ahead about efficient ordering systems.
14. - Costs, including storage, inventory, damage, and opportunity costs, increase if more stock is held.
- If insufficient inventory is held, changes in demand will not be met and consumers will be lost. For
these reasons, businesses must maintain an optimal stock level.
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Term 2 Week 8: Chapter 14; Grid Qs 1-6, Top Qs 1, 2, 4, 6, 7, 11-13
Term 2 Week 9: Chapter 14; Grid Qs 7-8, Top Qs 3, 5, 8-10
Chapter 15; Grid Qs 1-4, Top Qs 1-4
Chapter 14 Business Finance
Grid Questions
1. A business needs finance when it wants to:
- Set up (purchase essential capital equipment and premises)
- Finance its working capital (pay bills and expenses and build up stocks)
- Expand and increase capital assets
- Take over other businesses
- Keep the business stable in time of an economic recession, or pay for essential expenses if a customer
fails to pay for goods
- Pay for research and development or invest in new marketing strategies
2. Working capital is used to finance the day-to-day activities of a business. It finances the purchase of
materials and the payment of wages to employees. Working capital is current assets minus current
liabilities.
Therefore, the working capital may either be positive or negative:
- Positive working capital: When a business has positive working capital, this means that the business has
more current assets than current liabilities. Too much working capital means that the business has assets
that are not working hard enough. It could be that too much money is tied up in stock and is therefore
creating an opportunity cost. The money held in stock could be used more productively elsewhere in the
business.
- Negative working capital: When a business has negative working capital, this means that the business
has more current liabilities than current assets. Too little working capital could mean that the business is
unable to pay its short-term liabilities, such as suppliers and wages. This could lead to the business
becoming illiquid and ultimately failing. Liquidity means the ease with which an asset can be turned into
cash. A shortfall in working capital is often resolved by agreeing an overdraft to enable the business to
continue to function. Many businesses fail due to a lack of working capital, even though they are
profitable.
3. The spending on assets that are used up in a short period of time (i.e., every day running costs) is
referred to as revenue expenditure. Such costs include raw materials, fuel, wages, and power to run
machinery, and symbolize a normal part of trading activities. Revenue expenditure is usually shown as an
expense in a business income statement or profit and loss account.
Capital expenditure refers to the spending on items used many times (non-current or fixed assets) for a
prolonged period of time, such as machinery, property, and equipment. These will appear on the
statement of financial position or balance sheet.
4. Short-term finance includes overdrafts, short-term bank loans, trade credit, and debt factoring since
they require repayment within twelve months (one year). Any repayment that exceeds this time frame
would be considered as long-term finance, such as inviting new partners, share capital, and mortgages.
However, some of these external sources might not require repayment, such as crowdfunding and
government grants.
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5. Newly established firms cannot use retained profit as an internal source. Labor-intensive firms cannot
use the sale of unused assets as an internal source. Internal sources include sale and leaseback of assets,
owners’ savings, working capital, and sale of inventories.
6. - Share capital: money raised through share, mainly used by public limited companies.
- New partners, mainly used by partnerships
- Venture capital: risk capital invested in business startups or expanding small businesses that have good
potential but do not find it easy to gain finance from other sources.
- Leasing: obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed
period, mainly for acquiring assets.
- Hire purchase: an asset is sold to a company which agrees to pay fixed repayments over an agreed time
period – the asset belongs to the company after settling all the payments, mainly used to buy heavy
equipment and machines
- Bank loans depending on the amount needed and the collateral, mainly used for expansion
- Mortgages: long term loan, for warehouses, premises, or other property
- Debentures: bonds issued by companies to raise debt finance, often with a fixed rate of interest, mainly
used by public limited companies
- Microfinance: providing financial services for poor and low-income customers who do not have access
to banking services
- Crowdfunding: the use of small amounts of capital from a large number of individuals to finance a new
business venture, mainly for entrepreneurs
- Government grants: funds given to businesses with conditions attached, but don’t have to be
repaid if conditions are met.
7. Factors that affect the choice of finance include:
- Use to which finance is to be put, which affects the time period for which finance is required
- Cost
- Amount required
- Legal structure and desire to retain control
- Size of existing borrowing
- Flexibility
8. The factors to consider when choosing the source of finance include:
- The purpose: A business that needs to buy new office premises should consider taking a mortgage,
whereas a company that needs to buy a fixed asset should consider leasing or hire purchase.
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- The amount required: Usually large projects that need to be repaid over a longer period require larger
amounts compared to smaller projects.
- The urgency of the money needed: They must consider whether the business has time to raise the money
needed or money is needed urgently.
- The relative cost of each source: In general, internal finance tends to be cheaper since some external
sources incur additional costs in the form of interest paid on the borrowed amount.
- The risk involved: Projects that have lower chances of becoming profitable are deemed riskier than
profitable ones. In general, short-term finance is less risky than long-term finance since it is repaid within
a short period of time. Furthermore, a highly geared business with several existing loans is highly risky to
lend to.
- The time period of the required finance: Finance managers need to make a decision about whether
finance is required on a short- or long-term basis.
- The legal structure, financial history, and size of the business: The availability of finance varies from
one firm to another depending on the form of ownership, the age of the firm, and its size. A sole trader or
partnership cannot use share capital, unlike public limited companies that can sell shares on the stock
market and private limited companies that can sell shares internally. Moreover, a newly established
business with no credit history and no profit might not be able to receive bank loans. Alternatively, a
strong public limited company can easily secure a bank loan at a low interest rate.
- Degree of retaining control: Owners who do not wish to compromise losing ownership or control over
their business should ignore the sources of finance methods that dilute ownership, such as venture capital
and share capital.
- Degree of flexibility: Certain sources of finance, such as government grants are less flexible since they
dictate what the capital should be spent on. Flexibility may be required, not only in terms of purpose, but
also in terms of payment and duration. Flexibility might incur high costs. For example, if a long-term
bank loan is settled earlier than the agreed time, the business might be penalized.
Top Questions
1. a) Selling shares or share capital is the best option, as this will allow the company raise a large amount
of capital without the need to repay the shareholders.
b) Use trade credit in order to delay payments to suppliers and benefit from additional resources to meet
the increase in the production.
2. Trade credit and a bank overdraft are options, as the sole trader would need short-term sources of
finance to speed up the working capital cycle by increasing the amount of finance available and delaying
payments. As such, current assets increase, while current liabilities decrease by delaying
payments to suppliers.
3. Partnerships are unincorporated businesses that cannot issue or sell shares. Therefore, they have to use
other sources to raise finance or change the business structure to a private limited company if they wish to
sell shares internally, or public limited company if they wish to sell shares on the stock exchange market.
4. Long-term loans influence the risk involved, since they have to be repaid, regardless of whether the
company is profitable or not. By taking more loans, debts increase and the company becomes highly
geared, discouraging potential investors and shareholders from providing further capital.
5. Several factors need to be considered, as the sources would depend on the following:
- The existing financial position: Whether the manufacturer is profitable or has fixed assets for sale. If
profits are made and assets are available, using retained profits or sale of assets would be convenient
sources. The amount of capital raised internally: If internal sources are limited, a consideration of external
sources needs to be made. This will depend on the legal structure (whether a plc. or ltd.). If share capital
is not enough, other alternatives, such as bank loans or government grants should be considered.
- Gearing needs to be considered if financing is long-term and/or large amounts are to be raised.
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6. Sole traders have limited sources of finance. The hairdresser will need to raise capital to buy
equipment, pay for or rent the premises, and pay for workers since it is a labor-intensive business.
Therefore, possible choices would include the owner’s personal finance or a bank loan. The personal
savings do not need to be repaid; however, if the business fails to make profit in the short run, the owner
risks losing the money invested and will be personally liable for the debts. As for getting a bank loan, the
sole trader will need to provide a collateral.
7. Working capital allows firms to operate more effectively by controlling the flows of cash and
ensuring the continuous availability of finance to cover day-to-day expenditure. The difference between
current assets and liabilities represents the working capital.
8. Advantages:
- A Plc. can budget better, since future expenditure is predictable.
- There is no loss of control or ownership.
- Loans are available in different forms and under different terms.
Disadvantages:
- Loans can be expensive due to collateral and interest charged.
- They increase the risk by making the business highly geared.
- If timely payments are not made, penalties might apply.
This source will depend on the credit history and reputation of the Plc., in addition to the purpose of the
loan.
9. a) Microfinance is the provision of financial services, including small loans and advice, to poor people
who cannot get finance from traditional sources, such as banks.
b) Microfinance aims to help small businesses requiring small amounts of money to start up faster. If the
business is a sole trader or partnership, microfinance would be ideal, since the money will not need to be
repaid, and the owners will not lose control or ownership. However, if the shoes manufacturer needs
finance to spend on recruiting employees and paying their wages, or running the business on a day-to-day
basis, microfinance would not be appropriate as it is not a permanent source of finance.
10. a) A sum of money given to businesses for a specific purpose, such as relocating in a remote area or
expanding in fields such as technology, education, and medicine
b) - To reduce unemployment
- To improve the economy in terms of output, standard of living
- To generate new ideas or support important industries involved in research or medication
- To help revive remote areas
11. - Use an overdraft loan since the money in the bank is not enough. This assumes that the amount
needed does not exceed the allowed limit and that the interest charged can be covered by the
manufacturer.
- Control working capital or use a factoring company to reduce the time of credit provided to customers
and increase current assets.
12. a) Venture capital refers to funds advanced to highly risky businesses in the form of shares and loan
capital.
b) Advantage: Vendor capitalists provide advice, experience, and contacts in addition to finance.
Disadvantage: The amount of money invested might not be enough and the venture capitalist might ask
for a share in ownership.
13. An overdraft allows a business to spend more than what it holds in its current bank account, up to an
agreed amount, whereas a bank loan is an amount of money provided to a business over a specific period
of time, in return for an interest rate. A loan might ask for a collateral, whereas an overdraft does not
require a security.
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Term 2 Week 10: Chapter 15; Grid Qs 5-13, Top Qs 5-14
Chapter 15 Costs and Break-Even Analysis
Grid Questions
1. Why is cost information important?
2. What are the different types of costs?
3. Why is it difficult for firms to accurately allocate the costs?
4. How are costs used in making decisions?
6. What is “break-even analysis”, and what are its uses?
7. How is break-even output calculated?
8. What is meant by margin of safety and how is it calculated?
9. Why is break-even analysis used and what are its limitations?
10. Why do businesses prepare cash flow forecasts?
11. What is the difference between cash, profit, and liquidity?
12. How are accounts under a cash flow forecast calculated?
13. Why do businesses hold cash and what happens when the amount of cash is not enough?
14. What are the methods used by firms to improve cash flow?
Top Questions
1. Average cost is the cost per unit, equal to total costs divided by the quantity produced, whereas
marginal cost is the extra cost incurred from producing an additional unit.
2. Cost information is mainly used to make decisions about the following:
- Setting up the business
- Planning for expanding business operations
- Taking on special orders
3. Accepting special orders does not usually add to the fixed costs. Therefore, even if the price is lower,
profits would increase since average fixed costs decrease. Moreover, the new order might allow the
business to enter new markets, boosting sales and generating additional revenues and profits.
4. Businesses need to allocate costs to revenue and cost centers to identify the branches of that are
incurring losses and reducing revenues. In addition, businesses need to check whether costs are increasing
unexpectedly, as this impacts profits and budgeting. The close monitoring of costs also allows the
business to hit its profit targets.
5. - To decide on the output level that will generate profits
- To assess the impact of changes in production levels on profitability
- To support an application for a bank loan
6. The assumption that all the items produced will be sold is unrealistic. If the business fails to make
revenues from all the sales due to unforeseen decreases in demand or changes in competitors’
prices, it will fail to break-even.
7. a) Break-even = FC ' contribution = $8,000 ÷ $2 = 4,000 units
b) Margin of safety = Current output - BE output = 3,000 units
8. Short-term: The business can use debt factoring to collect outstanding debts and increase cash inflows
immediately.
Long-term: The business can sell its unused assets to release cash.
9. - The business may extend too much credit to its customers.
- The business might expand too quickly without planning for its cash needs.
10. Some businesses need to hold larger cash amounts to be able to trade securely, especially if cash
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inflows are delayed.
11. Customers might stop buying from the business if they dislike having their debts sold to a third party.
Moreover, the business might not receive the full amount of debts since the factoring company charges a
fee for its services.
12. Suppliers might not be able to pay their own debts if they receive delayed payments from firms. In
addition, they might refuse giving credit terms to businesses that do not have a trade history.
13. Businesses might fail to account for unexpected increases in costs or prices of raw materials, and
wages. For instance, a sudden machine breakdown can impose unanticipated pressure on cash outflows,
resulting in a discrepancy between forecasted and actual cash figures.
14. a) - A = $5 million as at zero output, total cost is equal to fixed costs
- B = $10 million (FC + VC).
b) $750 per computer ($15m ' 20,000 units).
c) $5 million
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Term 2 Week 11: Chapter 16; Grid Qs 1-7, Top Qs 1-11
Chapter 16 Introduction to Accounting
Grid Questions
1. Main users of business accounts:
2. - Cost of sales: (opening inventory + purchases) – closing inventory. It refers to the direct cost of the
goods that were sold during the financial year.
- Gross profit: equal to sales revenue less cost of sales.
- Operating profit / net profit: gross profit minus overhead expenses, before interest and tax.
- Profit for the year (profit after tax): operating profit minus interest costs and corporation tax.
- Retained earnings (profit): the profit left after all deductions, including dividends, have been made.
3. - Non-current/fixed assets: assets to be kept and used by the business for more than one year.
- Current assets: assets that are likely to be turned into cash before the next Statement of financial position
date.
- Current liabilities: debts of the business that will usually have to be paid within one year.
- Working capital/ net current assets: capital needed to pay for raw materials, day-to-day running costs
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and credit offered to customers.
- Non-current liabilities: value of debts of the business that will be payable after more than one year.
- Reserves and equity: how much the business worth (share and Equity finance: permanent finance raised
by companies through the sale of shares).
4. The current ratio is calculated by dividing current assets by current liabilities. Usually a ratio a value
greater than 1:1 is considered good as it will allow the firm to meet its short-term liabilities, without the
need to sell unused assets or raise additional capital. The acid test ratio which deducts the value of
inventories from current assets before dividing them by current liabilities, gives a better indication about
liquidity as it measures the very short term liquidity of the business. However, the value of the acid test
that is acceptable will vary according to business type.
5. The gross profit margin (gross profit/sales) and the profit margin (gross profit – expenses/sales) can be
calculated to determine whether the firm will be able to pay its shareholders. These ratios should be high
to conclude about the quality of profit (good, acceptable, or unsatisfactory). The profit margin is a better
indicator than the gross profit margin as it excludes the expenses.
6. The profit margin ratio can be improved by reducing the fixed costs, such as electricity and
administration expenses to raise the values of the operating profit or by setting a higher price to increase
sales revenue. The gross profit margin can be improved by raising the selling price to increase sales
revenue or by lowering the direct costs, including wages and raw materials. However, these two
approaches may be limited by the price elasticity of demand and the quality of cheaper labor and
resources.
Firms can improve the current ratio by increasing the value of their current assets, including selling off
unused assets and raising more cash.
Firms can improve the acid test ratio by selling more inventories to raise more cash.
7. Limitations of accounting ratios:
- They are based on past information and might not be a good indicator of future performance.
-The interpretation of ratios can be influenced because published accounts give the detail required by law
but avoid information that is not required and which might help their rivals. Ratios are a quantitative
technique and qualitative factors might also need to be considered.
- Ratios measure an outcome of business performance but do not convey information about the possible
causes or solutions to any potential problems.
- The use of different accounting techniques can make comparisons between businesses difficult.
Different techniques mean that you cannot compare like with like.
- The published accounts are an overview of a whole business and do not reveal departmental
performance.
- The statement of financial position records the value of assets and liabilities on a particular day, but
those values tend to vary throughout the year.
- Factors such as the relative size of a business can make the comparisons difficult or of less value for
reasons such as the ability to bulk buy.
Top Questions
1. a) Gross profit = $19,000 ($31,000 - $12,000)
b) Operating profit = $6,500 ($19,000 - $12,500)
c) Retained earnings = $200 ($6,500 - $2,100 - $4,200)
2. Liquidity is low when the firm holds a high level of stock. In order to improve this, the firm has to
reduce inventories by selling off old stock. This can be achieved through using just-in-time production, as
stocks will be only ordered when needed. Another measure would be to reduce its receivables by selling
less on credit to customers and increasing cash inflows.
3. The fall represents a decrease in net profit by 0.03 on each dollar sold. This can be due to an increase in
expenses by more than the increase in sales or due to selling at a lower price, which
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lowers gross profit and the net profit margin.
4. Gross profit is the difference between revenue and cost of sales and gives a broad indication about the
firm’s financial performance. The retained earnings measurement deducts all the business expenses and
payables to the government (taxes) and shareholders (dividends). These are also recorded under the
statement of financial position under shareholders’ equity and are kept in the business for investment
purposes.
5. - Shareholders
- Suppliers
6. The manufacturer may be planning to purchase new assets to expand the business in the future. The
firm may also have paid high dividends in the previous year.
7. Non-current liabilities are debts that do not need to be repaid within one year, such as mortgages. Total
equity is a liability as well, since shareholders’ initial investment will need to be repaid if the business
ceases trading.
8. Business reserves represent the accumulated profit that is not paid out to owners or shareholders.
9. For most retailers, it is normal to trade with a low acid test ratio since most customers pay in cash on
time, and, as a major retailer, it might be receiving trade credit items from suppliers, which improves its
liquidity.
10. A firm can lower its costs by buying cheaper resources to increase net profit or it can increase its
revenue by promoting its products or services.
11. Managers calculate the current and acid test ratios to determine whether the business is able to meet
its short-term debts or whether it will need to raise capital to meet its liabilities. Accordingly, they make
decisions about how to improve liquidity in case of unfavorable ratios. This also assists them in
monitoring the liquidity over different years and identify a trend.
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