Unit 1 Answers

Chapter 1: Enterprise

Case study: Small businesses in the UK, page 7

1 Use the definition of less than 50 employees accepted by both EU and UK government. 2 Using this definition the percentage of construction businesses that are small is: 199,125 100 = 98.3% 202,625 3 All three of the industries chosen have a high proportion of small businesses (less than 50 employees). In retail the percentage is 97.4% and in hotels and catering the percentage is 95%. However, these percentages take no account of the value of output produced by these small firms as a percentage of total output in each industry. In addition, the percentage of very small firms (less than 5 employees) is greatest in the construction industry (78.9%). 4 The data certainly suggests that small businesses with less than 50 employees make a very significant contribution to the UK economy. However, the data is too limited to make a thorough assessment of this. Additional data that would have been useful would have been the total number of workers employed by small firms in the UK and the total number of workers employed in total. This would have allowed the percentage of all workers employed in small firms to be calculated. In addition, the value of total output in the UK could have been compared with the value of output produced by all small firms to allow a further judgement of the relative importance of small firms to be made.

Case study: Why small businesses are vital to the UK, page 8
1 An economy based on skilled workers, innovation and research and development. 2 Own research 3 Benefits such as: employment, innovative ideas leading to unique products and services, creating competition for larger businesses, flexible and adaptable to market and other changes and can reduce imports of products and services. At least TWO of these need to be explained in detail with relevant examples. 4 Answers can consider both sides of the debate: running a business gives independence, opportunities to be innovative, financial and non-financial rewards and sense of achievement if successful but can involve much work, risk and lack of financial security. Answers may include quotes from entrepreneurs or examples from own research. Needs a clear final conclusion.

AQA Business Studies AS Level Nelson Thornes Ltd 2009

Unit 1 Answers

Chapter 2: Generating and protecting business ideas

Case study: Dyson wins Hoover case, page 12
1 Patent protection: prevents copies from taking market share and benefiting from Dysons investment; gives potential for high profits from monopoly production; encourages further investment in inventions and innovative products. 2 Patent is a legal monopoly so competition is prevented unless a substantially different design is produced by another company. This might mean that consumer prices are higher as there is no direct competition, but it does not stop other firms from coming up with even better ideas and patents encourage such research and development because of the protection they provide to truly innovative products.

Case study: Dominos Pizza, page 13

1 Benefits taken from page 12: able to benefit from Dominos established brand name, no direct advertising costs because of this brand name, take advantages of all of the central services offered by Dominos e.g. supplies of ingredients and training, gain from Dominos long term experience in operating in this market. Should be well applied to pizza operator. 2 400 outlets now 1,000 by 2015 is the target. The percentage increase is:
600 100 = 150% 400

5 400 outlets may create problems of maintaining consistent quality in all outlets, ensuring consistent customer service, coordination and communication problems e.g. over health and safety matters or giving details of a new pizza promotion. At least TWO need to be explained in the context of Dominos. 6 Existing: Proven track record, they know the market and Dominos operating systems, have experience of managing staff and maintaining quality but very big franchisees could start to put pressure on Dominos for lower prices of supplies etc. Also, new franchisees may be keener to succeed and be more entrepreneurial as they want to get established. Final conclusion needed in answer.

AQA Business Studies AS Level Nelson Thornes Ltd 2009

Unit 1 Answers

Chapter 3: Transforming resources into goods and services

Case study: Penelopes, page 17
1 Using telephone directories and Yellow Pages would be a good starting point. Local area Internet search too. 2 Tertiary service provider 3 Students own ideas but must be based on the concept of value added which should be defined or explained first. Examples could include: wedding anniversary champagne, flowers in the car or offered at the end of the evening, appropriate music on the car music system, formally dressed chauffeur. Explain how any of these might encourage customers to pay a higher price, above the cost of providing the extra, for the service. 4 Own research 5 Students own conclusion based on examples either conclusion is possible but must be supported by reasoned argument using actual examples e.g. very high priced restaurant meals add considerable value to ingredients as do hospitality catering services at rugby matches. Jewellery and cosmetic producers are well known for adding value by branding and presentation or packaging. Which is easier? Services or goods? Student must decide!

Summary questions, page 19

1 Showing skills of handling uncertainty and dealing effectively with change. (2 marks) 2 Enthusiasm, drive, initiative, independent, tenacity other acceptable answers. (1 mark each) 3 Any THREE from this list but they must be briefly explained: job creation, increased output, innovative products and services, may reduce imports and increase exports, creates competition for larger businesses, choice for consumers, may develop and grow into large businesses. (3 3 marks assume total is 9 marks) 4 Employment; sales value, capital employed or invested, selling space by floor area (more accurate than just number of stores). (1 mark each assume total is 3 marks) 5 Suggestions might include: franchisors of such businesses, Princes Trust; bank with small business advisory service; Business Link. (1 mark for each example plus 1 mark for some development) 6 The cost of the next best alternative that had to be given up. (2 marks plus 1 mark for a relevant example) 7 They all protect owners of intellectual property: patents inventions; trade image or commercial representation; copyright written material or music. 8 Advantages of existing market: can use data from existing businesses as a form of research; suggests that a market exists; can learn from mistakes of others apply to jewellery. (3 marks) Disadvantages of existing market: competition clearly exists; will have to be different to succeed, other firms might try to limit new competitors by reducing prices apply to jewellery. (3 marks) New marks points are the reverse of these. Evaluation to include overall conclusion. (2 marks) 7 Selling a product for a higher price than the cost of the materials used (2 marks) plus relevant example (1 mark). 8 Raises profitability; differentiates from other similar restaurants; may encourage customer loyalty if the added features are popular and difficult to copy. (2 marks each if applied, if not, 1 mark each)

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9 Unusual menus; expensive dcor; top class service; extensive wine list etc. (2 mark if explained 1 mark each if not) 10 Tertiary if the owner does not fish the ingredients himself! Service industry that transforms resources to provide a service to customers. (4 marks) 11 The business started from Pauls original product idea and he realised that he could operate a successful business as the demand from friends for the helmets was so high. (3 marks) a) Secondary it takes raw materials (plastic or fibre glass, perhaps) and converts them into a finished product for sale. (3 marks) See answer to question 5 above. Explain patent (1 mark). Gives protection from competitors copying design and helps to make the business more successful by being the only producer of such designs. (2 marks) Nothing guaranteed in business this should be the overall evaluation! Benefits of franchising to franchisor (up to 4 marks) Limitations to franchisor especially control issues which may make it difficult for Paul to reach his objective. (4 marks) Final conclusion in context may have been short of capital (young entrepreneur) so franchising might be his best chance of meeting his long term objectives. (2 marks)

AQA Business Studies AS Level Nelson Thornes Ltd 2009

Unit 1 Answers

Chapter 4: Developing business plans

Case study: The Old Railway Station Hotel, page 25
1 Visit local hotels not in London! to find out about facilities offered and prices charged; internet research on tourist numbers e.g. from local tourist board; Yellow Pages to find out number of local hotel competitor. Answers should be applied to hotel industry. 2 Business angel or venture capitalist may be prepared to offer capital needed in exchange for a sizeable share of the business. Will it be worthwhile Barry and James giving up this share in order to obtain the capital? This might depend on whether they have other sources of finance available to them. Could they sell shares in a limited company to family or friends? Would a bank loan be feasible? Might be best to exhaust all other sources before taking on a business angel but venture capitalists might be prepared to offer advice and experience too which could be an advantage over other sources of finance. 3 Define business plan. List of at least 3 major elements of a business plan. Applied to this business and explained in detail what the elements contain and the benefits of including this information 4 It will greatly improve the chances of success but cannot guarantee success. The process of creating the plan makes Barry and James think more about the strengths and weaknesses of their proposal and how they might overcome these weaknesses. It requires market analysis including market research and an analysis of future strategies. Cash flow forecasting is a key part of the plan it should help Barry and James avoid the same problems as before. But the plan cannot assure success competition might increase, there could be a crisis such as a fire which affects the hotels success or the economy might enter recession which cuts demand from forecasted levels. So the business plan is useful but not a guarantee of success.

AQA Business Studies AS Level Nelson Thornes Ltd 2009

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Chapter 5: Conducting start-up market research

Case study: Market research at Bladonmore, page 31
1 Definition of secondary data. The secondary research undertaken by Bladonmore was free (apart from time collecting it) and was from a good variety of sources this reduced the risk of bias. The data collected was of specific use in knowing the market size, reasons for competitors success and what potential clients want. But it was not collected for the company so it took three months to find the really useful data much time was probably spent eliminating the less useful data. Some of it may have been out of date too which could be a real problem in a fast changing industry such as this. 2 Definition of primary research. Could be used in this case to: survey potential clients about specific training needs; find out what competing training firms are charging; obtain feedback from trainees. These would have added up to date and specific data to the information gathered from secondary sources. 12 Give details of at least three research methods as outlined on page 30 of the textbook. Explain potential advantages and disadvantage in this case. Recommend one method that should be used in this case. For example, face to face interviews with the HR managers of financial companies would allow Bladonmore to introduce themselves and gain first hand information about who to contact in each company for marketing training courses, the specific training needed and how often. This would be time consuming for a relatively small business but the benefits of the data gathered could exceed the costs of collecting it.

Case study: Market research plan: making the right decisions, page 32
1 Suggestions might include: Dry cleaner: Yellow pages for number and location of local competitors. Society of Motor Manufacturers (or another industry body) to find out about numbers and sizes of car manufacturers and component suppliers. Hotel: Hotel industry body or hotel owners magazine/website to find out about number of themed hotels and what they offer. 13 Define sample or sampling. In each case analyse the benefits and limitations of the sampling methods. Come to a justified recommendation, e.g. dry cleaners primary survey would perhaps use quote sampling to ensure that a sample representative of all segments of the local population (apart from children?) were included. This should avoid just asking young parents who have dropped their children off at school if the sampling is conducted at 9.00am on a weekday 14 Suggest at least 3 methods analyse advantages and disadvantages of each in the 3 different contexts. Come to a supported recommendation in each case, e.g. dry cleaner interviews with local shoppers; telephone survey of motor manufacturers suppliers; postal questionnaire to people known to have taken hotel break recently. 15 Define both quantitative and qualitative data. Both would probably be important in all cases e.g. finding out numbers of potential customers and prices they would be prepared to pay. This would allow revenue forecasts to be made. Also, qualitative data would help to find out the reasons behind potential customers decisions. For example, what do customers consider most important from dry cleaners? Price? speed ? quality? This could help determine operations and marketing priorities. 16 Students own research

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Unit 1 Answers

Chapter 6: Understanding markets, page 37

Case study: Segmentation in TV and cinema, page 37
1 Answer should recognise that this is secondary data and applies to the whole country and is 7 years out of date! These are major limitations for using it to support the opening of a cinema in 2010 in the north of England but it does show some interesting trends and shows the relative sizes of cinema-going market segments. So it is of some use but more recent and more region specific data is really needed. 2 Define market segmentation. It might be possible to put on films that appeal to different age segments of the population 17 Define market share. Segmentation allows, in this case, different types of films to be shown to different age segments. Without segmentation just one type of film that might appeal to the total market would be offered limiting sales and revenue. Further market research needs to be conducted however, before segmentation will be effective. For example, what type of film appeals to each market segment? Market share will depend not just on the type of film: prices charged and decisions of competitors will also be important.

Case study: Calculating market share, page 39

1 Pie chart based on these market share percentages: Williamson 40%; Bryant 32%; Topping 8% 18 It is the third largest firm in the market out of four! A more detailed analaysis of the firms position in the market will require the market shares of these companies over several years. Is Hendersons share increasing or falling over time?

Case study: Hendersons market calculations, page 40

1 Market share 2007 Hendersons Williamson Bryant Topping 16.36% 38.18% 34.55% 10.91% Market share 2008 20% 40% 32% 8% Percentage change in sales 20072008 38.8% 19% 5.3% 16.7%

Total 100% 100% 13.6% 19 The correct statements are: Hendersons sales have risen Hendersons market share has risen The market as a whole has grown at a slower rate than Hendersons sales Hendersons market share has grown by 39% (38.8%) Hendersons and Williamsons sales have grown at a faster rate than the market as a whole Bryants sales have grown by 5% (5.3%).

AQA Business Studies AS Level Nelson Thornes Ltd 2009

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20 If the sales of a business grow at a slower rate than the total market sales, the market share of the business declines. If the sales of a business grow faster than total market sales then the market share of the business rises. 21 Explain with definitions or examples, both market growth and market share. Much depends on the actions of competitors. For example, in a shrinking market some firms might go out of business or just leave the market altogether. This gives scope for remaining firms to increase market share of a shrinking market. In a static market, the only way to achieve an increase in sales is to increase market share. This can lead to some fierce price and non-price competition which might make it very difficult to increase market share. Overall conclusion needed, perhaps based on actual examples e.g. supermarkets (static market), CD sales (shrinking market).

Summary questions, page 42

1 Individual investors prepared to put capital in to new business start-ups in return for share of the business. (3 marks) 2 What share of the business is being offered Is the capital investment in return for a large enough share? Cash flow and financial forecasts is the business likely to trade profitably and with sufficient cash flow in first few months/years? Experience of the entrepreneur(s) do they know enough about running a business and loft conversions? (2 marks each. Allow other reasonable answers.) 22 Define business plan. (2 marks) Time, cost, lack of expertise... (any relevant answer) applied briefly to this context. (1 mark each) 23 Define entrepreneur. (2 marks) Advice or help with business plan, arranging contacts with potential investors, often free or low-cost services for limited period. (1 mark each) 24 Business link; Department for Business Enterprise; Department of Food and Rural Affairs in this case for example, explanation of organic farming! (2 2 marks each) 25 The entrepreneur has had previous relevant experience; an opportunity has arisen that demands very quick response; opportunity cost the entrepreneur claims that time and money is better spent on starting the business. (2 2 marks) 26 Define primary research. (2 marks) Benefits: Find out why customers are leaving; whether potential customers are interested. (1 mark each) a) Define both quantitative and qualitative. (2 marks each) Distinguish between them by example e.g. quantitative: how many customers would want windows cleaning weekly? qualitative: Why do you prefer the other window cleaning business? (2 marks) b) Define random sample. (2 marks) This method of sampling needs a complete list of potential respondents and then a computer generated selection of the sample is this information available and is it worth the time and effort? Bias might be a problem if a completely random sampling method is not used. Those selected at random might not be prepared to answer the survey.(2 2 marks) c) Potential benefits: Clive should get to know the market better and make more effective decisions e.g. on price and frequency of service. Finding out the needs of potential customers should help to increase sales. (4 marks) Market research is expensive and time consuming can he do it himself? Can he afford an expert to do it? It will be of limited use if the sample is too small or not fully representative, so it will have either limited or negative impact if incorrect decisions are made.(4 marks) d) Overall judgement needed will the potential sales benefits exceed the cost? (2 marks)

AQA Business Studies AS Level Nelson Thornes Ltd 2009

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27 Students own answer based on application to hairdressers e.g. observation of other salons prices; interviews with a small sample of potential customers; acting as a customer in other salons to check the service offered etc. (1 mark each) 28 Regional consumer taste differences; raising finance for the expansion; staffing issues e.g. how to recruit additional staff; operational issues e.g. location decisions. (1 mark for statement plus 1 mark for application or explanation of each point) 29 Competitors (the number of them and prices charged); health concerns about fast food; consumers incomes or other relevant points. (1 mark each plus 1 mark for application or explanation) 30 Students own answer based on textbook. 31 Less risk of wasting food by focusing on needs of each market segment; may be able to identify segments with few competitors (e.g. organic ingredients) and charge higher prices; other relevant points. (1 mark for statement plus 1 mark for application or explanation) 32 Definitions of all three terms (1 mark each) plus scope for independent research here. If not used as a research task then award answers that refer to company names and their possible market share, total sales (market size) and growth of total sales (market growth). 33 Students own answer based on textbook. e) Students own answer based on textbook. Teachers can award more marks if they want answers to be applied to this case. f) Define primary research. (1 mark) It is useful in this case as secondary data was for the whole UK and out of date (1 mark); it is useful to discover local tastes for flavours or to establish likely demand. (1 mark) 27.7 g) 100 = 440% 6.3 (1 mark for formula; 1 mark for correct data; award 3 marks if answer correct even if no workings or formula) h) Explain benefits: forces owners to think carefully about the business; will understand the business and market better (useful in this case as it is growing so fast); helps to convince investors to lend. (3 marks) But, if time and money were limited how accurate are the forecasts and other details going to be? Did owners have sufficient expertise? (3 marks) Overall it is useful and will increase chances of success but as this case shows, external factors can intervene to make even the best laid plans ineffective. (2 marks)

AQA Business Studies AS Level Nelson Thornes Ltd 2009

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Chapter 7: Choosing the right legal structure for the business

Case study: Compass Point Counselling the way forward, page 49
1 Define sole trader. Benefits: able to set up quickly with few legal formalities important as Jane seemed to be concerned to start counselling as soon as possible. Low set-up costs important as this is a not-for-profit business. 34 Define partnership. Benefits: Jane would need capital to develop the barn (she may not have had enough savings herself and being a not-for-profit business there may not have been large enough surpluses to pay for this), Sahir had money!; Jane lacked experience of managing people and this was becoming a growing problem as the business expanded Sahir was an HR manager and could provide professional help and support, John had knowledge of the businesses finances so would have made a good partner too. Drawbacks: how much control over decisions did Jane want to give up or share? Would Sahirs investment give him a major degree of control over business decisions? Was John a good manager and decision maker or just a good bookkeeper? A Deed of Partnership would be a good idea in this case to indicate capital invested, who controlled what decision etc. but this creates a legal structure which Jane might not want. 35 Limited company structure might not be appropriate it is likely that the shareholders will expect a realistic return from the profits of the business and this would leave less profit to be invested for social purposes. It is possible that a partnership of like minded people with common social objectives would be the best legal structure in such cases. 36 Define limited company. Legal structure does not guarantee success! Limited company structure offers limited liability, continuity, legal identity and, in some eyes, increased image and stability over sole traders and partnerships. Some suppliers may prefer to do business with a limited company. There are legal requirements, e.g. formally prepared accounts to be submitted, which may add to costs. Perhaps the most important factors influencing the success of this type of social enterprise are the energy and dedication of the owners and workers.

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Chapter 8: Raising finance

Case study: Show me the money, page 56
1 Client and need a) Suggested source of finance Overdraft Reasons for choice of source of finance Only temporary finance is needed overdraft can be repaid at end of month. Flexible source of finance. No long term loan taken on. Large sum needed for potentially risky long term investment. There is high growth and profit return potential and business owner is prepared to give up a share of the company (which a business angel would expect). Angel might be able to offer professional guidance too. If cash from retained profits is held by the business (which could be the case as it is an existing firm) then this source of finance would be suitable as no interest has to be paid. The new equipment is also likely to increase profits due to improved reliability. Bank is likely to lend in this case if the builder has a good trading record and can show some recent accounts. More likely to be given loan by own bank branch than other lenders. Unlikely to be offered finance by formal financial institutions or investors. Unlikely to have personal savings Venture capitalist might have been interested in this investment but would expect a share of the business. If owner will not consider this and if retained profits are inadequate, then loan might be only option. The showroom could be used as security on the loan, increasing the chances of gaining a favourable interest rate. No loan needed with the interest costs that have to be paid and building work is often cyclical or seasonal so paying regular interest payments could be a problem. Are the two brothers prepared to give up a share in the business? Taking another partner is possible but will this new investor be prepared to accept unlimited liability?

b)

Business angel (venture capitalist if sum needed was greater)

c)

Retained profit (if available in cash) or a loan

d)

Loan, if personal savings are not enough

e)

The Princes Trust or BERR

f)

Loan

g)

Convert to private limited company and sell shares

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AQA Business Studies AS Level Nelson Thornes Ltd 2009

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37 See points above. Expand and develop these using textbook information. 38 Students own answers reflecting the different risks of the business and the skills needed by the current owners. For example for business b): What existing products do you have? What is current rate of return on investment? What is market potential for a new product? Who are major potential competitors? How long is it expected before a return is made from this product? What particular experience and skills does the business have in this field? What proportion of the business are you prepared to give up for 100,000 of investment?

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Chapter 9: Locating the business

Case study: Xtreem, page 62
1 Many factors are mentioned and each one should be applied to this business: weather; coastal location; tourist numbers; Zacharys own knowledge and preference for the area; a supply of keen and knowledgeable staff (labour supply). 39 Define these two terms. Little quantitative data is available so it does suggest that he was influenced more by qualitative factors such as his preference for the area. The high cost of land and property along with high salaries in the area did not deter him so costs were of less significance than other issues. On the other hand, revenue was likely to be quite high in this area which may well outweigh the high costs and make the business profitable. 40 Cost of land and high wages and salaries. Danger of competition. Area seems to be very dependent on tourists and this could make his business subject to seasonal fluctuations however that is partly the nature of the service being offered. 41 External threat: may take business away from Zachs shop; may lead to price war which could reduce profit margins. External opportunity: suggests that his location choice was a good one and customer choice of several shops may encourage more people to the area to buy. Overall: it might depend on whether all shops sell the same equipment or brands etc. and whether they aim at the same market segments. How close is nearby? Are they part of an established chain with potential scale economies? Could they undercut Zachs prices?

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Chapter 10: Employing people

Case study: Slivers-of-Time, page 70
1 Work seekers benefit from: variety of job and location (references should be made to Figures 10.5 and 10.6); suitable for those seeking part-time and temporary work (reference should be made to Table 10.1); income received from work many of these work seekers may not want or be able to gain full time employment. 2 The lack of full-time and permanent staff may mean that the small printing business has to frequently call in staff through Slivers-of-Time. This takes time to do and new recruits will need training. Training may be a particular problem for this type of business as printing is increasingly hi-tech. It may be difficult to find staff through Slivers-of-Time at short notice during very busy periods when many work seekers are in work. This could make the printing business less reliable and punctual in completion of customer orders. 3 The whole concept is internet based thus IT is crucial. This system would be much less effective if it was paper or telephone based. The immediate inter-face between buyers and sellers of labour would be lost and this is the key feature of the concept. IT malfunction could be serious for this business. 4 To work-seekers: no permanent job or income; cannot rely on employment and income; will not gain full-time and permanent job experience. To employers: see the points in question 2 above. To Slivers-of-Time: easy to set up in competition. Although the idea may be original it cannot be patented (the name is probably copyright protected) and other similar websites could be established. The business concept will need frequent updating (including the website) to continue to offer a unique selling point.

Summary questions, page 71

1 Textbook definition. (2 marks) 42 An expensive sounding business proposition may need the capital input of several people. There will be different management functions and different partners may have different appropriate skills. A Deed of Partnership would make clear each partners responsibilities, capital input, share of profits etc. 43 Textbook definition. (3 marks) 44 Textbook explanation. (3 marks) 45 Students likely to focus on ability to sell shares to public and why this is important and the disclosure of accounting data. (2 marks each point with some explanation) 46 What is the overdraft needed for? (It is not suitable for purchasing a new taxi.) How long will it be needed for? An overdraft is most suitable for short term finance needs. Is the future cash flow of the business likely to be sufficient to pay this off quickly? High interest costs are a feature of overdrafts. (1 mark for mention, plus 1 mark for some explanation or application) 47 Differentiate between not-for-profit organisations and other businesses. (2 marks) Likely differences: all profit or surplus invested back into the business with not-for-profit organisation (this is a crucial difference as other businesses will nearly always attempt to pay out share of profits to

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owners); objectives will be different (not-for-profit organisation will accept clients or customers based on their needs not necessarily on their ability to pay). (1 mark for mention any other relevant point acceptable plus 2 marks for explanation or application) 48 Opportunity cost; may be risky seasonal business and this means that finance is not repaid quickly; personal savings may be limited so the owners may not have enough finance to make the bed and breakfast property really comfortable and up to date. (1 mark for mention plus 1 mark for each point explained or applied) 49 Cash flow forecast; sales and profit data; possible repayment period; can loan be secured with assets? (1 mark for each point plus 1 mark for explanation) a) Define the term. (2 marks) A venture capitalist: would be prepared to take risks (this could be a risky venture); will be prepared to offer business advice as well as capital (could be useful as these two lack long experience in the industry); dealing with supermarkets may need input from an experienced venture capitalist (perhaps one with contacts in the industry). (1 mark for point plus up to 2 marks for explanation or application). b) Definition and examples from the textbook applied to this business. (1 mark for point plus up to 2 marks for explanation or application) c) Rapid growth will increase market share and market power more quickly could be important when dealing with supermarkets. The organic market might be growing fast so it would be easier to achieve sales growth than in a static market. Rapid growth will need more external finance internal finance is likely to be limited as the business has only operated for 3 years. This external finance could be expensive (loans) or involve some loss of control (venture capitalist). Final decision should be based on sources of finance, market research and the objectives of the two owners. Do they want the stress of running a rapidly expanding business if they have moved away from London, possibly for a less stressful life? Other points are possible. (Up to 3 marks for points for rapid growth, up to 3 marks for points against and up to 4 marks for balance of judgement and final conclusion applied to this case.) 50 Cost of office space (purchase or rent); salary costs for qualified and experienced accounting staff in the area; proximity to potential customers (if business is to be done face to face internet and IT links are also possible though). 51 May be difficult to receive clients (it may not appear professional); opportunity cost of space used (less room for family); may be limited room for expansion; may not be close to business district. (1 mark for mention plus 1 mark for explanation or application) 52 Flexible staff, can be used to meet seasonal demand; reduces fixed costs, as only hours worked are paid for, not full-time salaries; specific jobs can be used for special events e.g. IT technician to help with big business conference. Other relevant points accepted. (1 mark for point plus 1 mark for explanation or application) 53 May have problems recruiting extra staff at busy harvest times when other growers demand labour too; staff may lack motivation and could lead to spoiling of easily damaged goods; constant changeover of employees means that training in packaging/presentation/selling to supermarkets might be needed. (1 mark for point plus 1 mark for explanation or application) 54 Existing staff may not want longer hours or full-time contract (it might not suit their personal circumstances); may increase employment costs and this could make business uncompetitive; might be difficult to cover busy times of the day or week (other times may be slack and firm could be over-staffed). (1 mark for point plus 1 mark for explanation/application) 55 Define business consultant. (2 marks) A house builder might need a specialist to advise on financing deals, purchases of new sites, possible take-overs of other businesses etc. Cheaper than employing specialist full time. May only need temporary and limited assistance. Specialist help could be vital for a complex deal. (1 mark each) 56 Details from textbook, applied to this business. (1 mark for point and 1 mark for explanation or application) d) Loan; sale of shares (friends/family/business associates etc.) as it is a company. (1 mark each)

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e) Cost of site (can the business afford the best city centre sites?); proximity to competition (could be a good or bad point as several similar shops in one area could pull more customers towards them but too much competition might limit sales and force lower prices on this company). Other factors are possible. (Up to 3 marks for each point explained or applied and 2 marks for a final decision on the most important factor in this case.) f) Define temporary employees. (1 mark) Benefit: this is a business with variable levels of sales, and flexible and temporary staff would allow shop to call in staff when most needed. This could help improve customer service both in the shop and in fulfilling the website orders. But, it assumes that the need for temporary staff can be planned for in advance, which might not be possible with large website orders. It also assumes temporary staff are trained and motivated enough to offer a good customer service. Effective customer service is essential in this case. (Up to 3 marks for points why they will help, up to 3 marks for points that might restrict the usefulness of temporary workers, 3 marks for judgement and conclusion.)

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Chapter 11: Calculating costs, revenue and profit

Case study: Pizza price dispute, page 78
1 Sales: the number of pizzas sold. Sales revenue: the number of pizzas sold price. Fixed costs: costs that do not change with the number of pizzas produced e.g. rent of premises. Variable costs: costs that vary with the number of pizzas produced e.g. ingredients. 2 Profit will be needed by newly formed businesses to: earn a return to the entrepreneurs who are risking their capital; use as a source of finance for future expansion; to demonstrate success to potential investors. 3 Quality ingredients were meant to be one of the USPs of this business. Regular customers may notice the difference in quality and taste if cheaper ingredients are bought and customer loyalty may be lost. New customers may consider that the products of Pizza Parlour are no better than those sold by many other similar businesses. 4 Existing profit: sales revenue = 6,000 less variable costs of 4,000 less fixed costs of 1,300 = 700 Markus: Sales revenue = 1,200 5.50 = 6,600 Variable costs = 1,200 3 = 3,600 Fixed costs = 1,300 Expected profit = 1,700 Claire: Sales revenue = 1050 6.6 = 6,930 Variable costs = 1050 4 = 4,200 Fixed costs = 1,500 Expected profit = 1,230 Although Markus suggestion seems to be more profitable, how reliable is his forecast of higher sales? At least Claire seems to be basing her argument on previous evidence of advertising having been successful. In the long term, the business could regret damaging its image and USP of quality ingredients. Although lowering the price and food quality might be more profitable in the short run it could lead to lower customer loyalty and lower sales in the long term.

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Chapter 12: Using break-even analysis to make decisions

Case study, page 81
1 Profit = Contribution Fixed costs = 3,500 2,800 = 700 5 Contribution per unit = Price Variable costs = 10 4 = 6 6 Total weekly contribution = Contribution per unit Total customers served 6 500 = 3,000 7 New weekly profit = 3,000 2800 = 200. Yes, it is making a profit but lower than before.

Case study: Is it still worthwhile? page 90

1 Contribution per customer is the difference between the value of goods or service sold to each customer less the variable cost of these goods. a) Break-even level of output is the number of customers (or number of goods) needed to earn enough revenue to cover the total costs of the business. 2 In this case break-even analysis allows a numerate comparison between two business situations. This will give data on break-even level of customers, safety margin and estimated profit (loss) levels at different levels of output. This should make the final business plan agreed by Boris and Lena more realistic and more likely to succeed. 3 The analysis needs a comparison between the bank managers estimate and Boris and Lenas revised figures. This will allow a judgement to be made about how crucial Boris and Lenas changes are to the profitability of the business and an assessment of its overall chances of success. 4 (Break-even charts are also possible.) Bank Managers estimate Break-even number of customer hours Safety margin 2100 30 = 70 customer hours 10 customer hours Boris and Lenas revised data 1500 25 = 60 customer hours 20 customer hours

Profit at expected level 10 30 = 300 20 25 = 500 of customer hours (Also accept: sales revenue less (contribution per total costs) customer number of customers above breakeven point) 5 Students own answer based on these results and other information (or lack of it). For example, had Boris and Lena any previous experience of starting up and operating their own business? Using the bank managers data, the business looks very risky as the safety margin is so small. If the business did not gain at least 70 customer hours it would make a loss. How realistic is this figure? How many local competitors are there? The revised data looks more promising yet even this requires a high number of customer hours to break-even. More research might need to be undertaken before going ahead with this business

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proposal, e.g. market research into likely demand. Perhaps Boris and Lena or at least one of them should consider giving up their own jobs to establish this business?

Summary questions, page 92

1 Source of finance for future expansion; reward to investors and risk takers; can encourage investors or lenders to make more finance available. (1 mark for mention and 1 mark for explanation two points are sufficient for 4 marks) 2 Revenue = price quantity sold (1 mark). Demand from customers is likely to fall following a price increase the bigger the fall in demand, the less impact the price increase will have on revenue. (2 marks) Revenue could actually fall if the relative fall in quantity is greater than relative increase in price. (1 mark) 3 Purchase or leasing of cars: fixed. Rent of garage: fixed. Annual licence: fixed. Fuel costs: variable. Driver wages or commission of each fare: variable. 4 Define key terms: contribution (from textbook) (1 mark) and profit (from textbook) (1 mark). Explain that profit is made only if contribution exceeds fixed costs. (1 mark) Explain the likely level of fixed costs in this business venture, e.g. website design costs. Variable costs per subscriber are likely to be very low so contribution per subscriber could be high. However, profit will not be made until total contribution from subscribers exceeds the fixed costs. (5 marks) 5 Students answer based on textbook. 6 The break-even point is a key indicator to an entrepreneur of how many units must be sold or how many customers served before all costs can be covered. It also indicates when (in terms of time after setting up the business) a profit might be made if the likely rate of sales is estimated. It also indicates the safety margin (and thus the risk of the new business not making a profit) and allows for estimates of future profitability based on demand estimates. (1 mark for mention of point, 1 mark for some explanation) 7 Explain break-even point, definition plus sketch diagram or formula. (2 marks) This business owner can: increase daily rate charged to customers; reduce variable costs (might be difficult in this case, could they obtain cheaper plants and other supplies?) or reduce fixed costs (buy or lease cheaper van and equipment?). (2 2 marks) Explain how two of these will reduce break-even number of days worked. (2 marks) 8 Define profit and give formula. (2 marks) Steps include: use less gold in jewellery to cut variable costs; move to cheaper location to cut fixed costs; raise prices to maintain contribution per unit of jewellery sold. (2 1 mark for mention and 2 2 marks for explanation) 9 Define break-even analysis. (2 marks) This analysis is based on estimates, especially as it is a new business. Sales revenue depends on the price estimate and the demand estimate being accurate. Fixed costs depend on estimates of rent or leasing charges etc. being accurate (perhaps there is more of a chance of this than with revenue or variable costs as these may be easier to predict or plan for). Variable costs depend on accurate estimates of material and variable labour costs. All of these variations could make the original break-even estimate very inaccurate. (2 1 mark for mention and 2 2 marks for explanation) 10 Differentiate between fixed or variable costs. (2 marks). Examples of both in hotel context (2 marks). Seasonal demand means that the hotel could be fully booked some months but with very low occupancy in other months. The manager needs to cover all annual costs to start making an annual profit. Manager could offer lower prices in off-peak season covering at least the variable costs, and therefore made a positive contribution. This would increase the chance of covering total annual fixed costs. (Up to 4 marks for good explanation.) 11 (10 marks) Define break-even analysis plus formula or sketch (2 marks). Benefits: shows breakeven number of guests at different price levels; safety margin shown; estimated profit levels at different prices and occupancy rates. Therefore it is useful for planning and decision making. (3 marks) Limitations: based on estimates and forecasts e.g. level of demand at different room rates;

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may be affected by external factors e.g. higher food prices than predicted; profit estimates assume a certain level of room occupancy. (3 marks) Allow 2 marks for overall judgement and evaluation e.g. it is useful to a hotel business but they must be prepared to redraw or recalculate them frequently, to take into account external factors that change the assumptions on which the analysis is based. 12 Students own answer: the revenue line should rise from 0 to 1.8m at 4,000 desks. a) Variable cost = 200 per desk (600,000 3,000) New contribution = 450 200 = 250 New break-even point = 500,000 250 = 2,000 desks (can also be done graphically) b) Current profit = 400,000 New profit = 1,800,000 (500,000 + 800,000) = 500,000 New profit will be 100,000 greater. c) Student answer to include: comparison of profit, break-even point and safety margin (at assumed sales levels). What will the impact on quality image be if price is lowered? The lower price still leaves considerable excess capacity. Will competitors lower their prices too? Final answer can be Yes or No but must be supported. (3 marks for using or analysing break-even data; 3 marks for other factors; 2 marks for final evaluation)

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Chapter 13: Using cash flow forecasting

Case study: Fashion shop forecasts look good, page 98
1 x = (1.5); y = 10.5; z = 1.5 2 The estimates on which the forecast are based could prove to be inaccurate. Was the primary research detailed enough to allow an accurate figure for cash sales to be arrived at? The uncertainty of unsold stock would affect cash flow too and the discounts that might have to be offered to sell this stock. The uncertainty over labour costs is also referred to in the text. Any other relevant point. 3 July (000) Cash in = 10.2 Cash out = 9.7 Net cash flow = 0.5 Closing balance = 2.5 (assuming opening balance was 2 as stated in the question) 4 Explain cash flow forecast. Outline benefits, especially to a small business: helps to plan finance needs; helps to convince investors or banks to support business; prepares business for periods when cash flow is negative (need additional finance) and positive (to what use can this cash be put?). Limitations: based on forecasts and can be made inaccurate by unforeseen external events. On balance: very useful, certainly contributes to small business success as it helps to avoid liquidity problems (major cause of small business failure) but even a cash flow forecast cannot guarantee success!

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Chapter 14: Setting budgets

Case study: ChipRepair: two years on, page 104
1 Textbook a) Textbook 2 July budget (000): Shop revenue = 4 Repair revenue = 2.4 Overheads = 1.2 Labour costs = 3.6 Cost of items sold = 2.4 Profit (loss) = (0.8) 3 Problems: revenue/income budget based on forecasts or market research which may prove to be inaccurate. External factors may change to affect these forecasts Variable costs likely to be based on revenue forecasts i.e. the higher the level of forecasted sales, the higher the level of variable costs. 4 They need to discuss budgets with Omar as he has actual experience of running the business and he has to try to make the budget work. If he is not involved (and this will take time to do each month) then the budget may be unrealistic and as he does not own the budget he will be less inclined to work hard to make sure the business keeps to it. Despite this, external events such as competitors actions or the state of the economy can make it difficult to meet budgets.

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Chapter 15: Assessing business start-ups

Case study: The difference between success and failure, page 110
1 Textbook 2 Falling demand an external factor that was difficult to predict. Excess borrowing to finance expansion the cost of interest would have made cash flow position worse. 3 Clear objective; adequate finance including support of venture capitalists; good promotion via media skills; must have been a good product too! 4 Reasons for success: continued good publicity, development of other flavours and new markets; adequate finance and support from venture capitalists. Potential risks of failure: Levi might not have the management skills to cope with expansion; economic recession could reduce demand for this non-essential product; competition could bring out a similar product. The student should provide some overall evaluation or judgement.

Summary questions, page 111

1 Initial capital invested in business or loans taken out; sales from cash customers; payments by credit card companies; sales of assets no longer required. (1 mark each) 2 Market research: primary research amongst potential clients including an assessment of prices they would be willing to pay; secondary research of the market and industry as a whole (is demand rising or falling?). The entrepreneur may be able to contact friends or former colleagues who could give an indication of likely sales levels. a) Research needed on cost of premises and equipment possibly a vehicle is needed too. These will be the fixed costs. Variable costs include cost of paper and printing supplies, which will need to be researched also but these will vary with the number of clients. The sales forecast will indicate the likely level of variable costs to be incurred. 3 Yes! All new businesses need a cash flow forecast even if the entrepreneur does not have to raise finance from a bank. It is essential to plan and monitor cash inflows and outflows to reduce the chances of running out of cash (a liquidity problem, which is a major source of new business failure). (1 mark for each point mentioned plus 2 marks for development) 4 Use of textbook. The monthly net cash flow requires total cash outflow to be subtracted from total cash inflow. 5 Explain credit sales. (1 mark) The receipt of payments from creditors will always be uncertain it may be next week it may be in two months time. It partly depends on how well the business manages its creditors but some credit customers can be very difficult to obtain speedy payments from. Future sales to such customers may have to be for cash only. (3 marks explanation) 6 Define budget. (1 mark) Helps to give targets; plans for future profit/losses; monitoring budgets can help to identify problems; review of whether actual performance has equalled budgeted figures allows future budgets and operations to be made more effective. (Up to 3 1 mark for any mention plus 2 marks for any development in context) a) Sales forecast too optimistic; competitors lower prices or offer promotions, economic downturn may encourage customers to visit less frequently. (1 mark for mention plus 1 m for brief explanation) b) Monitoring budgets textbook. (1 mark) Allows a check to be made during the budgetary period. If the budgets are proving to be very inaccurate either they can be adjusted or corrective

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action might be needed. This helps to prevent the problem only becoming obvious at the end of the budget period. (1 mark for mention plus 2 marks for explanation of at least 1 point) Define. (1 mark) It forms the basis of the profit budget but also forecasts/planned sales levels are necessary to set the variable cost budget. (1 mark for mention of point plus 2 marks for explanation) Use of textbook. (For each objective 1 mark for mention plus 1 mark for explanation, for a maximum of two objectives). Survival might be most appropriate in this case given the constantly changing nature of the industry. Assess actual performance against the original objectives apply this point to the objectives referred to in part a). (Maximum 4 marks for good explanation of this point) Time taken to develop games and market them successfully is uncertain; customer tastes are constantly changing; new technology; new competitors. Adequate finance, to avoid cash flow problems; cash flow forecasts based on good research to aid financial planning; realistic budgets to motivate staff and provide a means of monitoring and review. (1 mark for mention plus 1 mark for explanation)

c)

a) b) c)

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