OCR Business Studies for AS

Budgets and decision-making Revision questions

(67 marks; 70 minutes) 1 Explain the meaning of the term budgeting. (2)

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A process of setting targets for costs and revenues for a future time period.

2 List three advantages that a budgeting system brings to a company. (3)

Helps prevent over-spending Provides a yardstick against which performance can be measured Allows spending power to be delegated.

3 Why is it valuable to have a yardstick against which performance can be measured? (3)

Exceeding targets can bring motivation through a sense of achievement, while failure to meet targets allows corrective measures to be taken in the future.

4 What are the advantages of a zero-based budgeting system? (3)

Carefully constructing justication for every pound to be included in the proposed budget takes up much time for budget holders, while checking the accuracy of budget holders demands takes up more management time that could be spent doing other things.

5 Briey explain how most companies actually set next years budgets. (3)

They take last years budget and adjust it slightly, perhaps adding a little to allow for ination.

6 Why should budget holders have a say in the setting of their budgets? (4)

People will be more committed to reaching a target they believe can be met. Budget holders are on the spot and may have particular knowledge of their area that is not available at head ofce level.

Hodder Education 2008

Unit

OCR Business Studies for AS

Budgets and decision-making
7 Complete the budget statement by lling in the gaps. (8)
January Income Variable costs Fixed costs Total costs Prot 4200 1800 1200 3000 1200 February 4500 2000 1600 3600 900 4000 2000 2100 4100 (100) March 4000 1800 1600 3400 600 April

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Answers in bold. 8 Amend the budget statement completed in question 7 to show the income levels needed to generate a prot of 1000 per month, assuming there is no change in costs. (4)
January Income Variable costs Fixed costs Total costs Prot 4000 1800 1200 3000 1000 February 4600 2000 1600 3600 1000 5100 2000 2100 4100 1000 March 4400 1800 1600 3400 1000 April

Answers in bold. 9 What are the two main advantages that using a budgeting system brings to a company? (2)

Allows the delegation of spending power. Can be used to monitor performance.

10 Why is it valuable to have a yardstick against which performance can be measured? (3)

Exceeding targets can bring motivation through a sense of achievement, while failure to meet targets allows corrective measures to be taken in the future.

11 How might a rm respond to an increasingly adverse variance in labour costs? (4)

Find ways to reduce the variance. This could involve imposing greater controls on labour costs, reducing stafng levels or overtime rates. It may also wish to check the viability of the budgeted gure.

12 Explain what is meant by a favourable cost variance. (2)

The actual costs for a time period are lower than the budgeted costs for that period.
Hodder Education 2008

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OCR Business Studies for AS

Budgets and decision-making

20

13 Why is management by exception a useful time-saving measure for management? (4)

It allows busy managers to focus their time only on problem areas and really successful areas, looking for causes of variances. This can allow them to learn lessons that can be spread throughout the organisation. It negates the need to look carefully at every budget.

14 Explain two drawbacks of budgeting. (4)

Setting and monitoring budgets takes up management time that carries an opportunity cost. Targets can be unrealistic, and therefore demotivate budget holders. Budgeting may encourage short-term decisions, taken solely to hit targets, which may actually be harmful in the long term.

15 Briey explain why a shop with a favourable income variance might expect some cost variances to be adverse. (4)

Selling more is likely to push up costs, such as stock and stafng levels if the shop is busier than expected.

16 Look at the table, then answer the questions that follow: (a)

May budgeted prot 1300 May actual prot 1100 June budgeted prot 1500 June actual prot 1600 (4)

(b) (i) (ii) June May

(iii) June (iv) (v) (vi) June June May

Hodder Education 2008

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OCR Business Studies for AS

Budgets and decision-making
(vii) May (viii) May (ix) (x) May June (10)

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Revision exercises B1 Data response

(30 marks; 30 minutes) (Refer to questions on page 139 of the textbook.) 1 Complete the budget statement by lling in the gaps. (4)
JanMar Shop sales Lake fees received Stock Wages Overheads Prot 200 0 2500 1000 1000 (4300) AprJun 3000 22000 1000 5000 4000 15000 JulSep 5000 25000 2500 5000 6000 16500 OctDec 2000 2800 1000 1000 4000 (1200)

Answers in bold. 2 Adjust the budget to show the effect of a 50% increase in shop sales in the third quarter and a 25% increase in wages in quarter 4. (4)
JanMar Shop sales Lake fees received Stock Wages Overheads Prot 200 0 2500 1000 1000 (4300) AprJun 3000 22000 1000 5000 4000 15000 JulSep 7500 25000 2500 5000 6000 19000 OctDec 2000 2800 1000 1250 4000 (1450)

Answers in bold.
Hodder Education 2008

Unit

OCR Business Studies for AS

Budgets and decision-making
3 Explain why a budgeting system might help KB Watersports to: (a) control expenses (6)

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Budgeting will help to keep a close eye on the wages budget when sorting out stafng rotas, and avoid over-stafng. Setting targets for shop sales should help to avoid over-stocking the shop, thus tying up more working capital than is necessary.

(b) motivate staff. (6)

Shop staff may be motivated to try to hit their sales targets. All staff may be committed to keeping overheads low and may therefore see the need to keep wastage to a minimum.

4 To what extent is budget-setting a crucial element of a successful small business start-up such as KB Watersports? (10) It is a crucial element, because:

start-ups always seem short of cash, and budgeting may help monitor and control cash ows more carefully the entrepreneurs will nd it hard to decide whether they are performing successfully without any targets against which success can be measured; as Kurt and Brian may lack experience of running their own business, this could be very helpful.

It is not, because:

for a start-up, estimates may be so far off as to be useless; there is no mention that Kurt and Brian have relevant business experience that would help them to set realistic budgets setting budgets could take Kurt and Brian away from more important tasks such as customer service and brand building.

Overall, in this case, a simple budgeting system, which should avoid taking up too much management time, would bring benets. However, Kurt and Brian may need to adjust the budgets regularly in the early stages of the business as they develop a feeling for exactly where their targets should be set.
10 marks Level 4 Level 3 Level 2 Level 1 Evaluation and judgement of information in context Analysis of information in context Application of knowledge in context Knowledge and understanding of business concepts
Hodder Education 2008

(10-9) (8-7) (6-4) (3-1)

Unit

OCR Business Studies for AS

Budgets and decision-making B2 Data response
(20 marks; 25 minutes) (Refer to page 140 of the textbook. Please note that there are a limited number of copies of the student book in which the questions for this activity are incorrect. The correct questions appear below.) 1 Identify and explain three pieces of evidence from the text that demonstrate the problems for rms that operate without a budget. (9) Up to 3 marks per point.

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Over 40% feel they can spend what they want. The lack of a budget does nothing to breed a culture of cost control this hits the bottom line. 88% arent inuenced by cost. It is therefore obvious that they will be inuenced by other factors, such as luxury, which drive up overheads. 1.3 billion that doesnt need to be spent is 1.3 billion of lost prot that rms could use more productively and protably.

2 Explain how a small business might benet from setting expenditure budgets for its business travel. (5)

No unexpected surprises when expense claims are handed in; makes nancial control easier. Can still empower staff to choose own arrangements, just set an upper limit. This may minimise the annoyance for staff used to making their own arrangements. Money tends to be tighter in smaller rms.

3 Outline two problems a business might have in setting a travel budget. (6)

Unpredictability of the need for many trips. Much business travel may be made in order to grab an opportunity while you can frequently an unexpected opportunity. Changes in costs charged by airlines, hotels and rail companies may be dramatic and unpredictable.

6 marks Level 2 Level 1 Application of knowledge in context Knowledge and understanding of business concepts (6-4) (3-1)

Hodder Education 2008

Unit

OCR Business Studies for AS

Budgets and decision-making Revision exercises B3 Data analysis
(20 marks; 20 minutes) (Refer to questions on page 140 of the textbook.) 1 What are the ve numbers missing from the variance analysis? (5)
January B Sales revenue Materials Other direct costs Overheads Prot 140 70 30 20 20 150 80 35 20 15 A 10 (10) (5) 0 (5) V 180 90 40 25 25 B 175 95 40 22 18 February A (5) (5) 0 3 (7) V

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Answers in bold. 2 Examine one nancial strength and two weaknesses in this data, from the companys viewpoint. (9) Strength:

good overhead control January saw zero variance and February saw a favourable variance.

Weaknesses:

adverse raw materials variance in February if sales were lower than expected, it may be considered a surprise that it spent more, not less, on materials, unless the lower revenue gure was due to a steep price cut that boosted the volume, but not the value, of sales; adverse prot variances in both months are a key initial indicator of possible problems with general nancial control.

3 How might a manager set about improving the accuracy of a sales budget? (6)

More or better market research. Look more closely at past trends and patterns. Consult more fully with local manager.
Hodder Education 2008

Unit

OCR Business Studies for AS

Budgets and decision-making
6 marks Level 2 Level 1 Application of knowledge in context Knowledge and understanding of business concepts (6-4) (3-1)

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B4 Data response
(25 marks; 25 minutes) (Refer to questions on page 141 of the textbook.) 1 Use the data to explain why Februarys prots were worse than expected. (5)

Sales revenue was worse than expected, by 13%. Overheads were higher than budgeted. Although variable costs were lower than budgeted (materials by 8%, others by 10%), the proportional fall in sales revenue was greater than that of costs. Therefore prot was reduced.

2 Why might Clinton & Collins Ltd have chosen to set monthly budgets? (5) 1 mark per point identied up to a maximum of 3, plus up to 2 marks for explanation.

Prevents over-spending by giving managers targets within which to stick. Provides a yardstick against which to measure performance, giving staff a chance to work towards a measurable objective. Allows delegation of spending power, increasing motivation of budget holders as they feel empowered.

3 Explain how the rm might have set these budgets. (4) 1 mark per point identied, second mark for brief explanation.

Based on last years gures, perhaps adjusted by the plans for the coming period. Zero-based budgeting, expecting budget holders to justify every pound allocated.

Hodder Education 2008

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OCR Business Studies for AS

Budgets and decision-making

20

4 The directors of Clinton & Collins Ltd knew that the recession was causing problems for the rm but were unsure as to whether things were improving or worsening. To what extent does the data suggest an improvement? (11)
Month January February March April

Sales variance (16) (24) (40) (52) (10) (16) (38) (48)

Prot variance

The variances are getting worse as time goes by suggesting something other than the recession. Lack of economic data prevents certainty since the recession may be deepening. The rate of worsening seems to be slowing. Overall, the chances are that problems appear to be down to more than just the recession.

Hodder Education 2008

Unit

OCR Business Studies for AS

Cash ow forecasting Revision questions
(64 marks; 64 minutes) 1 What is meant by cash ow? (2)

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Cash ow is the ow of money into and out of the business in a given time period. Businesses need to ensure they have sufcient money coming into the business to pay for any debts as they become due. Cash ow problems can result in suppliers stopping supplies. Creditors may also take a business to court to claim unpaid money. More positively, it is also important to know when surplus cash is to be generated by the business, enabling expansion to take place.

2 What is a cash ow forecast? (3)

A cash ow forecast shows the expected future ow of money into and out of the business. The ows are normally shown on a monthly basis.

3 Explain two limitations of cash ow forecasts. (4)

They rely on estimates and are only as good as the gures they are based on. Estimates of sales or costs may be wrong. Timing of cash receipts or expenditure may be incorrect.

4 Give two reasons why a bank manager might want to see a cash ow forecast before giving a loan to a new business. (2) Possible answers include:

To ensure that it has sufcient funds to pay for its expected expenditure. To see how much nance it is likely to need. To see how long it is likely to need the nance for. To ensure the business has sufcient funds to pay interest on the loan and repay the capital. To be sure the business is aware of the importance of good cash ow management.

5 How might a rm benet from delaying its cash outows? (3)

Cash stays in the business longer so it may avoid the need for borrowing. It can ensure that sufcient funds are available to pay other creditors.

Hodder Education 2008

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OCR Business Studies for AS

Cash ow forecasting

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It may earn interest on the retained cash.

6 What problems might a business face if its cash ow forecast proved unreliable? (3)

The net cash ow would be different to expected. If it was lower than expected this could cause cash ow problems.

7 How might a rm benet from constructing its cash ow forecasts on a computer spreadsheet? (4) Possible answers include:

May be less time consuming in the long term. Less chance of records being lost. Records can be backed up. Information can be easily sent back and forth. Easier to do variance analysis.

8 Why is it especially hard for a rst-time entrepreneur to produce an accurate cash ow forecast? (3)

It is difcult to predict cash inows before trading starts. Cash outows are rarely as expected.

9 Why is cash ow an especially important topic for small rms rather than large ones? (4)

Because it is harder for them than it is for large rms to negotiate longer credit terms or an overdraft, so they need to remain in the black.

10 Outline the probable cash cycle for a small sandwich shop. (4)

Buy in ingredients and pay xed costs. Then they can start trading, at which point they can start getting cash in.

11 Explain why good management of cash ow starts with good forecasting. (3)

In order to manage cash ow well, it is vital to accurately forecast the cash ow data. If the predicted cash inows and outows are not accurate, a business will not know its cash ow needs.

12 Outline two problems that might arise if a rm is operating with very poor cash ow. (4)

Inability to pay suppliers may lead to strained relationships.

Hodder Education 2008

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OCR Business Studies for AS

Cash ow forecasting

21

Charges may be incurred for going overdrawn. They may be unable to pay loan payments which would also lead to charges. They may be unable to actually buy suppliers which would prevent them from trading.

13 Why might a business be unable to get a loan or overdraft if it has cash ow difculties? (4)

The bank may be unwilling to give it a loan/overdraft as it would be concerned about the businesss ability to pay it back.

14 What impact does the length of the business process have on cash ow? (4)

The longer the business process, the more cash inows will be delayed which will have a negative impact on cash ow.

15 Getting money in from customers is a vital part of cash ow management. Outline two things a rm can do to ensure that cash is collected efciently. (4) Possible answers include:

Collect references from customers. Write to debtors demanding payment after 30 days. Offer cash discounts to ensure money doesnt have to be collected.

16 How might a small producer of shelf ttings benet from factoring? (4)

Get the cash now. Guarantee the money is collected. Improve cash ow position.

17 Outline three ways in which a business can improve its cash ow situation. (6) Possible answers include:

Collect payments from debtors. Delay payments to creditors. Get a loan from the bank. Factoring.
Hodder Education 2008

Unit

OCR Business Studies for AS

Cash ow forecasting
18 What internal factors could affect a rms cash ow? (3)

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Management ability to accurately forecast cash ow. Mistakes made by staff could worsen a rms cash ow position.

Revision exercises B1 Data response

(Refer to questions on page 152 of the textbook.) (20 marks; 20 minutes) 1 The companys forecast cash position at the end of June: (18)
Jan Cash at start Inow Outow Net cash ow Cumulative cash ow 40,000 0 45,000 (45,000) (5,000) Feb (5,000) 12,000 16,000 (4,000) (9,000) March (9,000) 16,000 18,000 (2,000) (11,000) April (11,000) 20,000 20,000 0 (11,000) May (11,000) 25,000 22,500 2,500 (8,500) June (8,500) 24,000 22,000 2,000 (6,500)

2 The maximum level of overdraft the owners will need to negotiate with the bank before starting up: (2)

Maximum overdraft 11,000.

B2 Data response
(30 marks; 30 minutes) (Refer to questions on page 152 of the textbook.) 1 Construct a cash ow forecast for the business for January to September. (10)

(1) for loan (okay if included in opening balance) (2) sales

Hodder Education 2008

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Cash ow forecasting

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(1) for each expenditure line (5) (2) for correct closing balance or up to max (1) for correct technique but incorrect calculation.

2 Outline two signicant features of this cash ow forecast: (6)

(2) for identifying a shortage of cash in March and April (2) for explanation such as: Merlin cannot continue with the development unless they solve the problem.

Use own gure rule if cash ow forecast was incorrect. 3 Discuss two possible courses of action. (8) (1) for each suggestion plus up to (4 ) for discussion of each. Possible answers include:

Use an overdraft for the period of the cash shortfall. Provides additional cash. Flexible but expensive. Negotiate larger initial loan. Makes additional cash available. Additional interest costs but provides a safety net. Sell the ats earlier. Brings in revenue earlier. May not be possible, depends on the market. Obtain longer credit for the materials. They will delay some expenditure. Depends on supplier and credit rating of rm.

4 Examine two ways in which the cash ow forecast might be unreliable. (6) Possible answers include:

the gures used may prove to be wrong -sales may be lower than expected; the price of materials or other production costs may be higher than expected the timing of cash inows may be wrong customers may not pay on time; creditors may demand payment sooner than anticipated.

Hodder Education 2008

Unit

OCR Business Studies for AS

Cash ow forecasting B3 Data response
(Refer to questions on page 153 of the textbook.) (25 marks; 25 minutes) 1 Explain two problems Sujugan may have had in drawing up this cash ow forecast for D&S. (6) Possible answers include:

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predicting sales estimating cash outows

6 marks Level 2 Level 1 Application of knowledge in context Knowledge and understanding of business concepts (6-4) (3-1)

2 Complete the job for Sujugan by working out the missing gures at. (10) a) 01,000 b) 94,000 c) 56,000 d) 7,000 e) (15,000) f) (37,000) g) 67,000 h) 44,000 i) (7,000) j) (6,000) k) (21,000) l) (58,000) m) 9000
Hodder Education 2008

Unit

OCR Business Studies for AS

Cash ow forecasting
n) 53,000 o) (6,000) p) (21,000) q) (58,000) r) 9,000 s) 53,000 t) 46,000 3 What would you recommend that Danielle and Sujagan do about this forecast? (9) Explain the reasons behind your answer. Possible answers include:

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arrange an overdraft of 60,000 for at least a 3-month period from September to November try to negotiate longer credit terms for September to December think about how to improve February sales (e.g. Valentines Day promotion).

Revision exercises B4 Data response

(Refer to questions on page 153 of the textbook.) (30 marks; 30 minutes) 1 What is meant by the term credit crunch? (2)

Reduction in the availability of loans or an increase in the cost of obtaining loans.

2 Why are banks less willing to lend to small businesses? (6)

Because they have less collateral so the risk is increased. Because they may not have condence in the rms ability to repay the loan.
Hodder Education 2008

Unit

OCR Business Studies for AS

Cash ow forecasting
3 What is the rate of interest that small businesses are likely to be paying? (2)

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1011%

4 On a 10,000 loan with an interest rate of 12%, how much will the interest charges be for the rst year of the loan? (4)

1,200

5 Why will a lack of available credit stop small businesses from expanding? (8)

It will increase the cost of borrowing which will decrease a small rms ability/will to borrow nance. Small businesses do not always have the level of prot required to expand using internal sources so if they cannot get a loan, they are far less likely to expand. Small businesses are less likely to be able to raise nance through share capital so reduced availability of loans will reduce their ability to expand.

8 marks Level 3 Level 2 Level 1 Analysis of information in context Application of knowledge in context Knowledge and understanding of business concepts (8-7) (6-4) (3-1)

6 Explain how a lack of easy credit for larger rms may affect smaller businesses. (8)

As large businesses slow down expansion due to lack of nance, this will have a knock-on effect on the small rms that rely on them to survive. For example, if Tesco slows down its expansion it will also slow down its purchasing from small suppliers. The suppliers will suffer a fall in demand which may have a knock-on effect on other small rms.

B5 Case study
(35 marks; 40 minutes) (Refer to questions on page 154 of the textbook.) 1 What might be the reasons for the increase in the stock of nished goods and materials? (6)

A reduction in sales would lead to an increase in stock. Overproduction.

Hodder Education 2008

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OCR Business Studies for AS

Cash ow forecasting

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2 Consider what suggestions the production director might make. Explain your reasoning. (7)

Introduce lean production in order to reduce costs. Reduce number of employees in production in order to reduce costs and quantity of production.

3 The nance director sees slow payment as his major problem. Examine the ways in which he could tackle this problem. (6) Possible answers include:

Factoring. Demanding payment by letter or phone. Threatening legal action if necessary. Introducing cash discounts in order to prevent the problem from occurring in the future.

6 marks Level 2 Level 1 Application of knowledge in context Knowledge and understanding of business concepts (6-4) (3-1)

4 Outline the contribution the marketing department might make to help improve the cash ow situation. (6)

Increase sales in order to improve cash in. If necessary reduce the price of the product in order to increase demand (as stock is piling up). Devise innovative and cost-effective marketing techniques to increase sales.

5 Apart from tackling the issue of slow payment, consider what other short-term measures the rm might take to overcome the immediate cash crisis. (10) Possible answers include:

Get an overdraft so they can pay the debt. Speak to the rms they owe the 500,000 to and explain the situation and try to negotiate delaying the payments further.

Hodder Education 2008

Unit

OCR Business Studies for AS

Cash ow forecasting Essay questions
1 Managing cash ow is vital for the future of any business. Discuss. Suggested points:

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Managing cash ow involves controlling the ow of money in and out of a business, in order to ensure that it can meet its nancial commitments when it needs to. The consequences of failing to do so include refusal of suppliers to supply goods on credit (or at all), withdrawal of overdraft facilities by the bank or missed sales opportunities with new or existing customers this is likely to have a negative impact on the business performance and could ultimately lead to business failure. Consequences of failing to manage cash ow depend on the extent of the problem and how easily it can be resolved obviously a temporary problem is unlikely to have the same consequences as an on-going cash-ow shortage. Small or new businesses may need to be particularly careful about managing cash ow as they are unlikely to have the resources required to resolve a crisis e.g. xed assets that can be sold off or used as collateral to secure bank loans.

Possible evaluation:

Clearly, there is more to a successful business than an ability to manage cash ow effectively, e.g. products that customers want to buy, appropriately skilled and motivated workers, etc. However, effective cash ow management is the foundation upon which success is built many protable rms fail as a result of not taking cash ow management seriously.

2 In periods of economic downturn it is even more important for a business to control cash ow. Do you agree with this statement? Suggested points:

Economic downturn is likely to be characterised by rising unemployment, falling levels of consumer and investment spending and increasing levels of bankruptcies this is likely to mean falling sales for businesses, reducing the level of cash inow and forcing rms to try to reduce cash outows, sell assets, seek overdrafts. It may become more difcult to resolve cash ow problems, once they arise, as suppliers will be more reluctant to offer generous credit terms and banks may be more reluctant to agree to overdrafts and other lending, because of the increased risk of bankruptcy. Some rms may actually see a rise in sales during an economic downturn e.g. discount retailers such as Aldi and Lidl have become more popular as shoppers seek better value for money.
Hodder Education 2008

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OCR Business Studies for AS

Cash ow forecasting

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Cash ow management is not just an issue during periods of economic downturn many rms fail due to cash ow problems even when the economy is healthy and sales are growing.

Possible evaluation:

Controlling cash ow is vital at all times for any rm, as failure to do so could ultimately lead to it going out of business altogether. The hostile trading conditions that exist during an economic downturn highlight the importance of this.

3 To what extent do you agree with the following statement? Managing cash ow is not just the business of the nance department, it is the responsibility of everyone in the business. Suggested points:

The activities of all employees generate costs which will need to be paid at some point, so everyone within an organisation has a responsibility to keep these costs down. For example, a production worker can reduce the amount of money that needs to be paid to suppliers by reducing the amount of waste generated. Similarly all employees can help to generate increased cash inows by producing products of high quality, delivering excellent customer service, etc. However, cash ow management involves specic tasks such as agreeing credit terms with customers and suppliers, chasing late payments, negotiating overdrafts, etc. In very small businesses, these tasks may be carried out by the owner but, as the business grows, cash ow management is likely to be more effective if carried out by an individual (or department) with specialist skills. Possible evaluation:

While, ofcially, cash ow management is likely to be the specic responsibility of a rms nance department, it is crucial that all employees are aware of the nancial consequences of their actions and the impact of these on overall performance.

Hodder Education 2008

Unit

OCR Business Studies for AS

Costing Revision questions
(50 marks; 50 minutes) 1 Why might a business initially receive relatively low revenues from a product newly introduced to the market? (3)

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Because it set a low price to penetrate the market. Because awareness of the product is poor. Because it hasnt yet been able to build a customer base and doesnt benet from repeat purchase. Because output may be low. Because it may be unable to charge a high price at the start due to high PED.

2 State two circumstances in which a company may be able to charge high prices for a new product. (2) Possible answers include:

If it has a strong USP. If it is the rst into the market. If it is already a recognised brand e.g. PS3.

3 For what reasons might a rm seek to maximise its sales revenue? (4)

When variable costs are relatively low, so each additional unit sold adds few extra costs. In such a case, maximising sales will, in effect, maximise prots.

4 If a business sells 4000 units of Brand X at 4 each and 2000 units of Brand Y at 3 each, what is its total revenue? (4)

X: 4000 units at 4 = 16,000 Y: 2000 units at 3 = 6,000 16,000 + 6,000 = 22,000

Hodder Education 2008

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OCR Business Studies for AS

Costing

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5 State two reasons why rms have to know the costs they incur in production. (2) Possible answers include:

to assess if it is protable to sell goods to market at a given price to compare actual costs with forecast costs to check they are on target to decide on the selling price for the purpose of nancial planning.

6 Distinguish, with the aid of examples, between xed and variable costs. (4)

Fixed costs are costs which do not change with output, e.g. rent, depreciation. Variable costs are costs which do change with output, e.g. raw materials, piece-rate labour.

7 Explain why xed costs can alter only in the long term. (3)

If output increases signicantly in the long term, more managers could be needed, or another factory or additional machinery. However, in the short term, xed costs will not change unless output alters massively.

8 How is the contribution of a product calculated? (2)

Price direct or variable cost = contribution per unit.

9 How is the prot of a product calculated? (2)

Total revenue total cost = prot

10 Give two reasons why prots are important to businesses. (2) Possible reasons include:

Prots are the primary objective for most businesses. They measure the success of the business. They are a source of capital. High prots act as a magnet to attract further investment. High prots keep shareholders happy.

Hodder Education 2008

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OCR Business Studies for AS

Costing

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11 Outline one advantage and one disadvantage that may result from a business deciding to lower the proportion of prots it distributes to its owners. (4)

Advantage: more prot available to reinvest which may help fuel growth. Disadvantage: it may demotivate owners.

12 State two purposes for which a businesss prots might be used. (2) Possible answers include:

reinvestment payments to owners.

13 Explain two reasons why a business might calculate contribution rather than prot in order to make a decision. (6)

The business may be uncertain how to calculate the prot on a particular item if xed overheads havent been divided up effectively between different product lines. Contribution gures per unit can be more useful than prot per unit, because they are not distorted by changes in xed costs per unit when the volume of output changes.

14 To what extent is the calculation of contribution useful when deciding whether to take on a special order? (10) To what extent is the calculation of contribution useful when deciding whether to take on a special order? (10)

Special orders can be confusing to calculate, especially if they are based on average costs. The best way is to calculate them purely on the basis of contribution per unit and then the total contribution generated by the order. As xed costs, by denition, are unchanged by the extra order, calculating the impact on contribution will also tell you the change in prot, so calculating contribution isnt just useful, its essential.

Hodder Education 2008

Unit

OCR Business Studies for AS

Costing Revision exercises B1 Calculation practice questions
(30 marks; 30 minutes) 1 During the summer weeks, Devon Ice Cream has average sales of 4000 units a week. Each ice cream sells for 1 and has variable costs of 25p. Fixed costs are 800. (a) Calculate the total costs for the business in the summer weeks. (3)

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Total cost = FC + TVC Total cost = 800 + (4000 x 25p) Total cost = 1800

(b) Calculate Devon Ice Creams weekly prot in the summer. (3)

Prot = TR TC Prot = (1 x 4000) 1800 Prot = 2,200

2a If a rm sells 200 widgets at 3.20 and 40 squidgets at 4, what is its total revenue? (3)

200 x 3.20 = 640 40 x 4 = 160 Total = 640 + 160 = 800

2b Each widget costs 1.20 to make, while each squidget costs 1.50. What are the total variable costs? (3)

200 x 1.20 = 240 40 x 1.50 = 60 Total variable cost = 240 + 60 = 300

Hodder Education 2008

Unit

OCR Business Studies for AS

Costing
2c If xed costs are 300, what prot is the business making? (3)

22

Prot = Total revenue total costs Prot = 800 300 300 = 200

3 Last week our sales revenue was 12,000, which was great. Our price is 2 a unit, which I think is a bit too cheap. (a) How many unit sales were made last week? (2)

6,000

(b) If a price rise to 2.25 cuts sales to 5600 units, calculate the change in the rms revenue. (4)

2.25 x 5600 = 12,600 Revenue would increase by 600 if they increase the price to 2.25.

4 BYQ Co has sales of 4000 units a month, a price of 4, xed costs of 9000 and variable costs of 1. Calculate its prot. (4)

Revenue = 4000 x 4 = 16,000 TC = 9000 + 4000 = 13,000 Prot = 16,000 13,000 = 3,000

5 At full-capacity output of 24,000 units, a rms costs are as follows: managers salaries materials rent and rates piece-rate labour 48,000 12,000 24,000 36,000

(a) What are the rms total costs at 20,000 units? (4)

Fixed cost = 72,000 Variable cost = (12,000 + 36,000) x 5/6 = 40,000 Total cost = 72,000 + 40,000 = 112,000

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Costing
(b) What prot will be made at 20,000 units if the selling price is 6? (1)

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20,000 x 6 = 120,000 120,000 112,000 = 8,000

B2 Case study
(Refer to case study on page 164 of the textbook.) (25 marks; 30 minutes) 1 Which of Marys two prices would provide her with the higher monthly revenue? (3)

Revenue at 4 = 4 x 125 = 500 per month Revenue at 5 = 5 x 100 = 500 per month The revenues would be equal.

2 Calculate Marys monthly prots (or losses) in each case. (6)

Prot at 4 = 500 (350 + (50p x 125) ) 500 412.5

Prot Prot at 5 Prot at 5 Prot at 5

= 87.50 = 500 (350 + (50px 100) = 500 400 = 100

3 Analyse two possible reasons why Marys nancial forecasts might not prove to be accurate. (7)

limited research respondents may say they will use her product but in reality they may not the costs are only estimations and may be higher than forecast.

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4 Analyse the case for and against Mary charging 5 per household for her window-cleaning service. (9) Case for:

higher prot less work and therefore less time pressure each unit sold will contribute more to xed costs and eventually prot.

Case against:

lower demand might be undercut by competitors will be less competitive.

B3 Case study
(Refer to case study on page 164 of the textbook.) (25 marks; 30 minutes) 1 What is meant by the term variable costs? (2)

A cost which changes in relation with output.

Calculate Roberts forecast prots for his rst three months trading. (5)

January:

Total revenue Total cost Total prot

= 40 x 40 = 1600 = (40 x 15) + 1000 = 1600 = 1600 1600 = 0 = 50 x 40 = 2000 = (50 x 15) + 1000 = 1750 = 2000 1750

February:

Total revenue Total costs Total prot

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= 60 x 40 = 2400 = (60 x 15) + 1000 = 1900 = 2400 1900

March:

Total revenue Total costs Total prot

3 Robert estimates that if he cut his prices by 10% he would have 20% more customers each month. Calculate the outcome of these changes and whether this would benet Robert. (8) Possible answers include:

Revenue would increase fairly signicantly which would, in turn, increase market share. This increased market share will make the rm a bigger player in the market. Prot also increases but only slightly (8) is it worth the hassle?

8 marks Level 3 Level 2 Level 1 Analysis of information in context Application of knowledge in context Knowledge and understanding of business concepts (8-7) (6-4) (3-1)

4 Examine the case for and against a bank lending Robert 10,000 on the basis of his forecast prots. (10) The case for may include:

It seems to be a potentially protable business and therefore he should be able to pay back the money. It is a growing market and therefore sales should increase over time.

The case against may include:

Poor research suggests he may not have very good attention to detail. Prot is not very high. Risky.

10 marks Level 4 Level 3 Level 2 Level 1 Evaluation and judgement of information in context Analysis of information in context Application of knowledge in context Knowledge and understanding of business concepts
Hodder Education 2008

(10-9) (8-7) (6-4) (3-1)

Unit

OCR Business Studies for AS

Costing Essay questions
1 Discuss whether a new ethnic restaurant, trading in a very competitive market, should aim to maximise its revenue, rather than its prots, during its rst year of trading. Possible answers include:

22

Depends on the nancial situation if risky then it needs to focus on prot. It should aim to maximise revenue as this will help to increase brand awareness. Not if prices are so low that prot cant be made. No, because costs will vary signicantly with output (as restaurants have high variable costs) so prot is the key.

2 For all new enterprises it is vital to sell at the right price this is the most important determinant of prots. Discuss whether this view is always correct. Possible answers include:

Yes, because if you sell at a price which is too low, prot will be low and if the price is too high, customers will not buy. Therefore demand will fall, revenue will fall and prot will be lower. Yes, price is important but the key to success is differentiation which allows a rm to increase price without demand falling signicantly. Price is just one of a number of vital factors that determine the level of prot, but it is certainly one of the most signicant.

3 The newly opened Bolton bakery is the rst upmarket baker in the town. The owners expect to make a 50,000 prot in their rst year. Evaluate the factors that might stop them from achieving this. Possible factors include:

Underestimation of costs. This would lead to costs being higher than anticipated, thus prot would be lower than anticipated. Overestimation of revenues. This would lead to revenue being lower than anticipated, thus prot would be lower than anticipated. Inability to meet demand. If the bakers are unable to produce efciently enough to meet the sales level required to make 50,000 prot they will not achieve this target.

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Poor nancial management. If cash ow is not managed effectively and expensive overdrafts are needed in times of negative cash ow, the bank charges will affect the level of prot. Poor marketing. Marketing can increase a rms ability to make a prot if it is good, but if their marketing is poor it may just serve to increase costs rather than bring in extra revenue as intended. Lack of demand.

Hodder Education 2008

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OCR Business Studies for AS

Break-even analysis Revision questions
(25 marks; 25 minutes) 1 What is meant by the term break-even point? (2)

23

The level of output at which total revenue equals total costs. Hence the business makes neither a prot nor a loss.

2 State three reasons why a business might conduct a break-even analysis. (3)

To estimate the future level of output it will be required to produce. To assess the impact of changes in costs on prots and/or the volume required to break even. To support an application for nance from a bank or other nancial institution.

3 List the information necessary to construct a break-even chart. (4)

Selling price. Fixed costs. Variable costs. Maximum capacity of the business.

4 How would you calculate the contribution made by each unit of production that is sold? (2)

Contribution can be calculated for each unit of production by subtracting the variable cost of producing a single unit from its selling price.

5 A business sells its products for 10 each and the variable cost of producing a single unit is 6. If its monthly xed costs are 18,000, how many units must it sell to break even each month? (3) Break-even point will be as follows:

18,000 (xed costs) / 4 (contribution per unit)* = 4500 customers per month *Contribution per unit = 10 (sales price) 6 (variable costs per unit)

6 Explain why the variable cost and total revenue lines start at the origin of a break-even chart. (3)

If a rm does not produce any output it will not incur any variable costs (fuel, materials, etc.), nor will it earn any revenue since it does not have any products to sell. For these reasons variable costs and total revenue lines on a break-even chart commence at the origin.
Hodder Education 2008

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Break-even analysis
7 What point on a break-even chart actually illustrates break-even output? (2)

23

Break-even point on the chart occurs at that level of output where the total revenue line crosses (and equals) the total costs line.

8 Explain how, using a break-even chart, you would illustrate the amount of prot or loss made at any given level of output. (2)

Prots are shown on the break-even graph at outputs in excess of break-even output. They are shown by the vertical distance between the total revenue line and the total cost line. Losses occur below break-even output and are shown by the vertical distance between the total cost line and the total revenue line.

9 Why might a business wish to calculate its margin of safety? (2)

The margin of safety is a useful guide to a business because it illustrates the amount by which output and sales can fall from their current level before the business reaches break-even output. A rm with a low safety margin should consider strategies for enabling prices to be increased or costs to be cut.

10 A business is currently producing 200,000 units of output annually, and its break-even output is 120,000 units. What is its margin of safety? (2)

The margin of safety equals current output less break-even output. Thus in this case it is 80,000 units.

Revision exercises B1 Data response

(45 marks; 60 minutes) (Refer to questions on page 173 of textbook.) 1a Construct the break-even chart for Pauls planned business. (9)

Break-even point = 500 customers per month (refer to graph).

1b State, and show on the graph, the prot or loss made at a monthly sales level of 600 customers. (4)

At 600 customers per month, the prot/loss made by the business is as follows:

Hodder Education 2008

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OCR Business Studies for AS

Break-even analysis
Total revenue (110 600) Total costs: Fixed costs Variable costs: (90 600) Prot/loss 66,000 (10,000) (54,000) 64,000 2,000

23

The hotel will make a prot of 2,000 per month (refer to graph). 1c State, and show on the graph, the margin of safety at that level of output. (4)
100 (3a) New Total Revenue Total Revenue Total Costs 80

90

70

Cost/revenues (000s)

60 (2b) 50 3b 40

(1a)

(3a)

30 (1c)

20

10

Fixed Costs

100

200

300 400 500 Output (Number of customers)

600

700

800

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The margin of safety at 600 customers = sales volume break-even output* = 6000 customers 5000 customers = 1000 customers per month *Break-even point = 10,000 / (110 90) (refer to graph)

2 Pauls market research shows that, in his rst month of trading, he can expect 450 customers at his hotel. (a) If Pauls research is correct, calculate the level of prot or loss he will make. (5)

At 450 customers per month, the prot/loss made by the business is as follows: Total revenue Total costs: Fixed costs Variable costs: (110 450) (10,000) (90 450) Prot/loss (40,500) 50,500 (1,000) 49,500

The hotel will make a loss of 1,000 per month. (b) Illustrate this level of output on your graph and show the prot or loss. (3) Refer to graph. 3 Paul has decided to increase his prices to give an average revenue per customer of 120. (a) Draw the new total revenue line on your break-even chart to show the effect of this change. (3) Refer to graph. (b) Mark on your diagram the new break-even point. (1) Refer to graph. (c) Calculate Pauls new break-even number of customers to conrm the result shown on your chart. (6)

If the average revenue per customer increases to 120, the new break-even number of customers will be as follows: = 10,000 / (120 90) = 10,000 / 30 = 334 customers per month (rounded up to the nearest customer).
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4 Paul is worried that his break-even chart may be misleading. Do you agree with him? Justify your view. (10) Possible points include:

Using a gure for average revenue per customer over-simplies the analysis in reality, revenue per customer will depend on the number of nights stayed in the hotel, the amount spent on meals, drinks, etc. In addition, the hotel may offer discounts for customers staying for more than one night, or at different times of the week or year. The analysis also assumes that variable costs will rise constantly in reality, the hotel may be able to negotiate discounts for buying supplies such as food and drink in bulk. The results of the analysis depend on Pauls ability to forecast future costs and room prices accurately. However, although break-even analysis may not give Paul precise gures as to the number of guests needed to break even, it should give him some idea, which has to be better than having no information at all.

10 marks Level 4 Level 3 Level 2 Level 1 Evaluation and judgement of information in context Analysis of information in context Application of knowledge in context Knowledge and understanding of business concepts (10-9) (8-7) (6-4) (3-1)

B2 Data response
(30 marks; 40 minutes) (Refer to questions on page 174 of the textbook.) 1 What is a break-even chart? (4) Possible answers:

A graph setting out the forecast costs and revenues associated with a given product. It allows prots or losses to be read off at each level of output. It illustrates the level of output necessary to cover costs (i.e. to break even).

2 Calculate the following: (a) the variable cost of producing 1000 T-shirts
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The variable cost of producing 1000 T-shirts is 6,000.

(b) the contribution earned through the sale of one T-shirt. (6)

The contribution from the sale of a single T-shirt is 9 (15 6).

3 Shelley has decided to manufacture the shirts in Poland. As a result, the variable cost per T-shirt (including commission and distribution costs) will fall to 15. However, xed costs will rise to 12,000. (a) Calculate the new level of break-even for Shelleys T-shirts.

12,000/35 15 600

(b) Calculate the margin of safety if sales are 1000 T-shirts per month. (10)

Margin of safety 1000 600 400

4 Should Shelley rely on break-even analysis when taking business decisions? Justify your view. (10) Possible answers include:

It is a useful technique for assessing the impact of changes in costs and revenue. However, it assumes that all output is sold. The model ignores factors such as economies and diseconomies of scale.

10 marks Level 4 Level 3 Level 2 Level 1 Evaluation and judgement of information in context Analysis of information in context Application of knowledge in context Knowledge and understanding of business concepts (10-9) (8-7) (6-4) (3-1)

Essay questions
1 Break-even is the most vital part of a business plan for a new enterprise. Do you agree with this statement? Justify your view. Support for the statement:

Break-even analysis provides a very clear, understandable projection of the output and sales that will be necessary for the business to be protable. This is vital when making decisions about whether to start, or how to structure a new enterprise.
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Break-even analysis is simple to understand which may make it especially useful for small or new enterprises which are not yet able to employ more sophisticated techniques. Banks and other nancial institutions will consider this information a vital part of a new business plan and its inclusion will indicate good business sense. It may help a business to make important decisions about how to structure production, such as whether to produce its own components or whether to purchase them from external sources.

However:

Break-even analysis is only as good as the data upon which it is based, and poor quality data may result in inaccurate conclusions. New businesses (particularly those which are quite different from their closest competitors) may have trouble nding suitable data upon which to base their calculations, greatly reducing the value of the break-even analysis. The model simplies the realities of the market, failing to take into account the fact that rms may benet from bulk buying inputs; that the rm may not sell all its output; or that it may not sell all its output at a single price.

2 Break-even analysis is of limited value to a start-up business because it ignores the market. To what extent do you agree with this statement?

Break-even analysis does clearly illustrate the relationship between possible costs of production and the possible price of the product at various levels of output. This is a necessary starting point for many production decisions.

However:

Because break-even analysis is based on a simplied version of the market it does ignore many of its complexities, greatly reducing the value of the analysis for a start-up business. For example: It cannot determine the actual sales of a product. Sales data is speculative. The analysis also works on the assumption that all output is sold, and that there will be no uctuations in demand. It does not take into account variations in the price of inputs, such as discounts through bulk buying. It does not take into account variations in the price of the product, such as through discounting. The value of break-even analysis may be limited when used in isolation, however, as one of a number of factors including market research to indicate possible demand it can help to create an overall picture of the market which can be of enormous value.

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Revision questions
(10 marks; 10 minutes)

1 Identify one risk from each of the following business decisions. Briey explain what you think the risk is: (a) Doubling the advertising budget when a rms sales havent increased compared to last year. (2)

This spending may not lead to a sufcient increase in sales to cover the cost of the advertising and therefore there is a risk attached to this act.

(b) A bakery switching to a new supplier of our. (2)

The new supplier may not be as reliable or as good as the previous supplier. Also bread is made from very few ingredients, the main one being our, so poor-quality our could have a serious effect on the end product.

(c) An entrepreneur borrowing 80,000 secured against his house, when interest rates are nice and low at 3.25%. (3)

With interest rates low at 3.25% the interest payments may seem affordable, but there is a risk that they will increase, which may put the entrepreneur in nancial difculty.

2 Why may a successful entrepreneur be good at moderate risk-taking rather than high risktaking? (3)

High-risk-taking activities may fail more often than they succeed, and therefore not lead to success. Entrepreneurs who are successful are more likely to be good at moderate risk-taking, which is more likely to prove a success.

Revision exercises B1 Data Response

(20 marks; 25 minutes) (Refer to questions on page 178 of the textbook.) 1 Using the payback and ARR, and any other relevant information you think would be necessary to make the decision, assess which option the bakery should choose. (20)
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This is not just a numerical question, the answers must be analysed in context and used alongside other information to come to a decision. New oven Cost: 150,000 6 years, 9 months Oven upgrade Cost: 30,000 3 years

Payback:

ARR

i. ii. iii.

total cash ow- initial cost expected life 156,000 150,000 = 600 10 600 150,000 100 = 0.4% ii. iii. 46,000 30,000 = 3200 5 3,200 30,000 100 = 10.7%

At rst glance the indication is that the oven upgrade is the best option. It will pay back the initial investment quicker and its return in terms of protability is much higher. Other criteria on which the decision needs to be made:

Economic life of upgrade plus additional maintenance costs. Cash ow after years of life. The gures are estimates which may differ signicantly. Economic condition may change affecting ability to raise nance. The long-term objectives of the business. Competition. Type of product.

B2 Data response
(20 marks; 25 minutes) (Refer to questions on pages 1789 of the textbook) 1 Calculate the investment appraisal for the Leeds store, using both payback and ARR. Recommend whether or not the business should open this second outlet on purely numerical grounds. (8)

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This question requires a simple analysis and recommendation based on an analysis of the payback and ARR of this new outlet. Payback: Initial cost 400,000 Net cashow: (000) Year 0 (400) Year 1 (100) Year 2 100 Year 3 200 Payback: 3 years, 8 months Year 4 300 Year 5 300 ARR: 800,000 400,000 = 80,000 5 80,000 400,000 100 = 20% Reasons for:

Payback is well before the end of economic life, therefore any cash ows would be positive. Trend is net cash ow rising. ARR is healthy at 20% in comparison to rate of interest on borrowing of 5%. Even with a rise in interest rates this is still healthy. Might be able to raise nance internally from retained prot.

Against:

Cash ow forecasts are estimates. Money for investment has to be raised. No account of the time value of money. Business already has substantial debt in loans and overdraft.

2 Discuss the other issues raised in the case material, then make a justied recommendation about whether or not the rm should proceed. (12) Other information that must be considered:

Falling demand for organic food.

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Assumption that 5 times the population will lead to 5 times the sales. Size of investment versus the risk. Doing well in Harrowgate in spite of competition. Less competition in Leeds. Demographic/market segment considerations. Growth in competition from large supermarkets.
Candidate evaluates the decision in financial and non-financial terms and makes a judgment. Candidate analyses the decision in financial and non-financial terms with no judgment. Candidate explains either financial or non-financial reasons for the decision. (12-9) (8-5) (4-1)

Level 3 Level 2 Level 1

Hodder Education 2008

Unit

OCR Business Studies for AS

Decision-making and nal accounts Revision questions
(26 marks; 20 minutes) 1 What is meant by net prot? (2)

25

Net prot measures the prot left after all the operating costs of the business have been deducted.

2 What is meant by revenue? (2)

The value of a rms sales over a given period of time.

3 Does an increase in price necessarily increase revenue? (3)

No. An increase in price results in an increase in revenue only if the product is price inelastic (has a PED of less than 1).

4 How can revenue increase without an increase in cash inows? (3)

Revenue is not necessarily actual money but rather just a sales transaction. So if goods were ordered on credit, the revenue would increase but the cash inow would not.

5 Explain two ways of increasing prots. (6)

Increase the level of sales revenue. Reduce costs.

6 Why might cutting costs end up reducing prots? (3)

It could result in a reduction in quality, which may lead to a decline in repeat purchasing and thus result in a decline in revenue and, in turn, a fall in prots. Additionally, if the cut in costs leads to a decline in quality, the rm may be forced to reduce the price and therefore reduce the prot per unit.

7 In what ways do the different functions of a business affect its prots? (4) Possible answers include:

Marketing activities tend to be expensive and are a large xed cost to the rm and thus could reduce prot. However, if the marketing is successful it could increase revenue, which would, in turn, help to increase prot.

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Operations if production could reduce the cost per unit by reducing wastage, this would increase prot (provided it did not result in a fall in quality and hence revenue). The revenue brought in by the sales department could also be mentioned. The nance department also has the ability to reduce costs and thus increase prot.

8 A business has an opening stock of 30,000, closing stock of 10,000 and cost of sales of 60,000. Calculate the value of purchases. (3) Opening stock + Purchases Less closing stock Cost of sales Answer 30,000 40,000 10,000 60,000 40,000

Revision exercises B1 Data response

(30 marks; 30 minutes) (Refer to questions on page 185 of the textbook.) 1 Distinguish between revenue, costs and net prot. (3)

Revenue is the value of sales; costs are how much it costs a rm to produce the product and maintain the business; net prot is revenue total costs or net prot gross prot expenses.

2 Explain why a fall in price might not have led to an increase in revenue. (5) Candidates should show understanding of price elasticity of demand, although they dont need to use the term.

When prices fall, revenue will increase only if demand increases at a faster rate than the price has fallen (i.e. the product is price elastic). However, if, for example, a 10% fall in price results in only a 5% increase in demand, the fall in price will lead to a fall in revenue.

3 Apart from the methods mentioned in the text, analyse two other actions SOFA-SOGOOD might take to improve its protability. (8) Any sensible answer should be credited.
Hodder Education 2008

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Decision-making and nal accounts
Possible answers include:

25

Reduce cost per unit by minimising wastage. If the product is price inelastic, an increase in price would lead to an increase in demand and an increase in protability. Reduce xed costs per unit by achieving economies of scale. Reduce xed costs per unit by minimising administrational costs.

8 marks Level 3 Level 2 Level 1 Analysis of information in context Application of knowledge in context Knowledge and understanding of business concepts (8-7) (6-4) (3-1)

4 Discuss the advantages and disadvantages to the business of the stafng cost-saving actions taken by Renis. (14) Advantages include:

Reducing costs may enable SOFA-SOGOOD to reduce prices, making it more competitive. Reducing costs will increase the contribution per unit, enabling it to break even at lower output.

Disadvantages include:

Staff may become demotivated because of the pay freezes. The demotivation could lead to a reduction in productivity, which would drive up the labour cost per unit and thus actually increase costs. Furthermore, the non-recruitment policy would prevent Renis from being open to recruiting new staff who may bring new skills and ideas into the company. Also, the policy of not replacing staff who leave could cause problems as existing staff may have to take on more work; this could lead to increased stress levels, which, in turn, may well lead to increased levels of absenteeism and staff turnover, both of which will increase labour costs.

Hodder Education 2008

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OCR Business Studies for AS

Decision-making and nal accounts B2 Data response
(36 marks; 36 minutes) (Refer to questions on page 185 of the textbook.) 1 Calculate the likely net prots for the college this year. (3)

25

15,000 200 3,000,000 revenue Net prot 3,000,000 12% 360,000

2 Outline two costs the college is likely to have. (4) Possible costs include:

salaries mortgage/rent costs stationery phone maintenance administration.

3 Explain one factor that might cause a change in demand for the college. (4) Possible factors include:

An increase in average income would result in an increase in demand as private schools are an income-elastic product. Good A-level results may increase local awareness of the school, which may, in turn, increase demand. If other schools in competition with the college get bad results this could also increase demand for places at Farmoor.

4 Explain how the net prot of the college might be used. (5)

The net prot could be used in marketing, in an attempt to increase demand.

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Net prot could be kept to ensure the college is nancially sound in case there is a dip in the economy, and thus in prots, in the future. Net prot could also be used for increasing the capacity of the college as it is currently operating at near full capacity.

5 Analyse how you might measure the performance of the college apart from looking at its nancial results. (8) Possible answers include:

you could look at the league tables to see how good results are; however, the results of the college may better reect the quality of the students than the quality of the college/teaching it may be better to analyse added value rather than just results (i.e. the average increase/decrease from predicted to actual results) you could also consider the views of the students/parents and how satised they are with the education they/their children receive.
Analysis of information in context Application of knowledge in context Knowledge and understanding of business concepts (8-7) (6-4) (3-1)

8 marks Level 3 Level 2 Level 1

6 Discuss the ways in which the college might increase its prots. (12) Possible answers include:

It could increase the price of fees, but the effectiveness of this strategy would depend on whether the demand for private colleges in the area is price elastic or price inelastic. If it improves the quality of the education, this would lead to better results and potentially make the college more price inelastic and enable it to increase price. It could also try to reduce costs for example, try to reduce photocopying costs or administration costs. It could start charging parents for additional things like books, exam entrance and so on (if it doesnt already), to bring in some extra revenue.

12 marks Level 4 Level 3 Level 2 Level 1 Evaluation and judgement of information in context Analysis of information in context Application of knowledge in context Knowledge and understanding of business concepts
Hodder Education 2008

(10-12) (9-7) (6-4) (3-1)

Unit

OCR Business Studies for AS

Decision-making and nal accounts B3 Data response
(22 marks; 20 minutes) (Refer to questions on page 186 of the textbook.) 1 Discuss the usefulness of a companys nal accounts to those who have a stake in the business. (12) This question looks at the relative usefulness of accounts to different stakeholder groups. Therefore, it requires a judgment to achieve evaluation marks.

25

Shareholders/owners: high priority prot, dividends, future share growth, future objectives Employees: limited use security, wages and salaries Customers: limited competitive prices Lenders: high priority ability to repay debt, helps to make lending decisions Government: medium priority depends on size of business employment, effect on economy, corporation tax, VAT, income tax Suppliers: ability to pay, regular orders Community: little importance
Candidate compares the usefulness of accounts to at least two stakeholders and comes to a judgment about their relative importance to these groups. Candidate analyses the usefulness of accounts to at least two stakeholder groups with no judgment. Candidate explains how one or more stakeholders might use accounts with no comparison or judgment. (12-9)

Level 3

Level 2 Level 1

(8-5) (4-1)

2 Lugitall Ltd makes and sells rucksacks to professional climbers. It markets and sells its products over the internet. Using the information presented in Table 25.2 explain why the value of working capital is 76,000 and assess whether this is a good position for this company. (10) Please note that in a limited number of copies of the student book this question incorrectly referred to Table 17.2. The correct table is Table 25.2.

Working capital constitutes current assets minus current liabilities. It indicates the ability of the business to cover its short-term liabilities or debts. It is used for the day-to-day running of the

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business. In this case the working capital is 76,000. The current assets are 86,000 and the current liabilities are 10,000, therefore working capital is 76,000.

In an ideal situation current assets should be about twice as much as the current liabilities. If the assets are less than this the business may not be able to pay its suppliers and other short-term creditors. However, it is also a problem if too much of the working capital is tied up in current assets, in particular stock and debtors. In this case the working capital ratio is over 4:1. The business has a lot of money tied up in stock which is not moving and debtors who have failed to pay. These two issues may result in the business running out of cash in the short term. Therefore, although the working capital situation is good, i.e. they have plenty, it may present a problem if the business needs cash in the short term.
Candidate analyses the importance of working capital in the context of this business and makes a judgment. Candidate analyses the working capital situation in context with no judgment. Candidate shows and applies knowledge of working capital with little or no analysis in context. (10-8) (7-4) (3-1)

Level 3 Level 2 Level 1

B4 Data response
(19 marks; 25 minutes) 1 Calculate Animo Ltds working capital for 2007 and 2008. (3) Please note that in a limited number of copies of the student book, Fixed Assets for 2008 are incorrectly listed as 1200. Fixed Assets for 2008 should be 1500.

Working capital: 2007 current assets current liabilities 1100 950 = 150 current assets current liabilities 800 825 = (25)

2 Analyse the reasons why working capital is important to a business such as Animo Ltd. (8) This is an analysis question so it is important to use the context to assess the implications to the business. Importance:

To pay for short-term debts such as farmers in UK and Europe. To pay for annual tax bill.
Hodder Education 2008

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OCR Business Studies for AS

Decision-making and nal accounts

25

To pay for day-to-day running of the business. To be able to set objectives in the long term. To ensure that an optimum ratio of 2:1 is maintained.

3 Analyse the ways in which Animo Ltd might improve its working capital. (8) Methods of improving working capital:

credit control/debtor management stock control policy creditor management changing storage and distribution methods foreseeing changes in demand.

Any of these options can be used in combination with the answers to 1 and 2 to show how the situation might be improved.

Hodder Education 2008

Unit