Core Knowledge

Question 1

price elastic

Answer 1

duet to poor customer service a business products may become price elastic -) leading to customers being less loyal-) if price increases their will be a significant fall in demand -) pressure to keep prices low-) lower SR -) reducing profit margins-) less retained to reinvest.

Question 2

price inelastic

Answer 2

Through R&D-) would differentiate a product from competitors -) customers stay loyal as product is superior than competitors -) making them more price inelastic can charge higher prices without a significant fall in demand-) increased revenue-) increased gross profit margins

Question 3

YED inferior goods

Answer 3

when unemployed is high then income will be lower therefore demand for inferior goods increase-) business needs to be flexible to respond to an unexpected change in income so they can increase e production of a good to meet the new demand-) purchasing EOS or increase GP.

Question 4

YED Normal goods

Answer 4

A business that sells normal good s have stable predictable sales this is because when income changes demand die not change-) unlikely to see a significant fall or rise in profits when income changes-) therefore unlikely to make a loss allowing them to keep up with repayments -) could get low interest rates on loans leading to lower expenses -) business is attractive to the banks as they are seen as safe investment.

Question 5

YED Luxury goods

Answer 5

Business venerable to changes in average incomes-) if people lose their job there will be a fall in income -) lead to significant fall in demand as consumers switch to cheaper alternatives-) fall in revenue-) fall in GP -) lead to them making an operating loss putting pressure to reduce expenses-) sell non current assets eg machinery-) reduces businesses scale

Question 6

Benefit of spreading risk YED

Answer 6

if bus sells combination of inferior normal luxury goods they will have a balanced product portfolio-) less venerable to changes in consumer income eg rising inflation,increase unemployment-) if consumer income falls-) business will experience consistent demand as consumers can switch from luxury to inferior goods-) therefore allows consistent inflows as sales have not dropped-) positive net cash flow-)able to keep up with day to day bills and repayments

Question 7

Drawback of spreading risk YED

Answer 7

however a developed product portfolio -) business needs to identify needs of multiple segments -) consumers with high incomes and consumers with low incomes -) collecting valid data from multiple groups will require a large sample -) need specialist researchers -) high salaries -) increased expenses -) fall in operating profit

Question 8

purchasing EOS

Answer 8

if a business has increased sales-) there will be an increase in demand-) this leads potential discount from bulk buying-) leading to lower average variable costs-) increased profit margins

Question 9

Marketing EOS

Answer 9

when bus has increased sales this increased sales volume-) meaning cost of MR,RandD,advertising can be spread over more units-) lower cost per unit -) making the above more affordable and can therefore do more of it-) leading to improved product development,increased brand awareness,improved innovation.

Question 10

Financial EOS

Answer 10

larger businesses have significant amount of non current assets-)meaning the more collateral for loans-) lower risk for banks-) lower interest rates lower FC-)lower FC per unit

Question 11

Technical EOS

Answer 11

as a business grows they make better use of machinery or have more resources to invest into the business-) more use of machinery increased output therefore productivity is also increased-) spreading FC over more units-) lower unit costs of producing a product-) allowing the business to reduce the selling price or increase gross profit margins.

Question 12

Benefit of multiple intermediaries

Answer 12

choosing to sell through multiple intermediaries eg wholesalers and retailers-) makes the product more available-) increasing accessibility for customers-) therefore more customers will purchase the product-) increasing sales volume-) more raw materials needed from suppliers-) discount from bulk buying-) gain purchasing economies of scale-) by negotiating a discount-) lower variable costs per unit-) increased gross and operating profit.

Question 13

Drawback of multiple intermediaries

Answer 13

However intermediaries may have high levels of buyer power-) this means that they will be able to do dictate terms to the business-) Eg lower prices and longer periods of trade credit-) therefore reducing cash inflows-) lower net cash flow-)reduced cash reserves-) mag suffer from poor liquidity-) unable to keep up with day to day bills eg payments to suppliers-) -) may have to sell non current assets therefore business unable to operate.

Question 14

Benefit of Direct distribution

Answer 14

Choosing to sell direct to customers-) increased the amount of control over the customer experience-) Able to offer better customer service-) increased differentiation from competitors-) increased customer loyalty-) price inelastic-) can increase prices without a significant fall in demand-) increased revenue-) increased gross and operating profit margins-) more retained profit-) able to reinvest capital into …

Question 15

Drawback of direct distribution

Answer 15

However selling direct to customers requires high investment-) as a business will need to set up their own distribution network -) they will need to purchase non current assets eg stores or delivery vans-) using lots of cash-) reducing cash reserves-) may suffer from poor liquidity-) unable to keep up with day to day payments eg payment to suppliers-) may have to sell non current assets to pay bills-) therefore business no longer able to operate.

Question 16

Benefit of specialisation

Answer 16

a manufacture producing a NARROW product range-) focuses its cash reserves on RandD of a single product such as improving durability-? making a more developed product-) improving levels of differentiation-) reducing the power of substitute manufacturers -) product becomes price inelastic-) can charge higher prices without a significant fall in demand-) increasing revenue.

Question 17

Drawback of specialisation

Answer 17

if a business specialises in one or narrow range of products -) they will be more vulnerable to changes in
-competition,social trends,product no longer in demand,shortage of supply meg labour skills or raw materials -) if one or more of these change business will experience a fall in demand-) without having an alternative product sales to rely on-) significantly reducing cash inflows from sales-) leading to poor liquidity.

Question 18

Benefit of Differentiation strategy

differentiation =broad
differentiation focus=narrow

Answer 18

pursuing porters differentiation strategy-) Businesses will develop product or services that are unique-) persuading customers to buy them over rivals-) products become less price elastic-)customers will be less sensitive to price change in price-) business can increase price without a significant fall in demand-) increasing sales revenue and gross profit.

Question 19

Benefit of a small scale (niche) cost focus

Answer 19

lower VC and FC-) cost focus/cost leadership strategy-) increased GP,OP, margins -) therefore able to reduce selling price-) become more price competitive within a price elastic market-) will not lead to significant fall in demand-) therefore increasing output allowing the business to benefit from eos.

Question 20

cost leadership/cost focus

Answer 20

Improve productivity-) by innovation in production technology or by the improvement in workout motivation-)leads to increased output per worker or machine-) leads to fixed costs/expenses being spread over more units-) leading to lower unit fix costs-) leading to lower unit cost increasing operating profit

Question 21

Benefit productivity

Answer 21

improved productivity-) by innovation in production technology are by the improvement in work motivation-) leads to increased output per worker or machine-) leads to the fixed cost/expenses being spread over more units-) leading to lower unit fixed costs-) leading to lower unit costs increasing operating profit

Question 22

Drawback of productivity

Answer 22

in order to improve productivity-)business must invest in new technology or improvements in employee motivation-) this will increase their cash outflows-) potentially risking a negative net cash flow in short term-) meaning have less cash reserves to spend elsewhere such as RandD for new product development.

Question 23

Benefit of high capacity utilisation -manufacture business

Answer 23

Through improving workermotivation OR ADVANCEMENT IN TECH-) leads to increase productivity -)increase output-) improved capacity utilisation-) fixed costs of production e.g. rent wages and insurance-)spread over more units-) lower unit fixed costs -)increase operating profit margin or opportunity to decrease selling price

Question 24

drawback of high capacity utilisation manufacturing business

Answer 24

operating with high capacity utilisation will mean that the machines are working for long periods -)to produce high levels of output -)increased chance of machine failure -) Disruption in the production process -)increased expenses as business will need to spend on repairs -)OR poor customer service as longer lead time

Question 25

Benefit of high capacity utilisation -service business

Answer 25

Through exceptional customer service or high levels of differentiation -) businesses will have high sales volume -) increase number of seats filled -) improve capacity utilisation -) fixed cost of providing service e.g. rent wages and insurance-) are spread over more units -) lower unit fix costs -) increase operating profit margin or opportunity to decrease selling price

Question 26

Drawback of high capacity utilisation- service business

Answer 26

operating with high capacity utilisation -) will mean that employees may have been working for long periods of time-) to ensure business has strong brand reputation -) and high percentage of seats full -) employees feel over worked -) safety needs will not be met (Maslow - contract working hours) -) employees become demotivated -) may look for employment elsewhere increase labour turnover-) increased expenses of recruiting process.

Question 27

Benefit of low capacity utilisation -manufacturing business

Answer 27

operating with low capacity utilisation -) will mean that the business has time to service machinery in between production -) to reduce the chance of machine failure-) as machinery will not need to be constantly in operation as capacity utilisation is low-) reduce the businesses expenses as less likely to need to repair machinery -) positive net cash flow -) or will retain positive brand reputation as there will be no delay in production process meaning the business will be differentiated.

Question 28

Drawback of low capacity utilisation -manufacture business

Answer 28

operating with low capacity utilisation -) will mean that the business is not fully utilising its resources-) leading to low levels of productivity-)reduced output -) fixed costs of production are spread over less units e.g. rent wages insurance -) increase unit fix costs -) lower operating profit less profit to retain and reinvest.

Question 29

Benefit of low capacity utilisation service business

Answer 29

Operating with low capacity utilisation -) will mean that the employees will not be working for long periods -) as service may not be as busy -) improve working conditions -) ensuring safety needs are being met by Maslow -) ensuring employees remain highly motivated and deliver exceptional customer service -) increasing level of differentiation porter -) service become small price inelastic

Question 30

Drawback of low capacity utilisation service businesses

Answer 30

operating with low capacity utilisation -) will mean that businesses is not fully utilising its resources -) low percentage of seats filled -) lower sales volume-) fixed cost of providing service are spread over the less seats eg rent wages insurance -) increased unit fixed cost -) lower operating profit

Question 31

Motivational methods Taylor Taylor scientific Management theory

Answer 31

Peace rate: workers paid based on how many units produced. Division of labour: identify most efficient METHOD OF PRODUCTION -) to spot the most efficient workers and see why they are so good -) trained the remaining workers to work like the best -) pay workers based on productivity PEACE RATE

Question 32

Taylor Financial method of motivation

Answer 32

Taylor scientific management method gives effective training to do a very specific job-) this means they will become more skilled in that given area-) this will mean they will be able to produce more and will be motivated to do so if they are paid for every item they produce-)increase output per worker-) increased productivity-) fix costs being spread over more units-) lower fixed cost per unit-) Increase operating profit or reduce selling price.

Question 33

Motivation Method Mayo Human relations management

Answer 33

Hawthorne effect: manager shows interest in workers making them more productive as they feel valued. Teamwork holds each other accountable effective communication

Question 34

Mayo motivation method non financial

Answer 34

through having more managers there will be more supervision-) this will lead to employees feeling like that actions are valued as the manager is showing interest in their work-) this is argued by Mayo to be an effective motivational factor as workers produce more when being watched this is called the Hawthorne affect-) this will increase productivity-) leading to fixed costs spread over more units-) leading to lower units fixed costs

Question 35

Motivation method Maslow Maslow hierarchy of needs

Answer 35

-self actualisation(empowerment promotion Maslow) -esteem( praise empowerment bonuses promotion job enrichment) -love and belonging (Mayo teamwork ) -safety (job security contract training) -Physiological (Taylor breaks food fringe benefits Taylor) (non financial)

Question 36

Motivation methods Maslow

Answer 36

Job enrichment gives employees greater responsibility by increasing the complexity of tasks they are called upon to complete-) enrichment is likely to improve employees levels of motivation as they will feel trusted to complete challenging task-) this will mean that employs esteem needs are met according to Maslows hierarchy of needs -) this may ensure that staff become more satisfied in the job. A high level of job satisfaction will improve staff members wellbeing -) therefor through job enrichment and improving job satisfaction labour turnover will be lower. A lower labour turnover will then ensure that the business does not increase FC of c recruitment cost

Question 37

motivational method Herzberg

Answer 37

Hygiene factors :satisfied but do not motivate employees these include P conditions company policy treatment at work relations with higher levels of hierarchy Motivational factors :motivate employees Sense of achievement chance of promotion chance of improvement recognition of effort responsibility nature of the job itself

Question 38

Motivational factor Hezberg

Answer 38

Businesses can make investments into working conditions-) this will mean that they can (choose a factor that is relevant to the case)-) this will help me et one herzbergs hygiene factors-) This will provide a foundation in which to motivate staff by other factors such as employee recognition.

Question 39

Autocratic leadership benefit

Answer 39

Autocratic leadership means that all decisions are made by the leader -) no delegation or consultation consultation-) ensures quick decision making -) business is able to quickly adapt to changing trends e.g. PESTEL-) increase differentiation explain further

Question 40

Autocratic leadership drawback

Answer 40

Autocratic leadership is that all decisions are made by leader-) No delegation or consultation-) employees don’t feel valued by organisation-) as they are not included in decision making process-) esteem needs are not met according to Maslow theory -) lack of innovation can’t encourage intraprenership -) May become demotivated-) demotivated workforce means lower output produced.

Question 41

Paternalistic leadership benefit

Answer 41

paternalistic leadership means leaders will consider employee welfare when making decisions while still maintaining full control of decision-making process-) this means that employees esteem needs are met according to Maslows theory-) as their welfare is important to leader employees will feel valued by organisation-) increasing employee motivation -) increased employee motivation means higher output produced explained further benefits.

Question 42

Paternalistic leadership drawback (Innovation)

Answer 42

paternalistic leadership means leaders will consider employee welfare when making decisions-) employee input maybe listened to but decision making still controlled by leader-) This may mean that ideas suggested by subordinates are ignored by leader-) reduction in innovation by the business -) products less differentiated -) loss of a competitive edge means price elastic can’t increase prices without sign fall in demand leading to lower profit margins

Question 43

Democratic leadership benefit

Answer 43

democratic leadership means that leaders involved employees in the decision-making process-) This means that employees will have a greater level of responsibility and authority-) increase responsibility will mean employees feel recognised by leader-) Meeting esteem needs by Maslow’s theory-) increasing employee motivation increase benefit further.

Question 44

Democratic leadership drawback

Answer 44

democratic leadership means that leaders involve employees in the decision-making process-) this may delay the decision making process-) Business fails to adapt to changing trends-) loss of first mover advantage( first business in the market ) -) Product less differentiated -) loss of competitive advantage explain drawback further

Question 45

Laissez Faire leadership benefit

Answer 45

Laissez faire Leaders delegate full responsibility for decision making to employees-) This means that employees will have a greater level of responsibility and authority-) increase responsibility will mean employees feel recognised by leader-) meeting esteem needs according to Maslow theory-)  Increased employee motivation explain benefit further

Question 46

Laissez faire leadership drawback

Answer 46

laissez faire leaders delegate full responsibility for decision making process to employees-) This means that employees will have a greater level of responsibility and authority-) To ensure effective decision-making employees must have necessary skills-) if not employees may feel overwhelmed with lack of direction-) hygiene factors not present according to Hezbergs‘s theory-) employs become demotivated-) Explain drawback of a demotivated workforce

Question 47

Role culture benefit

Answer 47

To improve reliability and consistency of the business needs to have clear guidelines and rules (examples) -) This will create a role culture -) What each employee is given direction and description eg job description on how best to do that job-) This may lead to less mistakes and therefore less defective products Or consistently good customer service-) This will improve the business’s reputation, leading to a stronger brand. Image therefore, more price inelastic and differentiated can increase in prices without a significant fall in demand, increasing cash reserves.

Question 48

Role culture, drawback

Answer 48

Lack of innovation or job in enrichment job enlargement

Question 49

Task culture benefit

Answer 49

To improve creativity they need to adopt a task culture-) This can be achieved by recruiting individuals who enjoy working as a team-) to encourage this businesses will need to empower teams to make decisions and give them freedom to make mistakes (Maslow love and belonging)-) This will lead to ideas being generated without fear -) this will lead to innovation and ultimately differentiated products They can increase prices without significant fall in demand Leading to increased cash inflows if inflows exceed out, those leads to a positive net cash flow, therefore can invest in non-current assets

Question 50

Task culture, drawback

Answer 50

Poor decision-making as project teams may have own objectives which may differ from businesses objectives of long-term growth

Question 51

Person culture benefit

Answer 51

Employees are highly skilled and therefore have more empowerment-) There is Little to no intervention from leadership or company policy -) therefore Laissez Faire leadership style is used-) highly skilled employees are given the opportunity to be creative meeting esteem needs according to Maslow theory as they get a sense of achievement from there inventions -) improves innovation leading to differentiation of products -) more likely to have price inelastic goods Therefore, can increase the prices without a significant fall in demand, leading to increased profit margins.

Question 52

Drawback of a person culture

Answer 52

No direction given when Dealing with a task therefore hygiene factors are not met according to Hezbergs theory There is no Love and belonging, according to Maslow’s hierarchy of needs theory, leading to demotivated employees, therefore less innovation

Question 53

Power culture benefit

Answer 53

There is a centralised decision-making system, where all the direction are controlled by one source -) This might be a team of directors of one individual -) Leading to clear instructions, been given very efficiently -) leading two quick decision-making (examples). For example, changing customer trends are economic situation-) Making the business differentiated and lowering costs

Question 54

Power culture, drawback

Answer 54

Employees are not giving decision-making power. Therefore esteem needs are not met according to Maslow’s theory As they are not given empowerment over their job, leading to a demotivated Employees, increasing labour turnover, therefore, increasing fix cost of recruiting and training leading to significant fall in cash reserves

Question 55

List in order the income statement

Answer 55

Sales revenue/turnover Cost of sales Gross profit Expenses Operating profit Exceptional items, e.g. sale of an non current asset Tax (all revenue — all expenses) Net profit ( revenue — costs ) Retained profit (reinvestment) Dividends ( Percentage of profit given to shareholders)

Question 56

List the balance sheet

Answer 56

Non-current assets ( more than 1 year cannot be changed into cash quickly) Current assets ( Raw materials, inventory They can be turned into cash within one year) Total assets (CA +NCA) Current liabilities ( Owe within one year eg overdraft, payables like trade credit given to you by suppliers) Non-current liabilities ( Long-term debts, have to be paid for longer than 12 months, e.g. a mortgage) Total liabilities Net assets ( Total assets - Total liabilities) Shareholder equity Retained profit Total equity ( Shareholder + Retained profit)

Question 57

List the liquid assets and the non-liquid assets

Answer 57

Liquid assets and money owed by customers, e.g. receivables Stock, including Rohma materials work in progress of Finnish goods These all can be easily turned into cash Nonliquid assets are land, equipment, machinery, vehicles And they cannot be easily turned into cash.