Please note that these are not fully-worked model answers, but they are

intended as a guide to the type of answer expected.

The Association of Business Executives
QCF
Introduction to Business
December 2011
Suggested Answers


STRUCTURE OF PAPER: Answer BOTH sections
SECTION A: Answer ALL SIX questions Q1Q6

14 marks
each
Total marks for Section A: 84 marks
SECTION B: Answer ONE question Either Q7 or Q8 16 marks
Total marks for Section B: 16 marks
TOTAL MARKS AVAILABLE FOR THE PAPER 100 marks


Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Section A: Candidates must answer ALL SIX questions in this section.
Question 1


Software giant Microsoft is rumoured to be distributing early copies of Windows 8, the latest
version of its computer operating system. Its predecessor, Windows 7 has sold over 175 million
copies worldwide generating over $15bn profits in 2009. Businesses such as Microsoft are
accountable to their shareholders and therefore continually develop new products to fulfil their
corporate objective of profit maximisation.
Q1
(a)

Identify and explain three inputs required by a business when developing new products.
Management skills - entrepreneurship. For a business to grow and become
successful, management skills are vital. It means having the ability to take
risks and have the necessary flair and skills to develop new products. This
often included the interpersonal skills to motivate, inspire and lead a team of
people to move the business forward.

Finance for a business to develop new products, they will require reserves
of finance to carry out market research and to make prototypes to ensure that
the products match the needs/wants of the customer.

Other valid inputs include: labour, suppliers and land. Please give credit for
any reasonable development for any of these offered. 6 marks
Q1
(b)
Define the term, corporate objectives.
A corporate aim is simply an intention of the how a business seeks to develop
in the long term. It seeks to create a shared vision that all stakeholders in an
organisation should seek to achieve. 2 marks
Q1
(c)
Explain the difference between the short, medium and long term objectives of a
business. Give examples to support your answer.
For instance, the short term targets will often be specific e.g. survival as
many businesses that fail do so in their first year of trading.

In the medium term targets will often relate to the size of the business and
how it will grow e.g. increase sales turnover by 25%.

In the longer term, the targets will be less specific reflecting the difficultly of
long term planning e.g. product diversification so as to maintain a
competitive advantage. 6 marks
Q1 Total Maximum Marks for Question
14
marks

Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 2
After completing their studies, Sarah, Olu and Xiang set up a dental practice. They operated as a
partnership and all three invested equal sums of money. After three successful years, a
disagreement arose when Sarah wanted to focus upon attracting more private clients as these
were more profitable for the business. After a period of disagreement, where communications
deteriorated, a partners meeting was held to find a solution. Sarah, however, felt that the only way
forward was for her to break away from the partnership
Q2
(a)


Identify the sector of the economy in which this business operates. Explain your choice.
Q2
(b)


Describe three advantages of operating as a partnership for a business such as a
dentist.
Possible advantages include:
No legal formalities
No need to publish any accounts that need to be seen by the public.
Each partner can specialise
Greater scope to raise finance than a sole trader
Sharing of work
6 marks
Q2
(c)


Describe three main disadvantages of partnership.
Possible disadvantages include:
If there is disagreement then there may be lack of continuity in how
the business develops and grows.
Each partner has unlimited liability.
Given the maximum number of partners is 20; this can limit the
volume of funds that can be raised.
Any decision made by one partner is legally binding on all the others.
Partnerships have unincorporated status so partners can be sued by
customers.
If there is no agreement then it is difficult to move the business
forward.
6 marks
Q2 Total Maximum Marks for Question
14
marks

Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 3
Q3
(a)


State and explain two ways in which a company might suffer from diseconomies of
scale. Give examples from an industry of your choice.
Communication diseconomies of scale. If a business grows too quickly then
people can find it more difficult to identify the most appropriate person to
speak with. This means it takes longer to fix problems which can result in a
rise in unit costs. 6 marks
Q3
(b)


Explain two advantages and two disadvantages of flow production.
Possible advantages include:

Unit costs are reduced as firms gain from economies of scale
Once the production line is set up, products can flow off the end of it
non stop for lengthy periods of time. This can reduce the demand for
labour which can bring cost savings to the business
The need to stockpile finished goods is reduced. The production line
can respond to short term changes in demand.

Possible disadvantages include:

Set up costs are very high as enormous investment in plant and
machinery is needed.
The product is standardised. It is not possible to offer a wide product
range and meet different customers needs.
Worker demotivation can develop.
Breakdown of the production line can often prove costly. 8 marks
Q3 Total Maximum Marks for Question
14
marks

Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 4
Q4
(a)


Identify and briefly explain the four elements of the marketing mix.
Price
Product
Promotion
Place
For example: price is important because if it is too expensive then customers
are unlikely to be able to afford it. Likewise, it the price is too low then
customers might perceive it to be value for money. 8 marks
Q4
(b)


Select any two of these elements and discuss why they are important to the success of
a product or service.
For instance, a possible approach to why promotion is an important element:
Effective promotion means that the consumer is aware of the
existence of a product and the benefits of it.
It allows the business to reach an audience which might be
geographically dispersed.
To show consumers that the product is better than that of its
competitors. 6 marks
Q4 Total Maximum Marks for Question
14
marks

Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 5
Mr and Mrs Chan are the owners of a Chinese restaurant. They have been considering renovating
their restaurant. They want to make it more exclusive and put up prices. They estimate that
improving the restaurant would cost $20,000 and they would need a loan. Before going to the bank
to ask for a loan, the Chans are required to produce a cash flow and budget including all costs and
revenues as part of their business plan.
Q5
(a)


Define the terms fixed costs, variable costs, and revenue as they would appear in
a cash flow forecast.
Fixed costs are costs of production which do not change with output.

Variable costs are costs of production which change with output.

Revenue is the receipts the business receives from the sale of goods and
services. 6 marks
Q5
(b)


Identify and explain two advantages and two disadvantages to a business from
producing a budget.
Possible advantages include:

Monitoring performance of both the business as a whole and of
various sections of it.
It can be used to identify factors that affect performance via prompt
variance analysis.
It can lead to improved plans in future
Improved accountability
Improved motivation.

Possible disadvantages include:
It can lead to the demotivation of those workers not consulted in the
planning process.
If a budget is too rigid then it can constrain the activities of the
business.
Increased short termism if managers are too focused upon the current
budget.
Budgets provide a static picture of the business. 8 marks
Q5 Total Maximum Marks for Question
14
marks

Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 6
Q6
(a)


Define the term labour turnover.
Labour turnover is the proportion of staff leaving a business over a period of
time.
OR
L.T. = Number of staff leaving over a period of time/average number of staff
in post over the same period) * 100 2 marks
Q6
(b)


Explain three problems of employee demotivation to a business.
Possible problems that could be explained include:
Increased labour turnover
Increased absenteeism
Reduction in competiveness advantage
Lack of cooperation with one another.
6 marks
Q6
(c)


Other than increasing wages, identify and explain three other methods by which a
business can motivate its employees.
Possible other methods that could be explained include:
Piecework
Salary
Commission
Profit sharing
Share ownership
Fringe benefits.
Security
6 marks
Q6 Total Maximum Marks for Question
14
marks

Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
SECTION B: Candidates must answer ONE question in this section (Either Q7 or Q8)
Question 7


Q7
(a)


Explain what is meant by the term exchange rate and give an example.
The exchange rate is the price of converting one currency into another. For
example one pound might be the equivalent of 1.4 US dollars.
4 marks
Q7
(b)


Explain how a rise in the value of the pound might affect a UK business that imports and
exports goods and services.
A strong pound will make the price of exports appear more expensive so a
business that exports goods abroad is likely to see a reduction in the demand
for them from overseas markers.

Likewise, the rise in the value of the pound will make foreign produced goods
appear cheaper than before which could lead to a fall in demand for
domestically produced goods in preference to those made abroad. 6 marks
Q7
(c)


The business environment is complex and is made up of many influences. Explain three
non-economic influences upon a business of your choice.
Possible non-economic factors that could be explained include:

Environmental
Cultural
Moral
Ethical
Legal 6 marks
Q7 Total Maximum Marks for Question
16
marks

Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 8

Q8
(a)


Explain what is meant by the term interest rate and give an example.
The interest rate is the price/cost of borrowing money. For example the base
rate in the UK is currently 0.5%.
4 marks
Q8
(b)


Explain how changes in interest rates might affect the profits of a business.
6 marks
A rise in interest rates will make the cost of borrowing more expensive than
before. Therefore this will increase the total costs of the business and reduce
total profits.

Likewise a rise in interest rates will increase the mortgage payments of
consumers which will reduce their disposable/discretionary income. Therefore
they will buy less goods and services than before and this reduction in sales
revenue will reduce the profits of the business.
Q8
(c)


Explain how firms can use PESTEL analysis as part of a business strategy.
For example:
Political e.g. laws on competitive practices will influence the number
of firms operating in an industry and therefore the strength of
competition. Minimum wage legislation might influence a business to
relocate abroad.
Economic The level of consumer demand and its impact upon the
quantity of sales and the selling price a business is able to charge.
Social a rise in the birth rate would have a significant influence on
the producer of childrens clothes. 6 marks
Q8 Total Maximum Marks for Question
16
marks