Business Paper 3

Question 1

What is cost-plus pricing?

Answer 1

> adding a mark-up (usually at least 100% in retail) on top of the cost of production of the product

Question 2

What is price skimming?

Answer 2

> charging a high price to attract initial enthusiast buyers, then lowering the price as time passes, or competitors enter the market

Question 3

For which type of product is price-skimming used?

Answer 3

> innovative products

Question 4

How are unit costs calculated?

Answer 4

Total costs/Number of units

Question 5

What is competitive pricing?

Answer 5

> charging at market level, or a discount to the market

e.g. Branston charging 65p, whereas Heinz (market leader), charging 75p

Question 5

What is competitive pricing?

Answer 5

> charging at market level, or a discount to the market

e.g. Branston charging 65p, whereas Heinz (market leader), charging 75p

Question 6

What is the implication for businesses using competitive pricing?

Answer 6

> they have no real control over their future revenues

Question 7

What is predatory pricing?

Answer 7

> charging below the cost of production, with the intention of forcing a rival out of the market

Question 8

What are the prerequisites for successful predatory pricing?

Answer 8

> Predator business is strong financially
or
Prey business is weak financially

Question 9

What is psychological pricing?

Answer 9

> pricing below round numbers (e.g. charging £0.99 instead of £1.00), in an attempt to entice customers

Question 10

What time span are pricing TACTICS?

Answer 10

Pricing TACTICS = short-term

Question 11

What is a price sensitive market?

Answer 11

> A market in which demand is highly elastic

Question 12

Which factors determine appropriate pricing strategy?

Answer 12

>Product differentiation
>Price elasticity
>Strength of brand
>Amount of competition
>Stage in product life cycle

Question 13

Which businesses mainly use cost-plus pricing?

Answer 13

> Businesses with strong brands and inelastic demand for products

Question 14

What is the formula for Cost-plus?

Answer 14

Unit cost + (% mark up)

Question 15

What should we consider in

‘Changes in price to reflect social trends?’

Answer 15

> Online sales (e.g. Amazon undercutting highstreet sellers)

>Price comparison sites (often just looking for commission, rather than showing the consumer the best deal)

Question 16

What is investment appraisal?

Answer 16

> using forecast cash flows to estimate the value of an investment decision based on quantitative criteria, then backing up calculations with an assessment of non-financial factors

Question 17

What does the payback period focus on?

Answer 17

> (Solely) how long it takes to repay the business’ initial outlay

Question 18

What is the formula for Payback period?

Answer 18

> Payback = Initial outlay/net cash flow

Question 19

What is the formula for REMAINING payback period?

Answer 19

> Outlay outstanding (from cumulative cash flow)/monthly net cash flow in year of payback

Question 20

What are the three steps in calculating ARR?

Answer 20

1. ) Total net cash flow - Initial outlay
2. ) /Number of years of project
   3) (Average annual profit/initial outlay) x 100

Question 21

What does Net Present Value (NPV) do?

Answer 21

> Considers the future value of cash in today’s terms (accounts for both time risks and opportunity cost of cash)

Question 22

How is NPV calculated?

Answer 22

1) Net cash flow x discount factor

2) Total = NPV

Question 23

What are the general limitations of Investment Appraisal techniques?

Answer 23

Further ahead cash flows are projected > greater likelihood of inaccuracies

Quantitative investment appraisal methods fail to account for important qualitative factors

Data may be biased (e.g. calculated with an agenda, e.g. appeasing management)

Question 24

What are factors which could affect future cash flow?

Answer 24

> Costs rising unexpectedly (perhaps due to decrease in currency value)
New competitor may push prices down >undermines future cash flow
Consumer tastes may change (e.g. away from business’ product)
Cyclical economic downturn may become full-blown recession

Question 25

What are the negatives of a low capacity utilisation?

Answer 25

> Fixed costs cost per unit rises (fixed costs cannot be spread over as many units of output)&raquo_space;business may have to increase prices >may decrease demand

Question 26

What are the positives of a high capacity utilisation?

Answer 26

> Fixed costs per unit decreases (fixed costs can be spread over a greater output) >business can decrease prices to incentivise demand, or keep prices the same and enjoy higher profit margins

Question 27

What are the advantages of internal recruitment?

Answer 27

> Business already aware of employee skills and experience
Often cheaper and quicker
Promotional opportunities may motivate existing employees
MAY avoid need and cost of induction training

Question 28

What are the disadvantages of internal recruitment?

Answer 28

> May create vacancy >unhelpful if business wants to expand workforce
Relying on existing employees >stagnation of ideas within business
Existing employees may lack skills required for promotion (particularly in developing new products/expanding into new markets)
Lacks the wider, potentially more skilled and diverse range of external recruitment
Workforce tensions (employees disappointed a co-worker got the promotion over them)

Question 29

What is the formula for capacity utilisation?

Answer 29

(Current output/maximum possible output) x 100