Core Knowledge

Question 1

Line of analysis for PED

Answer 1

Due to a change in the factors that affect PED the business’ product or products might become more price

• Due to poor customer service for example a business’ products may become price elastic
• Leading to customers being less loyal to the brand
• Therefore if price increases there will be a significant fall in demand
• Leading to pressure to keep prices low
• Leading to lower revenue
• Reducing gross profit margin

Question 2

Line of analysis for Price inelastic

Answer 2

If the business does any of the above then they are more likely to be price inelastic …

• Customers are loyal to the good or brand
• Therefore if the price rises they continue to buy the product meaning there will only be a small fall in demand
• Therefore businesses can charge higher prices in order to generate more revenue
• Leading to an increase in gross profit margin
• Potentially increasing operating profit which can be retained to improve liquidity or invested in non current assets to increase scale.

Question 3

Line of analysis for luxury good

Answer 3

Luxury goods

• If a business only sells luxury goods then they are vulnerable to changes in average incomes
• Therefore if many people within a country lose their jobs then there will be a fall incomes
• This will lead to a significant fall in demand for a business’ goods as consumers switch to cheaper alternatives
• Leading to a fall in revenue resulting in a fall in gross profit
• This could lead to them making an operating loss putting them under pressure to reduce their expenses
• This could involve selling their non-current assets such as stores and factories
• Reducing scale

Question 4

Line of analysis for a normal good

Answer 4

Normal goods

• If a business sells normal goods then they are likely to have stable, predicable sales • This is because when incomes change demand does not change very much
• This means that they are unlikely to see a significant fall or rise in profits when incomes change
• This means the business is attractive to banks as it is a safe investment
• Meaning they are unlikely to make a loss and can therefore keep up with loan repayments
• This could result in them getting low interest rates on loans leading to lower expenses

Question 5

Line of analysis for Inferior goods

Answer 5

Inferior goods

• When unemployment is high then incomes will be lower and therefore the demand of inferior goods will increase
• The business may then need to be flexible to be able to respond to an unexpected change in income so they can increase production of a good to meet the new demand
• This will lead to an increase in gross profit.
• This flexibility will also help them reduce production when incomes rise again
• This will ensure that they can reduce operating expenses when demand falls therefore avoiding a loss

Question 6

Line of analysis for purchasing economies of scale

Answer 6

Purchasing economies of scale

• If sales increase.
• There will be an increase in volumes ordered from suppliers (use the case study to identify what they will be buying more of – be specific - E.g. plastic and metal).
• Leading to a potential discount from bulk buying.
• Leading to lower average cost of sales/variable costs.
• Resulting in increased gross profit margin.

Question 7

Line of analysis more marketing economies of scale

Answer 7

Basic analysis

• When businesses have increased sales.
• Increase sales volume. • Meaning the fixed costs of marketing e.g…. a) Market Research b) Advertising c) Research and development
• Can be spread over more units.
• Lower unit fixed costs.
• Making the above more affordable and can therefore can do more of it.
• Link to the advantages of doing more of the above – improved product development, increased brand awareness, improved innovation.

Question 8

Line of analysis for financial economies of scale

Answer 8

Basic analysis

• Large businesses have significant non-current assets.
• Meaning they have more collateral for loans
• Lower risks for banks.
• Lower interest rates.
• Lower fixed costs (interest payments are a fixed cost).
• Lower unit fixed costs

Question 9

Line of analysis for technocal economies of scale

Answer 9

Basic line of analysis

• As businesses grow they begin to make better use of capital/machinery or have the resources to invest in more.
• Further/increased use of machinery will improve productivity and further increase output.
• Spreading fixed costs of production (labour, rent, utilities) over more units.
• Lowering unit cost of producing a product.
• Allowing business to lower selling price / increase profit margin (choose one).

Question 10

Line of analysis for multiple intermediaries

Answer 10

Basic Analysis

• A business may choose to distribute their products through multiple intermediaries, eg – multiple retailers/online.
• This improves the accessibility of the product as it will be more widely available.
• Therefore, more customers may purchase the product.
• Leading to an increase in sales for the business.
• Link to EOS, increased capacity utilisation, lower cost per unit.

Question 11

Line of analysis for direct distribution

Answer 11

• A business may choose a more traditional distribution channel and sell their products directly.
• This gives the business more control over the customer experience.
• Improved customer service.
• Makes business more differentiated.
• Business become more price inelastic.
• Increase selling price and not experience significant fall in demand.
• Higher revenue.

Question 12

Line of analysis for specialisation

Answer 12

• Focus cash reserves and resources on being an expert in one field - product or industry
• Increased investment on research and development within the chosen field as cash/spending not spread across a wider product portfolio
• More advanced product development
• Gives business a competitive advantage
• Increased volumes sold
• Fixed costs of the R&D spread over more units Lower unit costs

Question 13

Downside to specialisation

Answer 13

However…

Specialisation means a business has a focus on one product or industry

The business does’t have spread risk so is vulnerable to external factors

e. g: - Changes in incomes (more of an issue if the good is income elastic)
- Changes in competition

– new businesses enter the market and become more advanced in that area

– lose competitive advantage

• Social trends change

– product no longer in demand

• Shortage of supply:
• Labour – skill shortage
• Raw materials – commodities run out

Question 14

Line of analysis for differentiation Strategies (porter)

Answer 14

• increased differentiation…
• make the product/ service unique
• persuading customers to buy it over competitors
• making the product less price elastic
• consumers less sensitive to a change in price
• the business can charge higher prices and therefore increase gross profit margin

Question 15

Line of Analysis for low cost strategies (porter)

Answer 15

Line of Analysis for low cost strategies

• Lower variable/fixed costs
• Increased gross/operating profit margins
• Therefore able to reduce the selling price
• Become more price competitive within a price elastic market
• Leading to a significant increase in demand
• Therefore increasing output, allowing the business to benefit from economies of scale

Question 16

Line fo analysis for productivity

Answer 16

Analysis

• Improved productivity by innovation in production technology or by the improvement in worker motivation
• Leads to increased output per worker or machine
• Leads to the fixed costs/expenses that a business has being spread over more units
• Leading to lower unit fixed costs
• Leading to lower unit costs increasing operating profit

Question 17

Line of analysis for Taylor

Answer 17

Taylor

• Through Taylor’s scientific management staff are given effective training to do a very specific job
• This means they will become more skilled in that given area
• This will mean that they will be able to produce more and will be motivated to do so if they are paid for every item them produce
• This will lead to increased output per worker and therefore lead to increased productivity
• Leading to fixed costs being spread over more units leading to lower unit fixed costs

Question 18

Line of analysis for Mayo

Answer 18

Mayo

• Through having more managers there will be more supervision
• This will lead to employees feeling like their actions are valued as the manager is showing an interest in their work
• This is argued by Mayo to an effective motivational factor as workers produced more when watched called the hawthorn effect
• This will lead to increased productivity
• Leading to fixed costs being spread over more units leading to lower unit fixed costs

Question 19

Line of analysis of Maslow

Answer 19

Maslow

• Empowerment refers to giving employees more control in their work and more responsibility in decision making.
• Therefore, by empowering employees it is likely to improve their levels of motivation as they will feel trusted to make the right decision without having to consult with a superior.
• This will mean that employee’s esteem needs are met according to Maslow’s hierarchy of needs.
• This may ensure that NHS staff become more satisfied in their job. A higher level of job satisfaction will improve staff members wellbeing.
• Therefore, by empowering staff and improving job satisfaction it is likely to reduce labour turnover
• A lower labour turnover will then ensure that the NHS does not experience significant recruitment costs

Question 20

Line of analysis for Herzberg

Answer 20

Herzberg

• By having increased profits the business can make investments into working conditions
• This will mean that they can expand office spaces to avoid workers being cramped and the office space being too noisy
• This will help meet one of Herzberg’s Hygiene factors
• This will provide a foundation in which to motivate staff by other factors such as employee recognition

Question 21

Line of analysis for Capacity Utilisation (manufacturing only)

Answer 21

Capacity utilisation in your answer – for a manufacturing business.

• If a business increases sales then you can apply it to capacity utilisation
• Increased sales
• Increased capacity utilisation
• Fixed costs will be spread over more units • Lower unit costs …. Then explain the benefit of lower unit cost

Question 22

Line of analysis for task culture

Answer 22

Task

• 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 business will need to empower teams to make decisions and give them the freedom to make mistakes
• This will lead to ideas being generated without fear
• This will lead to innovation and ultimately differentiated products

Question 23

Line of analysis for Role Culture

Answer 23

Role

• To improve reliability and consistency the business needs to have clear guidelines and rules
• This will create a role culture
• Where each employee is given direction and descriptions on how best to do their job
• This may lead to less mistakes and therefore less defective products
• This will improve the business’ reputation leading to a stronger brand

Question 24

Line of analysis for Power Culture

Answer 24

Power

• Through power culture there is a centralised decision making system where all the directions and actions that employees need to take are controlled by one source.
• This might be a team of directors or one individual • This follows an authoritarian style of management
• Leading to clear instructions being given very efficiently
• Leading to rapid change in employee behaviour provided they are all tuned in t o the directives of the central power source.
• This means that the business may be able to quickly avoid failure, for example, as the central power source will be able to quickly change attitudes towards business spending and expenses
• Making the business less likely to experience a loss.

Question 25

Line of analysis for Person culture –ONLY FOR HIGHLY SKILLED EMPLOYEES

Answer 25

• Through a person culture employees are empowered to act in a way they see as the most effective manor there is little to no intervention from leadership and or company policy
• Therefore a Laissez- Faire leadership style is used
• This means that highly skilled employees (such as software engineers) are given the opportunity to be creative – meeting their esteem needs as they get a sense of achievement from their inventions
• This effectively improves innovation within the organisation leading to differentiation of products • Meaning they are more likely to have price inelastic goods

Question 26

Contents of an income statement

Answer 26

1. Sales revenue
2. Cost of sales
3. Gross profit
4. Expenses
5. Operating profit
6. Exceptional items e.g sale of an asset
7. Tax
8. Net Profit (profit for the year)
9. Retained profit
10. Dividends

Question 27

Contents of a balance sheet

Answer 27

1. Non-Current Assets
2. Current Assets
3. Total Assets
4. Current Liabilities
5. Non-Current Liabilities
6. Total Liabilities
7. Net Assets
8. Shareholder Equity
9. Retained profit
10. Total Equity

Question 28

Line of analysis for high liquidity

Answer 28

High Liquidity

• High liquidity – (current ratio between 1.5-2 or acid test above 1)
• High amount of cash reserves/ working capital
• Therefore can keep up with payments to suppliers and banks (loans and mortgages)
• Unlikely to be forced to sell non-current assets in order to pay day to day bills
• Therefore likely to have uninterrupted business operations
• Leading to reduced risk or failure and higher chance of success

Question 29

Line of analysis for low liquidity

Answer 29

Low liquidity

• Low liquidity (Current ratio below 1 and acid test below 0.75)
• Low level of cash reserves
• Will struggle to pay suppliers and the bank
• May be forced to sell non-current assets to pay day to day bills
• This may lead to a disruption in business operations
• Leading to a high risk of failure