Theme 2 - External Influences

Question 1

Inflation (impact on cost of sales) (drwback)

Answer 1

Increase inflation

Increased in the cost of goods and services

Increased in the cost of raw materials

Increased cost of sales

Lower gross profit

Lower operating profit

Pressure to increase prices

Fall in demand for the businesses goods

Question 2

However, inflation (impact on demand if a business sells price inelastic good)

Answer 2

If a business sells price inelastic goods (look at the case)

The increased in price (caused by the increase in costs)

Will lead to an insignificant fall in demand

Therefore gross profit will not fall significantly or at all

Reducing the impact of inflation

Question 3

Impact of inflation (using income elasticity)

Answer 3

Increase in inflation

Increased consumer spending on necessities

E.g. milk gas electricity fuel

Lower disposable income for luxury and normal goods

Such as fashionable clothing

Customers switch to inferior goods

Lower demand for luxury and normal goods

Lower sales revenue leading to lower gross profit

Question 4

HOWEVER Impact of inflation (using income elasticity)

Answer 4

If wages rise more than the rise in inflation

Real wages will increase

Rise in income rather than fall in income

Increased demand for luxury and normal goods

Such as fashionable clothing

Question 5

Stronger pound benefit

Answer 5

The pound buys more foreign currencies

Fewer pounds required to buy foreign currency

Therefore, fewer pounds required to buy foreign goods

Cheaper to import raw materials

Lower cost of sales

Can lower the price

Higher gross profit

Question 6

Stronger pound drawback 1

Answer 6

Foreign currency buys fewer pounds

More foreign currency needed to buy pounds

Therefore, price of UK goods increases for foreigners

UK exports are dearer and less competitive

Fall in demand for UK goods

Pressure to lower prices

Question 7

Stronger pound drawback 2 (domestic businesses)

Answer 7

The pound buys more foreign currency

less pounds required to buy more foreign goods

Foreign competitors products appear cheaper

Customers switch to foreign imports

Fall in demand for domestic businesses

Question 8

Weaker pound benefit

Answer 8

Foreign currency buys more pounds

Less foreign currency needed to buy pounds

Therefore, price of UK goods falls for foreigners

UK exports are cheaper and more competitive

Rise in demand for UK goods

Economies of scale

Question 9

Weaker pound benefit for domestic businesses

Answer 9

Pound buys less foreign currency

More pounds needed to buy foreign currency

Foreign goods become more expensive as more pounds required to purchase them

Foreign competitors unable to compete on price

Increase in demand for domestic businesses

Question 10

Weaker pound - drawback

Answer 10

Pounds buys less foreign currency

More pounds needed to buy foreign currency

Foreign goods become more expensive as more pounds required to purchase them

Increasing cost of raw materials if business relies on foreign goods

Increasing the cost of sales

Lower gross profit margin

Question 11

Drawback if interest rates are higher, (luxury and normal goods).

Answer 11

Increased costs of borrowing

Increased cost of consumer loans and mortgages to individuals

Leads to lower spending on luxury and normal goods

Leading to lower demand for luxury and normal goods but higher for demand for inferior goods

Reduced sales revenue for luxury and normal goods

Lower gross profit leading to lower operating profit

reduced retained profit limiting long term investment in staff training or R+D

Question 12

However, higher interest rates (if wages rise)

Answer 12

If wages rise by more than the rise in interest rates and inflation

There will be increased income

Reducing the impact of increased mortgage and or loan costs

Consumers continue to buy luxury and normal goods

Demand remains stable or increases if wages rises significantly

Question 13

Drawback on increase in national insurance for normal and luxury goods.

Answer 13

Increase in national insurance

Increases tax for all workers

Proportionally greater for lower income workers

Leading to reduced disposable income for all income for all income demographics

Fall in demand for luxury and normal goods

Fall in sales revenue for businesses such as supermarkets e.g. M&S as customers switch to inferior goods

Businesses reduce capacity

Loss of EOS

Falling GDP

Question 14

Benefit of an increase in national insurance

Answer 14

Increase in notional insurance

Increases tax available for fiscal spending

Increased government spending on education, e.g. increasing government subsidiaries to universities

Increased number of people attending universities as it is now cheaper to attend

Increase skill level within a population

Meaning businesses will have an increased supply of skilled labour

Improve business productivity as a result of increased skilled labour/innovation

Decrease unit costs, reduce prices

Question 15

Drawback of a recession

Answer 15

Falling demand for goods and services in an economy

Falling production of goods and services in an economy

Falling GDP

Businesses reduce capacity by making staff redundant and selling non-current assets such as robots and factory space

Increased unemployment

Fall in average incomes

Increased demand for inferior good but falling demand for luxury and normal goods

Fall in tax revenue/ Fall in sales revenue

Question 16

However the long term benefit of recession

Answer 16

Presents and opportunity

If a business has high cash reserves, they may be able to sustain losses

Caused by falling revenue

During this time, competitors lower cash reserves may go out of business

Reducing in the market (long term)

Due to lower buyer power as there will be less choice long term

Can increase prices when the economy recovers

Increase in long term sales revenue

Question 17

However, benefit of recision (spred risk)

Answer 17

The impact of a recession will be reduced if a business has spread risk

This may achieved by having a wide product portfolio

For example, selling luxury and inferior goods

Therefore, the falling demand for luxury goods (due to the recession) will be offset by the increase in demand for inferior goods

Ensuring that demand stays stable

Resulting in sales revenue remaining stable

Avoiding losses

Question 18

Boom period benefit

Answer 18

Increase demand for goods and services in an economy

Increased production of goods and services in an economy

Increase GDP

Businesses increase capacity by making recruiting staff and buying non-current assets such as robots and factory space

Increased employment and wages

Rise in average incomes

Increased demand for normal and luxury goods but falling demand for normal goods

Increase in sales revenue

Question 19

However, boom drawback (inflation risk)

Answer 19

Boom leads to increase average incomes caused by business demand increasing

Rise in wages (more bonuses and pay rises)

Increased demand in the economy

Demand pull inflation

If inflation is higher than rise in wages

Consumers spending more on necessities

Fall in real wages

Potential falling demand for luxury and normal goods

Question 20

The effect of economic uncertainty on the business environment

Answer 20

Uncertain what economic variables e.g. inflation will be in the future

Uncertain consumer incomes

Uncertain demand

Uncertain profits, therefore difficult for shareholders to invest in confidence

As their return will be uncertain

Reduced share capital when selling shares

Reduced expansion

Benefit less from EOS

Question 21

Consumer protection legislation

Answer 21

Consumer protection legislation

Ensure that businesses products must sell products that are fit for purpose

And are truthfully advertised

This means that customer can trust the products

Making them more likely to purchase them, leading to an increase in sales volume

Increase in revenue

Increase in gross and operating profit

Increased retained and profit to reinvest

Question 22

Employee protection legislation

Answer 22

Ensures that businesses must meet employees basic needs

By giving them a minimum wage and allowing them to have adequate rest

This means that employees hygiene factors are likely to be met

Which will prevent them from being demotivated according to herzberg

Increased productivity

Increased output per worker

Fixed costs of wages spread over more units

Lower fixed costs per unit

Increased operating profit margins

Question 23

Health and safety legislation

Answer 23

Health and safety legislation

Businesses are responsible for making sure that employees are kept safe from danger

Meaning that employees are trained and working conditions are safe

Ensuring that employees saftey needs are met

Increase motivation

Increasing productivy

Fixed costs of wages spread over more units

Lower fixed cost per unit

Increased OP

Question 23

Health and safety legislation

Answer 23

Legislation leads to increased bureaucracy

As procedures and processes needed to be implemented to ensure legislation is followed

Experts will be hired in order to ensure that this is followed

Increasing the cost of wages

Increased fixed costs

Reduced operating profit margins

Reduced retained profit

Reducing capital for reinvestment into….

Question 24

Environmental protection.

Answer 24

Enviromental protection

Prevent businesses from causing excess pollution and producing large amounts of waste

If busineses follow the legislation

Then they can appear more enviromentally friendly

Making them seem more ethical

Giving them a strong brand image

More price inelastic

Able to increase prices without a significant fall in demand

Increased revenue

Increased gross and operating profit

Question 24

Competition Policy

Answer 24

Competition Policy

Prevents a businesses suppliers from colluding or forming monopolies

More choice between different supplies

Reducing bargaining power of suppliers

Meaning suppliers are unable to charge high prices

Reducing the cost of raw materials

Lower variable costs

Increase gross profit margins

Inc