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Question 1 Report
Azeem owns a new business making refillable pens for local school and office markets. He currently produces 4 000 pens each month in a small workshop. An option to buy a faster moulding machine would allow the business to produce 12 000 pens each month. The machine costs $18 000, but Azeem expects that less plastic will be wasted and that each worker will make more pens per hour. He wants to increase profit without causing cash flow problems. Azeem has asked a business adviser whether the lower unit cost from expansion would be an economy of scale.
(a) Define economies of scale. [2]
(b) State one way that the faster moulding machine could reduce the average cost of making pens. [2]
(c) Calculate the percentage increase in monthly output if production rises from 4 000 to 12 000 pens. Show your working. [2]
(a) Economies of scale are a fall in average, or unit, cost as the output or size of a business increases. [2 marks]
(b) The faster machine could reduce average cost by spreading fixed costs over more pens, increasing worker productivity so labour cost per pen falls, or reducing plastic waste and therefore material cost per pen. Any one explained method is valid. [2 marks]
(c) Increase in output:
\[12,000-4,000=8,000\text{ pens}\]
\[\frac{8,000}{4,000}\times100=200\%\]
Monthly output increases by 200%. [2 marks]
(a) Economies of scale are a fall in average, or unit, cost as the output or size of a business increases. [2 marks]
(b) The faster machine could reduce average cost by spreading fixed costs over more pens, increasing worker productivity so labour cost per pen falls, or reducing plastic waste and therefore material cost per pen. Any one explained method is valid. [2 marks]
(c) Increase in output:
\[12,000-4,000=8,000\text{ pens}\]
\[\frac{8,000}{4,000}\times100=200\%\]
Monthly output increases by 200%. [2 marks]
Question 2 Report
Read the information below about a proposed rise in the national minimum wage. The government wants to improve living standards for low-paid workers. MME Cleaning employs 14 cleaners and pays each of them £10.20 per hour for a 35-hour week. The proposed minimum wage is £11.00 per hour. MME has limited cash reserves and competes with several local cleaning businesses. Its manager is considering higher prices, fewer working hours, or investment in equipment that may increase productivity.
(a) State what is meant by a minimum wage. [2]
(b) Calculate the increase in weekly wage cost for MME if all 14 cleaners keep the same hours. [2]
(c) Analyse one possible benefit of a higher minimum wage for MME Cleaning. [3]
(d) Discuss one reason why the government may still support a higher minimum wage despite possible job losses. [3]
(a) A minimum wage is the lowest hourly rate of pay that employers are legally allowed to pay workers. [2]
(b) The increase in hourly pay is:
\[£11.00-£10.20=£0.80\]
For 14 cleaners each working 35 hours:
\[£0.80\times35\times14=£392\]
The weekly wage cost rises by £392. [2]
(c) Higher pay may improve cleaners' motivation. This can reduce absence and staff turnover, so MME may spend less on recruiting and training replacements. More motivated workers may also provide better cleaning quality, helping customer satisfaction and profit. [3]
(d) The government may support a higher minimum wage because it increases the income of low-paid households. This can reduce poverty and improve living standards. Workers may also spend more in local businesses, increasing demand, even though some employers may respond by reducing jobs or hours. [3]
(a) A minimum wage is the lowest hourly rate of pay that employers are legally allowed to pay workers. [2]
(b) The increase in hourly pay is:
\[£11.00-£10.20=£0.80\]
For 14 cleaners each working 35 hours:
\[£0.80\times35\times14=£392\]
The weekly wage cost rises by £392. [2]
(c) Higher pay may improve cleaners' motivation. This can reduce absence and staff turnover, so MME may spend less on recruiting and training replacements. More motivated workers may also provide better cleaning quality, helping customer satisfaction and profit. [3]
(d) The government may support a higher minimum wage because it increases the income of low-paid households. This can reduce poverty and improve living standards. Workers may also spend more in local businesses, increasing demand, even though some employers may respond by reducing jobs or hours. [3]
Question 3 Report
Which policy should a coastal government select after a severe storm damaged the harbour at Fenton Bay? The harbour supports fishing boats, a fish-processing business and tourism operators. The government has three options: spend £6 million rebuilding the harbour, give temporary tax relief to affected businesses, or provide grants for workers to retrain. Local residents want jobs protected, while the finance department is concerned about the effect on government borrowing. A field survey found that 65% of visitors said a working harbour was an important reason for visiting the area.
(a) State one opportunity cost of spending £6 million on rebuilding the harbour. [1]
(b) What is meant by government borrowing? [2]
(c) Analyse one reason why rebuilding the harbour could support economic growth in Fenton Bay. [2]
(d) Justify which one of the three policy options the government should select. [3]
(a) An opportunity cost is the next best alternative given up. Spending £6 million rebuilding the harbour could mean less government spending on hospitals, schools, roads or tax relief. [1]
(b) Government borrowing is when the government obtains money, usually through loans or bonds. The money must be repaid, normally with interest. [2]
(c) Rebuilding the harbour allows fishing, fish processing and tourism businesses to operate again. This protects jobs and incomes, which increases local output and spending, supporting economic growth in Fenton Bay. [2]
(d) The government should select rebuilding the harbour. It restores shared infrastructure needed by several local businesses, rather than helping only one group temporarily. It is also likely to protect tourism because 65% of visitors say a working harbour is important when choosing to visit. Although rebuilding is costly and may require borrowing, it is likely to have a longer-term effect than temporary tax relief or retraining grants. [3]
(a) An opportunity cost is the next best alternative given up. Spending £6 million rebuilding the harbour could mean less government spending on hospitals, schools, roads or tax relief. [1]
(b) Government borrowing is when the government obtains money, usually through loans or bonds. The money must be repaid, normally with interest. [2]
(c) Rebuilding the harbour allows fishing, fish processing and tourism businesses to operate again. This protects jobs and incomes, which increases local output and spending, supporting economic growth in Fenton Bay. [2]
(d) The government should select rebuilding the harbour. It restores shared infrastructure needed by several local businesses, rather than helping only one group temporarily. It is also likely to protect tourism because 65% of visitors say a working harbour is important when choosing to visit. Although rebuilding is costly and may require borrowing, it is likely to have a longer-term effect than temporary tax relief or retraining grants. [3]
Question 4 Report
Fig. 1 shows a simplified share issue by Harlow Tools plc. The company makes specialist repair tools and wishes to build a new production site. Its directors are considering a public limited company because they need a large amount of finance. Shares will be available to members of the public through a stock market. The directors expect some shareholders to be interested mainly in dividends, while others may want the share price to rise.
(a) Define a public limited company. [2]
(b) Calculate the total finance raised if all 400,000 shares are sold for £1.20 each. [2]
(c) Analyse one advantage and one disadvantage to Harlow Tools of becoming a public limited company. [4]
(a) A public limited company is a company whose shares can be sold to the general public [1] and whose shareholders have limited liability [1]. [2 marks]
(b) Total finance is:
\[400000\times£1.20=£480000\]
Finance raised = £480 000 [2 marks].
(c) Selling shares publicly can raise substantial finance for the new production site without a bank loan [1], enabling capacity to increase [1]. However, existing owners may lose control because outside shareholders can buy shares and vote [1]. Public reporting and flotation costs can also reduce available profit [1]. [4 marks]
(a) A public limited company is a company whose shares can be sold to the general public [1] and whose shareholders have limited liability [1]. [2 marks]
(b) Total finance is:
\[400000\times£1.20=£480000\]
Finance raised = £480 000 [2 marks].
(c) Selling shares publicly can raise substantial finance for the new production site without a bank loan [1], enabling capacity to increase [1]. However, existing owners may lose control because outside shareholders can buy shares and vote [1]. Public reporting and flotation costs can also reduce available profit [1]. [4 marks]
Question 5 Report
Table 1 shows economic data collected by the finance ministry over three years. Inflation has become a concern because a rise in the general price level can reduce the real value of household cash. The ministry is considering increasing interest rates. Roja's Furniture, a family business, has a bank loan for new machinery and sells sofas on credit. Its owner wants to know how this policy could affect sales, costs and profit.
(a) Define inflation. [2]
(b) Calculate the percentage increase in the inflation rate from 2023 to 2025. [3]
(c) State one likely effect of higher interest rates on Roja's Furniture and one likely effect on its customers. [3]
(d) Analyse whether increasing interest rates is likely to achieve the government's objective of lower inflation. [4]
(a) Inflation is a sustained, general increase in the prices of goods and services. It concerns the overall price level, not just a price rise for one product. [2]
(b) The inflation rate rises from 3.0% to 5.4%, an increase of 2.4 percentage points. Percentage increase is calculated from the original rate:
\[\frac{5.4-3.0}{3.0}\times100=80\%\]
The percentage increase is 80%. [3]
(c) Higher interest rates increase Roja's Furniture's loan repayments or interest costs. For customers, buying sofas on credit becomes more expensive, so some may delay purchasing. This can reduce the firm's demand and sales. [3]
(d) Higher interest rates make borrowing and credit spending less attractive. Consumers may save more and spend less, reducing total demand in the economy. With weaker demand, businesses find it harder to keep increasing prices. This reduces inflationary pressure, so the policy is likely to help achieve lower inflation. [4]
(a) Inflation is a sustained, general increase in the prices of goods and services. It concerns the overall price level, not just a price rise for one product. [2]
(b) The inflation rate rises from 3.0% to 5.4%, an increase of 2.4 percentage points. Percentage increase is calculated from the original rate:
\[\frac{5.4-3.0}{3.0}\times100=80\%\]
The percentage increase is 80%. [3]
(c) Higher interest rates increase Roja's Furniture's loan repayments or interest costs. For customers, buying sofas on credit becomes more expensive, so some may delay purchasing. This can reduce the firm's demand and sales. [3]
(d) Higher interest rates make borrowing and credit spending less attractive. Consumers may save more and spend less, reducing total demand in the economy. With weaker demand, businesses find it harder to keep increasing prices. This reduces inflationary pressure, so the policy is likely to help achieve lower inflation. [4]
Question 6 Report
A report for the national trade department examines a small company called PPS Games. The business designs board games in a studio and sells 40% of its output to shops in other countries. The government is considering reducing import tariffs on card, ink and electronic timers used by PPS Games. At the same time, it is considering export support to help small firms attend overseas trade fairs. The government wants economic growth and a stronger balance of payments, but it must decide how best to use limited public funds.
(a) Define a tariff. [1]
(b) State two ways export support could help PPS Games. [2]
(c) Analyse how lower import tariffs on materials could affect PPS Games' profit. [2]
(d) Assess whether export support is a better policy option than lower import tariffs for PPS Games. [3]
(a) A tariff is a tax on imported goods. [1]
(b) Export support could help PPS Games pay for attending overseas trade fairs. It could also raise awareness among overseas customers or help the business find foreign distributors and new markets. Any two valid ways are credited. [2]
(c) Lower import tariffs reduce the cost of imported card, ink and electronic timers. PPS Games could lower prices to compete more strongly, or keep prices unchanged and increase its profit margin. [2]
(d) Export support may directly increase overseas sales and foreign-currency earnings by helping PPS Games reach customers abroad. Lower import tariffs reduce production costs, benefiting games sold both abroad and in the domestic market. Export support is the better policy if lack of overseas awareness is the main barrier; lower tariffs are better if expensive materials are the main constraint on profit. [3]
(a) A tariff is a tax on imported goods. [1]
(b) Export support could help PPS Games pay for attending overseas trade fairs. It could also raise awareness among overseas customers or help the business find foreign distributors and new markets. Any two valid ways are credited. [2]
(c) Lower import tariffs reduce the cost of imported card, ink and electronic timers. PPS Games could lower prices to compete more strongly, or keep prices unchanged and increase its profit margin. [2]
(d) Export support may directly increase overseas sales and foreign-currency earnings by helping PPS Games reach customers abroad. Lower import tariffs reduce production costs, benefiting games sold both abroad and in the domestic market. Export support is the better policy if lack of overseas awareness is the main barrier; lower tariffs are better if expensive materials are the main constraint on profit. [3]
Question 7 Report
The diagram shows the ownership structure of Rojaz Furniture Ltd, a small company making desks for home offices. Rojaz has received an order from a new market and needs to recruit two staff for production. The founder wants to keep most shares but is considering selling a small number to a former colleague. The company is not quoted on a stock exchange. Use Fig. 1 when selecting your answer about the type of organisation.
(a) What is meant by the word limited in the name Rojaz Furniture Ltd? [1]
(b) State three characteristics of a private limited company. [3]
(c) Analyse why Rojaz Furniture Ltd may be more suitable than a partnership for this expansion. [4]
(a) In the name Rojaz Furniture Ltd, limited means the owners’ liability for business debts is limited to their investment or the value of their shares [1 mark].
(b) A private limited company is owned by shareholders [1], has a separate legal identity [1], and cannot sell shares to the general public [1]. Shareholders have limited liability and the business uses Ltd in its name. [3 marks]
(c) Limited liability protects Maya’s personal assets if the new order fails or creates debts [1]. Selling shares to the colleague can raise finance for staff or materials without borrowing [1]. The company continues to exist if an owner leaves, which can give suppliers confidence [1]. However, Maya may lose some control and company reporting requirements add cost. It is most suitable if expansion needs finance and lower personal risk [1]. [4 marks]
(a) In the name Rojaz Furniture Ltd, limited means the owners’ liability for business debts is limited to their investment or the value of their shares [1 mark].
(b) A private limited company is owned by shareholders [1], has a separate legal identity [1], and cannot sell shares to the general public [1]. Shareholders have limited liability and the business uses Ltd in its name. [3 marks]
(c) Limited liability protects Maya’s personal assets if the new order fails or creates debts [1]. Selling shares to the colleague can raise finance for staff or materials without borrowing [1]. The company continues to exist if an owner leaves, which can give suppliers confidence [1]. However, Maya may lose some control and company reporting requirements add cost. It is most suitable if expansion needs finance and lower personal risk [1]. [4 marks]
Question 8 Report
Fig. 1 shows the forecast closing cash balance for Azeem Cycle Repair, a business that services bicycles near a coastal holiday route. The business has high repair income in summer, but it pays annual insurance and workshop rent during spring. Azeem is considering a loan to make sure the business can pay cash outflows when they are due.
The loan option has an interest charge. Azeem could instead ask suppliers for longer credit or run a promotion for pre-booked summer repairs. He wants to select the option that improves cash flow without damaging the business in the longer term.
(a) Define the term cash flow forecast. [2]
(b) Calculate the minimum finance required to prevent a negative closing cash balance in May. [3]
(c) Analyse two reasons why the forecast balance improves between May and July. [5]
(d) Assess whether Azeem should use a loan to deal with the May cash shortage. [10]
(a) A cash flow forecast is a prediction of a business’s future cash inflows and cash outflows [1] over a stated future period of time [1]. It is about when cash enters and leaves the business, rather than whether the business makes an overall profit. [2 marks]
(b) The May forecast closing balance is 3200. To prevent a negative balance, finance must bring this up to 0:
\[£0-(-£3200)=£3200\]
Minimum finance required = £3200 [3 marks]. A larger amount could be justified only if a clearly calculated safety buffer were added.
(c) Between May and July, summer visitors are likely to increase demand for bicycle repairs [1]. More repairs mean more cash received from customers [1]. Also, annual insurance may already have been paid during spring [1], so later monthly cash outflows are lower [1]. Pre-booked repairs or deposits could provide cash before the repair work is completed [1]. These factors increase net cash flow, causing the forecast balance to rise from 3200 to £4100. [5 marks]
(d) A loan would give Azeem a known sum to cover the £3200 shortage [1]. This could prevent missed rent, wage or supplier payments [1], protecting the business’s credit reputation and relationships with suppliers [1]. If repayments are fixed, the future outflows can be forecast more easily [1].
However, interest increases total cash outflows [1]. Repayments could become difficult if summer repair demand is below forecast [1]. The forecast is already positive in June [1], so a loan may be unnecessary for a short, seasonal shortage. Asking suppliers for longer credit would postpone cash outflows without taking a full loan, although a supplier may refuse or charge more [1]. A promotion for deposits or pre-booked repairs could improve cash inflow, but may reduce the price charged or profit per repair [1].
Judgement: short-term supplier credit, or a small overdraft, is likely to be more suitable than a loan because the shortage is temporary and July’s balance is forecast to be £4100 [1]. A loan is more justified only if Azeem expects a funding need beyond June. [10 marks]
(a) A cash flow forecast is a prediction of a business’s future cash inflows and cash outflows [1] over a stated future period of time [1]. It is about when cash enters and leaves the business, rather than whether the business makes an overall profit. [2 marks]
(b) The May forecast closing balance is 3200. To prevent a negative balance, finance must bring this up to 0:
\[£0-(-£3200)=£3200\]
Minimum finance required = £3200 [3 marks]. A larger amount could be justified only if a clearly calculated safety buffer were added.
(c) Between May and July, summer visitors are likely to increase demand for bicycle repairs [1]. More repairs mean more cash received from customers [1]. Also, annual insurance may already have been paid during spring [1], so later monthly cash outflows are lower [1]. Pre-booked repairs or deposits could provide cash before the repair work is completed [1]. These factors increase net cash flow, causing the forecast balance to rise from 3200 to £4100. [5 marks]
(d) A loan would give Azeem a known sum to cover the £3200 shortage [1]. This could prevent missed rent, wage or supplier payments [1], protecting the business’s credit reputation and relationships with suppliers [1]. If repayments are fixed, the future outflows can be forecast more easily [1].
However, interest increases total cash outflows [1]. Repayments could become difficult if summer repair demand is below forecast [1]. The forecast is already positive in June [1], so a loan may be unnecessary for a short, seasonal shortage. Asking suppliers for longer credit would postpone cash outflows without taking a full loan, although a supplier may refuse or charge more [1]. A promotion for deposits or pre-booked repairs could improve cash inflow, but may reduce the price charged or profit per repair [1].
Judgement: short-term supplier credit, or a small overdraft, is likely to be more suitable than a loan because the shortage is temporary and July’s balance is forecast to be £4100 [1]. A loan is more justified only if Azeem expects a funding need beyond June. [10 marks]
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