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1 Time allowed: 3 hours.

2 Answer any FOUR questions.

3 All questions carry 25 marks. Marks for subdivisions of questions are shown in brackets.

4 No books, dictionaries, notes or any other written materials are allowed in thisexamination.

5 Calculators, including scientific calculators, are allowed providing they are not

programmable and cannot store or recall information. Electronic dictionaries andpersonal organisers are NOT allowed. All workings should be shown.

6 Candidates who break ABE regulations, or commit any misconduct, will be disqualified

from the examinations.

7 Question papers must not be removed from the Examination Hall.

1.1IB

IB1207 ABE 2007 F/500/3659

IB12

07

The Association of Business Executives

Certificate

Introduction to Business

morning 5 December 2007

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Answer any FOUR questions

Q1 (a) Using examples, identify the differences between:(i) inputs and outputs

(ii) short-run and long-run decisions(iii) secondary sector and tertiary sector (9 marks)

(b) Explain the advantages and disadvantages of operating a business as a franchise.

(16 marks)(Total 25 marks)

Q2 (a) Using examples, discuss how political, social and technological factors might influence

a business. (13 marks)

(b) How might the business of an internationally popular hotel in London be affected by the

following changes in the economic environment?(i) a rise in interest rates(ii) a fall in the exchange rate of the pound sterling

(iii) a world-wide recession (12 marks)(Total 25 marks)

Q3 (a) Many supermarkets are now located in retail parks situated on the edge of large towns

and cities. What are the main location factors that influence such businesses in theirdecision? (17 marks)

(b) Briefly describe two benefits and two problems that such a location might cause for the

local community. (8 marks)(Total 25 marks)

Q4 (a) Distinguish between:

(i) shareholders and stakeholders(ii) corporate objectives and corporate strategy

(iii) private sector and public sector (15 marks)

(b) Explain how the objectives of a new business might change as it grows in size.

(10 marks)

(Total 25 marks)

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Q5 (a) What do you understand by the terms?

(i) primary research(ii) skim pricing

(iii) USP(iv) product promotion (12 marks)

(b) How is the market for a product such as shoes segmented? (13 marks)(Total 25 marks)

Q6 (a) What do you understand by the term labour turnover and explain how it might be

calculated (give equation)? (4 marks)

(b) Why should a firm be concerned about an increase in labour turnover? (9 marks)

(c) What steps can a business take to motivate employees to remain with the company?(12 marks)(Total 25 marks)

Q7 (a) What do you understand by the following financial terms?(i) gearing

(ii) current ratio(iii) working capital

(iv) fixed assets(v) budget (15 marks)

(b) What is the purpose for a firm of drawing up a Profit and Loss Income Statement and aBalance Sheet? (10 marks)

(Total 25 marks)

Q8 (a) Explain the services that each of the following institutions could provide for a new

business:(i) insurance companies

(ii) banks (12 marks)

(b) Describe and differentiate between job production and batch production systems.

(13 marks)(Total 25 marks)

End of Question Paper

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(ii) Social A business must be aware of changes in society. Demographic changeswill affect demand in different sectors. The ageing population in Europe has led to

greater demands for healthcare and nursing homes. As societies grow wealthierthe population spends a greater proportion on leisure pursuits, such as foreign

holidays, sports and pastimes. Changes in public attitudes can also affect abusiness. The public are more environmentally aware and are not prepared to

buy products and services that are considered antisocial e.g. aerosols that

contain CFCs.(iii) Technological Technological changes affect not only the production process but

also the range of products that are possible. The microchip has led to the

miniaturisation of many products while the development of plastics hasrevolutionised the style of products and their cost. The media industry has

witnessed vast changes with the advent of miniaturised music systems, flatscreen televisions and High Definition broadcasting.

A business must be aware of changes otherwise it will lose market share tocompetitors that are more technologically advanced.

(b) (i) Usually a rise in interest rates will reduce the disposable incomes of families

living in the UK which might affect the level of spending on luxury items, such ashotel accommodation. However if the clients are mainly from abroad the rise in

rates will have no affect on them. Also if it is an expensive five star hotel whosecustomers are usually businessmen and wealthy individuals the rise might have

no affect at all. However, the hotel could incur higher finance charges for anyborrowing it has made and might be forced to raise its hotel charges.

(ii) A fall in the exchange rate of the pound will make the hotel appear cheaper toforeign visitors. This should have a positive effect as the hotel is internationally

popular. Bookings should increase which will improve the room occupancy leveland lead to a rise in overall sales and profits.

(iii) Generally a worldwide recession results in a fall in demand for all goods andservices. This might significantly affect the luxury hotel trade particularly for the

business traveller who will have less business to conduct around the world. Salesand profits might fall.

Q3 (a) The main factors that would influence the location decision are: Availability of land a large supermarket requires a significant area of

reasonably priced land not only for the storage and display of its goods but alsofor customer parking. Most supermarkets are single storey buildings therefore a

flat area would be the most suitable. Closeness to market the profits of supermarkets rely on a large throughput of

customers therefore it must be located close to a high density urban area. Suitable transport links supermarkets must have good road links for easy

access for its suppliers vehicles as well as car and bus access for its customers. Availability of labour a supermarket requires a large number of unskilled and

semi-skilled workers. Unskilled workers are required for warehouse duties and forstacking shelves. Semi-skilled workers are required for checkout, customer

services, supervisory and security duties.

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(b) One benefit for local residents will be easy and quick access for shopping. Largesupermarkets often have longer opening hours which will also be a benefit. For some

residents it will also provide employment, both skilled and unskilled.However, there might also be disadvantages in having a busy supermarket in an urban

area. The first problem might be increased traffic, which will present a greater dangerto children playing in the area and to pedestrians trying to cross a busy road. A second

problem is the danger of damage to the local environment from pollution. Increased

exhaust fumes will affect air quality plus there is likely to be more litter left from thethousands of customers.

Q4 (a) (i) A stakeholder is any individual or group that has an effect on or is affected by abusiness or organisation. This might include groups, such as employees, owners,

trade unions, customers, pressure groups and competitors. A shareholder,however, is a part owner of a business who has invested funds in the purchase of

firms shares. Shareholders have a right to vote and to attend the annual generalmeeting.

(ii) Corporate objectives are the medium and long term targets of a business thatgive a sense of direction to the managers, departments and the organisation as a

whole. They should be measurable and have a specific timeframe for example toincrease European sales by 7% by June 2009. To be effective they must be

realistic and attainable.However, a corporate strategy is the detailed plan for achieving the corporate

objective. The plan would include details of not only what is to be done but alsothe financial, production and personnel resources required.

(iii) Both the private and public sectors are part of a countrys economy. The publicsector is owned and directed by the government on behalf of the people whereas

the private sector is owned and managed on behalf of the owners andshareholders. The principal task of the private sector is to make profits whereas

the public sectors main role is to provide free or cheap public services, such as

health care and education.

(b) As a new business grows its objectives will change. At first the principal objective is

survival that is to reach a sustainable sales level that allows the firm to break-even.Unless a business can achieve this objective it will close as soon as initial capital is

exhausted. Once a firm has reached a sustainable level of sales it might change itsobjective to one of profit maximisation. At this stage the business is attempting to

maximise the difference between total revenue and total cost. A sustained period at thisstage allows a business to develop capital reserves that can be used to fund the next

stage of expansion.Successful firms can follow a policy of growth not only growing market share with

existing products but introducing new products and moving into new markets. This

leads to a greater diversification in its operations, which in turn should reduce the risk.

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Q5 (a) (i) Primary research is the gathering of first hand data that is specifically relevant to

a firms products, consumers or markets. This is carried out by fieldwork usingquestionnaires, interviews, focus groups or direct observation. It is usually

expensive to collect but is specific to the product.(ii) This is a pricing policy that aims to price a new product at a high level so that it is

only purchased by trendsetters, enthusiast or the very rich. Skimming themarket is usually an option used for innovative products, such as the recent

launch of High Density Television and digital cameras.(iii) USP stands for Unique Selling Point which is a feature of a product that can be

focused on in order to differentiate it from all competition. The USP should bebased on a real product characteristic that consumers can easily verify, for

example a sports car boasting that it has the fastest acceleration. Stronger USPsare those based on a patented technical advantage, for example Dyson vacuum

cleaners that boasted the only dual cyclone suction method.(iv) Product promotion is a means of boosting a products sales as part of the

marketing mix. A combination of advertising, branding, sales promotion andpublic relations can be used to influence consumer opinions and buying habits.

(b) The market for shoes can be segmented according to:a. Gender not only are the size of shoes different for males and females but also

the preferred styling.b. Age the market can be divided in to sections for infants, children, teenagers and

adults.c. Lifestyle even within a single age category there will be many different

segments to cater for the many styles e.g. business shoes, trainers, casualshoes, etc.

d. Purpose consumers desire shoes for specific purposes, such as sport, hiking,working or relaxing.

e. Socio-economic status within one category different shoes can be made tocater for the wealth of the customer. This is usually achieved by the use of

different materials, styling, manufacturer and branding.

Q6 (a) Labour turnover is the rate at which employees leave a business. In its simplest form

labour turnover can be calculated using the equation:Number of employees leaving / Total workforce * 100%

(b) An increase in labour turnover might indicate that employees are dissatisfied withmanagement, dissatisfied with working conditions or are unhappy about the rate of pay.

Whatever the reason a firm should be concerned because replacing employees on aregular basis is costly in terms of time and money. Every replacement results in

recruitment costs, such as advertising, interviewing and induction training. Departing

employees represent lost skill and lost investment in training and expertise. These canonly be replaced once the new recruits have gained sufficient experience.

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(c) The Human Resources department can motivate employees by recognising that theymust be treated as separate individuals. Each person will have different needs and

desires from the job he or she is doing. These needs must be identified and fulfilled.Training and self-development are important as they recognize the personal worth of

the individual to the company. The development of teamwork is important, as mostworkers require a social environment within which to develop their personal

relationships.

Job enrichment is also an effective means of increasing worker motivation, as is jobenlargement. The elimination of boredom and monotony by frequent rotation is a goodmeans of reducing dissatisfaction.

Empowerment of the work force is also a good way of motivating staff. This involvesdelegating not only tasks but also giving the employee the freedom to decide what is

done and how it is done.Finally the basic rewards in the form of pay and working conditions is also important. If

the basic needs are not met it is difficult for the individual to be constantly motivated toachieve his or her best.

Q7 (a) (i) Gearing measures the proportion of capital employed that is provided by longterm lenders. The gearing ratio is given by the equation:

Gearing = Long term liabilities/Total Capital Employed *100

(ii) The current ratio is a measure of a firms ability to meet its short term debts. It is

a main test of liquidity, the ability to settle debts as they fall due by havingavailable the necessary cash. The ratio should be between 1.5 and 2 signifying

sufficient liquid assets to meet its obligations. Insufficient liquid assets couldresult in the closure of the business. The equation to calculate the ratio is:

Current ratio = Current assets/current liabilities

(iii) Working capital is the day-to-day finance required to run a business. It is the

finance required to pay for raw materials, running costs, labour and to financecredit offered to customers.

(iv) Fixed assets are items that have a long-term function in a business and can beused repeatedly. Examples might include buildings, land, vehicles, equipment and

machinery.(v) A budget is a financial plan for a specified future period of time. A master budget

combines the forecast income from sales together with forecast expenditure. Thiscan be used to determine a forecast cash flow statement as well as a forecast

profit and loss account.

(b) The purpose of a Profit and Loss statement is to assess the success of themanagement decisions that have been made in the past and to help them to make

appropriate decisions in the future. The statement will show the annual sales, the costsof generating those sales and the resulting profit or loss. Most companies hope to grow

year on year. The Profit and Loss statement can also be used to inform and reassureexisting shareholders or to persuade prospective investors to invest in the business.

The statement would also be needed to support an application for a loan to a bank andto satisfy government in regard to taxation due.

The balance sheet represents a valuation of the assets that a business owns and theliabilities that it owes. In other words it identifies the net wealth of the business.

Shareholders hope to see growth in the net value of the business on an annual basis.

The balance sheet also shows how much of the capital has been borrowed and thusprovides an indication of the level of risk from interest rate changes.

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8 (a) (i) Insurance is a means of managing risk. Technically it is the provision of a legal

contract between an insurer who promises to pay the insured if a particularevent (known as the peril) happens and the insured suffers a financial loss. For

example a business may insure themselves against fire, theft, or storm damage.In return for the insurance the insured pays a premium usually by regular

installments to an insurance company.The main types of insurance used by a business are fire and accident insurance.

Fire insurance is required to protect not only the buildings belonging to abusiness but also the stock and equipment stored in it. It is possible to obtain

extra insurance in order to cover consequential loss. This compensates for thedisruption of business caused by a fire and may cover loss of profits and extra

expenses incurred in restoring the business, such as temporary accommodation.Accident insurance covers a wide range of events. Employers liability protects

the business from claims made by employees for injuries suffered at work. Allbusinesses are required by law to have this form of insurance. Public liability is a

similar form of insurance except that it covers the general public from injurycaused by the business or its employees. For example if part of the roof fell off

and injured pedestrians or if a company vehicle injured a cyclist then the publicwould be compensated by the insurer. Without this type of insurance the business

may face extremely high claims for compensation, which could cause the firm tocease trading.

(ii) Clearing banks (also known as retail banks) offer businesses a wide range ofbanking services. For every day purposes banks provide business accounts

where money can be deposited, withdrawn or transferred, usually by cheque.This provides a safe and easy way for a firm to pay its debts and to secure its

takings. Clearing banks can also assist to finance a business through a range oflending services that include overdraft facilities, short and medium term loans,

factoring of debtors and leasing arrangements.In recent years banks have developed business consultancy services that a firm

can use when faced with larger or more long term projects, such as entering a

new market, expanding its business or negotiating a takeover.Specialist banks, such as merchant banks (also known as wholesale banks)provide services to assist with share issues, the raising of loan stock or mergers

and takeovers. These are generally only used by the large public limitedcompanies.

(b) Job production is usually associated with the making of a unique item for example a

road bridge, an oilrig or a wedding dress. The task normally requires the use ofgeneral-purpose tools or machinery that are operated by a highly skilled work force.

The unit cost is, therefore, quite high and there is unlikely to be a repeat order.Batch production is concerned with making a number of standardised items aimed at a

more general market. A number of items or batch completes each process beforepassing onto the next production stage. The greater quantity and longer production run

allows the use of special purpose machines. This is often used in the textiles industrywhere garments of different sizes and colours are made in batches.

The differences between the two systems are, therefore, the type of product made, themachinery used, the skill level of the work force needed and the unit cost. The product

is a one-off in job production whereas a standard product is made by the batchmethod. As the product is unique the machinery must be versatile in job production but

is more specialised for the larger quantities required in batch. In the same way thelabour is more skilled for the job method. Finally the unit cost for the unique order is

generally higher than the equivalent product produced in large quantities.

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