Total marks: 80 · Duration: 1 hour 30 minutes
Instructions to candidates
- Answer all the questions.
- Section A contains 15 multiple-choice questions. Choose one answer for each.
- Section B is based on the case study about Greenhill Juice Ltd. Read it carefully before you answer.
- You may use a calculator. Show your working for calculations.
- The number of marks for each question is shown in brackets [ ].
- Quality of extended response is assessed in the questions marked with an asterisk (*).
- The business in this paper is fictional.
Paper
Section A — Multiple choice (15 marks)
1 Which of these is a fixed cost for a manufacturer? [1] A) Raw materials B) Packaging for each product C) Commission paid on each sale D) Rent for the factory
2 A business sells 400 units at £12 each. What is its sales revenue? [1] A) £412 B) £4800 C) £48 000 D) £3333
3 Which is a feature of job production? [1] A) One-off products are made to each customer's specification B) Identical products are made continuously on a production line C) Groups of identical products are made, then the line is changed D) The whole process is carried out by robots
4 Which statement describes quality assurance? [1] A) Finished products are inspected at the end of production B) Customers report faults after they have bought the product C) Quality is checked at every stage of production by all workers D) Faulty products are recalled from shops
5 Which is a long-term source of finance? [1] A) A ten-year bank loan B) A bank overdraft C) Trade credit from a supplier D) Selling off unwanted stock
6 A business has fixed costs of £12 000. It sells its product for £10 and the variable cost per unit is £4. What is its break-even output? [1] A) 1200 units B) 3000 units C) 2000 units D) 857 units
7 The Bank of England raises interest rates. What is the most likely effect on businesses? [1] A) Consumer spending on luxury goods increases B) Costs rise for businesses with variable-rate loans C) UK exports become cheaper for buyers abroad D) Unemployment falls quickly
8 The value of the pound falls against the euro. Which statement is correct? [1] A) Imports from the eurozone become cheaper for UK businesses B) UK exports become more expensive for European buyers C) Holidays in Europe become cheaper for UK residents D) UK exports become cheaper for European buyers
9 How is net cash flow calculated? [1] A) Sales revenue minus total costs B) Cash inflows minus cash outflows C) Opening balance plus closing balance D) Net profit minus tax
10 Under the Consumer Rights Act, goods sold to consumers must be: [1] A) of satisfactory quality, fit for purpose and as described B) cheaper than similar goods sold by competitors C) made in the United Kingdom D) sold with a free two-year warranty
11 Which is an advantage to a small business of selling online (e-commerce)? [1] A) Customers can touch and try the products before buying B) There are no delivery costs to pay C) The business no longer needs a website D) It can reach customers across the country and abroad
12 How is gross profit calculated? [1] A) Sales revenue minus all expenses B) Net profit plus tax C) Sales revenue minus cost of sales D) Sales revenue multiplied by the profit margin
13 Which is an opportunity that globalisation creates for UK businesses? [1] A) Access to new markets abroad B) Less competition from foreign firms C) Fewer laws to follow when trading abroad D) Higher prices for imported materials
14 Which ethical decision is most likely to increase a business's costs? [1] A) Reducing the amount of packaging it uses B) Paying its suppliers a fair price for raw materials C) Turning off machines when they are not in use D) Selling waste materials for recycling
15 A business sells 5000 units a month and its break-even output is 3800 units. What is its margin of safety? [1] A) 8800 units B) 3800 units C) 5000 units D) 1200 units
Section B — Case study: Greenhill Juice Ltd (65 marks)
Greenhill Juice Ltd makes cold-pressed fruit and vegetable juices in a small unit on an industrial estate in Leeds. It was founded by Amira Shah, and her brother Sami is the finance director. The juices are sold in 330 ml bottles to independent cafés, gyms and delicatessens across Yorkshire.
Operations. Juice is made in batches of about 600 bottles. The machines are cleaned and set up for a different recipe between batches. Every batch is tested before it leaves the unit, but last month 3% of bottles were rejected for being under-filled or poorly sealed. About 40% of Greenhill's fruit is imported from Spain and is paid for in euros.
Finance. Each bottle sells to retailers for £2.50. The variable cost of each bottle (fruit, bottle, label) is £1.10. Fixed costs are £8400 per month. Greenhill currently sells 7500 bottles a month.
Last year's income statement (extract):
Item £ Sales revenue 240 000 Cost of sales 108 000 Gross profit 132 000 Expenses 96 000 Net profit 36 000 Cash-flow forecast for July to September:
July (£) August (£) September (£) Cash inflows: sales receipts 18 000 19 500 17 000 Fruit and bottles 8000 8600 7800 Wages 5200 5200 5200 Rent and other costs 3200 3200 3200 Deposit on new machine 0 0 4000 Total cash outflows 16 400 17 000 20 200 Net cash flow 1600 X (3200) Opening balance 2500 4100 6600 Closing balance 4100 6600 Y A big opportunity. A regional supermarket chain has offered Greenhill a contract to supply 4000 extra bottles a month to 30 of its stores, at a price of £1.80 per bottle. To produce this many bottles, Greenhill would need a flow production line costing £90 000. Sami estimates that the line would add a total of £67 500 to profit over its five-year life. He could finance it with a bank loan at 7% interest, or by selling shares in the business to an investor who would want a seat on the board.
Influences. Interest rates have risen twice this year. Many of Greenhill's café customers say that their own customers are spending less. Amira also wants to switch from plastic to glass bottles, which customers prefer, although glass bottles cost 12p more each.
16 (a) Identify two features of batch production. [2]
16 (b) Explain one benefit to Greenhill of using quality assurance rather than only testing each finished batch. [3]
16 (c) Analyse one impact on Greenhill of having 3% of its bottles rejected. [4]
16 (d) Analyse one way in which Greenhill could use technology to improve its operations. [4]
17 (a) Using the income statement, calculate Greenhill's gross profit margin. [2]
17 (b) Calculate Greenhill's net profit margin. [2]
17 (c) Calculate Greenhill's break-even output per month. Show your working. [2]
17 (d) Calculate Greenhill's margin of safety per month. [2]
17 (e) The price of imported fruit rises, increasing the variable cost per bottle to £1.30. Using a calculation, explain how this affects Greenhill's break-even output. [4]
17 (f) Explain one limitation of break-even analysis for Greenhill. [3]
18 (a) Calculate the values of X and Y in the cash-flow forecast. [2]
18 (b) Explain one reason why a profitable business such as Greenhill might still have cash-flow problems. [3]
18 (c) Calculate the average rate of return (ARR) on the £90 000 flow production line. Show your working. [3]
18 (d)* Recommend whether Greenhill should finance the flow production line with a bank loan or by selling shares. Justify your answer. [9]
19 (a) Identify two ways in which the recent rises in interest rates could affect Greenhill. [2]
19 (b) Explain one effect on Greenhill of a fall in the value of the pound against the euro. [3]
19 (c) Analyse one benefit and one drawback to Greenhill of switching from plastic to glass bottles. [6]
19 (d)* Recommend whether Greenhill should accept the supermarket contract. Justify your answer. [9]