Chapter 1: Introduction to business 1 What are the primary objectives of profit-oriented and non-profit oriented organisations? Profit-oriented organisation Non-profit oriented organisation A. Output of goods/services Minimise costs B Output of goods/services Provision of goods/services C_ Maximisation of wealth Minimise costs D. Maximisation of wealth Provision of goods/services Lota 2 Atthe Annual General Meeting (AGM) of Vortex plc, a major shareholder claimed that the company was suffering from the symptoms of 'satisficing’. In the context of corporate objectives, ‘satisficing’ means that: A managers seek to make satisfactory profits rather than maximise wealth B managers seek to keep all stakeholders satisfied C owners seek to meet a satisfactory level of corporate responsibility obligations ° ‘owners seek to make satisfactory profits Lota 3 Joe, the Managing Director of Gargoyle Ltd, has set a primary objective of growth in profits for the company. He aims to concentrate on product development to support this objective. Identify whether the following will be suitable secondary objectives to achieve the growth in profits via product development. Bringing in new products Reducing labour turnover Investing in research and development Zand 3 only 1 2 3 A land 2 only 8 © 1and3 only D 1,2and3 Lota 4 Maximising the wealth of its shareholders is the stated goal of Avernanche ple. The ‘company's objectives have been expressed as a hierarchy of primary and secondary objectives. Identify which of the following is most likely to be Avernanche ple's primary business objective A. Toincrease the annual profit after tax by 125% in the next 10 years B Tointroduce an average of two new products each year for the next six years © To double the share price within the next 10 years D To become the market leader in four market segments within the next 10 years LO 1a ICAEW 2020 Chapter 1: Invoduction to business 3Ider has stated that for three years the directors of Barrington Plehay, manner designed solely to increase their prestige in the business”? ing to Wiliam Baumol, this is most likely to be shown in the directo, rs 5 Amajor sharehol the company ina ‘community. Accordi aim to: A. maximise wealth B_ maximise sales revenue minimise costs D> minimise social impact = EEE PEPER REE PEELE LEEPER EE Pr pe 6 Toestablish whether a particular organisation should be classified as a busine: necessary to enquire about the nature of its: SS OF Not, itis A. primary objective B_ mission Cc vision D__ secondary objective ioe 7 The primary objective of ABC Car Rental Ltd is as follows: "We aim to be the fastest growing company with the highest profit margin in the global vehicle rental and leasing business * (One ofits secondary objectives is: “To increase our market share for global family car rentals to 20% within a reasonable time." Which three components of the SMART acronym are present in the company's secondary objective? AS BoM cA DR er Lota 8 Fora business, which two of the following would be classified as secondary objectives? ‘A. The business's market share target for next year B The business's productivity improvement target for next year C The business's mission statement D_ The business's financial objective of shareholder wealth maximisation E The business's vision Lota, 1b Business, Technology and Finance: Question Bank ;9 Amajor airline, FlotAir ple, has been drawing up a mission statement. Which three of the following items could be expected in it? ‘We will double profits in three years We will encourage diversity in the workplace We intend to be the best airline in the world We aim to give excellent customer service We intend to take over XYZ airlines ™m™ 90 o> We intend to have a 30% market share on the London to New York route LO ta, 1b 10 Two of Sunshine Tours ple's stakeholder groups are putting the company under pressure to improve its return on investment. These are most likely to comprise which two of the following groups? A. Shareholders Customers Bankers Suppliers Employees Sample Exam LO 1a, 6 mooao 11. The directors of Gordon Ltd have recently appointed two members of its unionised workforce to an internal committee. The committee makes suggestions to the company's. main board of directors about all aspects of the company's strategies and policies. These appointments illustrate the company's concern for which stakeholder? A Lenders B Suppliers C Customers D Trade unions LO 1a, 6e 12. Mandrake ple processes waste for local authorities. Ithas stated that it seeks to provide ‘our shareholders with increased value, our customers with value for money, our employees with secure and interesting jobs and the public with safe and sustainable waste disposal." This is analysed below into four statements. Identify which is Mandrake ple's primary business objective. A. To provide our shareholders with increased value 8 To provide our customers with value for money C To provide our employees with secure and interesting jobs D To provide the public with safe and environmentally sustainable waste disposal Sample Exam LO 1a ICAEW 2020 CChapter 1: Introduction to business §B 4 needs of the present without compromising the ability of future The ailly 0 ree ae wn needs is best described as: generations to meet t ‘A. corporate responsibility B sustainability C__ business ethies D__ natural capital os pityis about the lng term use of both tangible and intangible resources, Green Aeon ape customised furniture for customers from recycled materials, ple manu Which two of te following represent intangible resources of Green plc? A The design expertise of its employees Stationery supplies tothe factory office Recycled timber received from suppliers Its reputation in the community moo Its head office premises 0s 15 16 Daycare is a charity that funds nursery places for children whose parents are both unemployed. On its website, the organisation states that it continually needs to raise funds that can be reinvested to produce an on-going income to fund its activities. It also seeks to provide daycare forall families who need its support and that it will never turn a family in need away. A business adviser has made two statements: Statement(1) The primary objective of Daycare is to maximise profit. Statement (2) The secondary objective of Daycare is the funding of nursery places. Identify whether each statement is accurate. A. Statement (1) accurate; Statement (2) inaccurate B Statement (1) inaccurate; Statement (2) inaccurate C Statement (1) accurate; Statement (2) accurate D Statement (1) inaccurate; Statement (2) accurate LO 1a, 1b At its recent AGM, the shareholders of dividend. At the meeting many shareh the company's profits were low, company's financial statements Boron ple voted by a small majority to accepta small 'olders said that they accepted the dividend because but were very unhappy with the return because the showed a large increase in revenue. Which of the following describes what is most likel ly to be happening at Boron plc? A Revenue maximising 8 Profit satisficing C Profit maximising D Revenue satisficing Lo 1a, 1b ness, Technology and Finan ice 2020Question BankChapter 1: Introduction to business 10 n 2 D__ Profit-oiented organisations should aim to maximise shareholder wealth. Non-profit oriented organisations, such as charities, should aim to provide goods and/or services. A. Satisficing is when managers are not maximising wealth for owners (which they should in fact be doing) but are merely making enough profits to keep owners satisfied Beyond that they simply choose to pursue their own management objectives. This is the classic agency problem caused by the separation of ownership and control. C listed under the broad heading of product development, Joe might choose to: bring in new products; develop a product range; invest in research and development; provide products of a certain quality at a certain price level. ifhe was concentrating on employees and management to support his primary objective, then he might aim to reduce labour turnover. Doubling the share price within the next 10 years is most likely to be the primary business objective. The other three options would be typical secondary objectives for ‘Avernanche plc in pursuit of the primary objective. 8 William Baumol argued that businesses act to maximise sales revenue if managers are rewarded on the basis of the size of the organisation rather than its profitability or relative performance. A Organisations whose primary objective is to make profits for their owners are classified as businesses. ABD = specific; M = measurable; A ~ achievable; R = relevant; T= time-bound The secondary objective is: specific (market share is a manageable feature of the company); measurable (20% is a quantifiable yardstick of attainment). All of this is relevantto the business. The objective is not time-bound because ‘a reasonable time’ does not set a specific time frame. Had it said that the objective should be met within, say, three years then it would have been. There is no information about whether the secondary objective is achievable. AB The mission statement and vision are general expressions of the business's basic function and planned future status. Shareholder wealth maximisation would rank as the primary objective of any organisation classified as a business. cD ‘Armission statement should answer the following fundamental questions: What is our business? What is our value to the customer? What do we want our business to become? What should our business be? A and F are numerical targets and more likely to be secondary objectives; E is a detailed tactic. AC The two groups most likely to put the company under pressure to improve its return on investment are shareholders and bankers. Customers want products of a certain quality at a reasonable price; suppliers are interested in regular orders in return for reliable delivery and good service; and employees' objectives include job security, good conditions of work and job satisfaction. SAMPLE EXAM D Trade unions are the stakeholders most likely to press for employee representation in the company's affairs. ‘A. The primary business objective of a profit-seeking company is the maximisation of shareholder wealth (A). The other statements are secondary objectives that will be pursued in support of this primary objective. SAMPLE EXAM ICAEW 2020 Chapter 1: Introduction to business 10113. B This isthe definition of sustainability as set out in the Brundtland report. 14 AD Stationery, ew materials and property are all examples of tangible resources. By Contrast, intangible assets are those which have no physical form. Reputation and employee expertise are examples of intangible assets, 15 B Daycare is clearly a charity, therefore the funding of nursery places is its primary abjective. As a non-profit making organisation it does not seek to maximise profit. 16 A. Revenve maximisation is where a business acts to maximise revenue (not necessarily profit or wealth} in order to maintain or increase its market share, ensure survival, and Giscourage competition. Having a large increase in revenue but low profit indicates that the business is maximising revenue at the expense of profit. There is no satisficing because the shareholders are unhappy with the return. 102 Business, Techeology and Finance: Answer Bank ICAEW 2020