October /November/2008 Paper 1

1 Hersha Singh runs a textile manufacturing business. He pays his workers a high hourly wage
rate. He is thinking of introducing a piece rate element but with a lower hourly wage rate. He
is not sure whether such a change would benefit either his business or his employees.
(a) (i) Explain what is meant by a ‘high hourly wage rate’.

Ans. Hourly wage rate implies that basis of pay earned for the time spent at work. High implies that it is large compared
to other businesses. (2)

(ii) Do you think that the introduction of a piece rate element will benefit the following?
Explain your answers.
1. His employees: Introducing a piece rate element will benefit Singh’s employees as they now have to work hard
to get high wages, and cannot be insolent any longer. According to Mc. Gregor’s theory, theory Y employees
are going to be happy, as they view work as a normal thing. Singh’s employees will now be motivated to be
more productive. However they might not pay attention to quality as they want to produce and earn more.
2. Mr. Singh’s business – Mr. Singh’s business will experience a boost in its productivity as employees will work
hard to get highly paid. Mr. Singh will now be able to know the lazy, inefficient workers as the pieces they make
will single them out. Mr. Singh’s business will become more productive as the efficiency of its labour force has
increased.

(b) Hersha’s son Jordan owns a business that assembles computers. He believes in giving
his workers responsibility to plan their own work. ‘I just let them get on with their jobs as
I’m sure that this freedom motivates them’ he said. ‘I help organise training for them if
they need it’.
(i) Do you think that responsibility motivates employees? Explain your answer. (4)
Ans. Responsibility motivates employees as it gives employees the opportunity to utilise the creative
potential. Also, according to Abraham Maslow’s hierarchy of needs being given more responsibility is
highlighted as self-actualization because every employee wants to succeed to his/her uttermost
potential. This is why I believe that delegation is very effective in stirring employees to work more
because responsibility motivates workers.

(ii) Describe and explain Jordan’s management style.

Ans. Jordan’s management style allows his workers to make decisions on their own rather than
receiving clear instructions and orders from their heads of department or managers. Jordan’s
management lets the employees do or take actions that they deem fit. Jordan’s management style is
referred to Laissez – Faire and constitutes a decentralization government. Implications of this style are
that lack of leadership and positive direction can lead to confusion and lack of action and control.

(iii) To what extent might training help the performance of employees in Jordan’s business?
Ans. Training involves employees being taught new skills or improving skills they already have. Thus
training helps increase the productivity of employees and also increases flexibility. i.e. to do more jobs
and tasks. It also helps employees to be multi tasked. Once the employees are trained they need to be
less supervised which even reduces the cost of the organization and supervisors can be focussed on
more important tasks. Even though training may cost the organization, it is worth the returns the
business receives from it.

2 Pedro has recently set up a small business washing cars in a supermarket car park. He charges $4 per car cleaned
and estimates his variable costs as being $1 per car. He has weekly overheads of $600 including a marketing budget of
$60. Output
(a) (i) Draw the sales revenue line on Fig. 1 above. [2]
(ii) State the breakeven output shown on the chart.

c(i) What is meant by a ‘marketing budget’?

Ans. A marketing budget is an expenditure target to be met along with a quantifiable target for the market
plan. It allocates expenditure between different aspects of marketing such as promotion, sales staff,
advertising.

(ii) Why do most businesses have a marketing budget?

Ans. A marketing budget set targets that allow performance to be assessed. They help control expenditure.
They also assess how achievable the aims of a business really are. They are thus a planning tool and a
method of control. It helps control costs, prevents from overspending and help increase profits of the
business.

(d) If Pedro’s business is successful he hopes to use the profits to expand the business and
to make Pedro Car Wash a well known brand name.
(i) Explain the term ‘brand name’.
Ans. In order for a product to be distinguished from other products or brands, it has to have a unique name.
A name given by a business to one of its products as a means of identification by consumers.

(ii) How could this brand name help Pedro build up his business?
Ans. The aim of branding is to make products or services stand out from rivals. It differentiates them in the
market place. The brand name must project the right image and should be easy to identify and be
remembered. It should convey a strong image in the minds of the customer. Thus a brand name helps
 makes the business become better known and thus increases customers’ confidence. This should help
boost sales.

3 Sudhir Yadav lives in a city in country Z. The city has a big Indian population. When Sudhir
was looking for a business opportunity he identified a niche market in selling saris and similar
clothes to Indian ladies. He imports the clothes from country X and sells them to retailers in
his city.
(a) Explain the term ‘niche market’.
Ans. Niche Market is usually a small segment of the market. In this case it is Indian females in a
particular city.. It is a specialized segment of a market with specific needs or requirements.

(b) Sudhir’s business is that of a wholesaler. Why do you think that retailers in country Z don’t buy their
clothes directly from the suppliers?
Ans. The retailers would not have the contacts in other countries. Usually they buy in small quantities
so it is easier to buy from a wholesaler than from a supplier who will be unwilling to sell in small
quantities. A wholesaler holds stock and breaks bulk and supplies on demand the required quantity.
Thus it is more convenient to buy from the wholesaler than to buy from the supplier.

(c) If the currency of country Z appreciated in value how would this affect the profitability of Sudhir’s
business? Explain your answer.
Ans. Currency appreciation occurs when the value of a currency rises – it buys more of another
currency than before. An appreciation in the value of the currency would mean that it was cheaper to
import products than before. This should be of benefit to Sudhir because all his purchases are from
country X. Thus he should be able to increase his profit margins or sell greater volume by offering lower
prices. Either way profits should rise.

(d) (i) A recent report into working conditions in different countries suggested that Sudhir’s suppliers paid
very low wages to their employees. The report also stated that they employed child labour working long
hours. Do you think that Sudhir should continue to buy from these firms? Justify your answer.
Ans. This kind of situation becomes an ethical problem for the business. If Sudhir stops buying
from these suppliers then costs rise and supply source lost. Other companies may still buy
from these firms so Sudhir is at a competitive disadvantage. However, if he continues to buy he
knows he is supporting such activities and he might feel uncomfortable with this. He may also
get negative publicity in his own country by the Pressure groups. Thus it is a problem of
principles vs economics.

(iii) The government in country Z is passing tougher consumer protection laws on materials used in clothing.
How might this affect Sudhir’s business in the future?
Ans. Consumer protection laws passed by the government would mean compliance with stricter standards.
Thus Sudhir needs to be sure that the quality of the merchandise sent to him meets the required
specifications. He might need to find new suppliers. Certainly he needs to communicate with the suppliers.
It might increase his costs. It is of course possible that existing materials used already comply but this
seems unlikely.

4 Sunny has been General Manager of a business for a number of years. She has recently identified a business
opportunity that would require a lot more capital. Her financial advisers recommend that she converts the business into
a Public Limited Company.
(a) Discuss the consequences to this business of the possible change to a Public Limited Company.
Ans. Sunny’s decisions of converting into a Plc company would include a lot of advantages as well as
consequences too. Sunny would be able to raise very large capital sums to invest in the business. It still offers
limited liability. The capital does not need to be repaid. It also carries no interest charges. However, the legal
formalities of forming such a company are quite complicated and time consuming. Their accounts need to be
 disclosed annually to all the shareholders and sometimes some plc’s grow so large that they become difficult to
control and manage leading to diseconomies of scale.

(b) Sunny would use any extra capital to invest in new technology. This should benefit the business by cutting costs and
improving efficiency. Some managers have told her that new technology often causes problems.
(i) Why might new technology cut the costs of a business?
Ans. New “ High Tech” production methods increase productivity and lower average costs making the
business more competitive. Fewer workers are often required with new production methods thereby
reducing the recruitments and training costs. New production methods can be adapted very quickly to
make a wide range of similar products and this gives business more flexibility to meet consumer needs.
Technology has helped businesses to use e-commerce and reach masses without investing a large sum
of capital and thereby creating an impact on marketing costs.

(ii) Why might new technology cause problems for a business?

Ans. It is expensive for small firms to afford the investment needed. Business that do not develop new
products will lose sales and market share. They may go out of business, causing workers to lose their
jobs. Workers will need re-training. This will be expensive and workers may be reluctant to learn new
skills. Technology soon becomes out of date and hence costs are not recovered. Also break downs of
machinery can create cash shortages in businesses.

(c) The government in Sunny’s country has recently passed new laws concerning working conditions. These include
Health and Safety at Work laws and a maximum number of hours that can be worked per week.
Do you think that employees always benefit from such laws? Justify your answer.
Ans. Examples of the impact of such legislation might include minimum/maximum temperature hygiene rules,
protection from dangerous machineries, maximum hours that can be required to work. Yes, employees do
benefit because it reduces the risks of exploitation. It forces all employers to adopt minimum standards.
However, if wage rates (or costs) are forced up, then jobs might be lost. Furthermore the opportunity to work
long hours to earn more money might also be reduced. Protection against dangerous and unhygienic conditions
must however benefit employees. So, generally the employee gains, but under certain circumstances they may
not!

5 Aglahor Enterprises manufacture a range of kitchen equipment for the home. Fig. 2 gives data concerning their 3 best
selling products (coded x, y and z). In 2000 Aglahor’s sales were valued at $90m, while by 2007 they had grown by a
further $60m. The total value of the market for kitchen equipment in 2007 was $1200m.

(a) Calculate
(i) The value of sales of product x in 2007.
Ans. $30m i.e. 20% of $150m

(ii) The market share of Aglahor Enterprises in 2007.

(ii) 12.5% The sales of Aglahor in 2007 are $150m. The total market sales are $1200m.
Market share is company sales/total market sales % (1). Thus market share is 1/8 or
12.5%.
Aglahor Enterprises use flow production methods to manufacture their products. Some of its rivals use batch methods of
production.
(b) (i) What is meant by ‘batch production’?
Ans. Batch Production is when a method is used which involves completing one operation at a time on
all units before performing the next. Production can be flexible because batches can be made to
individual specifications.

(ii) Explain two benefits of flow production methods.

Benefit 1: Flow generates mass production with all the potential for unit cost reductions. Organizations enjoy
economies of scale due to large volumes of production and bulk buys.
Benefit 2: It often leads to increased specialization resulting in productivity gains. Specialization leads to
uniform quality and increased specialization leads to greater job opportunities for employees too.

(c) Recently sales of one of Aglahor Enterprises products (a coffee machine) have been falling. The pattern of
sales is shown in the product life cycle shown in Fig. 3.

(i) Label the x axis on Fig. 3. [1]

Ans.Time
(ii) How might Aglahor Enterprises try and extend the product life cycle of its coffee machines?
Ans. In order to extend the product life cycle of its coffee machines, Aglahor enterprise could start
introducing new variations of its coffee machines by producing a newer, sleek version which may attract
consumers. Aglahor enterprises could sell its coffee machines into new markets by exploring them to other
countries. They could also sell through different retail outlets or create a new advertising campaign to
create awareness. Also, they can make slight changes in their packaging , design, color or even change
their promotional policies.

(d) Explain two benefits to the management of Aglahor Enterprises of sales forecasts for their products.
Benefit 1: Sales forecasts are predictions and premonitions of the future, for example likely changes
in the size of the market. So sales forecasts are beneficial to Aglahor, because they can prepare for
likely changes in the future.

Benefit 2: Sales forecasts are also useful because they allow capital needs to be anticipated. They
allow resources requirements to be calculated for production.