AQA AS/A-Level Business

Section 4 / Decision-making to improve operational performance

WORKBOOK ANSWERS

AQA AS/A-level Business

Topics 1.4–1.6

This Answers document provides suggestions for some of the possible answers that might be given for the questions asked in the workbook. They are not exhaustive and other answers may be acceptable, but they are intended as a guide to give teachers and students feedback.

Section 4Decision-making to improve operational performance

4.1 Setting operational objectives

12 marks for the definition below, or similar:

Turning inputs into outputs in order to meet customer needs.

2Added value is the value of the finished product over and above the combined value of the inputs.

Possible ways in which a jeans manufacturer might add value include:

design features of the jeans
brand name, e.g. Levi

3Operational objectives are the targets set to be achieved by the operations department in a specified period of time.

A firm may be able to keep costs down if stock is bought in bulk, hence achieving an objective of cost minimisation. However, this would mean they had large holdings of a specific type of stock and therefore may not be able to change outputs quickly in response to a change in consumer tastes. Hence a potential conflict between cost and flexibility.

4AO1 Knowledge = 2 marks

AO2 Application = 3 marks

Operational objectives are the targets set to be achieved by the operations department in a specified period of time.

Possible benefits to a large food manufacturer include:

clear targets for all employees to work towards
quality targets to meet food hygiene standards
cost targets to keep prices down in a competitive market

AQA AS/A-level Business Topics 1.4–1.6

Section 4 / Decision-making to improve operational performance

reducing waste

5AO1 Knowledge = 2 marks

AO2 Application = 3 marks

AO3 Analysis = 4 marks

Operational objectives are the targets set to be achieved by the operations department in a specified period of time.

Possible reasons might include:

to enhance the reputation of JLR as an environmentally friendly business
strong brand reputation and customer loyalty
high added value allowing them to charge high prices
reputation as a luxury brand

Analysis requires a line of argument to explain cause and effect.

One reason why JLR set ambitious operational targets such as minimising the negative impact on the environment is because this gives all employees a clear focus. They will therefore work to meet this objective, enhancing JLR’s reputation in a competitive market. This will make their cars stand out, attracting customers. This gives the product high added value, allowing JLR to charge a premium price for their luxury brand.

4.2 Analysing operational performance

62 marks for the definition below, or similar:

Quantifiable information is presented in a statistical or numerical form and is therefore easy to analyse and interpret.

Output / 0 units / 1,000 units / 2,000 units / 3,000 units
Fixed costs / £25,000 / £25,000 / £25,000 / £25,000
Variable costs / £0 / £3,000 / £6,000 / £9,000
Total costs / £25,000 / £28,000 / £31,000 / £34,000
Unit costs / £25,000 / £28 / £15.50 / £11.34
Number of employees / 0 / 10 / 15 / 20
Labour productivity / 0 / 100 / 134 / 150

8D57

9185,000 units x 0.70 = 129,500 units

Total costs = £168,000 + (129,500 x £5) = £815,500

£815,500/129,500 = £6.30

4.3 Making operational decisions to improve performance: increasing efficiency and productivity

10AO1 Knowledge = 2 marks

AO2 Application = 2 marks

AO3 Analysis = 2 marks

Full capacity is when a firm’s actual output is the same as the maximum total output.

Possible benefits to a theme park include:

lower unit costs as the fixed costs of operating each ride is spread amonga greater number of customers
higher spend on additional items, e.g. food and drink

Analysis requires a line of argument to explain cause and effect.

One possible benefit is that the fixed costs of operating rides, e.g. operators and the cost of purchasing the ride itself, will be spread among a greater number of passengers. Therefore the unit cost will go down. This will allow the leisure park to have higher profit margins which could be used to buy new rides, ensuring the theme park continues to attract new and repeat customers.

11AO1 Knowledge = 2 marks

AO2 Application = 2 marks

AO3 Analysis = 2 marks

Full capacity is when a firm’s actual output is the same as the maximum total output.

Possible disadvantages to a theme park include:

long queues for rides and other facilities, e.g. restaurants and toilets
staff feel pressurised and may not provide a friendly service

Analysis requires a line of argument to explain cause and effect.

One disadvantage is that the theme park may not be able to effectively cope with this number of visitors. This could lead to long queues for popular rides resulting in customer dissatisfaction. This could lead to poor reviews and bad word of mouth advertising. This would damage the reputation of the theme park and ultimately result in fewer visitors in the future.

122 marks for the definition below, or similar:

Lean production is reducing waste within the operations function of a business to increase productivity.

13Labour productivity is a measure of output per worker. Training will provide staff with the necessary skills and knowledge to perform their job more efficiently and can therefore increase output per worker.

14Labour-intensive firms have a higher proportion of workers than machinery within the production process. In a capital-intensive industry there is a greater proportional use of machinery.

15AO1 Knowledge = 2 marks

AO2 Application = 3 marks

Just-in-time stock is where inventories arrive at the time they are needed to match production or demand.

Possible benefits to a clothes retailer include:

less capital tied up in holding stock allowing maximum space for displaying clothes on the shop floor
reduced risk of holding obsolete stock when certain lines go out of fashion

16AO1 Knowledge = 2 marks

AO2 Application = 3 marks

Just-in-time stock is where inventories arrive at the time they are needed to match production or demand.

Possible disadvantages to a clothes retailer include:

loss of sales if a customer wants a specific size or colour that is not in stock
fewer impulse purchases as clothes are a shopping good

4.4 Making operational decisions to improve performance: improving quality

17Quality assurance is where each employee takes responsibility for quality at each stage of the production process as opposed to quality control, where responsibility for checking quality is assigned to a specialist at the end of the process.

18A quality product will meet customers’ expectations and therefore lead to customer satisfaction. Satisfied customers will enhance the reputation of a business via positive word of mouth,whereas dissatisfied customers will harm the business’s reputation. This has become an increasing issue with growth in use of social media.

19Suppliers provide goods and services to a business. If there is a good relationship between the supplier and the business then the right goods, of the right quality, should be delivered on time. This will impact on the business’s ability to provide a quality product, i.e. the supplier supplies quality raw materials which are needed to produce the quality end product.

20AO1 Knowledge = 2 marks

AO2 Application = 2 marks

AO3 Analysis = 2 marks

Quality assurance is where each employee takes responsibility for quality at each stage of the production process.

Possible benefits to a toy manufacturer include:

greater confidence by parents that toys are safe
less wastage of materials and time spent reworking toys
more motivated workers as responsible for achieving own quality standards

Analysis requires a line of argument to explain cause and effect.

One benefit is that there will be fewer (or zero) faulty goods reaching the market, as they will be checked at each stage of the process. This will enhance the reputation of the business as a safe and quality manufacturer of toys. Parents will therefore be confident when buying toys for their children, helping the business to build brand loyalty.

21AO1 Knowledge = 2 marks

AO2 Application = 3 marks

AO3 Analysis = 4 marks

Quality problems exist when a product fails to meet customers’ expectations and needs.

Possible consequences at Harley-Davidson include:

cost of recalling 46,000 bikes and fixing the problem
damage to Harley-Davidson brand, which is associated with being a quality product
potential legal action if bikers are injured as a result of losing control of their bikes

Analysis requires a line of argument to explain cause and effect.

One possible consequence is damage to the reputation of Harley-Davidson. Customers associate the brand with a quality image, which adds value to the products and generates brand loyalty. If goods are recalled, customers may question the safety of the product and hence not wish to purchase the bikes in the future, which would stop Harley-Davidson from being able to charge a premium price.

4.5 Making operational decisions to improve performance: managing inventory and supply chains

222 marks for the definition below, or similar:

Mass customisation is when the basic product is mass produced, but the customer is able to tailor-make some aspects of it to meet their specific needs.

23Mass-produced products will be manufactured quickly and make use of automation. Ready-made products may even be held in stock for immediate dispatch and machinery will be set up to produce these. If goods are produced to order then this willslow down the speed of response, as the goods will not be held in stock and machinery may need to be altered/reprogrammed to meet any specific requirements of the order. Hence the speed of response is slowed down.

24Stock may be:

raw materials, such as flour and yeast
work in progress, such as dough that has been made but not yet baked
finished goods, e.g. a sliced loaf of bread

25AO1 Knowledge = 2 marks

AO2 Application = 3 marks

Producing to order means that the meal will be cooked only once the customer has placed the order. A benefit of this is that the food will be freshly prepared and can be made to meet the exact requirements of the customer, e.g. cooked rare or without sauce. This will lead to a higher-quality end product and hence greater customer satisfaction.

26AO1 Knowledge = 2 marks

AO2 Application = 3 marks

AO3 Analysis = 4 marks

Dependability refers to the ability of the consumer to confidently rely on the supplier of a good or service.

Possible benefits to an online book retailer include:

customer satisfaction shown through online ratings and blogs
fewer returns if deliveries are incorrect or late
competitive advantage over larger rivals such as Amazon

Analysis requires a line of argument to explain cause and effect.

One benefit is that the customer will receive the right product on time. This will lead to a greater level of satisfaction. They are therefore likely to give positive feedback on the website. This will provide confidence to other customers,ultimately leading to more new customers trying the website.

27Buffer stock is the minimum level of stock a business wants to hold in order to ensure production is never halted if stock replenishment is delayed. One benefit is that the business will be able to meet the needs of the customer quickly and therefore not risk losing sales to competitors.

28Buffer stock is the minimum level of stock a business wants to hold in order to ensure production is never halted if stock replenishment is delayed. One disadvantage is that it costs to hold stock in terms of warehousing, security and insurance. This will therefore be an additional expense to the business, affecting profit margins.

29B The minimum stock a business aims to hold

30AO1 Knowledge = 2 marks

AO2 Application = 3 marks

AO3 Analysis = 4 marks

Inventory control charts are a diagrammatic representation of the amount of stock held, use rates and ordering details.

Possible benefits to a sandwich shop of using inventory control charts on a daily basis include:

it reminds the owner when to reorder stock and how much, to ensure that there are no shortages
ability to meet the needs of customers rather than having sold out of some ingredients, e.g. cheese

Analysis requires a line of argument to explain cause and effect.

One benefit to a sandwich shop is that it will reduce the risk of stock shortages. Therefore they will be able to meet the needs of customers by providing them with a full range of choices from the menu. This will lead to high rates of customer satisfaction. This could lead to loyalty from nearby office workers.

31AO1 Knowledge = 5 marks

AO2 Application = 4 marks

AO3 Analysis = 6 marks

AO4 Evaluation = 10 marks

Buffer inventory is the minimum level of stock a business wants to hold in order to ensure production is never halted if stock replenishment is delayed.

Reasons why it is necessary for all businesses to hold buffer stock include:

to satisfy customer needs quickly
to stop customers from going to a competitor if the business does not have what they want in stock
to ensure unforeseen circumstances do not cause a shortage of stock
to reduce overreliance on suppliers

Reasons why it is not necessary for all businesses to hold buffer stock include:

the business may be flexible enough to respond quickly to customer needs without buffer stock
a business using job production will only need to buy stock and produce a finished good once an order has been received
a business that has an objective of cost minimisation will want to avoid the cost of holding stock

Overall:

the relationship with suppliers
the distance from suppliers and risk of external influences, e.g. if importing from abroad what is the stability in that country?
the business objectives
relationship with customers, including degree of loyalty
number of competitors

AQA AS/A-level Business Topics 1.4–1.6

Section 5 / Decision-making to improve financial performance

Section 5Decision-making to improve financial performance

5.1 Setting financial objectives

322 marks for the definition below, or similar:

Shareholders’ funds are the capital invested by shareholders in the business, plus any retained profit not yet paid in dividends.

33Cash-flow objectives are targets set for the amount and timings of cash inflows and outflows,in order to achieve a closing balance that allows the business to continue to operate and meet day-to-day expenses. One benefit is that it will encourage managers to review cash flow against the objectives in order to take corrective action where necessary and therefore reducing the risk of liquidity problems.

34Return on investment = operating profit/investment x 100

£890,000/2,000,000 x 100

44.5%

35Cash flow is the flow of money into and out of a business over a period of time. It is therefore crucial to short-term survival. Profit, however, is a longer-term concept of the surplus of revenue over total costs within a given period of time.

aGross profit = sales revenue – cost of sales

Sales revenue = selling price x quantity sold

£450 x 2,500 = £1,125,000

Cost of sales = £1,125,000 x 0.4 = £450,000

Gross profit = £1,125,000 − £450,000 = £675,000

bOperating profit = gross profit – expenses

Expenses = 2,500 x £100 = £250,000

Operating profit = £675,000 − £250,000 = £425,000

cOperating profit/sales revenue x 100

£425,000/£1,125,000 x 100 = 38%

5.2 Analysing financial performance

37Expenditure budget is a limit set on the amount of money flowing out of a business to pay costs in a set period of time. One benefit is that this will provide a guideline for managers to monitor actual expenditure in relation to the budget. This will allow them to identify where the business might overspend and therefore take corrective action.

Budget (£) / Actual (£) / Variance (£)
Sales revenue / 195,000 / 205,000 / 10,000 F
Cost of sales / 49,250 / 57,000 / 7,750 A
Wages and salaries / 58,500 / 55,000 / 3,500 F
Marketing / 10,000 / 10,000 / 0
Rent / 35,000 / 35,000 / 0
Utilities / 4,500 / 5,200 / 700 A
Other expenses / 4,300 / 3,300 / 1,000 F

Budget profit = £195,000 – (£49,250 + £58,500 + £10,000 + £35,000 + £4,500 + £4,300) = £33,450

Actual profit = £205,000 – ( £57,000 + £55,000 + £10,000 + £35,000 + £5,200 + £3,300) = £39,500

Variance = £6,050 F

39AO1 Knowledge = 2 marks

AO2 Application = 2 marks

AO3 Analysis = 2 marks

Income budget is a target for the amount of money coming into a business from sales in a set period of time.

Possible benefits to a branch manager of a travel agents include:

to set sales targets for individual travel agents within the branch
to motivate self and team by having a target to work towards
to review branch performance towards budgets in line with other similar-sized branches

Analysis requires a line of argument to explain cause and effect.

One benefit is that the manager will have a clear goal to work towards. This can then be shared with all of the travel agents within the branch to ensure they are all working towards a common goal. This will provide a sense of purpose, motivating the team.

40AO1 Knowledge = 2 marks

AO2 Application = 2 marks

Income budget is a target for the amount of money coming into a business from sales in a set period of time. Market research will help a start-up business identify potential demand for its products and the amount customers are willing to spend. From this, the entrepreneur could forecast potential sales revenue and use this to set an income budget.

41AO1 Knowledge = 2 marks

AO2 Application = 3 marks

Profit budget is a target set for the surplus of income over expenditure in a set period of time. Competitors’ actions can affect the level of demand for a music shop and hence sales revenue and profit. If, for example, a competitor lowered the price of top-selling CDs, then their demand would go up, taking sales from the other store.

422 marks for the definition below, or similar:

Cash-flow forecast is a prediction for the flow of money into and out of a business over a period of time.

43Payables are money owed by the business,which will therefore flow out of the business at a point in the future. Receivables are money owed to the business,therefore the flow will be into the business at a point in the future.

44Credit terms are the length of time a supplier will give a business to pay for goods received, e.g. 30 or 60 days. Negotiating credit terms will give a business a longer period of time within which to pay. Therefore this will slow down the flow of money going out of the business, hence helping cash flow.

£ / Month 1 / Month 2 / Month 3
Cash in
Cash sales / 115,000 / 125,000 / 130,000
Credit sales / 11,000 / 22,000 / 25,000
Total cash inflows / 126,000 / 147,000 / 155,000
Cash out
Wages and salaries / 40,000 / 40,000 / 40,000
Raw materials / 38,000 / 38,000 / 39,500
Rent and rates / 11,000 / 8,000 / 8,000
Utilities / 2,250 / 0 / 0
Administration costs / 500 / 500 / 500
Other expenses / 3,500 / 1,500 / 1,500
Total cash out / 95,250 / 88,000 / 89,500
Net cash flow / 30,750 / 59,000 / 65,500
Opening balance / (25,000) / 5,750 / 64,750
Closing balance / 5,750 / 64,750 / 130,250

46AO1 Knowledge = 2 marks