Business Studies Level M Course Questions Solutions

Business Studies Level M
Business Level M - Solutions
Chapter 1 Introduction to Marketing
Section 1 Key Concepts in Marketing

(1) 1. a) Marketing is defined as the process that links a business to its customers by
identifying their preferences and predicting their possible consumption habits in an attempt to
increase profit margins.
b) Marketing will help Tom analyze the reasons behind changes in consumption patterns and
the importance of trends in consumer habits or preferences. Tom will be able to assess the
competition level in the local area and understand the reasons why some markets became
more competitive than others. Through marketing, he will identify a way to react and respond
to higher competition and changes in consumer patterns, and inform his consumers about his
new business.
(2) 2. A market-oriented business is usually better because it is less risky than a product-
oriented business because it can guarantee sales, since it supplies what consumers want.
However, this will depend on the type of product. For instance, a product-oriented business
can succeed if it supplies a top quality, highly-innovative product.
(3) 3. a) P&M is a market-oriented business because it conducted market research to identify
the commercial preferences of consumers before designing and selling its new product.
b) The probability of success of a market-oriented business is high since the research
conducted before launching a new product ensures that the item will be introduced where
there is a market and a consumer base. This guarantees sales and enhances efficiency since
revenues will be generated. Also, this motivates managers to search for possibilities for
further profits.
(4) 4. a) sales
b) promotion
c) R&D
d) distribution
(5) 5. G Informing customers about products and identifying their preferences in order to
make profit.
(6) 6. G A product-oriented firm develops a product without prior research of customers’
needs, and then finds a market to sell it. A market-oriented firm studies the markets’ needs
and then supplies the product according to consumers’ needs. By doing so, it guarantees
sales.
(7) 7. G Marketing is used to help a business:
- Identify changes in consumers’ tastes and purchases.

- Identify the level of competitiveness within markets and the reasons why markets become
more competitive.
- Identify ways to overcome competition by rivals and develop better products to meet
consumers’ demand.
- Identify consumer needs and satisfy them profitably.
- Develop and maintain consumer loyalty.
Section 2 Marketing Objectives and Strategies

(8) 8. Selling the product in new markets, introducing new innovative products that were not
marketed before, and using aggressive marketing campaigns. These strategies allow the
business to enter new markets, expand, increase market share, as well as sales and
profitability.
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(9) 9. a) Developing a marketing plan allows the business to reach the greatest number of
consumers by making decisions about the marketing mix elements.
b) An efficient marketing plan allows the business to use its resources (i.e., money and time)
efficiently which helps it remain competitive. It allows the business to adjust to anticipated
changes in the market by avoiding potential threats, and grasping new opportunities. The
business can also use the marketing plan to monitor performance and ensure that it is
achieving the overall corporate objectives.
(10) 10. G Product, price, place, promotion
Section 3 The Elements of the Marketing Mix

(11) 11. G They assist in achieving marketing objectives and include:
- entering new markets to expand sales

- increasing sales to achieve a higher market share
- maintain the same level of sales and market share
- improving existing products to sell more
(12) 12. G In order to develop the appropriate marketing strategy, the business should
consider different issues related to the elements of the marketing mix.

• When considering the product, the business should determine whether to produce one
or more products, its/their features, the production method, the importance of quality,
the availability of aftersales services, and the package.
• When considering the price the business should identify whether the market is
competitive, whether the product is new or old, whether to use promotion to attract
customers, whether the good is a luxury or a basic item, and whether the demand is
highly elastic.
• When considering the place, the business should decide whether to sell directly to
customers or use intermediaries, determine whether the product needs to be widely
available, identify methods and channels of distribution, consider costs and barriers if
the product is exported, and identify how the product type affects its distribution.
• When considering promotion, the business should determine the promotion budget,
the competition level in the market, the frequency of advertising, where and how to
advertise, and the target customers.
Section 4 Marketing, Customers, and Competition

(13)13. a) A mass market sells a standard product in bulk, at a relatively low price.
b) A shoe manufacturer can segment the market in two ways; by taste and gender. For
instance, older people look for different features in shoes (comfort) than younger people
(style and fashion). Moreover, male and female consumers (both young and old) have
different commercial needs and preferences for shoes. (It is also possible to segment the
market by
age: shoes for young and old).
c) Segmentation will allow the shoe manufacturer to identify the target market that will be
addressed and increase sales and profit. Moreover, by segmenting the market, the shoe
manufacturer will be able to identify any gaps in the market that may offer new opportunities
to increase sales and compete better.
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d)
(14) 14. a) A product-oriented firm considers the quality and price of products prior to
searching for markets or establishing new ones. A market-oriented business carries out the
necessary research to understand the commercial preferences of consumers, before
developing its products.
b) In a mass market, a standard product is sold in bulk, at a relatively low price. A niche
market tends to be a smaller section of a mass market that promotes more specialized
products.
c) The marketing strategy outlines how the company intends to achieve its marketing
objectives by considering the overall approach to be taken by the entire enterprise. A
marketing plan is a written document that provides details about the necessary actions needed
to achieve one or more marketing objectives.
d) Consumer market is for goods and services aimed at households. Industrial market is for
manufactured goods (or capital goods), aimed at businesses.
(15) 15. a) The market share decreases when competitors attempt to “steal” the consumers
from t business.
b) A low market share limits the market power and influence of the firm and reduces its
competitiveness.
(16) 16. a) Supplying to a mass market is beneficial because it leads to economies of scale
from large scale production and diversification, and it increases profits and competitiveness.
b) - Increasing or maintaining a solid market share in an attempt to overcome competitors,
penetrate the market, and expand.
- Improving or maintaining a positive image of a product or firm.
- Developing new products or improving existing ones in order to enter new markets and to
avoid loss-making products.
- Increasing sales revenue and profitability.
(17) 17. a) The lack of market research about what consumers are demanding greatly increases
the risk of making the product hard to sell.

b) Without marketing, the firm fails to inform consumers about its products. This leads to
lower sales and market share.
c) Without segmenting the market, the business will not be able to identify its target market
or benefit from potential opportunities or gaps in the market.
(18) 18. a) Strengths: new techniques used in the production such as natural flavors and healthy
ingredients help differentiate the product, giving it the ability to meet the public's demand to
eat healthy. Weaknesses: no reference Opportunities: high incomes and employment in a
booming economy allow for faster expansion and higher production. Threat: high
competition will require continuous marketing and R&D.
b) The SWOT analysis is a technique used to assess a product through studying and
analyzing its strengths, weaknesses, opportunities, and threats.
(19) 19. a) A market can be segmented by age; people of the same age share similar interests.
For instance, older people look for different things in a good/service than younger people. A
market can also be segmented by gender; for instance, male and female consumers (both
young and old) have different commercial needs and preferences. Therefore, markets have
developed to cater to these differences (e.g., men’s designer clothing, and cosmetics for
women).
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b) By identifying the target markets and dividing consumers into segments, a business can
identify the segments “left behind” by competitors and develop a product to meet the demand
of the small segment or niche market
(20) 20. a) The elements of the marketing mix are product, price, place, and promotion.
b) The automobile industry (e.g., Ford) might concentrate on civilian vehicles and those
required by the military. Depending on its purpose, the process of promotion will include
social media or other advertising methods to target the different segments. The price it sets
will depend on the various income groups within the identified market segments. Ford
will determine the place to make its vehicles available, based on the location of consumers
and suppliers of resources
(21) 21. a) financial market
b) consumer market
c) industrial market
d) commodity market
(22) 22. a) The internet encouraged e-commerce which facilitated the transfer of money and
enabled consumers to purchase goods and services online. This resulted in a wider variety of
products to choose from, thus increasing the number of competitors each business has.
b) globalization and improvements in transportation
(23) 23. a) The bakery lost some of its customers to new rivals.
b) The bakery can improve the quality of its existing doughnuts and work on creating a new
type by adding new flavors or designing new shapes.
(24) 24. a) age
b) socio-economic grouping
c) use of the product
(25) 25. G Changes in price, incomes, population, income tax, fashion or tastes result in a
change the consumption patterns.

(26) 26. G Limiting control over businesses, providing financial assistance in the form of
subsidies, using information technology and the internet to sell more, eliminating trade
restrictions on international trade
(27) 27. G Develop new products or add features to existing ones
Offer sales discounts or vouchers

Enter new markets
Reduce costs to be able to make more profit
(28) 28. G Benefits: higher chance for survival and profit generation, resources are not over
consumed due to low competition, firms can charge premium prices, firms can build
consumer loyalty
Drawbacks: cannot produce in bulk and achieve economies of scale
(29) 29. G Achieve economies of scale, supply to a larger market and even internationally,
ability to lower costs of production, ability to survive even if consumers change their tastes
by supplying alternatives.
(30) 30. G Allows to increase sales and revenues
Allows to know what consumers want and increase their satisfaction

Allows to identify gaps in the market and benefit from first mover advantage
Allows to set more successful marketing strategies
Allows to provide a variety of products to meet different segments’ needs and hence increase
profit
(31) 31. G Develop and maintain good customer relationships, develop new products or
improve existing ones, control costs.
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G Market share = sales of the company/total market sales × 100%

(32) 32.
T a) A “more competitive market” means additional enterprises will be offering the
(33) 33.
same goods and services that are aimed at the same market segment.
b) Market share = (sales of the company/total market sales) × 100%
➔ Sales of company = (market share × total market sales)/100% = (20 × 70m)/100 =
$14 million.
c) The market share of this business has decreased and this is could be due to:
- Competitors who attempt to obtain a higher percentage of the market share by
providing more highly innovative goods.
- Failure to set the most beneficial price, which results in loss of consumers to
competitors.
- Quality control issues, which result in dissatisfied consumers and lowers sales.
d) Even if new products are developed, this cannot guarantee sales. This is because
the price set or the quality might not allow the business to compete. However, if the
variety provided is better than in the market, the managers’ strategy would be
beneficial.
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Chapter 2 Market Research and Data Presentation
Section 1 Primary Market Research

(34) 1. a) The market research process involves several steps which include the following:
- Identify the purpose of the market research.

- Set the objectives.
- Select the right research methods.
- Design the research method.
- Determine the data analysis to use.
- Collect the data, organize it, and analyze the outcome.
- Present the findings, and use the information to meet the objectives.
b) Primary research can be used to collect information about the products that the business
sells, customer satisfaction about the company’s product and services, and consumer
feedback on newly-launched products.
(35) 2. Using interviews to research the market allows the interviewer to ask several questions
and obtain detailed information. Also, face-to-face interviews provide detailed insights from
signs such as body language which assist these studies.
(36) 3. a) A business can carry out primary research by collecting original or first-hand
information through direct contact with customers such as interview surveys, questionnaires,
etc.
b) The primary research conducted by the chips producer targets a specific purpose which is
identifying consumers’ flavor preference by directly gathering information from them to
decide on the new flavor accordingly. The producer also determines the exact source of
information which allows him to classify it by target market such as age or gender.
(37) 4. G Market research is used:
- To identify who the consumers are and what prices they are willing to pay.
- To increase the demand for a product.
- To become more competitive.
- To advertise efficiently.
- To develop better products.
- To identify which products are profitable and which prices are consumers willing to pay.
(38) 5. G Primary research is conducted by the business itself and it answers a specific
purpose. It is more accurate and specific. It includes quantitative and qualitative data that is
genuine.
(39) 6. G It allows to identify potential consumers, know what they prefer, and supply
products that allow the firm to better compete in the market and make profit. Through market
research, the firm can plan better on the four elements of the marketing mix, especially the
price.
(40) 7. G Benefits: data is up to date and serves a specific purpose
Drawbacks: time consuming and expensive, involves a certain degree of bias and data may
not be useful if the employees who are collecting it are inexperienced.
Section 2 Secondary Research

(41) 8. Primary research is a market research method, such as surveys, that involves gathering
original or first-hand information, However, secondary research, such as company reports,

involves researching already available information sources.
(42) 9. a) He can use internal secondary sources like consumer feedback to find out what other
customers think about the service. He can also conduct a survey to determine what is causing
consumer discontent.
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b) To guarantee better market research results, he can hire a market research agency that has
the ability to conduct any market research investigation or inquiry. Specialized agencies have
the know-how which saves the business time and increases the accuracy of the data.
(43) 10. a) Primary research would be more useful for the company because it is launching a
new drink. Primary research is a market research method that involves gathering original or
first-hand information and collecting new information that answers a specific purpose.
Collecting secondary research would be misleading in this case.
b)
(44) 11. a) It is important for a company to be aware of the competition in an entire market
before launching a new product as it helps to know how the product will compete. The
business will also learn about its competitors’ strengths and develop items that will give it a
competitive edge.
b) Primary research is more useful. For instance, by conducting a SWOT analysis, a business
can change its marketing strategy in order to compete more successfully. It also gains a
greater working knowledge of consumer trends or views, products, and the overall reputation
and public perception of a business.
(45) 12. a) primary research
b) secondary research
c) primary research
d) secondary research
(46) 13. G Secondary data might not answer a specific purpose and hence could not be used
as it will be irrelevant or outdated.

Primary research is more time consuming and more expensive than secondary data. However,
it collects first hand data that is more accurate and that serves a specific purpose.
(47) 14. G Primary research is more time consuming and more expensive than secondary
research. However, it collects first-hand data that is more accurate and that serves a specific
purpose.
(48) 15. G
- Data is being collected for another purpose.

- The sample chosen might not be representative of the whole population.
- Bias.
- Questions asked might be misleading or not well prepared.
- The researcher might not have the skills and experience to conduct research.
(49) 16. G
- Less expensive and less time consuming than primary data, but it serves another purpose.
- It includes articles from magazines, newspapers, and the web.
- It can be used to complement primary research.
(50) 17. G
a) The Internet: secondary

b) Competitors’ publications: secondary
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c) Questionnaires: primary
d) Focus groups: primary
(51) 18. G Use clear language, no jargon, and hire experienced employees who know how to
develop clear questions in questionnaires and analyze data without bias. Also, by making
questions short, easy to understand and easy to answer.
(52) 19. G Specialized research agencies have the know-how and the ability to increase the
accuracy of the data. They can also provide information about competitors’ products and
advise managers on how to increase competitiveness. They also save time for the business.
Section 3 Data Presentation from Market Research

(53) 20. a) From year 1 to year 3, the sales of tomatoes increased a lot, from $25,000 to reach
$45,000. However, the sales of carrots decreased continuously from $70,000 to $60,000.
b) According to the data, if sales are increasing annually, he should increase his product
range. If, on the other hand, the data shows that they are decreasing, he should do the
opposite since successful products are usually in demand, while those not successful are not.
Given this quantitative data, he should produce more tomatoes and less carrots.
(54) 21. a) Tables collate and demonstrate data efficiently and articulately. However, it is
difficult to quickly pinpoint trends in tables.

b)
c) This information can be used to determine the drinks preferred by women and men. The
data can be used to determine the target market or segment, and determine the type of drink
that will guarantee high sales.
d) The data collected from the website might be outdated. In addition, the business cannot
identify why men or women favor a certain beverage. The firm should be also concerned
about this data because the samples surveyed might not be representatives of the whole
market.
(55) 22. G Tables, charts (line and bars), pictograms, and maps.
(56) 23. G Facebook has the highest activity in terms of use, meaning it is the mostly used
and familiar social media
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Chapter 3 Marketing Mix: The Product
Section 1 Features of Successful Products

(57) 1. G - It serves the purpose it is intended to serve.
- It has an attractive design and a good package.

- Its price reflects its quality.
- It allows the business to make profit through acquiring lower costs.
- It can attract more customers and increase demand.
(58) 2. G A business can diversify and enter new markets, allowing it to increase its market
share and respond to market changes. Also, a business can develop genuine products, and sell
them at higher prices to make additional profits. It does so to win a competitive edge.
(59) 3. G Consumer goods and services and producers goods and services.
Section 2 The Product Life Cycle

(60) 4. a) The stages of the life cycle of product B are: Introduction, growth, maturity and
decline.
b) First, the life cycle of product B is longer than that of product A. Product B is more
successful than product A because with product A the decline stage occurs directly after a
very short maturity stage. This reveals lower sales that product B.
(61) 5. At the introduction stage, the product is launched for the first time into the market. The
introduction stage is characterized by low sales. Advertising is needed to notify consumers

about the product launching and inform them of its features.
(62) 6. The development of new products requires high investment in research and acquires
high costs which could affect the financial situation of a business. It is better to add features
to existing products and extend their life cycle, since it is cheaper and incurs less risk.
(63) 7. The company can sell the jeans in a new market, target a different market segment such
as children and slim individuals, add new designs, and encourage customers to buy more
jeans of different colors.
(64) 8. a)
b) He can target a different market segment by developing games for different age groups. He
can also add new features or improve the existing games by changing the design or making it
an online game.
c) A product with a short life cycle incurs losses for a firm and requires it to either develop a
new product or shut down its operations. In the decline stage, no profit is generated
encouraging competitors to take advantage of their rival’s declining products to develop a
better alternative. This reduces the market share and reflects negatively on the image of the
business.
(65) 9. a) It is important for a marketing manager to understand the concept of the product life
cycle, since it projects the level or pattern of a product’s sales over time. This allows the
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manager to develop a new marketing mix and introduce necessary changes to maintain
profits.
b) Yes, because it might not be launched or advertised immediately and effectively. Also, the
costs at the beginning might not be covered by sales revenues.
(66) 10. G Development, introduction, growth, maturity, saturation, decline.
(67) 11. G Different products have different life cycles and they are usually bell-shaped. A
business can find ways to extend the maturity stage and prevent the product from declining.
(68) 12. G - Lowering the price of the product.
- Entering new markets.

- Redesigning the product and adding new features.
- Changing the use of the product.
(69) 13. G
(70) 14. T a)
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b) It could sell the product in a new market: The business might consider selling its
products overseas, especially if foreign markets are less competitive than domestic
ones.
(71) 15. T a) The end of the maturity stage means that sales have reached their peak and the
market has become saturated. It can be very difficult for companies to maintain their
profits, let alone continue trying to increase them, especially in the face of what is
usually fairly intense competition.
b) - Add new features to, or improve the existing product: The business can make
small changes to the product design, color, or packaging, in order to make it more
appealing to customers.
- Sell through additional retail outlets: If the product is sold only in one store, the
business can work on the “place” element of the marketing mix and make the product
available in different locations.
Section 3 Product Differentiation

(71) 16. a) The owner can develop a logo or slogan and add it to the T-shirt to create an image
and build loyalty.
b) It reached the maturity stage, because at this stage the product is well established. There is
good profit, but the level of sales is slowing.
c) Branding allows the Lions to sell branded T-shirts for a higher price, increase sales and
extend the life cycle. Additionally, branding makes it easier to diversify and supply other
vintage products.
(72) 17. a) Branding, involves giving a product a distinctive name or “brand name” and
building a brand image and helps the business differentiate its products. However, packaging
refers to how a product is presented. It is the physical container or wrapping for a product.
b) It will not appeal to customers because packing improves the selling appeal. A proper
package is a means to attract customers. For instance, the use of colors and shapes can help a
product stand out against competition.
c) They package their products because a package protects the product, improves the selling
appeal, displays information, promotes the brand, extends the life cycle and facilitates the use
of the product. It is also a mean to promote the products.
(73) 18. a) The owner can create a unique selling point for the clothes such as selling shirts
with a special design at a lower price than any other shop in the mall, or he can use branding
by developing a brand name for his clothes as well as a trademark.
b) With time, consumers might develop brand loyalty to the clothes sold in this shop which
ensures high sales and makes it easier for the owner to launch new collections or styles. This
is due to customer faith in the shop’s products
and willingness to purchase without hesitation, especially if the brand name is synonymous
with high quality.
(74) 19. a) McDonald’s chose a distinctive name to differentiate it from other businesses in the
same industry and developed it into a trademark that cannot be used by others and that can be
identified by all customers easily through the letter “M”.
b) A well-established brand name ensures high sales for McDonald’s and allows it to
diversify since launching new items can easily attract consumers who know the brand and
trust it.
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c) Because of brand loyalty developed towards McDonald’s. Consumers trust the brand even
if bad rumors surround it. Successful marketing strategies also allow McDonald’s to maintain
its high sales in such situations.
(75) 20. Quality affects the ingredients, the package, the price, and the use of the product. A
high-quality product stands out from other products and easily attracts consumers. Usually a
high-quality product can sell at a higher price.
(76) 21. G Differentiation, greater consumer loyalty, product differentiation, higher
competition and better consumer recognition of the brand. A good brand also allows the
business to raise the price level.
(77) 22. G The package protects the product content, helps promote the brand and image at
no extra cost, extends the product life cycle, gives consumers details about the product and
help them to easily identify it.
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Chapter 4 Marketing Mix: The Price
Section 1 Importance of Price

(78) 1. a)
b) An increase in income increases the demand for normal goods and a successful advertising
campaign results in an increase in demand.
c) Higher production costs, higher taxes and bad weather decrease the supply of a product.
(321) 2. a) An increase in price will lower the demand for a product. However, this will depend
on elasticity. An elastic demand would see a sharper decrease following an increase in price
than an inelastic demand.
b)
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(79) 3. a) If demand is elastic, an increase in price will cause sales to fall by more than the
percentage change in price. However, if demand for a product is inelastic, an increase in price
results in sales falling by less than the percentage change in price.
b) Products that are easily substituted for more economically priced alternatives and products
that are not a necessity are likely to have high elasticity, such as jewelry or other luxury
items.
(80) 4. a) It depends on the elasticity of demand of petrol. Petrol usually has an inelastic
demand, meaning revenues will increase following an increase in price, because consumers
will not be highly responsive to changes in price.
b) This is done because the demand of food and beverage is decreasing when fewer motorists
stop at the gas stations. It depends on the types of food and beverage. For example, during
holidays, many customers might travel, reducing the demand.
(81) 5. No, because a business must consider both internal and external factors when setting a
price. External factors can significantly affect this decision as they provide information about
consumers’ willingness to pay, competitors’ prices, the type and nature of demand, the legal
requirements, and the industry trends.
(82) 6. Because some external factors cannot be controlled and because setting a price that is
not suitable for the market or consumers will cause losses to the business.
(83) 7. a) Medicines have highly inelastic demand as they are considered necessity goods.
b) Since the demand for medicines is inelastic, an increase in price either reduces the quantity
demanded by a smaller proportion, or has no effect on the quantity demanded if demand is
perfectly or highly inelastic. A higher price with a slight (or no) decrease in quantity
demanded increases total revenue:
TR = Price × Quantity.
(84) 8. G Prices are affected by costs, objectives of firm, the number of rival firms and the
degree of competition.
(85) 9. G - An increase in incomes.
- A successful advertising campaign.

- A decrease in the price of a complementary good.
- An increase in the price of a substitute.
- An increase in the population size.
(86) 10. G - A decrease in wages.
- An increase in subsidies.
- A decrease in the costs of factors of production.
- A decrease in corporate taxes.
- An increase in productivity and technology.
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(87) 11. G Product is not habit forming or a necessity and it has many substitutes.
(88) 12. G For elastic demand, as prices increase total revenues decrease. When demand is
inelastic, an increase in price results in an increase in total revenue.
(89) 13. G - When a business enters a new market or increase market share.
- When competition increases.

- When the costs of production change.
- When a business wants to increase profit.
(90) 14. T a) The marketing strategy outlines how the company intends to achieve its
marketing objectives by considering the overall approach to be taken by the entire enterprise.
b) The marketing strategy provides decisions and direction regarding variables, such
as market segmentation, target market identification, marketing mix elements, and
expenditures. In this case, the Bakery is changing the marketing mix elements;
therefore, it should have a new strategy.
c) It is not always beneficial to reduce prices. It depends on the value of PED. If
demand for a product is inelastic, a decrease in price results in sales increasing by less
than the percentage change in price. This results in lower revenues and profit margins.
Section 2 Pricing Strategies

(91) 15. a) They will use the cost-plus pricing strategy.
b) Selling Price = Item Cost + (Item Cost × Markup Percentage)

Selling price X = 10 + (10 × 20%) = $12.
Selling price Y = 12 + (12 × 20%) = $14.4.
c) The two companies produce similar products and are in competition so the market price for
the product will be relatively the same for both companies. However, company X’s costs are
lower than company Y’s costs, thus company X will yield a higher profit.
(92) 16.
a) Penetration pricing method.

b) Price skimming or competitive pricing.
c) Promotional pricing.
d) Cost-plus pricing.
e) Price skimming.
(93) 17. a) The pricing strategy used is skimming pricing strategy.
b) No, because the demand for its products is elastic. Moreover, the percentage decrease in
sales is greater than the percentage increase in price. This resulted in a decrease in total
revenue due to low sales.
(94) 18. Penetration pricing is used to launch a product into an existing or a new market by
selling at a lower price than competitors. An example would be launching a new chocolate
bar at a very low price in a market where many other chocolate producers already exist.
Promotional pricing is used for products with a record of decreased sales, or by businesses
that need to clear stocks by reducing prices temporarily in order to attract consumers. For
example, a clothes shop reduces the prices on an old collection in order to reduce its stock.
(95) 19. a) Psychological pricing which encourages consumers to buy it because it makes the
product appear cheaper than $20.

b) Promotional pricing because a temporary decrease in price attracts customers and helps the
shop reduce its unsold stock.
c) Competitive pricing since the doll has many competitors; therefore, the decision to price it
depends on the prices of its competitors.
d) Price skimming because new features mean that the TV has no competitors yet, therefore it
can be sold at a high price.
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e) Price penetration because the new detergent is launched in a market where competitors
already exist; therefore, a low price is required to attract consumers.
(96) 20. G Price skimming, penetration pricing, competitive pricing, and promotional pricing.
(97) 21. G Businesses need to consider the prices, taking into consideration the prices set by
competitors. A good pricing strategy should result in higher sales and profits and hence a
higher market share and a competitive edge. The price should cover all the costs in order for
profits to increase.
(98) 22. G- A business can use price skimming when it is introducing a new genuine product
into the market.

- A business can use penetration pricing if it is launching a new product with many existing
substitutes.
(99) 23. G a) Consumers are unaware of the price once a product is being developed. During
the growth stage of a product life cycle, successful products can still sell for high prices. As
the product matures, prices are decreased so that firms keep competing in the market.
b) At the introduction stage of a product life cycle, firms spend high amounts of money on
promotion to raise consumers’ interest. At the maturity stage, promotion is needed to remind
customers of the new product and sustain sales. To avoid a decline in product life cycle,
vigorous promotion is needed to encourage consumers to buy the product more often.
(100) 24. G
a) The higher price under price skimming helps the business recover its development costs
quickly and reinforces high quality when the product is branded.
b) The low price under penetration pricing attracts customers and therefore increases market
share quickly. It results in a barrier to entry to potential competitors and helps promote other
full-price products.
c) Cost-plus pricing is easy to apply, covers costs, and guarantees profit.
Level M | 16
Chapter 5 Marketing Mix: Promotion
Section 1 Promotion in the Marketing Mix

(101) 1. a) Above-the-line activities do not target a specific audience because a promotion can
be seen by anyone through the paid media such as the internet and TV. Below-the-line
activities are directly controlled by the business. These activities target a specific audience
without the use of paid media. Examples include price reductions and after-sales services.
b) To familiarize consumers with an existing or a newly released product, or remind them of
this item. It can also be used to persuade potential customers that the firm’s products are the
best in the market.
(102) 2. Promotion is affected by the marketing strategy which includes decisions about price
and product. The nature or type of product is essential in making promotion decisions; for
example a medication requires detailed information about its usage while a pen does not.
Price could vary depending on the stage of the product life cycle. Therefore, suitable
promotional techniques need to be used in order to persuade consumers to purchase the
product at the set price.
(103) 3. G The nature of the product, the marketing mix, and the competitors in the market
and how they promote their products.

(104) 4. G Informative advertising is needed during introduction and persuasive advertising is
needed during the growth stage. No advertising is done during decline and development.
(105) 5. G Used to introduce consumers to existing and new products in order to increase
sales and profits.

(106) 6. G The price, product, and place mainly.
(107) 7. G It allows the business to estimate the costs of the marketing campaign, control
spending, assess performance and efficiency, and compare actual results in order to perform
better.
(108) 8. G - Build customer loyalty.
- Increase sales and profit through targeting new markets.

- Assist the business in creating an image and maintaining it.
- Informing or persuading consumers about products.
(109) 9. G
• The firm’s marketing objectives

• The amounts spent by competitors on marketing
• Changes in markets
• The amount of finance available
• The cost of promotion methods
• The stage of the product life cycle
Section 2 Advertising
(110) 10.a) Advertising refers to non-personal, paid-for messages about goods/services or
organizations, through mass media. Party Fiesta is using the identified methods of advertising
because it is a relatively small business that supplies specified services to a small target
market.
b) It can use billboards, magazines or direct mails.
c) It should use informative advertising, since it wants to first notify its consumers about the
benefits they would enjoy if they were to purchase the service.
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(111) 11. a) His decision will mainly be influenced by the target market which could be local,
national, or international. He also needs to consider the cost of the medium used if he was to
choose advertising.
b) The decision about the type of advertising medium to select depends upon the following
factors:
- Who the media is targeting: Whether local, national, or international customers need to be
reached.
- The product: Through advertising, the media used must reflect the image of the product.
- Cost of the medium: Marketing specialists consider the cost per head.
- The stage of the product life cycle.
(112) 12. a) According to the graph, we can see that as advertising expenditures increased
between 2003 and 2007, sales also increased. But from 2007 to 2008, the cost of advertising
increased a lot but sales decreased.
b) Yes, because advertising increases sales. However, at a certain point where the product
reaches the end of its maturity, the cost of advertising will continue to rise but sales will
decrease.
(113) 13. a) A small business cannot set the same promotion strategy as a big business as this
will depend on the budget allocated and the variety and types of products. For example, a
small grocery shop will send leaflets to consumers, while a retailer such as Carrefour can use
more than one form of advertising.
b) Promotion changes as the product moves from one stage to another. For instance, when a
product is introduced, informative advertising is used. However, as sales begin to increase,
advertising becomes more persuasive. At maturity, advertising is used to remind consumers
about the product and entice them to purchase it more often. Advertising stops at the decline
stage.
(114) 14. a) Informative advertising notifies consumers about the benefits they would enjoy if
they were to purchase the good/service. Alternatively, persuasive advertising creates a

favorable attitude among consumers.
b) Both, because informative advertising notifies consumers about the benefits of computers
and how they should be used, and persuasive advertising assists in creating a favorable
attitude among consumers.
(115) 15. a) It is spent the most on television which helps reach a mass and diversified
audience. It is appealing, since it uses colors, images, and sound.

b) Newspapers and magazines are cheaper than the use of cinema and can be read more than
once.
c) Advertising helps raise the standard of living in a society, because it increases demand and
production, generating profits. Also, it helps to pay for several services and create
employment opportunities and increases the general income level since it encourages people
to consume and spend more.
(116) 16. a) According to the graph, advertising expenditure increases as sales increase.
b) There is a positive relationship between sales and advertising expenditure.

c) The size of the firm and the stage of the life of the product influence the amount that
should be spent on advertising.
(117) 17. - Who the media targets: the business must identify the consumers it aims to target in
order to decide whether to advertise locally, nationally, or internationally.

- Cost of the medium: advertising can be expensive, so the business should take into
consideration the cost of the medium: before choosing it.
(118) 18. a) Advertising can increase the sales of a business; as a result economies of scale can
occur when production costs decrease. This causes consumers to pay less for the product
while also being educated about the goods and services that help them improve their lives.
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b) Advertising can mislead consumers by persuading them to buy goods or services they do
not need or cannot afford. In addition, some harmful products are advertised such as fast food
and demerit goods. These products are harmful to society, especially children.
(119) 19. G Advertising is a form of promotion used to inform and persuade customers about
products.
(120) 20. G Who the media is targeting, the product, the cost of the medium, and the stage of
the product life cycle.
Section 3 Other Forms of Promotion

(121) 21. a) A yacht company because personal selling is commonly used for expensive
custom-designed products.
b) A restaurant in a hotel because public relations is concerned with promoting a respectable,
dependable, and innovative image of the restaurant. The PR personnel directly follows up on
consumer satisfaction about products and continuously identify their needs.
(122) 22. a) sales promotion
b) The retailer can persuade consumers to purchase a product immediately without hesitation
and encourage them to switch from rivals through the use of sales promotion,. This builds
awareness for his products, reinforces his brand, and increases customer loyalty.
(123) 23. Customer service provides information about a firm’s products, assistance before and
after purchasing, and credit facilities. This helps enhance brand loyalty and can promote a
good image of the business.
(124) 24. The car toy cannot be effectively promoted by sales representatives as the product is
not custom designed for specific tastes and is not expensive enough to be promoted for
through face-to-face communication to potential clients. This method is costly and time-
consuming. A better approach would be to use sales promotion in the form of temporary price
reductions.
(125) 25. T a) According to the graph, advertising expenditure increases as sales increase. It
is a positive and direct relation.

b) It could use sales promotion techniques that are based on short-term activities.
They persuade potential consumers to purchase a product immediately, without
hesitation. Also, sales promotion encourages customers to switch from rival products.
It can be price reduction, special offers or free samples or gifts.
Section 4 Influences on Promotion

(126) 26. Social media requires effort, patience, and dedication. Moreover, continuous updates
are needed and technical problems are likely to occur. In addition, the business will not be
able to control negative posts by unsatisfied customers.
(127) 27. Technology made communication about products between businesses and consumers
easier through the use of the internet and social media. It allowed businesses to have direct
contact with consumers by creating platforms, such as blogs and social media tools, where
products can be promoted and feedback can be received.
(128) 28. G
- Reach consumers that traditional marketing methods fail to reach.

- Reach mass numbers, at low costs and in less time.
- Collects more data about consumers and markets.
- Allows fast distribution of data.
^
Level M | 19
Chapter 6 Marketing Mix: Place
Section 1 Place in the Marketing Mix

(129) 1. a) The wholesale merchants buy in bulk from the producer. Then, they break down the
products into smaller units for the retailer.

b) By breaking bulk, retailers only buy what they need. This reduces storage costs.
Wholesalers provide delivery services, which reduces transportation expenses for retailers.
(130) 2. The use of the wholesaler will benefit the company since the wholesaler helps it break
bulk and orders large stocks. Since the company runs four chain stores and sells a wide range
of products, it will not be beneficial to change the distribution channel because this might
result in higher costs.
(131) 3. Place is important because the product cannot be sold if it is not available where
consumers want to buy it.

(132) 4. a) Conurbation results in more customers locating in urban areas than in rural areas.
Since the toy manufacturer uses a direct channel, he will become worse off because of
conurbation. This is because the cost of transportation will increase.
b) The producer can use a retailer to reach consumers and restore sales.
(133) 5. a) Because consumers prefer a stress-free market, where they can purchase a
good/service that is delivered to them, and eliminate the need to go to a retail store. Also, to
eradicate the need for wholesale merchants or retailers. This lowers the overhead costs and
makes firms more environmentally friendly.
b) The benefits received from selling directly to consumers are lower overhead costs and
making firms more environmentally friendly.
(134) 6. a) Channel 1 because the product is perishable and may easily become unfit to eat so it
requires a short distribution channel.

b) Channel 2 because make-up can be bought by retail chains in bulk. These retail chains can
deal with manufacturers, and use their own system of distribution.
c) Channel 2 because retailers can purchase bulky quantities of expensive products which
lowers distribution costs.
(135) 7. a) The wholesaler buys in bulk from the producer then breaks down the products into
smaller units for retailers. Retailers then buy what they need.
b) Wholesalers usually buy their products in bulk which allows them to benefit from
discounts from the producer. They also provide delivery services and allow retailers to buy
what they need. This reduces transportation and storage costs for retailers.
(136) 8. G It is about distributing the product either directly or through intermediaries, and
making it available to consumers when they want to buy it.

(137) 9. G Type of market and products, the competitors, and how often consumers buy the
products.
(138) 10. G The intermediaries used or how distribution of a product to consumers happens
refers to channel of distribution. Method of distribution refers to where the product is made
available to consumers.
(139) 11. G
a) Advantages:
- Storage facilities provided to manufacturers and retailers.
- Lower storage costs incurred by retailers
- Access for manufacturer to many markets and potential consumers.
- Credit facilities, after-sales services and advice provided by retailers to consumers.
- Promotion undertaken by the wholesalers which reduces costs for producers.
Disadvantages:
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- Lowers profits for manufacturers who sell their products at discounts to wholesalers.
- No direct contact between manufacturers and consumers.
- Higher prices in case retailers and wholesalers aim to increase profit.
- Communication problems.
- Poor quality for perishable goods.
- Expensive channel for shops that are far from wholesalers.
- Wholesalers might not have a full range of products to sell.
b) Advantages:
- Simplified and straightforward
- Lower retail price
Disadvantages:
- Impractical when customers are far from retailers.
- Does not suit products that can be easily sent by post
(140) 12. G Wholesalers buy in bulk from producers and break down the products into
smaller units sold to retailers.

Benefits to producers:
• Allow producers to deal with few large orders
• Allow producers to be less concerned about storage cost and space
• Promote the producers’ products
• Take up the fiscal burden of unsold products
• Provide advice about products to manufacturers
• Facilitate repackaging and delivery to retailers
Benefits to retailers:
• Reduce storage costs
• Reduce transportation expenses
• Provide extended credit periods
• Hold responsibility for insurance premiums until products are delivered to retailers
(141) 13. T a) The unit selling price is: $400,000/500 = $800
b) Market share = (sales of the company/total market sales) × 100% =

(400,000/2,000,000) × 100% = 20%
c)
d) 1. Promotion: promotion represents all the forms of communication used in a

market place. It will help increase sales and market share, attract existing and
potential consumers, inform, remind, or persuade potential and existing consumers
about the product, create an image, and build consumer loyalty.
2. Product: it is the main reason why people buy something. If a product does not fit
the purpose for which it was designed, customers will not purchase it. An unpopular
good/ service will not generate revenues, and without profits, the enterprise can either
become bankrupt or be sold off to a competitor.
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(142) 14. T a) Producer to retailer to consumer, or producer to consumer since tractors are
heavy products and an explanation about the tractor is needed. A retailer that
specializes in agricultural products might be used as well to give advice to consumers.
b) Producer to agent, agent to wholesaler, wholesaler to retailer, and retailer to
consumer. Since the goods are sold in overseas markets, the producer will access the
services of an agent, who interacts with wholesalers on their behalf.
c) Producer to wholesaler to retailer to consumer, since the wholesaler will be able to
break the bulk and the retailer will be able to sell the goods on behalf of the producer
to consumers.
d) Producer to consumer, since the tailor has to directly communicate with the
consumer regarding measurements, style, etc.
(143) 15. T a) When setting a price, business managers must consider:
- The target groups the enterprise wants to attract, and their willingness to pay
- The price set by competitors.
b) The market share of a business refers to its total sales expressed as a percentage of
the market in which it operates. Since the bakery is targeting a new place, it will
attract new customers with higher incomes which could increase its sales and market
share.
Section 2 Technology and Place

(144) 16. a) The wholesalers may not have a full range of products to sell, and prices might be
higher if the wholesaler aims to increase profit by charging a higher price.

b) Yes, because costs per head will decrease. In addition, this will create an easy and friendly
environment for consumers. Since she sells clothes for newborns, her chances of increasing
sales through online sales increase, because it is more convenient for new moms to purchase
online. However, Carol will have to study the cost and time entailed in delivering
the goods sold to customers.
(145) 17. a) E-commerce is a distribution method.
b) No, because some goods such as highly perishable items might have a fast expiry date.
These products will lose quality when transported for long distances to reach the customer.
(146) 18. G Increase market share and profit through targeting consumers in a wider market.
(147) 19. G Businesses might run out of business due to higher competition.
(148) 20. G It refers to commercial transactions that are conducted electronically on the
internet.
Effects: increases the efficiency of distribution, increases competition, improves the
distribution process, lowers costs related to staffing and operations, and increases the market
share of the firms.
Section 3 Distribution and Foreign Markets

(149) 21. a) With rising incomes and low competition, foreign enterprises benefit from the
opportunity of providing alternatives for

consumers. This would increase sales revenues, and lead to a larger market share. People will
be able to afford the products.
b) The two other factors for a business to consider when selling its products in a foreign
market are the low cost and high availability of land and the fewer trade restrictions.
(150) 22. a) The differences between the African and European markets are the language and
culture and the trade barriers.

b) The company might have to pay high transportation costs. Depending on the mode of
transport (e.g., plane, train, or truck), the economic situation, and fossil fuel prices, increases
Level M | 22
in delivery costs can occur, especially over long distances. Trade barriers are another problem
because high tariffs might be added to the retail price of the final product. If the tariffs
are excessive, the profit margins will suffer due to reduced sales.
c) Employing an agent can be beneficial for this company, as this will make product
transition more fluent and rapid. He provides a link between sellers and buyers by assisting in
the movement of goods through the wholesaler retailer network.
Also, the agent helps manufacturers gain a better understanding of the African markets,
choose the most effective place for selling, and identify potential market opportunities.
(151) 23. When a firm enters a new market, consumers in that market will have new
alternatives to choose from. This increases the firm’s sales and market share.
(152) 24. a) A joint venture allows a foreign firm to merge with a local one in the new market.
The local business enriches the foreign firm’s knowledge about the domestic market and
helps it adapt to the new culture. This reduces the risk of failure.
b) Licensing reduces transportation costs, trade restrictions, and time frames by giving a local
business in a foreign market the permission to manufacture products for a specific payment.
c) A foreign franchise can run and operate all the outlets in the foreign markets. This helps
the enterprise build a strong name and image in the foreign country.
d) The localization of brands allows a business to cater to local tastes and culture. This
increases sales and reduces the risk of failure.
(153) 25. G
- The culture and language.

- Government policies with regards to taxes and imports.
- The exchange rate between currencies.
- Economic and political stability.
(154) 26. G Establishing joint ventures, licensing, franchising, and localization of brands.
(155) 27. T a) The elements of the marketing mix stated in this case are:
Product: farming tools

Place: overseas.
The missing elements are price and promotion.
b) The marketing mix is a set of marketing tools that work together to achieve a
company’s most important, immediate, and long-term objectives, therefore he should
focus on all of the four elements.
c) The marketing strategy outlines how the company intends to achieve its marketing
objectives by considering the overall approach to be taken by the entire enterprise.
John could expand sales with new products by introducing updated versions of
existing products or introducing innovative products that were not marketed before.
He should set a good price and study the foreign market culture before promoting the
products.
(156) 28. T a) - By breaking bulk, retailers only buy what they need. This reduces storage
costs.
- Wholesalers provide delivery services. This reduces transportation expenses.
b) The cost of production of CDs and DVDs is lower in China than US. In addition,
an advanced country as the USA with its known reputation can charge higher prices
than China.
c) Online transactions are prone to cyber-attacks. Transportation costs are higher than
direct sales because each product has to be packed and delivered separately. Danny
will have to face risk of fraud and he cannot test, feel or try his new products.
Level M | 23
Chapter 7 Business Accounts
Section 1 Business Accounts

(157) 1. G To assess and measure the financial performance of a business, its profitability and
liquidity levels.
(158) 2. G - The shareholders care about the profitability of the business since this affects
their returns on shares.

- The managers use financial records when they are planning and making decisions.
- Banks study the financial situation of firms before giving out loans to assess the risks
involved.
- Competitors check the financial records to study the potential of takeover or merger.
- Potential investors base their decision about investing in a business based on financial
performance.
(159) 3. G
- The debts of the business that need to be paid.

- The cash flow activities.
- The total funds as retained profits that can be ploughed into the business in the future.
- The net financial worth of the business
Section 2 The Final Accounts of Businesses

(160) 4. a) It refers to the direct costs of producing the goods sold by the business, such as the
costs of purchased materials.

Cost of goods sold = opening stock + purchases – closing stock.
b) Net profit is the gross profit minus expenses. Retained profit is the profit left after all
business payments are made.
c) Sales revenue = P × Q, the business can either increase the price (if the demand is
inelastic) or increase the quantity it sells through advertising the products.
(161) 5. a) Non-current assets refer to the assets owned and kept within a business, and used for
more than one year, such as machines.

b) The three current assets likely to be held by a manufacturing company: cash, stock and
debtors accounts.
c) Shareholders’ funds represent the finance provided by shareholders: share capital and
retained profits.
d) Current liabilities are the amounts owed by the business, that must be repaid to creditors or
suppliers within one year. For example, bank overdrafts and accounts payable.
(162) 6. Income statement (P&L)
Sales 150,000
c.o.g.s (100,000)
Gross profit 50,000
Equipment cost (14,000)
advertising cost (16,000)
other expenses (14,000)
Net profit 6,000
dividends (2,000)
Retained profit 4,000
(163) 7. Balance sheet December 2013
MN Ltd
Assets
non-current assets 50
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current assets 21
Total assets 71
Liabilities
current liabilities 18
non-current liabilities 20
Total liabilities 38
Shareholders’ equity
Retained profit 13
Share capital 20
Total 33
(164) 8. a) Double-entry bookkeeping is a system that requires each entry of an account to have
an opposite entry. This means that credit and debit amounts in a transaction should be equal.
b) An accountant records this transaction as a $20,000 debit asset (increase in assets by
$20,000) and a $20,000 credit (a decrease in cash, due to the payment for the machine).
(165) 9. a) The income statement records the incomes and expenses of a business and has three
main accounts: gross profit, net profit, and retained profit. The balance sheet includes a firm’s
assets, liabilities, and shareholders’ equity.
b) The income statement allows managers to make profit-oriented decisions while a balance
sheet allows stakeholders to analyze the financial strengths and performance of the business.
(166) 10. a) Gross profit, which is the firm’s profit before fixed costs and expenses are
considered. Net profit (or profit), which is the profit after all expenses and overhead costs are
considered
and depreciation is recorded. Retained profit, which is the profit left after all business
payments, such as taxes and dividends, are made.
b) Retained profit can be reinvested into the business as an existing source of finance.
(167) 11. On a balance sheet, assets should balance liabilities and shareholder’s equity
(Assets = Liabilities + shareholders’ equity).

(168) 12. a) Working capital (or net current assets) is the amount of money used by a business
to pay short-term debts. Working capital = Current assets - current liabilities.

b) It is important for a business because it enables it to finance its day-to-day debts and
allows it to improve its relationship with creditors.
(169) 13. a) a = 50 + 12 + 8 + 1 = 71
b = 120 + 50 + 16 + 4 = 190
c = g = 71 - 38 = 33
d = h = 190 - 100 = 90
e = 33 - 20 = 13
f = 90 - 75 = 15.
b) The working capital of LMN Ltd. is equal to 21 (current assets) minus 18 (current
liabilities) = 3, while the working capital of OPQ Ltd. is equal to 0 (70 - 70). This means
that LMN Ltd. is in a better financial position than OPQ Ltd because it has a better potential
to cover its day-to-day expenses.
(170) 14. a) The business takes a long-term bank loan that does not need to be paid in one year.
b) an increase in the amount of dividends paid by the business to shareholders

c) sale of newly issued shares
d) the sale of a stock of final goods owned by the business
(171) 15. G Retained profit = Net profit – (taxes + dividends)
(172) 16. G The balance sheet records what the business owns and owes in terms of assets,
owners’ equity, and liabilities at one moment in time. The profit and loss or income statement
records revenues, costs, and profits over a period of time.
Level M | 25
(173) 17. G By increasing total revenue through either selling a larger quantity or setting a
higher price, and by lowering costs of production
(174) 18. G To owners, profit is the reward for risk taking and decision making
To firm, profit helps compete, survive, and expand in markets. It also serves as a source of
finance.
To managers, profit reflects their success and guarantees raises in salaries
(175) 19. G The income statement is used to assess the profitability of a business over a
specific period of time and includes sales revenue, cost of sales, expenses, and profit.
(176) 20. G Gross profit = sales revenue – cost of sales = (1 x 2,000) – 250 = $1,750
Profit = gross profit – expenses = 1,750 -50 = $1,700

(177) 21. G a) Accounts payable: short term liabilities
b) Accounts receivable: current assets

c) Equipment: fixed assets
d) Inventories: current assets
(178) 22. G It gives them information about how much the business is worth, how much the
firm owes lenders and how much it owns in assets and how it finances its payments.
Section 3 The Analysis of Data

(179) 23. a) The return on capital employed for
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 400,000

𝑇𝑜𝑦 − 𝑍 = = × 100 = 40%
Capital employed 1,000,000
The return on capital employed for
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 40,000
𝑇𝑜𝑦 − 𝑅 = = × 100 = 50%
Capital employed 80,000
This means investors are receiving 10% more return on their capital employed at Toy-R.
Thus, Toy-R investment decisions are more profitable than Toy-Z, because managers are
more successful at making higher profits from each dollar invested in the business.
b) Toy-R investment decisions are more profitable than Toy-Z, since it has a higher ROCE,
reflecting a more efficient management than Toy-Z.
(180) 24.
(181) 25. a)
This means the company made 17.85% net profit on each $1 worth of sales. However, to
determine more accurately whether the company’s overall profitability is high, we need to
compare the ratios to other years.
b) The qualitative aspects of the business performance are ignored. Also, ratios are largely
based on previously documented data. In addition to that, analysts may confront some
obstacles when attempting to compare the performance of their business with that of
competitors.
Level M | 26
(182) 26.
= 1.5. This means that for every $1 in current

liability, the business has $1.5 in current assets, which makes it safe to repay short term debts.
Therefore, the company cannot cover its current liabilities and current assets depend on
inventories. The business might face liquidity problems.
(183) 27. a) Shareholders and managers are interested in these ratio results, because they are
used to measure two major aspects of a business: performance (i.e., profitability) and
liquidity.
b) Yes, because the ROCE and the net profit margin increased between 2012 and 2013.
c) Yes, because the current ratio increased from 1.3 to 1.6 and the acid test ratio increased to
1. Nevertheless, this is a risky situation since for every $1 in current assets there will be a
matching $1 in current liabilities.
d) As profits are increasing, and the level of liquidity in the company is controlled, I
recommend the expansion plan for Resto. We can see from the ROCE that investment
decisions are profitable; however, the liquidity of the business needs to be improved to
guarantee the repayment of short-term debts.
(184) 28. a) Cost of goods sold = $ 350m.
Overheads = $ 110m.
b) Profit is important for Sunglass Co. because it is applied to sustain business operations and
can be used as a source of finance.
c)
This indicates a low margin of commercial security.

(185) 29. Capital employed is the total value of a firm’s long-term finance.
Capital employed = Long-term liabilities + shareholders’ equity.

(186) 30. G Acid test = (current assets – stock)/current liabilities
Current ratio = current assets/current liabilities

ROCE%= profit/capital employed × 100
Gross profit margin% = Gross profit/sales revenue × 100
Net profit margin% = Net profit/ sales revenue × 100
(187) 31. G Liquidity refers to the ease with which assets are converted into cash. A liquid
business is able to meet its short-term liabilities and debts.

(188) 32. G - Different methods are used by different businesses, making it difficult to
compare ratios across competitors.

- Ratios are based on previous years’ accounts, this might result in inaccurate analysis.
- Inflation is not taken into account, leading to inflated results.
- Some businesses manipulate the numbers to look financially sound.
(189) 33. T a) X = Current assets – Current liabilities = 26 – 18 = 8
Y = long-term liabilities + shareholders’ funds = 18 + 23 + 5 = 46.

b) Alpha Engineering Plc. needs working capital to perform its daily operations and
keep the business running. In addition, a positive working capital ensures that the firm
has sufficient funds to satisfy both maturing short-term debt and upcoming
operational expenses.
c) Stakeholders use the final books to analyze the financial strengths and performance
of a business and assess the value of dividends paid.
d) Current ratio 2014 = current assets/current liabilities = 26/18 = 1.44
Level M | 27
Current ratio 2013 = current assets/current liabilities = 23/12 = 1.91

Alpha Engineering liquidity slightly decreased between 2013 and 2014, yet, it is still
performing safely since it owns enough current assets to finance its current liabilities.
Level M | 28
Chapter 8 Businesses and the Sources of Finance
Section 1 Cash Flow Planning

(190) 1. a) Cash outflow.
b) Cash inflow.
c) Cash inflow.
d) Cash outflow.
(191) 2. a) Gross profit = sales revenue - cost of goods sold = 50,000 - 20,000 = $30,000.
b) Cash inflow = 50% × 50,000 = $25,000

Net cash at the end of the month = opening balance + cash in - cash out = 1,000 + 25,000
- 20,000 = $6,000
(192) 3. a) Gross profit = sales revenue - cost of goods
sold = 60,000 - 15,000 = $45,000.

b) The bank closing balance = opening balance + cash in - cash out
Cash in = 50% # 60,000 = $30,000
Closing balance = 0 + 30,000 - 15,000 = $15,000
c) Profit figures will not be equal to the cash flow because the profit includes cash and
noncash sales (50% on credit) while the cash flow includes only the sales for cash (50%). For
this reason, the gross profit exceeds the cash flow balance.
(193) 4. a) January: resources = 20% × 23,000 = 4,600
Cash flow = (23,000 - (2,000+4,600)) + 1,000 = $17,400

February: resources = 20% × 25,000 = 5,000
Cash flow = (25,000 - (15,000+5,000)) + 17,400 = $22,400
March: resources = 20% × 20,000 = $4,000
Cash flow = (20,000 - (16,000 + 4,000)) + 22,400 = $22,400
April: resources = 20% x 24,000 = $4,800
Cash flow = (24,000 – (18,000 + 4,800)) + 22,400 = $23,600
b) No measures are needed since the cash flow is positive in all three months, meaning the
business is maintaining a high cash balance which allows it to meet its short-term debt.
(194) 5. a) By extending credit, the company can win loyal customers, increase sales, and make
more money if an interest is charged on the credit amount.

b) The amount of cash received in the month of March is: From the January sales, 60% will
be paid by businesses in cash in the month of March (after 2 months): 60% # 20,000 =
$12,000. This amount will be added to 40% of the March sales to customers, not businesses:
40% × 40,000 = $16,000 So total cash received in March = $16,000 + $12,000 = $28,000 (195)
(195) 6. a) Insolvency is the inability to repay money owed, such as debts.
b) A business becomes insolvent when it extends the credit period to customers, purchases
resources with cash, and overtrades.
(196) 7. a) Net cash flow decreases.
b) Net cash flow increases.

(197) 8. a) A = $16,000 - $14,000 = $2,000
B = $14,000 - $12,000 = $2,000

C = $16,000 - $14,000 = $2,000
D = $23,000 - $26,000 = ($3,000)
E = $29,000 - $18,000 = $11,000
b) Because cash sales are forecasted to increase in July and August, more materials and labor
will be needed to produce more goods.
c)
Level M | 29
(198) 9. G Cash flow is a record of the total amount a business pays as cash outflows and the
total amount of the money received by the business as cash inflows during a specific period
of time.
(199) 10. G It guarantees liquidity of firms to pay wages, supplies of resources, rent, and
other expenses. Cash also ensures the continuity of business operations.

(200) 11. G
Jan Feb
Cash
inflow
Receipts 20 15
Cash
outflows
Payments 7 30
Net cash
A B
flow
Opening
5 C
balance
Closing
D E
balance
A = 20 – 7 = 13
D = 13 + 5 = 18
C = 18
B = 15 – 30 = -15
E = -15 + 18 = 3
(201) 12. G Delay cash payments to suppliers and ask customers to pay promptly, while
reducing credit sales and increasing cash sales. Use other alternative sources of finance to
ensure liquidity.
^
(202) 13. G
$ April May June

Cash 231,000 100,000 600,000
from
sales
-Total 400,000 + 300,000 300,000 +
payments 100,000 + + 80,000 200,000 =
500,000
Level M | 30
50,000 = =
550,000 380,000
Net cash 231,000 – 100,000 600,000 –
flow 550,000 = – 500,000 =
-319,000 380,000 100,000
=-
280,000
Opening 300,000 -19,000 -299,000
balance
Closing -319,000 + - 280,000 100,000 –
balance 300,000 = -19,000 299,000 =
-19,000 =- -199,000
299,000
Cash flow problems occur when the closing balance (receipts – payments + opening balance)
is negative in April and May and June.
(203) 14. G Profit is different from cash. A profitable business can have cash flow problems if
it has high credit sales.

(204) 15. G
• Managers because it helps them identify cash shortages, plan and control the business,
and monitor and manage cash flows.
• New businesses because it helps them raise capital, attract investors, and ensure the
availability of cash.
• Potential lenders of capital such banks, because it helps them assess whether the business
is able to repay loans or not.
(205) 16. T
a)
b) The enterprise is forecasted to have a negative net cash flow over three consecutive
months. In order to overcome this, managers need to increase receipts and delay
supply payments.
(206) 17. T a) Forecasting cash inflow and outflow is important for a florist because it allows
him to control the status of the total cash available in his firm’s cash bank, and make
decisions about purchases and payments accordingly.
b) The sales for trees and flowers vary each month because of seasonal factors. The
demand for some products varies according to the season or the time of year. For
instance, the demand for flowers increases on special occasions like Valentine.
c) Wages decreased in January and February, because it is not the planting season for
trees and flowers. Thus, the florist needs less workers.
Level M | 31
(207) 18. T a) Negative cash flow means cash outflow exceeds cash inflow. For instance, at
the end of November, the net cash flow is: 5,000 + 1400 - (20,000 + 10,000 + 1,000)
= - 24,600.
b) The florist can delay creditor payments or postpone purchases.
c) If the problem persists, he can manage the administrative costs and efficiency by
reducing overhead costs or by decreasing employee wages. Finally, he can buy fewer
trees until he sells the available ones.
(208) 19. T a) Cash refers to physical money (e.g., coins and paper banknotes). In
bookkeeping and finance, cash refers to current assets that constitute currency, or currency
equivalents. Profit is the positive difference between total revenue and total cost of a firm.
b) It could happen, because at the same time total cost might increase. In other words,
the increase in sales revenue may be accompanied by an equal increase in costs.
Section 2 Working Capital

(209) 20. a) Cash needed to pay for materials, goods produced, goods sold, and cash payment
received for goods sold.

b) The cash flow cycle depends on the period between cash inflows and cash outflows. The
shorter the period, the more cash is made available. When cash is available, current assets
increase resulting in higher working capital that the business uses to pay its day-to-day debts.
(210) 21. a) The working capital cycle shows the amount of cash flowing into the business,
what happens to it while it is held by the business, and how it is spent.

b) When finished goods are delivered but the amount of receivables takes time to be paid, the
business will lack the working capital needed for certain purposes such as purchasing new
material or equipment. This delays its activities when other source of finance exists.
(211) 22. G Working capital is needed to cover short-term payments, mainly day-to-day
expenses, and maintain a high liquidity.
Section 3 Financing a Business

(212) 23. a) Short-term
b) Long-term
c) Can be short term or long term
d) Short-term
(213) 24. Using the retained profit to buy a new machine is cheaper than acquiring a bank loan
since no interest payment is involved and no collateral is needed. Moreover, retained profit
does not have to be repaid.
(214) 25. a) It might not have a guarantee for debt repayment (collateral) and since the business
is not yet established, it will not have financial credibility or record, making it more risky to
lend to.
b) Microfinance is a source of financial services for entrepreneurs and SME owners who lack
access to commercial bank loans. A small loan can be granted without requiring a security,
based on terms and conditions imposed by the lender.
(215) 26. a) The company could take an overdraft or use its retained profit if in cash form. It
can also
consider a short-term bank loan. The most suitable though would be an overdraft of $20,000
if retained profit is insufficient since the overdraft can be accessed and repaid quickly.
b) Company B could issue shares or stocks since it is already loaned out. The most suitable
would be share issue in case retained profit is insufficient.
c) The factors that might influence Company B’s choice are:
Level M | 32
- Shareholders expect dividends to be paid and ownership might change if many shareholders
are involved.
- The profitability, time, and ease of issuing shares
- The gearing ratio.
(216) 27. a) Venture capitalists, because it’s a new product that might succeed.
b) Bank loan, because building the plant has a specific cost and it might be costly.
c) Leasing, because it allows the company to use resources to increase the inventory, without
acquiring high costs.
(217) 28. a) a = 35 + 5 = 40
b = 160 - 110 = 50
b)
c) In the cash flow forecast, net cash flow increases when there is an increase in cash inflows
(i.e., Q4) and decreases when there is an increase in cash outflows (i.e., Q1, Q2, and Q3).
d) A business can operate for years without making a tangible net profit, given that it has
enough cash to continue its operations. Therefore, even though profit is essential, a business
cannot proceed its operations and meet its financial commitments without adequate cash
flows.
e) Yes, because large, well-established businesses, have already acquired a know-how in
managing risks related to cash flows while new businesses tend to suffer from over
expenditure. Therefore, a cash flow forecast could be more helpful to them in anticipating the
required amount of cash and avoiding the risk of failure.
(218) 29. No, because a decrease in share price means that the business is possibly losing
market value and profits are deteriorating. A decrease in dividends indicate that the business
is trying to save cash, most likely to solve its cash flow problems. In addition, a gearing ratio
of 60% is high indicating that the business is risky and heavily financed by external loans.
(219) 30. G To have a positive working capital, expand, overcome financial problems, and
buy new assets, or pay old debts.

(220) 31. G Time, amount needed, level of risk involved, the credibility level, and the cost
such as the interest rate.

(221) 32. G
- Give subsidies to firms.

- Facilitate borrowing at low interest rates.
- Assist mass employers by giving funds, especially in deprived areas.
- Guarantee the repayment of business loans.
Level M | 33
(222) 33. G Short-term finance must be paid back within one year and it is used for the
working capital. Long-term finance is required for investment in assets, mainly fixed assets
such as machines.
(223) 34. G
a) Mortgages: external
b) Trade credit: external
c) Retained profit: internal
d) Sale of assets: internal
e) Venture capitalists: external
(224) 35. G Microfinance assists small businesses or individuals who live below the poverty
line in developing countries so that they can improve the overall standard of living, since
commercial banks are reluctant to give them finance.
(225) 36. T
a) Tia needs the $3,000 to finance her start-up.

b) She might not have a security or a guarantee for debt repayment, and she might not
have a detailed information about her current loans and debts.
c) The alternative source of finance for Tia is microfinance.
(226) 37. T
a) The two other possible sources to finance his business are: Bank loans and hire purchase.
b) Shareholders expect dividends to be paid.
(227) 38. T
a) Long-term finance refers to finance sources that are settled within a long period of time,
usually more than 1 year.
b) Long-term finance is required for fixed asset procurement (e.g., property, and
machinery). It is also applied to takeover bids and other forms of economic
expansion.
(228) 39. T The company can issue shares or sell its unused assets.
(229) 40. T a) Working capital is the amount of money required to accommodate the day-to-
day commercial operations, overheads, and transactions of an enterprise. The cash flow of a
business represents the forecasted inflow and outflow of money during a specific period of
time.
b) The balance sheet identifies the value of a firm’s assets, liabilities, and shareholders’ funds
at a specific time. The profit and loss statement measures the income and expenses of a
business, over a period of time.
c) Internal finance can be drawn from within the business itself (e.g., retained profit, sale of
assets, and owners’ savings). External finance is acquired from organizations or individuals
outside the business, such as commercial banks, shares, loans, and government subsidies.
d) Share capital is the amount of money generated from the sale of newly issued
shares.
Owner capital represents the value of capital owned by the owner.
(230) 41. T
Level M | 34
Level M | 35
Chapter 9 Business Location
Section 1 The Main Factors that Influence the Location of a Business

(231) 1. An increase in transportation costs will increase the cost of delivery and resources.
This might result in lower profits and higher prices for products. A supplier should locate
where these costs are low so that he can still generate some profit.
(232) 2. a) In bulk-increasing, the finished product acquires volume or weight during the
production processes (i.e., the end-product weighs more than the resources used). For
example, beverages (e.g., Coca- Cola) can be sold as products with metallic containers, which
adds to their weight. Alternatively, bulk-reducing companies consume mass resources but
produce smaller finished products. For example, a manufacturer of industrial copper will try
to locate near a copper mine because of the cost of transporting the unrefined copper.
b) Retailing business:
- Customer parking
- Access for delivery
- Shops near by
Manufacturing business:
- Personal preference of the owners
- External economies of scale
- Government influence
(233) 3. In my opinion, he should choose site A. First, site A is less expensive than site B by
$2,000, and since the manufacturer is labor intensive, it will more likely locate in Site A
where the unemployment rate is higher, and wages are lower than in Site B.
(234) 4. a) It is important because it will allow the business to obtain more customers, generate
higher profits, enhance competitive ability, and improve production efficiency.

b) A single market manufacturer will try to locate close to consumers. For instance, a
producer of automobile components will attempt to locate near an automobile manufacturer.
This cuts out excessive costs of delivery. However, this is not the main factor, since
manufacturers also care about infrastructure and costs of production. The internet has also
allowed manufacturers to locate away from customers and access a larger market.
(235) 5. The first consideration is the shopping area. This fast food chain would prefer to locate
within popular areas such as the city center to attract a variety of customers. The second
factor is, parking lots and spaces; large retail stores or shopping complexes have to provide
sufficient parking facilities for customers to easily access the food outlets. The third factor is,
the security issues of location since this company might open for extended hours, requiring
some measure of internal and external security.
(236) 6. It is due to improvements in delivery services and systems of telecommunication
which facilitated the transportation of products, and made the proximity to the markets less
significant.
(237) 7. A manufacturer located in a well-established location benefits from the external
economies of concentration. For example, suppliers in that location will be very competitive;
therefore a manufacturer can benefit from lower prices when dealing with them.
(238) 8. a) Firm A should be located near its customers because it offers services that require a
worker to be present at the customers’ house. Therefore a closer location allows it to cater to
customers’ needs quickly. Firm B offers services through the internet, therefore it does not
need to be located close to customers, as it has a wider market reach.
b) It is important because it allows the service provider to attract customers especially when
the service provided requires the presence of an employee (i.e., cleaning services) or includes
the sale of products (i.e., shopping malls).
Level M | 36
(239) 9.G Location affects the costs of production, the availability of an adequate supply of
employees, security, and convenience for customers. The right location will result in higher
sales.
(240) 10. G - Owners might prefer a place over another for personal reasons.
- The cost of rent and land.

- The quality and quantity of employees.
- The government policies in terms of taxes, and regulations.
- The availability or cheap resources and the proximity of suppliers.
(241) 11. G As it will be providing services, it is most beneficial to locate near consumers.
Section 2 Multinational Corporations and Foreign Location

(242) 12. Dell as a multinational will have to consider trade barriers, the costs and availability
of resources, political and economic stability, new foreign and emerging markets overseas
and government incentives.
(243) 13. The country will benefit from Ford since unemployment levels might decrease
because Ford uses large scale production and develops new job opportunities. This will lead
to an increase in the country’s output of cars, and the introduction of new ideas and
production methods and techniques through the use of technology.
(244) 14. a) Adidas, Nestlé, and Sony
b) Because they operate in more than one country, across different time zones, through
different commercial laws, and with various systems of political ideology.
(245) 15. G - Consumers will have a wider variety.
- The multinational will contribute in more investments in the country.

- The output level increases, improving the standard of living.
- Multinationals are usually mass employers. As a result, new job opportunities will be
available.
(246) 16. G - Low wages are paid to employees.
- Some of the profit is repatriated to the home country.

- Monopolies might form, threatening smaller, and newly set up businesses.
- Jobs might be lost.
- Resources get used up at a faster rate, resulting in scarcity.
(247) 17. G The cost and supply of labor
The cost and availability of resources

The restrictions on trade and other form of government assistance/taxes
The culture/taste of consumers
(248) 18. G Higher security since risk is spread
Lower unit costs and ability to achieve economies of scale

Access to larger markets
Higher output, revenues, and profit
Access to cheaper labor and resources
(249) 19. G A corporation that sells and operates in more than one country across times
zones, under different commercial laws and political ideologies.

(250) 20. T Yes it was right because in China, the costs were less than in Country B. Also, the
output per week in China is greater than in Country B while demand and revenues have
decreased in Country B. Therefore by relocating to China, Hoodies can benefit from
economies of scale.
Level M | 37
Section 3 The Influence of Government and Environment on Location Decisions

(251) 21. a) The most important factors would be the wages since it is a labor-intensive firm.
Also significant are, the pool of skilled workers available in the market and trade restrictions
on imported ingredients. The higher the tax on imported goods, the more costly the
production of candies.
b) A government can encourage the owner of Candict to locate or relocate to specific
regions by providing fiscal incentives, or by giving him a subsidy in order to expand into
underdeveloped parts of the respective country since it is a labor-intensive company. The
government decision about restricting imports will also affect Candict negatively since most
resources are purchased from abroad.
(252) 22. a) Governments influence enterprise location to achieve the following fundamental
objectives: Control congestion in crowded areas, boost areas where unemployment is high,
and attract foreign firms to locate in the country.
b) When locating in a new country, two factors need to be considered. First, the economic
and political factors as an unstable economy or a corrupted government can lead a business to
relocate to more stable countries. International and national laws or regulations that govern
commerce. Often, international and national governments alter laws that affect commerce,
mostly due to competition.
(253) 23. a) Multinational companies are not always welcome by the host country, because,
MNCs could cause damage to the environment or the general public. In addition,
manufacturing enterprises are not allowed to locate in beautiful green areas; only farming is
permitted in these locations. MNCS might exploit the resources available in the country, pay
lower wages to workers and use the country’s resources to export more products to their
home country and increase profit. MNCs might also be blocked if they are monopolies or if
they threaten domestic firms.
b) The government should seek to attract multinational companies, especially if the economy
is not performing well. For instance, the country will benefit from a decrease in
unemployment levels because MNCs develop new job opportunities, contribute to an
increase in the country’s output of goods/ services, contribute to developing new ideas, and
introducing new production methods and techniques through the use of technology, increase
the country’s exports, contribute to higher government revenues, provide a wider choice to
citizen, improve the quality of human capital and invest in future economic plans. However,
MNCS might also harm the economy by using up its resources or exerting power
to influence the government. They might also threaten domestic firms.
(254) 24. G The government can give financial assistance in the form of subsidies, grants, and
easy term loans. It can also limit the restrictions imposed or reconsider taxes imposed.
(255) 25. T a) The exchange rate because of its continuous fluctuation. Trade barriers are also
significant since certain governments impose restrictions on imported goods/services to

protect domestic companies. Finally, the company should study transportation costs.
b) The government might have supported the relocation of businesses to its territory
to create job opportunities, lower unemployment levels, and control the balance of
payments (increase exports and reduce imports).
c) The demand level in Country B is decreasing which will result in higher
unemployment. The closing down of the multinational company might result in more
serious economic problems since exports will decrease and employees who lose their
jobs will not have spending power, leading to a lower standard of living. This will
negatively affect the demand for local supplies and products.
Level M | 38
(256) 26. T a) The country will benefit from a decrease in the unemployment level, an
increase in the country’s output of goods/services, and higher government revenues.
b) The multinational might threaten domestic firms by either taking them over or
forcing them to go out of business. Moreover, most of the resources might be
exploited, the profits generated might be repatriated, and the large enterprise may
become powerful enough to influence the government, evade laws, avoid paying
taxes, and cause environmental damage.
c) The government already provided a grant to support the establishment of the
multinational because it is to be located in an area facing a run-down. This means the
economy is not doing well and local suppliers cannot cover the increase in demand.
Therefore, the government should allow the multinational to locate in the country to
increase job opportunities and the country’s output.
Level M | 39
Chapter 10 Economic and External Influences on Businesses
Section 1 The Economic Objectives of Governments

(257) 1. a) Recession is characterized by a fall in consumer demand for products, a serious
increase in unemployment, and an overall decrease in commercial activities.

b) The two economic objectives of the government of Country X would be to achieve
economic growth and increase employment.
c) Business owners are worried about the economic situation because this situation will be
reflected by extremely high levels of unemployment, low incomes, and low prices. Many
businesses will fail to survive such circumstances.
(258) 2. G - Higher standard of living.
- Higher employment.
- Stable prices.
- Stable balance of payments.
- Higher economic growth.
(259) 3. G Recession is marked with low employment and low output. As a result, the
companies sell less because consumers’ incomes decrease. Recession reduces the profits of
firms.
(260) 4. G
a) Recession: prices, employment, and output decrease. This leads to a drop in business
operations and profits and increases their chances of shutting down.
b) Recovery: the demand, employment and prices start to increase bringing along a
higher demand for a firm’s products and an increase in sales and profits
G If the government implement economic policies to reduce the unemployment
(261) 5.
rate, consumer demand increases, but so will prices and BOP deficit.
Section 2 Government Economic Policies

(262) 6. a) Inflation occurs when the general price levels increase in a country.
b) The government can increase taxes to correct inflation.

c) When inflation is high, real incomes fall when prices rise much faster than the increase in
prices. Consequently, consumer demand for goods/services decreases, resulting in lower
profit margins. The increase in prices also affects wages. This increases costs for businesses
and affects productivity and output.
(263) 7. a) Attracting tourists will increase domestic demand for goods and services like food
and hotels, and at the same time they will spend their money on domestic products. In turn,
production will increase, and the economy will grow.
b) When the level of employment is high, individuals earn wages and salaries. This means
they will be able to purchase the goods/services produced by firms. Consequently, profits
increase.
(264) 8. a) When the level of unemployment is high, wages are likely to go down because
unemployed people are willing to work for any wage given to them, and those employed will
accept lower wages to remain in their jobs. Thus, businesses
will benefit from lower labor costs. In addition, unemployed individuals do not earn wages
and salaries.
This means they will not be able to purchase the goods/services produced by firms.
Consequently, profits decrease.
Level M | 40
b) Loans become more expensive to finance or to obtain. Businesses, which are subject to a
variable interest rate, will have to pay a higher cost for the accumulated interest. This expense
eats into the profit margins.
c) When the economy grows, workers will be earning more. This results in a higher income
level (i.e., national income per head) and higher demand. Thus, the economic expansion
induces high profits creating new opportunities
for businesses, since they can expand due to the additional profits earned from high demand.
(265) 9. Due to the process of public tender (i.e., a project offered by governments to
companies), the construction and transportation industries benefit greatly from this annual
budget. Companies bid for projects (e.g., a new airport),
and the government extends the major part of the funds. Suppliers of resources benefit from
government spending on these projects. Also, when a government increases its expenditures,
the GDP per capita level rises along with the general
standard of living, and consumer demand. Thus, SMEs and large-scale enterprises increase
their output, employ more workers, and spend more money on R&D and expansion projects.
On the other hand, higher spending might lead to higher
inflation, and result in lower profits.
(266) 10. a) A decrease in GDP means the economy is not growing, and the resources are not
used efficiently. If the decrease lasts for a long period of time, the economy might enter a
recession.
b) The government should increase its expenditures, then the GDP per capita level will rise,
and more consumer demand will evolve. Thus, SMEs and large-scale enterprises increase
their output and employ more workers.
c) The effect of the decrease in GDP on a business producing necessities will be more or less
insignificant, because people will always demand necessities to survive. However, demand
for luxury goods will significantly decrease, reducing profits of luxury businesses.
(267) 11. a) Sam’s earnings in 2014 = (40,000 # 10%) + 40,000 = $44,000.
b) Real income = nominal income - inflation. Thus, his real income increased by 2% only
(10–8).
(268) 12. Profit margins and sales revenues increase, efficiency and productivity levels increase
and the firm will be more competitive.

b) An increase in corporate tax rates will affect businesses negatively. Higher taxes reduce
retained profits and funds available for investment, limit the expansion of the business and
lower share prices and returns to investors.
c) Higher government expenditure on employee training programs will affect businesses
positively. This results in higher and more efficient productivity. As the GDP per capita rises,
the standard of living improves, disposable income increases, demand increases, and thus
profit margins increase.
(269) 13. The government intervenes to maintain stable prices, reduce unemployment, and
achieve economic growth.

(270) 14. Inflation reduces the purchasing power of the domestic currency and makes domestic
products
more expensive. This encourages consumers to import cheaper products from foreign markets
and reduces the competitiveness of domestic exports. When the value of imports exceeds that
of exports, a trade deficit occurs.
(271) 15. When more people are employed, consumption increases, and commercial activity
and investment improve. Higher investment leads to higher output and GDP per capita,
leading to improvements in the standards of living.
(272) 16. a) Total imports = $4000 + $1,800 = $5,800 Total exports = $5,000
b) The BOP was in deficit because imports exceeded exports.

Level M | 41
(273) 17. Direct taxes are directly levied on people’s incomes or firms’ profits, not on goods
and services. One example is income tax paid by an employee. Indirect taxes are imposed on
goods and services such as the VAT which is paid when
buying goods from a supermarket.
(274) 18. a) An income tax is a direct tax imposed on the gross income earned by a worker.
b) $1,200.
c) Peter’s disposable income = $12,000 - $1,200 = $10,800.
d) i. A high-income tax reduces the demand for products which leads to lower business sales
and profits.
ii. Lower demand for products reduces production and output which leads to higher
unemployment levels.
(275) 19. a) €1 = $2
b) The dollar depreciated in year 2.

(276) 20. G - Fiscal policy is used to control spending and aggregate demand through taxes
and government spending.

- Supply-side policy is used to create incentives for firms to produce more.
- Monetary policy is used to control the money supply and the lending power of banks.
(277) 21. G A decrease in corporation tax, an increase in government spending, a decrease in
interest rate, a decrease in income tax, an increase in subsidies granted to firms.

(278) 22. G Decrease in taxes: profit increases allowing the business to expand and invest
more. Alternatively, output increases.

Decrease in interest rates: increases borrowing and investment and results in a higher demand
for business products. As a result, output and business profits increase.
(279) 23. G When a currency depreciates, domestic products become more competitive and
the demand for exports increases while the demand for imports decreases, making domestic
firms better off. However, if the firms were importing their resources, they will become
worse off following their currency depreciation as their costs will increase.
(280) 24. G A policy based on the use of taxes and government spending to affect aggregate
demand and achieve certain economic objectives.

(281) 25. G
a) Reaction: lower prices to maintain demand

Effect: profit margins and sales revenue decrease
b) Reaction: substitute imported resources with cheaper homemade ones
Effect: domestic products may be of lower quality.
c) Reaction: the ability to take additional loans and expansion decrease
Effect: competitors might expand and take over businesses in debt.
(282) 26. T a) The objectives that this government might have are to monitor and control the
aggregate demand, control inflation and generate revenue from taxes which will improve
infrastructure by developing road networks and raise the standard of living.
b) When the economy grows, workers might demand higher wages as the demand for
labor is derived from the higher demand. With these additional wages, employees can
demand more goods and services, generating high profits for companies. However,
economic growth might lead to inflation which will increase the cost of raw materials
and production for firms.
c) First, demand will decrease because disposable incomes decrease, reducing sales
and profits.
Second, higher taxes reduce retained profits, limiting the expansion of the business
and lowering share price and return on investment.
Level M | 42
(283) 27. T a) The demand for jewelry will decrease, because disposable income will
decrease and jewelry is a luxury good.
b) The demand for petrol will decrease but only slightly because petrol might be
needed as a necessity if there are no cheaper substitutes.
c) The demand for holidays will decrease, because holidays have a relatively elastic demand
and people cannot afford them when their incomes decrease
(284) 28. T a) From 2010 to 2011, interest rates strongly decreased from 9% to a lowest point
around 6%. However, from 2011 to 2013, interest rates increased progressively to
reach again 9% at the end of 2013.
b) From 2010 to 2013, the annual increase in average incomes increased progressively
from 2% to around 5%.
c) From 2010 to 2013, the rate of population growth highly increased from 3% to
10%.
d) From 2010 to 2011, the economic growth rate increased from 1% to 2%. However,
from mid-2011 to mid-2012, it remained stable and constant at 2%. And finally from
2012 to 2013, it increased from 2% to around 3%.
Section 3 International Trade and Globalization

(285) 29. a) The purchase of machines is an import for Country A.
b) Foreign machines become cheaper and in greater demand; imports increase, and domestic
machines become more expensive and less competitive than foreign machines.
c) Country A will resort to trade restrictions to secure the domestic market. Thus, imports
from
country B will decrease, negatively affecting the balance of payments in country B (exports
of country B will decrease).
(286) 30. a) The company can access cheaper imported resources. This reduces costs and
increases profit margins for the firm allowing more investments and potential to expand.
b) The factors include the elimination of trade barriers and restrictions, economic union
between countries, improved and cheaper transportation and communication and
industrialization, as well as high technological advances.
(287) 31. G Advances in technology, communication, and transportation.
Economic and political integration of countries

Industrialization and the elimination of barriers to trade
(288) 32. G Higher competition and decrease in profit when the exchange rates fluctuate
Higher wages and costs of production

Higher distribution costs
Culture barriers and decrease in demand
(289) 33. G To exert political pressure, access foreign goods and services, access less
expensive foreign resources, improve consumer choice, and sell off surplus stock.
(290) 34. T a) The shop will benefit from higher profit margins and less risk of failure
because more tourists will be visiting the country which will gain more than one market.
b) The number of tourists from other EU countries will decrease, reducing demand.
Thus profits will decrease.
c) A fall in the Chinese Yuan means the Yuan has depreciated and is now less
expensive.
Therefore, tourists from China will find that their purchasing power in France has
decreased. As a result, coffee shop will face a decrease in demand and its profits will
decrease as French products become less competitive.
Level M | 43
T a) “Boom” is the result of fast economic growth. It is characterized by very high
(291) 35.
output and employment levels.

b) When the economy is booming and employment levels are high, workers will be
earning more. This creates a higher income level and a higher demand. A boom
induces high profits and creates new opportunities for businesses, since they can
expand due to the additional profits earned from high demand.
c) Expanding overseas will open new and larger markets for the firm, thus more sales
and profits.
However, it may face exchange rates fluctuations and changes in the values of
currencies that affect demand.
Level M | 44
Chapter 11 Influence of Government Legislation on Businesses
Section 1 Laws that Protect Consumers

(292) 1. a) Weights and Measures Act (1985): This law represents the legal framework for
commercial weights and measurements.

b) The Sale of Goods Act: It is illegal for firms to solicit products that have defects. Products
must be of merchantable quality.
(293) 2. Legislation prevents businesses from adopting practices that put customers at a
disadvantage. Their aim is to increase consumer trust and loyalty to businesses that respect
these laws.
(294) 3. a) These practices include unjustified increases in retail prices, monopolization
strategies, limiting consumer choice, and influencing politicians through corruption.

b) Consumers suffer from unfair prices and could receive poor quality products. In addition,
they could be subject to price discrimination whereby different consumers are charged
different prices for the same products.
c) The government should impose laws to protect consumers, encourage competition, and
join alliances that develop cross-border consumer protection strategies.
(295) 4. G Laws result in changes in the production methods. This could be costly for firms,
resulting in lower profits or higher prices.

(296) 5. G
• The Sale of Goods Act: makes it illegal for firms to solicit products that have defects.
• The Supply of Goods and Services Act: makes it illegal to provide a service without a
qualified staff.
• The Food Safety Act: governs food produced by enterprises for human consumption.
• Weights and Measures Act: represents the legal framework for commercial weights and
measurements.
• The Trade Description Act: prevents businesses from making false claims about the
performance of goods and services.
• The Consumer Protection from Unfair Trading Regulations: makes public
misidentification of property a crime.
• The Consumer Contracts (or the distance selling regulations): regulate online purchasing
and give consumers a period of time to return a product if it does not match the advertised
specifications.
(297) 6. T An enterprise becomes a social enterprise when its managers take decisions that
benefit stakeholders other than shareholders.

b) Health and safety laws might prevent food suppliers from using artificial or
chemical substances that are health hazards. This will force the business to change the
products’ ingredients. Also, laws might be set to reduce accidents and costs incurred
from high labor turnover.
c) The company could take a bank overdraft or a short- term bank loan.
Section 2 The Laws that Protect Employees and their Effects on Business
(298) 7. a) Yes, a trade union is considered a pressure group because it influences enterprises to
consider employees demand and respect laws and implement them.

b) The government might have introduced strict safety and health laws such as protection
from dangerous machinery (e.g., industrial glasses, fireproof clothing, and industrial
footwear) and sustained beneficial ventilation (e.g., in an office), clean toilet facilities, and a
cafeteria. These would add up to costs if Electro was not using them, especially that it is a
labor-intensive company.
Level M | 45
c) At first, costs will increase as all the new requests are being implemented. But in the long
terms, this will lead to higher productivity and improved efficiency. The turnover of
employees decreases due to job satisfaction, and workers will feel protected under the law.
d) Yes, because in some countries these laws are not set, and employees work under harsh
conditions or get paid below the minimum wage (e.g., child labor and mine workers). Also,
by relocating, many employees will be made redundant which will affect labor supply and
reduce wage levels due to higher unemployment.
(299) 8. a) The government’s goal is to achieve a low level of unemployment, because when
the level of employment is high individuals earn wages and salaries. This means they will be
able to purchase the goods/services produced by firms. Consequently, GDP increases and the
economy will grow.
b) No, because large-scale enterprises have the option of relocating to a country with very
weak labor laws which will lead to fewer job opportunities and higher unemployment levels.
However, if tight laws are implemented, businesses are less likely to practice discrimination
and unfair dismissal. This increases employment.
(300) 9. a) The ad received a negative response from the audience because the choice of
employee was based on race and gender which is discriminating by nature. This ad is enough
for people to judge that the business does not respect or protect its employees.
b) The business will have a bad image in society and will face opposition from pressure
groups. This will create trade disputes and lower sales when consumers boycott its products.
(301) 10. a) Peter cares about his employees at work and takes measures to ensure their safety
(i.e., protect them from dangerous machinery.) However, John does not, because he only
focuses on increasing his profit margin.
b) Peter’s business will have a good reputation while John’s business will be penalized and
face problems with the government and trade unions.
(302) 11. The business avoids paying compensation to individuals and does not have to face
external pressure from groups and negative media.

(303) 12. G To limit the conflicts that arise between employers and employees
To ensure employees are protected by providing a healthy and safe work environment
To avoid discrimination and unfair dismissal
To restore equality between genders and races
To improve relationships with trade unions
(304) 13. G
Higher costs if the business has to change its operations to become a safer place to work
Lower disputes with trade unions and improve employees’ motivation
Lower labor turnover
Lower accidents and industrial disputes
Promote better image of the firm
Lower costs if employees become highly productive
Section 3 Protecting the Environment

(305) 14. a) This increased awareness helps the business identify a new market. Profits will be
guaranteed if consumers positively support the business.

b) It is bad for consumers because the lack of competition will result in lower quality and
safety of goods/services and higher retail price fluctuations. Price fixing or limiting the
quantity plied will limit the choice for consumers as well.
(306) 15. a) The supermarket and the chemical manufacturer will both have to abide by the new
laws. However, the impact of these laws will be heavier on the chemical manufacturer
Level M | 46
because he will be emitting more gazes and waste than a supermarket. This increases costs of
production and affects profits.
b) The chemical manufacturer will be affected more by these laws because production is
more hazardous and the products are dangerous to manipulate or mishandle.
(307) 16. a) The main aim of consumer protection laws is to prevent businesses from operating
in illegal and harmful ways against consumers.

b) The main aim of environmental protection laws is to behave in a socially responsible
manner.
c) The main aim of competition laws is to prevent commercial enterprises operating under
unfair trading practices.
d) The main aim of employee protection laws is to protect workers from hazardous
conditions.
(308) 17. G - Pressure groups use their power to influence governments to set strict rules.
- They can boycott the company’s products.

- They can destroy the reputation or image of the business through negative publicity.
- They can use lobbying.
(309) 18. G Social benefits = private benefits + external benefits
Social costs = private costs + external costs

Social costs/benefits increase whenever external costs/benefits increase.
(310) 19. G
1) Increase the use of scarce resources: low sustainable economic development and more
negative externalities.
2) Use renewable resources: better growth prospects, more sustainable development and
economic growth.
3) Develop new green products: lower negative externalities, better image.
G
(311) 20.
a) Positive externality or benefit: creation of new job vacancies, improvement in

infrastructure, development of green products
b) Negative externality or cost: pollution, congestion, waste
Section 4 Business Ethics and Sustainable Economic Development

(312) 21. a) A business is ethical when it does the right thing, while respecting norms and
moral values.
b) A business can be ethical by not accepting bribes and discouraging child labor.
(313) 22. a) Pressure groups influence business activity by encouraging consumer boycotts
whereby consumers stop purchasing from the firm or by using bad publicity to negatively
influence the image of the business.
b) Short-term profits will fall because most ethical decisions require additional funding, such
as changing production methods.
(314) 23. a) A manager can take advantage of socioeconomic conditions to manipulate matters.
Also, he can force employees to work harder for less pay or use discrimination in the
workplace.
b) Governments set laws and systems to protect workers such as laws concerning industrial
relations, occupational health &
safety and employment standards. Also, the government can set a minimum wage and
antidiscrimination laws.
Level M | 47
(315) 24. G No monopolies will form, which will increase competition and give reasons for
firms to invest more and become more efficient. But this will prevent the firm from being
able to achieve economies of scale.
(316) 25. G Conserving resources or using recycling
Limiting negative externalities such as pollution

Using renewable resources
Using lean production
(317) 26. G Use lobbyists, the government, boycotts or media to negatively affect its image.
This leads to higher costs, lowers sales, lower market shares, and lower competitive
advantage.
(318) 27. G They can set legal controls on pollution, quality standards, and waste.
They can encourage environmentally friendly firms through giving financial assistance,
exemptions from taxes and subsidies.
They can restrict the location of polluting firms to specific areas.
They can impose taxes on highly polluting firms.
(319) 28. G Benefits: lower disputes with pressure groups, lower government intervention in
business affairs, better image and reputation, higher employee satisfaction and retention
Drawbacks: higher costs if production needs to be changed.
(320) 29. T The government can impose barriers and restrictions on foreign companies. The
government limits the amount of imports (i.e., via tariffs and quotas) and acts to protect
domestic enterprises by granting them subsidies.
Level M | 48

Business Studies Level M Course Questions Solutions

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Business Studies Level M

Business Level M - Solutions

Chapter 1 Introduction to Marketing

Section 1 Key Concepts in Marketing

- Identify changes in consumers’ tastes and purchases.

Section 2 Marketing Objectives and Strategies

Section 3 The Elements of the Marketing Mix

- entering new markets to expand sales

consider different issues related to the elements of the marketing mix.

Section 4 Marketing, Customers, and Competition

the risk of making the product hard to sell.

change the consumption patterns.

Offer sales discounts or vouchers

Allows to know what consumers want and increase their satisfaction

improve existing ones, control costs.

G Market share = sales of the company/total market sales × 100%

Chapter 2 Market Research and Data Presentation

Section 1 Primary Market Research

- Identify the purpose of the market research.

Section 2 Secondary Research

original or first-hand information, However, secondary research, such as company reports,

as it will be irrelevant or outdated.

- Data is being collected for another purpose.

a) The Internet: secondary

Section 3 Data Presentation from Market Research

difficult to quickly pinpoint trends in tables.

and familiar social media

Chapter 3 Marketing Mix: The Product

Section 1 Features of Successful Products

- It has an attractive design and a good package.

Section 2 The Product Life Cycle

introduction stage is characterized by low sales. Advertising is needed to notify consumers

- Entering new markets.

(70) 14. T a)

Section 3 Product Differentiation

Chapter 4 Marketing Mix: The Price

Section 1 Importance of Price

- A successful advertising campaign.

- When competition increases.

Section 2 Pricing Strategies

b) Selling Price = Item Cost + (Item Cost × Markup Percentage)

a) Penetration pricing method.

product appear cheaper than $20.

into the market.

Chapter 5 Marketing Mix: Promotion

Section 1 Promotion in the Marketing Mix

and how they promote their products.

sales and profits.

- Increase sales and profit through targeting new markets.

• The firm’s marketing objectives

they were to purchase the good/service. Alternatively, persuasive advertising creates a

audience. It is appealing, since it uses colors, images, and sound.

b) There is a positive relationship between sales and advertising expenditure.

order to decide whether to advertise locally, nationally, or internationally.

the product life cycle.

Section 3 Other Forms of Promotion

is a positive and direct relation.

Section 4 Influences on Promotion

- Reach consumers that traditional marketing methods fail to reach.

Chapter 6 Marketing Mix: Place

Section 1 Place in the Marketing Mix

products into smaller units for the retailer.

consumers want to buy it.