AQA A-Level Business: Analysing the strategic position of a business (7132) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover topic 3.7, Analysing the strategic position of a business (A-level only), in the AQA AS and A-level Business specification (7131 and 7132). All businesses and figures are invented. Use the study guide and revision notes first. Course hub: AQA A-level Business. Checklist: printable checklist. Diagnostics: free diagnostics.

Questions

1. Define the term “corporate objective”. [2]

2. Pelhurst Joinery (figures in £000) has operating profit of 96, total equity of 420 and non-current liabilities of 180. Last year its ROCE was 14.4% and its gearing was 20.0%.

(a) Calculate this year’s ROCE. [3] (b) Calculate this year’s gearing. [2] (c) Analyse what the changes in ROCE and gearing suggest about Pelhurst’s position. [4]

3. Pelhurst’s revenue is 840, cost of sales 510, receivables 84, inventories 102 and payables 62 (all £000).

(a) Calculate receivables days. [2] (b) Calculate payables days, to 1 decimal place. [2] (c) Calculate inventory turnover. [2] (d) Explain one limitation of using ratios to assess a business. [2]

4. Explain how a strategy of selling in overseas markets could affect two functional areas of a business. [4]

5. Analyse one advantage and one disadvantage of using Kaplan and Norton’s Balanced Scorecard instead of financial ratios alone. [4]

6. Merrion Foods makes chilled ready meals. Two suppliers provide 70% of its chicken. One supermarket buys 60% of its output and has threatened to switch. A new rival has just opened a factory nearby. Using Porter’s five forces, analyse the pressures on Merrion Foods’ profits. [6]

7. Wilbrook Hotels is a UK chain. 40% of its guests come from the euro area. The pound has weakened against the euro, UK interest rates have risen and UK inflation is 4%. Analyse how these changes may affect Wilbrook. [6]

8. Darnell plc is considering cutting its use of plastic packaging at extra cost to its shareholders. Evaluate whether a plc should put shareholders’ interests before those of other stakeholders. [6]

9. Explain two ways in which tougher environmental legislation could affect a manufacturer. [4]

10. Vexhall Cycles will buy a machine for £250,000. Expected net cash flows are £50,000, £90,000, £120,000 and £100,000 in years 1 to 4. The discount rate is 10%.

(a) Calculate the payback period. [3] (b) Calculate the average rate of return. [3] (c) Calculate the net present value. [4]

11. Vexhall’s finance manager repeats the calculation with every cash flow 15% lower.

(a) State what this technique is called and what the new NPV is. [2] (b) Justify whether Vexhall should buy the machine. [6]

12. Explain one reason for greater globalisation and one way in which technological change could affect a retailer’s marketing. [4]

Answers

1. A corporate objective is a goal [1] set for the whole business, which should be measurable (for example a growth or return target) [1]. [2] Examiner insight: A definition earns more with a qualifier such as “whole business” or “measurable” than with a bare “aim”; an example alone rarely defines.

2. (a) Capital employed = 420 + 180 = 600 [1]. ROCE = 96 / 600 x 100 [1] = 16.0% [1]. [3] (b) Gearing = 180 / 600 x 100 [1] = 30.0% [1]. [2] (c) ROCE rose from 14.4% to 16.0%, so profitability improved [1]. Gearing rose from 20.0% to 30.0%, so more of the funding is long-term debt [1]. The rise in profit may have been helped by borrowing to invest [1]. Higher gearing means more interest and risk if profits fall, so the improvement may not be secure; more data such as cash flow would help [1]. [4] Examiner insight: Analysis needs both movements linked to each other with a “so” or “because”; quoting the numbers without a consequence usually stays at description.

3. (a) 84 / 840 x 365 [1] = 36.5 days [1]. [2] (b) 62 / 510 x 365 [1] = 44.4 days [1]. [2] (c) 510 / 102 [1] = 5.0 times [1]. [2] (d) Ratios use past data, so they may not predict the future [1]; or they ignore non-financial factors or depend on accounting choices; or they need a benchmark, because a figure means little alone (any one, developed) [1]. [2] Examiner insight: Payables days use cost of sales, not revenue; using the wrong base is a common slip. A limitation needs a reason it matters, not just a label.

4. Marketing would need research and promotion suited to overseas customers [1], for example language and local tastes [1]. Operations might need extra capacity or distribution to meet overseas orders [1], raising costs or requiring investment [1]. (Other functions, such as finance raising funds or HR recruiting language skills, are acceptable.) [4] Examiner insight: Naming two functions is not enough; each needs a specific effect that comes from the overseas strategy rather than a general statement of what the function does.

5. Advantage: it balances financial results with customer, internal process and learning and growth measures [1], so it shows drivers of future performance that profit ratios miss [1]. Disadvantage: it is harder and slower to design and keep up to date, and deciding which measures to weight is subjective [1], so managers may be unsure which matters most when measures conflict [1]. [4] Examiner insight: “Instead of financial ratios alone” asks for a comparison, so tie each point back to what ratios cannot show or do.

6. Supplier power is high because two suppliers provide 70% of chicken [1], so they can raise prices and cut Merrion’s margin [1]. Buyer power is high because one supermarket takes 60% of output and could switch [1], so it can push prices down [1]. Rivalry or entry threat: the new factory adds capacity [1], which may lead to price cutting or promotion spending that reduces profit [1]. [6] Examiner insight: Strong answers use the evidence in the stem for each force and finish with the effect on profit; listing all five forces with no context gains little.

7. A weaker pound makes the UK cheaper for euro-area guests [1], which may raise demand and revenue from the 40% of guests [1]. Imported supplies may cost more [1], and inflation of 4% raises other costs [1]. Higher interest rates raise borrowing costs, especially if the chain is highly geared [1], and may cut UK customers’ spending [1]. [6] Examiner insight: A balanced answer shows both an opportunity (the exchange rate) and threats; saying which effect is likely to be bigger earns credit for judgement.

8. For prioritising shareholders: they own the business and bear risk, and returns attract investment [1]; extra packaging costs cut profit and dividends [1]. Against: the stakeholder concept says employees, customers and the community are also affected [1], and better environmental practice can build reputation and long-term sales [1]. Judgement: a plc should weigh both, as long-term profit often depends on stakeholders, so it should go ahead if the cost is manageable and customer response is likely to be positive [1]. Justification refers to the stem, for example the cost to shareholders against likely reputation gains [1]. [6] Examiner insight: An evaluation needs a decision with a reason; stating both views and stopping leaves the final mark out of reach.

9. Costs: it may have to buy cleaner equipment or pay for waste treatment [1], raising costs and reducing profit unless prices rise [1]. Strategy and operations: it may redesign products or processes to use less material and cut emissions [1], which could create an environmental selling point in marketing [1]. [4] Examiner insight: Each way needs an effect on the business; describing what the law says earns little.

10. (a) After year 3 cumulative cash flow is 260,000, so the cost is recovered in year 3 [1]. After year 2 it is 140,000, leaving 110,000 [1]. Payback = 2 + 110/120 = 2.92 years (about 2 years 11 months) [1]. [3] (b) Total returns 360,000, so net return 110,000 [1]. Average annual return 110,000 / 4 = 27,500 [1]. ARR = 27,500 / 250,000 x 100 = 11.0% [1]. [3] (c) Present values: 50,000/1.1 = 45,450; 90,000/1.21 = 74,380 [1]; 120,000/1.331 = 90,160; 100,000/1.4641 = 68,300 [1]. Total = 278,290 [1]. NPV = 278,290 - 250,000 = +£28,290 [1]. [4] Examiner insight: Show the discounting line by line; the cost must be subtracted, and giving the present value total as the NPV is a frequent mistake.

11. (a) Sensitivity analysis [1]. New NPV: 0.85 x 278,290 = 236,550, less 250,000 = -£13,450 [1]. [2] (b) For: NPV is positive (+£28,290) at the forecast [1]; payback of 2.92 years is within the four-year life [1]; ARR of 11.0% may exceed a target return [1]. Against: the result is sensitive, since a fall of just over 10% in cash flows makes NPV negative [1]; payback is long, so risk is high [1]. Judgement: buy only if the manager believes the forecasts are reliable and non-financial factors, such as product quality, support it; otherwise gather more information first [1]. [6] Examiner insight: A justification must reach a decision and give a reason using the calculated figures; quoting results without a view is not enough.

12. Globalisation: lower transport and communication costs (or freer trade) make it easier to sell and source across borders [1], so firms can reach larger markets [1]. Technology: online channels and customer data let the retailer target advertising at specific groups [1], for example by sending offers based on past purchases [1]. [4] Examiner insight: Pair each reason with an explained consequence for the business; naming “the internet” or “trade” alone is not an explanation.

Where marks are usually lost

• Giving a ratio with no comparison, so there is nothing to analyse.
• Using revenue instead of cost of sales for payables days and inventory turnover.
• Forgetting that capital employed is equity plus non-current liabilities.
• Applying Porter’s forces as a list rather than to the data in the stem.
• Writing about an economic change without saying who it helps or hurts.
• Not subtracting the initial cost in NPV, or discounting the wrong year.
• Stopping an evaluation at “it depends” with no decision.

Next steps

• Review the revision notes and the study guide.
• Course hub: AQA A-level Business and the printable checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Frequently asked questions

How do you calculate capital employed for ROCE in AQA Business? Capital employed = total equity + non-current liabilities. Forgetting this is one of the most common ways marks are lost on ROCE and gearing questions.

Should payables days and inventory turnover use revenue? No. Payables days and inventory turnover use cost of sales, while receivables days uses revenue. Using revenue for all three is a frequent error.

Why must a ratio be compared with something? A ratio on its own gives nothing to analyse. Compare it with last year or a rival and say what the change means for the business.

How should you apply Porter’s five forces in an answer? Apply each force to the data in the question rather than listing the forces, and explain how strong it is for that business. Listing the forces without the stem’s data limits the marks.

Is topic 3.7 in the AQA AS Business exam? No. Topic 3.7, Analysing the strategic position of a business, is A-level only content in the AQA Business specification (7131 and 7132).

Official syllabus

AQA, AS and A-level Business (7131 and 7132) specification, section 3.7 (A-level only).