AQA A-Level Business: Understanding management decision making (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 section 3.2.2, Understanding management decision making, of the AQA AS and A-level Business specification (7132, A-level). All businesses and figures are invented. Read the study guide and revision notes first if a method is unfamiliar. Links: Business hub, checklist, topic practice paper and diagnostics.

Questions

1. Define “scientific decision making”. [2]

2. Identify two resource constraints that could limit a small business’s decision. [2]

3. Sandwick Kayaks can buy a hire fleet for £36,000. It estimates a 0.5 chance of a £90,000 return, a 0.3 chance of £50,000 and a 0.2 chance of £10,000. Calculate the expected value and the net gain of the fleet. [4]

4. Distinguish between risk and uncertainty in decision making. [4]

5. Linden Ford Dairy has £60,000 to invest. Its calculated net gains are £34,000 for a new cheese vat, £27,000 for a delivery van and £19,000 for a marketing campaign. It chooses the vat. Calculate the opportunity cost of this choice and explain why it is not £46,000. [3]

6. Harlow Weave must choose one of two dye projects. Project A costs £50,000, with a 0.4 chance of a £160,000 return and a 0.6 chance of £40,000. Project B costs £30,000, with a 0.8 chance of a £75,000 return and a 0.2 chance of £25,000. The business wants steady growth and has small cash reserves.

(a) Calculate the net gain of each project. [4] (b) Recommend which project to choose. [4]

7. A small printing firm is choosing between a certain option with a net gain of £14,000 and a risky press that costs £70,000. The press returns £120,000 with probability p and £30,000 otherwise.

(a) Calculate the value of p at which the press has the same net gain as the certain option. [3] (b) Explain what this value tells the owner about the decision. [2]

8. A supermarket is about to open near a town bakery that is deciding whether to open a second shop. Analyse how the supermarket could influence the bakery’s decision. [4]

9. Ravensthorpe Joinery plans to launch a new range at a cost of £40,000. There is a 0.6 chance of a strong first year and a 0.4 chance of a weak one. After a weak year the range returns £30,000 in total. After a strong year the owner must choose. Expanding costs a further £50,000 and returns £220,000 with probability 0.7 or £80,000 with probability 0.3. Staying the same costs nothing more and returns £100,000.

(a) Calculate the net gain of expanding after a strong first year. [3] (b) State which choice the owner should make after a strong year, and why. [2] (c) Calculate the net gain of launching the new range. [3]

10. Zerelda runs a street-food van with eight years’ experience. At 7 am she must decide how much extra stock to buy for a festival she has never traded at. No sales data exist for it. Justify whether she should rely on intuition or on data. [6]

11. Linden Ford Dairy has £40,000 in cash. Its mission is local, organic, small-scale production. A supermarket has just announced its own organic range. The owners compare two options.

Option X is a cheese plant costing £60,000, with a 0.5 chance of a £150,000 return, a 0.3 chance of £90,000 and a 0.2 chance of £20,000. It would buy in milk from farms outside the area, some of which are not organic.

Option Y is an expanded organic delivery round costing £35,000, with a 0.7 chance of an £80,000 return and a 0.3 chance of £40,000.

Evaluate which option the dairy should choose. [12]

Answers

1. Making a choice by using data and analysis [1], such as decision trees, expected value or net gain, rather than gut feeling [1]. [2] Examiner insight: A definition gains from naming what the decision rests on (data); an example alone does not define the term.

2. Any two from: finance or cash; skilled or available staff; time; space or premises; equipment [1] [1]. [2] Examiner insight: Naming a constraint is enough on “identify”; writing a sentence about each adds no credit.

3. EV = (0.5 × 90,000) + (0.3 × 50,000) + (0.2 × 10,000) [1] = 45,000 + 15,000 + 2,000 = £62,000 [1]. Net gain = 62,000 − 36,000 [1] = £26,000 [1]. [4] Examiner insight: Showing each probability × payoff product lets a marker credit the method even if one figure slips.

4. Risk: a chance of an unfavourable outcome that can be estimated, for example from past data [1]. Uncertainty: outcomes or their likelihood cannot be reliably estimated [1]. Difference: with risk, probabilities can be put on a decision tree [1]; with uncertainty, any probabilities would be guesses, for example launching a product type nobody has sold [1]. [4] Examiner insight: “Distinguish” needs both terms and the difference between them, not two separate definitions left unlinked.

5. The next-best alternative is the delivery van [1], so the opportunity cost is £27,000 [1]. Opportunity cost is the single best alternative given up, not the total of all rejected options (27,000 + 19,000 = 46,000) [1]. [3] Examiner insight: A common slip is to add the rejected options; naming the next-best one first avoids it.

6. (a) A: EV = (0.4 × 160,000) + (0.6 × 40,000) = 64,000 + 24,000 = £88,000 [1]; net gain = £38,000 [1]. B: EV = (0.8 × 75,000) + (0.2 × 25,000) = 60,000 + 5,000 = £65,000 [1]; net gain = £35,000 [1]. [4] (b) A has the higher net gain, by £3,000 [1]. But A’s worst case returns £40,000 on a £50,000 outlay, a £10,000 loss, against £5,000 for B (25,000 − 30,000) [1]. The firm has small reserves and wants steady growth, and a £3,000 gap on estimated probabilities is thin [1]. Recommend B (A is also acceptable with a reasoned case), on the grounds of lower risk and the smaller outlay [1]. [4] Examiner insight: A recommendation usually earns more when it uses both the figures and the stem details (small reserves, steady growth) than when it only repeats the net gains.

7. (a) EV = 120,000p + 30,000(1 − p) = 30,000 + 90,000p [1]. Net gain = 90,000p − 40,000 [1]. Setting this equal to 14,000 gives p = 54,000/90,000 = 0.6 [1]. [3] (b) If the owner believes the chance of the high return is above 0.6, the press has the higher net gain [1]; as p is only an estimate, a belief close to 0.6 means the decision is fragile and more evidence, or attention to risk, is needed [1]. [2] Examiner insight: Part (b) is about what the figure means for the decision, so a repeat of the arithmetic from (a) does not answer it.

8. The supermarket is part of the external environment, specifically competition [1]. It may attract customers away or cut bread prices [1], so the probability of strong sales at a second shop falls, lowering expected value and net gain [1]. The bakery might therefore delay, choose a cheaper option, or stress quality and locality to differentiate [1]. [4] Examiner insight: Analysis tends to gain from a chain (competition, then sales, then expected value, then the decision), not from naming the supermarket alone.

9. (a) EV = (0.7 × 220,000) + (0.3 × 80,000) = 154,000 + 24,000 = £178,000 [1]. Net gain = 178,000 − 50,000 [1] = £128,000 [1]. [3] (b) Expand [1], because £128,000 exceeds the £100,000 from staying the same [1]. [2] (c) Value at the chance node = (0.6 × 128,000) + (0.4 × 30,000) = 76,800 + 12,000 [1] = £88,800 [1]. Net gain = 88,800 − 40,000 = £48,800 [1]. [3] Examiner insight: Working right to left, using the later decision’s value in the earlier calculation, is the usual way to avoid double-counting the £50,000.

10. Rely on intuition [1], mainly because there are no data on this festival, so no reliable probabilities for a tree [1]. The 7 am deadline leaves no time to research [1], and her eight years’ experience of similar stock decisions gives her judgement real value [1]. Limit: intuition can be biased or overconfident, so she could cap the stock bought to limit the loss if she is wrong [1]. Judgement: intuition is justified here, ideally combined with a simple check such as past ordinary-day sales [1]. [6] Examiner insight: A justified choice relies on the stem’s facts (no data, time, experience); a general list of pros and cons of intuition tends to score less.

11. Calculations: X EV = (0.5 × 150,000) + (0.3 × 90,000) + (0.2 × 20,000) = 75,000 + 27,000 + 4,000 = £106,000 [1]; net gain £46,000 [1]. Y EV = (0.7 × 80,000) + (0.3 × 40,000) = 56,000 + 12,000 = £68,000 [1]; net gain £33,000 [1]. For X: it has the higher net gain, by £13,000 [1]. Against X: its worst case returns £20,000 on £60,000, a loss of £40,000 [1], and its £60,000 cost exceeds the £40,000 cash, so it needs outside funding [1]. It also clashes with the organic, local mission because of the milk sourcing, risking the brand’s reputation [1]. For Y: its worst case still returns £5,000 more than it costs (40,000 − 35,000) [1], it fits the cash and the mission [1], and an organic range could help defend against the supermarket’s organic entry [1]. Judgement: Y is the better choice [1], because X’s extra £13,000 of expected net gain is an average on estimated probabilities and is outweighed by its funding gap, large downside and mission conflict. This would change if the owners could fund X safely and sourced organic milk locally. [12] Examiner insight: A high-level evaluation usually ends in a supported judgement that says what it depends on, not just a list of points for each option.

Where marks are usually lost

• Writing the expected value but not subtracting the cost to reach net gain.
• Giving the total of all rejected options as the opportunity cost.
• Recommending the highest net gain without checking worst case, funding or mission.
• Repeating the stem’s numbers instead of using them to support an argument.
• Treating risk and uncertainty as the same idea.
• Listing influences on decisions without explaining the effect on this business.
• Stating one approach (data or intuition) is always better.
• Leaving calculations without working, so a slip cannot be credited.

Next steps

• Revision notes and study guide
• Topic practice paper
• Business hub and checklist
• All free 10-minute diagnostics
• Book a free trial class: /trial/

Frequently asked questions

What is the most common mistake in decision tree questions? Stopping at the expected value without subtracting the cost of the option to find the net gain. Always finish the calculation and show the working so a slip can still be credited.

Should you always recommend the option with the highest net gain? Not automatically. Check the worst case, whether the business can fund the option, and whether it fits the mission and other influences before recommending. Recommending on net gain alone is a frequent weakness.

How should you use the numbers in a decision-making case study? Use them to support an argument, for example to show the size of a possible loss, rather than repeating the figures from the question.

Is scientific decision making always better than intuition? No. Answers lose marks for stating that one approach is always better; the right approach depends on the quality of the data, the time available and the size of the decision.

Official syllabus

AQA AS and A-level Business specification (7131 and 7132), subject content section 3.2.2 Understanding management decision making, published by AQA.