AQA A-Level Business: Businesses and the external environment (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 3.1.3, Understanding that businesses operate within an external environment, of the AQA AS and A-level Business specification (7131 and 7132), for A-level Business 7132. The businesses and figures are invented. Learn the content from the study guide and revision notes. The wider topic has topic practice questions. See also the AQA A-level Business hub, the Business checklist and the free diagnostics.

Questions

1. State two of the external factors that the specification lists as affecting a business’s costs and demand. [2]

2. Explain what is meant by market conditions. [2]

3. Kettleburn Garden Furniture has a variable-rate loan of £150,000. The interest rate rises from 4.8% to 6.4%.

(a) Calculate the annual interest on the loan before and after the rise. [2] (b) Calculate the percentage increase in the annual interest bill. [2]

4. Moorcliffe Coffee Roasters has a unit cost of £12.00 and sells at £20.00. Packaging is 30% of unit cost and its price rises by 15%.

(a) Calculate the new unit cost. [2] (b) Calculate the percentage increase in unit cost. [1] (c) Calculate the selling price needed to keep the margin at 40% of the selling price. [2]

5. Hexwood Bakery sells 600 cakes a week at £9.00. Variable cost is £4.50 a cake and fixed costs are £1,800 a week. A national chain opens nearby.

(a) Calculate Hexwood’s weekly profit before the chain opens. [2] (b) The owner matches the chain by cutting the price to £8.20. Volume becomes 640 a week. Calculate the new weekly profit. [2] (c) If the owner held the price at £9.00 instead, volume would fall to 520 a week. Recommend which response gives the better weekly profit, using your calculations. [2]

6. Strathbeck Cycles sells premium e-bikes and budget bikes. Local real incomes fall by 4%. Premium sales fall by 12% and budget sales rise by 6%.

(a) Calculate how many times larger the percentage fall in premium sales is than the percentage fall in incomes. [2] (b) Explain why budget sales rose when incomes fell. [3]

7. In Hollin Cross Care Homes’ town, people aged over 80 were 5.1% of the population five years ago and are now 6.4%.

(a) Calculate the percentage increase in the share of the population aged over 80. [2] (b) Analyse how this demographic change could affect Hollin Cross’s demand and its costs. [4]

8. Thorsgill Packaging makes 250,000 gift boxes a year. Retailers increasingly ask for recyclable board, which adds £0.04 to each box.

(a) Calculate the extra annual cost of switching all production to recyclable board. [1] (b) Analyse how this environmental pressure could affect Thorsgill’s costs and demand. [4]

9. Wharfe Ices sells ice cream. Its unit sales last year were: January to March 18,000; April to June 61,000; July to September 74,000; October to December 27,000.

(a) Calculate total annual unit sales and the percentage sold between April and September. [2] (b) Analyse one problem for costs and one problem for demand that this pattern could create. [4]

10. Greyfriars Cafe has 1,000 customers a week, each spending £7.50 on average, for 52 weeks a year. Variable costs are 38% of revenue. Operating profit before interest is £48,000 a year. Its £90,000 variable-rate loan is expected to move from 6% to 8%. A national chain is opening nearby and the owner expects to lose 8% of customers. Local real incomes are forecast to fall by 1.5%.

Evaluate whether competition is the most significant external threat to Greyfriars Cafe’s profit. [12]

11. Fallowdene Coffee Roasters sells 80,000 bags a year at £5.50. Unit cost is £3.60, of which coffee beans are £1.80. Fixed costs are £120,000 a year. The owner is considering fair trade beans, which cost 15% more. She expects to raise the price to £5.70 and to sell 4% more bags.

(a) Calculate annual profit before the switch and after it. [4] (b) Recommend whether Fallowdene should switch to fair trade beans. [8]

Answers

1. Any two from: competition; market conditions; incomes; interest rates; demographic factors; environmental issues and fair trade. [1] [1] [2] Examiner insight: A “state” question rewards only what is asked, so name two factors and move on.

2. The state of the market a business trades in, such as whether demand is growing, falling or seasonal [1], and the supply and price of the inputs it buys [1]. [2] Examiner insight: “Explain” usually needs a point plus a development.

3. (a) Before: £150,000 × 4.8% = £7,200 [1]. After: £150,000 × 6.4% = £9,600 [1]. (b) Increase = £9,600 − £7,200 = £2,400 [1]. Percentage increase = 2,400 ÷ 7,200 × 100 = 33.3% [1]. [4] Examiner insight: A 1.6 percentage point rise in the rate is a 33.3% rise in the bill. Divide by the original and show the working.

4. (a) Packaging = 30% × £12.00 = £3.60 [1]. New packaging = £3.60 × 1.15 = £4.14, so new unit cost = £12.00 − £3.60 + £4.14 = £12.54 [1]. (b) Rise = £0.54 ÷ £12.00 × 100 = 4.5% [1]. (c) Price = unit cost ÷ (1 − 0.40) = £12.54 ÷ 0.60 [1] = £20.90 [1]. [5] Examiner insight: Isolate the part of cost that changes first. In (c), margin is a share of price, so divide by 0.60.

5. (a) Contribution per cake = £9.00 − £4.50 = £4.50 [1]. Profit = 600 × £4.50 − £1,800 = £900 [1]. (b) Contribution = £8.20 − £4.50 = £3.70 [1]. Profit = 640 × £3.70 − £1,800 = £2,368 − £1,800 = £568 [1]. (c) Holding the price: 520 × £4.50 − £1,800 = £540 [1]. Matching the cut gives £28 more, so recommend matching; the gap is small, so the choice is close and depends on whether lost customers would return [1]. [6] Examiner insight: State which option wins and by how much, then add one comment on risk.

6. (a) 12 ÷ 4 [1] = 3 times [1]. (b) Budget bikes behave as an inferior good: demand rises when incomes fall [1]. Customers who can no longer afford premium e-bikes trade down [1], so the rise in budget sales partly offsets the premium fall [1]. [5] Examiner insight: Explain customers’ behaviour, not just the numbers.

7. (a) 6.4 − 5.1 = 1.3 percentage points; 1.3 ÷ 5.1 × 100 = 25.5% [2]. (b) Demand: a larger share of over-80s means more potential residents, so demand for places is likely to rise [1], raising occupancy and revenue [1]. Costs: more residents need more care staff [1], and recruiting them from a smaller pool of younger workers may mean higher pay or training costs [1]. [6] Examiner insight: Tie the trend to this business’s product and workforce.

8. (a) 250,000 × £0.04 = £10,000 [1]. (b) Costs: recyclable board raises the cost of every box, so unless price rises, profit per box falls [1]. Demand: retailers who want recyclable boxes may move to a supplier that offers them, so switching could protect orders [1]; not switching risks losing them [1]. Net effect: switching pays if the protected orders are worth more than £10,000, or customers accept a small price rise [1]. [5] Examiner insight: Environmental pressure works through costs and demand. Show both, then weigh them.

9. (a) Total = 18,000 + 61,000 + 74,000 + 27,000 = 180,000 [1]. April to September = 135,000, and 135,000 ÷ 180,000 × 100 = 75% [1]. (b) Costs: rent and equipment are paid all year, yet January to March sales are only 18,000 against 74,000 in July to September [1], so capacity sits idle in quiet months [1]. Demand: sales depend on the warm months, so a cold, wet summer would cut them sharply [1], and low winter demand strains cash flow [1]. [6] Examiner insight: Quoting figures from the stem makes the point specific to this business.

10. Competition: 8% of 1,000 customers is 80 a week [1]. Annual revenue is 1,000 × £7.50 × 52 = £390,000, so an 8% loss is £31,200 [1]. Variable costs are 38%, so contribution is 62% and the lost contribution is £31,200 × 62% = £19,344 [1]. Interest: £90,000 × 6% = £5,400 rises to £90,000 × 8% = £7,200, an increase of £1,800 [1]. Combined: £48,000 − £19,344 − £1,800 = £26,856 [1]. Competition is 40.3% of current profit against 3.75% for interest, about 10.7 times larger [1]. Incomes: a 1.5% fall may cut eating out or push people to cheaper options [1], but no size is given, so it cannot be quantified [1]. Evaluation: the interest cost is known and small, and a fixed rate could limit it [1], whereas the 8% loss is only an expectation, and loyalty offers could limit it [1]. Judgement: competition is probably the most significant threat because it affects profit far more [1], but this depends on the 8% forecast and on whether customers return once the new chain is no longer novel [1]. [12] Examiner insight: Calculate each effect, then compare sizes before judging.

11. (a) Before: 80,000 × (£5.50 − £3.60) = 80,000 × £1.90 = £152,000 [1]; less £120,000 = £32,000 [1]. After: beans cost £1.80 × 1.15 = £2.07, so unit cost = £3.60 − £1.80 + £2.07 = £3.87 [1]. Bags = 83,200. Profit = 83,200 × £1.83 − £120,000 = £152,256 − £120,000 = £32,256 [1]. (b) Unit cost rises by £0.27 and price by £0.20, so margin per bag falls from £1.90 to £1.83 [1]. Profit rises by only £256 (about 0.8%), so the case rests on forecasts [1]. If demand rose by only 2% (81,600 bags), profit would be £29,328, below today’s £32,000 [1]. If customers rejected the price rise, profit at £5.50 with 83,200 bags would be £15,616 [1]. Break-even output rises from about 63,158 to about 65,574 bags, so the margin of safety is thinner [1]. Non-financial gains: ethical reputation and appeal to fair trade customers [1]. Recommendation: switch only if a trial or customer research shows buyers will accept £5.70 and demand will rise by at least 4% [1], because the gain is small and the downside large; a phased switch on one blend limits risk [1]. [12] Examiner insight: Test the forecasts. Showing what happens if demand or price turns out worse supports a conditional judgement.

Where marks are usually lost

• Naming a factor without saying whether costs, demand or both change.
• Applying a percentage rise on one input to the whole unit cost.
• Mixing up a percentage point change in a rate with a percentage change in the interest paid.
• Describing a trend without linking it to the business’s product or workers.
• Treating fair trade or recyclable materials as only a cost.
• Listing effects without comparing their size, or giving a judgement with no condition.

Next steps

• Review the revision notes and the study guide.
• Go to the AQA A-level Business hub and the checklist.
• Try the free 10-minute diagnostics.
• Book a free trial class at /trial/.

Frequently asked questions

What is the difference between a percentage point change and a percentage change? An interest rate rising from 4.8% to 6.4% is a rise of 1.6 percentage points, but the percentage change in the interest paid is much larger. Mixing up the two is a common error.

How do you work out the effect of a rise in one input’s price on unit cost? Apply the percentage rise only to that input’s share of unit cost, then add the increase to the original unit cost. Applying the rise to the whole unit cost is a frequent mistake.

How should you explain an external factor’s effect on a business? Say whether the factor changes costs, demand or both, and link it to the business’s product or workers. Naming a factor without that link earns little credit.

Are environmental or fair trade choices only a cost to a business? No. They raise costs, but they can also affect demand, for example when customers or retailers ask for recyclable materials. Treating them as only a cost limits the marks.

Official syllabus

AQA, AS and A-level Business (7131 and 7132) specification, section 3.1.3, Understanding that businesses operate within an external environment, under 3.1 What is business?