AQA A-Level Business: Understanding the nature and purpose of business and Understanding different business forms (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 AQA A-level Business (7132) sections 3.1.1 and 3.1.2, for first teaching from September 2023. Use the study guide and revision notes first. The topic-level practice questions are separate. See also the course hub, the checklist and the free diagnostics.

Questions

1. Define the term “mission”. [2]

2. State three reasons why a business sets objectives. [3]

3. Tarrant Tea Merchants is a sole trader. In one quarter it sells 3,000 boxes at £6.00. Variable costs are £2.40 a box and fixed costs are £7,200.

(a) Calculate revenue, total costs and profit for the quarter. [4] (b) Fixed costs rise by 10% next quarter and sales stay the same. Calculate the new profit. [2]

4. Explain two reasons why profit is important to a business. [4]

5. Marl Street Bakery opened eight months ago. Monthly revenue is £9,500 and total costs are £10,200. The owner wants to open a second shop. Analyse why survival may be a more suitable objective than growth for the bakery now. [4]

6. Explain the difference between limited and unlimited liability. [3]

7. Marrick Glass plc has 2,400,000 ordinary shares in issue. The share price falls from £5.50 to £4.40. The company pays a dividend of 15p a share.

(a) Calculate market capitalisation before and after the fall. [2] (b) Calculate the percentage change in market capitalisation. [2] (c) Calculate the total dividend paid. [1] (d) Explain one possible reason for the fall in share price. [2]

8. Distinguish between a charity and a mutual. [4]

9. Bridie Hartnoll runs Corrin Joinery as a sole trader. Annual revenue is £210,000 and profit is £38,000. She wants to bid for a contract that needs £90,000 of machinery. A bank will lend £50,000, but only if her house, worth £300,000, is offered as security. A friend would invest £40,000 for 25% of the business if it became a private limited company. Recommend whether Bridie should convert to a private limited company. [9]

10. Rook Dairy Foods plc was founded by a family with the mission of providing honest dairy products from local farms. It now has 12,000,000 shares, 85% held by investment funds. The board has set targets of 12% annual profit growth and a dividend of 8p a share. It is considering buying cheaper imported milk, which would save £1,400,000 a year. Analyse how its status as a plc may affect this decision. [8]

11. Explain one reason why an investor might buy ordinary shares in a company and one reason why limited liability helps this decision. [3]

Answers

1. The mission is the overall purpose of the business, why it exists [1]. It is broad and long-term rather than a numerical target [1]. [2] Examiner insight: A definition tends to gain full credit when it says both what a mission is and how it differs from an objective; “what the business wants to achieve” alone is vague.

2. Any three from: to give all departments a common direction; to motivate staff with something to aim at; to measure performance by comparing results with targets; to help choose between options; to make managers accountable to owners. One mark each [1] [1] [1]. [3] Examiner insight: A state question rewards three distinct reasons. Rewording one reason three times is likely to earn one point.

3. (a) Revenue = 3,000 × £6.00 = £18,000 [1]. Variable costs = 3,000 × £2.40 = £7,200 [1]. Total costs = 7,200 + 7,200 = £14,400 [1]. Profit = 18,000 − 14,400 = £3,600 [1]. [4] (b) Fixed costs = 7,200 × 1.10 = £7,920 [1]. Profit = 18,000 − 7,200 − 7,920 = £2,880 [1]. [2] Examiner insight: Show each stage. A common slip is to treat variable costs as the total costs, which overstates profit.

4. Any two developed reasons. Profit rewards owners for the risk they take [1], so they are willing to keep investing in the business [1]. Retained profit can fund expansion without borrowing [1], which avoids interest costs and keeps control with the owners [1]. Other valid reasons: attracts lenders and investors; builds a cushion for survival; pays dividends. [4] Examiner insight: Each reason needs a consequence. Naming “reward” or “finance” without saying what follows is likely to earn only half of the available credit.

5. The bakery makes a loss of £9,500 − £10,200 = −£700 a month [1]. Losses drain cash, so the owner risks being unable to pay suppliers or wages [1]. A second shop would add fixed costs and need finance, which a loss-making firm may struggle to obtain [1]. Surviving first, by raising revenue or cutting costs, builds a base from which growth can later be funded [1]. [4] Examiner insight: Use the figure in the case. Analysis that mentions the loss and follows it through a chain tends to score higher than a general claim that survival matters.

6. Limited liability means an owner can lose only the amount invested in the business [1]. Unlimited liability means the owner’s personal assets, such as a house, can be used to pay business debts [1]. Sole traders have unlimited liability; shareholders in Ltd and plc companies have limited liability [1]. [3] Examiner insight: Keep the wording about the owner’s loss. Saying that “the company’s debts are limited” is a typical way of losing the mark.

7. (a) Before: 2,400,000 × 5.50 = £13,200,000 [1]. After: 2,400,000 × 4.40 = £10,560,000 [1]. [2] (b) Change = 10,560,000 − 13,200,000 = −£2,640,000 [1]. 2,640,000 ÷ 13,200,000 × 100 = −20% [1]. [2] (c) 2,400,000 × £0.15 = £360,000 [1]. [1] (d) Any valid reason, such as lower profit forecasts or weak results [1], which reduce investors’ demand for the shares so more sell than buy [1]. Other reasons: takeover news, scandal, higher interest rates, loss of confidence. [2] Examiner insight: Convert pence to pounds before multiplying. A percentage fall should be shown as a negative or described as a fall, with the working visible.

8. A charity exists to pursue a charitable purpose [1], and puts any surplus back into that purpose [1]. A mutual is owned by its members, who are its customers or savers [1], and uses any surplus for their benefit [1]. [4] Examiner insight: A distinguish question needs the difference stated, not two separate definitions. Saying that both “do not make profit” is inaccurate; the point is what happens to the surplus.

9. Staying as a sole trader: Bridie has unlimited liability, so the bank’s condition puts a £300,000 house at risk [1], and £50,000 is about 1.3 years of her whole £38,000 profit [1]. She keeps all control and profit and avoids extra reporting [1]. Converting to a private limited company: limited liability would cap her loss at her investment [1]; the friend’s £40,000 plus the £50,000 loan reaches the £90,000 needed [1]. Costs: she would give up 25% of the business and its profit [1], and a company has more reporting and less privacy [1]. Judgement: convert [1], because the contract’s size relative to her income makes personal risk high, provided the contract is realistic and a lender will accept company security terms [1]. If the contract were small, staying as she is would be more attractive. [9] Examiner insight: A recommend answer is stronger when it uses the figures, weighs both options and states a condition for the judgement. Listing features of each form does not reach a decision.

10. The dividend costs 12,000,000 × £0.08 = £960,000 [1]. The imported milk saving of £1,400,000 is larger than the whole dividend, by £440,000 [1], so it would help meet profit and dividend targets [1]. Institutions hold 85%, so the board faces pressure to meet the targets [1]. Ownership is separated from control; directors may favour short-term profit [1]. This conflicts with the mission of using local farms [1], so reputation and loyal customers could suffer [1]. A fall in profit could cut the share price and raise takeover risk, so the board may weigh this more than the founders’ mission [1]. [8] Examiner insight: An analysis answer needs a chain from plc status to the pressure to the decision. A generic list of plc features, with no use of the case figures, tends to remain in the lower levels.

11. One reason: dividend income, or capital growth if the share price rises [1]. Limited liability means the investor can lose only the sum invested [1], so the risk is capped and investing in a business they do not run is more acceptable [1]. [3] Examiner insight: The two parts need separate reasons. Repeating the first reason in the second part does not earn the second mark.

Where marks are usually lost

• Giving a list when the command word is explain or analyse.
• Missing a step in a profit calculation, usually fixed costs.
• Forgetting to convert pence to pounds in dividend questions.
• Writing that market capitalisation is the money held by the company.
• Describing limited liability as limiting the company’s debts.
• Treating charity and mutual as the same thing.
• Recommending a business form without using the figures in the case.
• Giving only advantages of a plc, or only disadvantages.
• Stating a judgement without a reason or a condition.

Next steps

• Re-read the revision notes and the study guide.
• Return to the course hub and tick the checklist.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Frequently asked questions

Is market capitalisation money the company holds? No. Market capitalisation is the number of shares multiplied by the share price, a measure of the company’s value on the stock market, not cash in its bank. Treating it as company money is a common error.

What is the most common slip in profit calculations? Missing a step, usually leaving out fixed costs when working out total costs. Revenue = price × units, total costs = variable costs + fixed costs, and profit = revenue − total costs.

What should you watch for in dividend questions? Dividends are often given in pence per share, so convert pence to pounds before multiplying by the number of shares.

How should you recommend a business form in AQA Business? Use the figures in the case, weigh both the advantages and the disadvantages of the form, such as a plc’s access to capital against loss of control, and give a judgement with a reason or condition.

Official syllabus

AQA, AS and A-level Business (7131 and 7132) specification, sections 3.1.1 and 3.1.2.