Edexcel A Level Business: Managing Business Activities — Practice Questions

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — examination boards hold copyright in their own papers. Use these alongside the official past papers available free from your board.

Related: Managing Business Activities study guide | Managing Business Activities revision notes

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Section A

1. State two internal and two external sources of finance. [4]

2. Distinguish gross profit from operating profit. [2]

Section B

3. A business has fixed costs of $60,000, a selling price of $30 per unit, and a variable cost of $18 per unit. Calculate the break-even point, and the margin of safety if the business sells 6,000 units. [5]

4. Explain two reasons why a profitable business can still fail due to cash-flow problems. [6]

5. A business has current assets of $120,000, including $50,000 of inventory, and current liabilities of $60,000. Calculate the current ratio and the acid test ratio, and explain what the difference between them shows. [6]

6. A small, family-owned business wants to raise $20,000 to buy new equipment without giving up any control or ownership. Recommend a suitable source of finance, with justification. [5]

7. Explain the difference between historical-figures-based budgeting and zero-based budgeting. [4]

8. State two internal and two external causes of business failure. [4]

9. Evaluate whether break-even analysis is a reliable tool for a new business deciding whether to launch a product. [10]

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Answers

1. Internal: any two of owner’s capital, retained profit, sale of assets [1] [1]. External: any two of bank loan, share capital, venture capital, overdraft, leasing, trade credit, grants, crowdfunding, business angels [1] [1].

2. Gross profit = revenue − cost of sales [1]. Operating profit = gross profit − operating expenses (such as rent, wages and marketing costs) [1].

3. Contribution per unit = 30 − 18 = $12 [1]. Break-even point = 60,000 ÷ 12 = 5,000 units [1] [1]. Margin of safety at 6,000 units sold = 6,000 − 5,000 = 1,000 units [1] [1].

4. Any two, explained: customers paying late while suppliers require quick payment creates a timing gap between cash received and cash owed, even if the business is profitable on paper [1] [1]; overtrading — growing sales faster than the cash flow can support — means a business commits cash to fulfil larger orders before it has been paid for previous ones [1] [1]; poor working capital management, such as holding too much cash in slow-moving inventory, leaves too little available cash to cover short-term liabilities as they fall due [1] [1].

5. Current ratio = 120,000 ÷ 60,000 = 2.0 [1] [1]. Acid test ratio = (120,000 − 50,000) ÷ 60,000 = 70,000 ÷ 60,000 = 1.17 [1] [1]. The gap between the two ratios shows how much of the business’s short-term cover depends on selling its inventory — the acid test is the stricter measure since it excludes inventory, which may not be quickly or reliably converted to cash [1] [1].

6. Retained profit (or owner’s capital) [1]. Justification: it is an internal source, so it involves no interest payments, no dilution of ownership, and no loss of control to an outside lender or investor — appropriate for a family business that explicitly wants to keep both ownership and control [1] [1] [1]; the amount needed ($20,000) is relatively modest, making it realistic for an established business to fund from its own resources rather than needing external finance [1] [1].

7. Historical-figures-based budgeting starts from the previous period’s actual figures and adjusts them, which is quick but can carry forward past inefficiencies [1] [1]. Zero-based budgeting starts each period from nothing and requires every cost to be justified afresh, which takes longer but can eliminate unnecessary spending that a historical approach would simply repeat [1] [1].

8. Internal: any two of poor cash-flow management, overestimated sales, overtrading, poor inventory control, poor marketing, poor quality [1] [1]. External: any two of market conditions, competition, economic factors, exchange rates [1] [1].

9. Arguments that it is reliable: break-even analysis gives a clear, calculable minimum sales target the business must hit before it starts making a profit, based on known fixed and variable costs [1] [1]; it allows the business to test different pricing scenarios and see the effect on the break-even point before committing to a launch [1]; the margin of safety gives a concrete sense of how much room for error the business has if sales fall short of the forecast [1]. Arguments that it is unreliable: it assumes all output is sold and that costs and selling price stay constant, which rarely holds exactly in practice, especially for a genuinely new product with no sales history [1] [1]; it depends entirely on the accuracy of the sales forecast feeding into it, and new products are exactly the case where consumer trends, economic variables and competitor actions are hardest to predict [1] [1]; it says nothing about cash-flow timing — a product could be forecast to break even over a year while still causing a cash-flow crisis in its early months [1]. Judgement: break-even analysis is most useful as one input alongside a cash-flow forecast and market research, not as a stand-alone decision tool, since its value depends heavily on the reliability of the sales estimate behind it — for a genuinely novel product with no comparable sales history, that reliability is often low [1] [1].

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Where marks are usually lost

• Dividing fixed costs by selling price instead of contribution per unit when calculating break-even.
• Confusing the current ratio with the acid test ratio, or forgetting to subtract inventory for the acid test.
• Recommending a source of finance without matching it to the scenario’s stated priorities (such as retaining control).
• Blending internal and external causes of business failure into one undifferentiated list.
• Treating break-even analysis as fully reliable without questioning the sales forecast it depends on.

Approaching managing business activities questions

Treat every calculation question as a two-step process: first identify and state the correct formula, then substitute the given figures and show the working explicitly, since Edexcel’s mark scheme awards method marks for a correctly identified formula even when a later arithmetic step goes wrong. For scenario-based questions on sources of finance or causes of failure, always tie the answer back to the specific details given in the question — the business’s size, its need for control, or the timing of its cash-flow problem — rather than stating textbook definitions in isolation, since application marks on this unit are earned through that specific link, not general knowledge.