Exam code: J204
In 2023 a business sold 22 million items at an average price of £0.75 per item. Its total costs for the year were £13.5 million.
The business made a net profit of:
£3 million
£16.5 million
£1636.5 million
£1650 million
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Which would be variable costs for a building firm?
Administrative and legal expenses
Bricks and roof tiles
Business rates and buildings insurance
Cement mixers and tools
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A company has recently experienced a fall in its net profit margin from 4.2% to 2.9%.
This means that:
every £100 of sales earns £1.30 less net profit than it used to
for every £100 of sales the company only earns £1.30
net profit levels have fallen by 1.3%
the company has made a net loss of 1.3%
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The table below shows a company’s total costs over the last four years.
2020 | 2021 | 2022 | 2023 | |
Operating costs | £200 000 | £170 000 | £280 000 | £320 000 |
Other costs | £40 000 | £30 000 | £30 000 | £40 000 |
The percentage change in the company’s total costs from 2020 to 2023 was:
33%
37.5%
50%
60%
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A market trader paid £4600 for goods which they sold for £12 500.
The market trader’s gross profit margin was approximately:
37%
63%
79%
172%
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An entrepreneur has invested £150 000 to start up their own business. Their expected average rate of return is 10% per annum for the first three years.
Over the first three years of trading, the entrepreneur should expect to make:
average profits of £45 000 per year
average profits of £135 000 per year
profits totalling £15 000
profits totalling £45 000
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Unilever plc
Unilever plc is a multinational company that makes and sells a wide range of quality products including food, cleaning agents and beauty products across 190 countries.
Unilever plc has benefitted from operating in a global marketplace and the majority of its products are international brands. Some of its branded products include Lynx Body Spray, Dove Soap, Hellmann’s Mayonnaise, Ben & Jerry’s ice cream and Persil washing machine detergent. All of these products are made in factories all around the globe, some using flow production and others using batch production.
Unilever plc’s average revenue has grown over the last five years. However, the economic climate is becoming more difficult and Unilever plc’s directors are having to adapt to these challenges.
(i) Calculate Unilever plc’s average revenue from 2019 to 2022.
Answer .....................................................
[2]
(ii) Explain one way revenue affects a business’ decision making.
[2]
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The Sea View Hotel
The Sea View Hotel is a profitable hotel located near the coast. Anika and Charlie own the hotel in a business partnership. They are now considering opening a second hotel in a town further along the coast. It would cost them £1.5 million to buy the property and £0.5 million for redecoration.
To fund the £2 million expansion, the partners are considering getting a bank loan or accepting a new partner into the business. The partnership already has one bank loan but has worked out it can afford a second loan as long as the cost of borrowing does not rise too much.
If Anika and Charlie decide to take on a new partner, they would like to ask Finley, a friend of Anika’s who has just returned to the UK from travelling around the world. Finley is currently unemployed but is a keen photographer and environmental campaigner.
Anika has forecasted the following revenues and costs for the proposed 25-room hotel:
selling price: £100 a day per room
fixed costs: £6300 per week
variable costs: £40 a day per room.
(i) Explain why profit is important to a business’ future.
[2]
(ii) Analyse one disadvantage to the partnership if the proposed hotel’s fixed costs were 10% higher than expected.
[3]
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A market stall sells bread for £1 a loaf and cookies for 60p each. Yesterday 1000 loaves of bread and 2000 cookies were sold.
What was the market stall’s revenue?
£200
£1000
£1200
£2200
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Gross profit margin is:
a computerised method of production
a financial ratio
a pricing method
a variable cost
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A business has a net profit margin of 8%.
Which one of the following must be true for this business?
The business cannot pay its short term debts
The business has made a loss
The business has revenues that are greater than its costs
The business is operating below its break even level
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MD Sports Clinic
Martina Doyle currently works for the National Health Service (NHS). She has total savings of just over £5000 in her bank account. Martina is planning to leave the NHS and start up a private sports injury clinic. She intends to call her new business ‘MD Sports Clinic’.
Martina wishes to rent a property for her new business and expects to pay rent each month. She wants to take a monthly income from the business. She also wants to employ a part time receptionist.
Martina needs to buy some equipment to set up MD Sports Clinic. She has estimated the following figures for MD Sports Clinic’s first month of trading:
fixed costs of £6000
variable costs of £5 per session
revenue of £30 per session.
Explain, giving an example, what is meant by ‘fixed costs’.
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MD Sports Clinic
Martina Doyle currently works for the National Health Service (NHS). She has total savings of just over £5000 in her bank account. Martina is planning to leave the NHS and start up a private sports injury clinic. She intends to call her new business ‘MD Sports Clinic’.
Martina wishes to rent a property for her new business and expects to pay rent each month. She wants to take a monthly income from the business. She also wants to employ a part time receptionist.
Martina needs to buy some equipment to set up MD Sports Clinic. She has estimated the following figures for MD Sports Clinic’s first month of trading:
fixed costs of £6000
variable costs of £5 per session
revenue of £30 per session.
Calculate the profit that MD Sports Clinic would make in its first month of trading if Martina sold all 320 sessions.
Answer: £ ...............................................................................................
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Which of the following would be fixed costs of a fruit farm?
Farm workers’ wages
Plant food and fertiliser
Rent and rates
Seeds and seedlings
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Four years ago an entrepreneur invested £200 000 to start up their own business. The business is making an average profit of £53 000 per year.
The entrepreneur’s average rate of return is:
6.6%
26.5%
73.5%
106%
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Financial data for Pilti plc in 2022 is shown below.
Revenue £44 million
Expenses £12 million
Net profit £14 million
Pilti plc’s gross profit in 2022 was:
£18 million
£26 million
£32 million
£58 million
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The net profit margin of a business has increased from 6% in 2021 to 9% in 2022.
Which of the following must be true for this business?
Expenses have fallen by 50%
Net profit has increased by 3%
Profitability has increased by 50%
Revenue has increased by 3%
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Zara
Zara is a global fashion brand based in Spain. Zara is best known for the speed and frequency it can get its new clothing ranges into its online shop and 2270 stores. Approximately 50% of Zara’s clothes are manufactured in Spain; the rest come from other European countries, or from Asia and Africa. Like most firms in 2020, Zara experienced a fall in sales. Zara’s global sales revenues in 2019 were €19 954 million, but in 2020 these fell to €14 129 million. However, during this period Zara’s online sales increased by approximately 75%, as consumer buying habits changed in favour of e-commerce.
Zara can get new clothing designed, manufactured and delivered to its stores within 15 days. It does this by buying fabric in large quantities from suppliers in Europe, which helps keep its variable costs low. This means that it is delivered quickly to its factory in Spain, where it can then be made up into the new designs.
Zara’s highly responsive supply chain is central to its business success. This means it can change its clothing designs on average every two weeks, while competitors change their designs every two or three months.
Analyse one reason why keeping variable costs low may reward Zara’s owners.
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Zara
Zara is a global fashion brand based in Spain. Zara is best known for the speed and frequency it can get its new clothing ranges into its online shop and 2270 stores. Approximately 50% of Zara’s clothes are manufactured in Spain; the rest come from other European countries, or from Asia and Africa. Like most firms in 2020, Zara experienced a fall in sales. Zara’s global sales revenues in 2019 were €19 954 million, but in 2020 these fell to €14 129 million. However, during this period Zara’s online sales increased by approximately 75%, as consumer buying habits changed in favour of e-commerce.
Zara can get new clothing designed, manufactured and delivered to its stores within 15 days. It does this by buying fabric in large quantities from suppliers in Europe, which helps keep its variable costs low. This means that it is delivered quickly to its factory in Spain, where it can then be made up into the new designs.
Zara’s highly responsive supply chain is central to its business success. This means it can change its clothing designs on average every two weeks, while competitors change their designs every two or three months.
Calculate the percentage decrease in Zara’s sales revenue between 2019 and 2020.
Answer .......................................................
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AstraZeneca plc
AstraZeneca plc (AZ) is a multinational pharmaceutical company that operates in over 100 countries around the world. AZ develops treatments for a range of diseases. It sells its medicines and vaccines worldwide. Its headquarters are in Cambridge, England. In 2021 AZ’s sales revenue was £37 417m, from which it made £24 980m gross profit.
AZ has a code of ethics, which is at the centre of everything that it does. The company has approximately 75 000 employees worldwide; 10 000 of these work in its three research and development centres.
AZ uses technology throughout its operations to provide high quality products for its customers. These customers include doctors, hospitals and governments from around the globe.
In the UK, AZ has changed the way it sells its products. Previously, sales staff would visit medical professionals; now it uses a call centre and website where medical professionals can order products and samples. AZ says this means it can now provide a high quality service that meets the needs of its customers at a lower cost.
Calculate AZ’s gross profit margin for 2021.
Answer ............................................
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Performance data for Pallin Ltd for the last five years of trading is shown below.
2017 | 2018 | 2019 | 2020 | 2021 | |
Profit | £15 000 | £0 | –£9000 | £17 000 | –£3000 |
Pallin Ltd’s average level of profit over the last five years is:
£4000 per year
£5000 per year
£6400 per year
£8000 per year
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A perfume shop has a gross profit margin of 50%.
This means:
for every £10 of sales, it makes £5 profit after all costs have been paid
the perfume shop’s variable costs are exactly half of its fixed costs
the shop charges customers double what it pays when buying the perfume
to make £10 of profit, it needs to sell £50 of perfume
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A drum kit manufacturer plans to make 500 drum kits this year. Estimated costs are as follows:
raw materials £40 per drum kit
rent £600 per month
heating and lighting £900 per quarter
other expenses £56 000 per annum
The manufacturer’s estimated total cost for the year is:
£66 840
£77 500
£85 900
£86 800
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Which of the following would be a variable cost for a restaurant?
Advertising fees
Buildings insurance
Chef’s salary
Fruit and vegetables
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Kareem is an entrepreneur. He makes hand-made shoes for newborn babies. Data for his first four years of trading is shown below.
Year 1 | Year 2 | Year 3 | Year 4 | |
Number of pairs sold | 104 | 1040 | 820 | 1860 |
Revenue | £2080 | £20 800 | £16 400 | £46 500 |
Profit | –£24 000 | £2000 | –£1800 | £26 000 |
According to the data, which of the following is true?
Costs have been greater than revenue in all four years
In Year 2, Kareem reduced the average selling price of the shoes
In Year 4, Kareem increased the average selling price of the shoes
Revenue has increased year on year
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BP plc
BP plc is a UK energy company, which has its headquarters in London. BP produces oil, gas and petrol. It sells and distributes these products to customers all over the world. It also produces some environmentally friendly energy including biofuels, as well as wind- and solar-powered electrical energy.
The company’s finance function is critical in ensuring the business is managed efficiently. BP plc’s revenue increased from $245 billion in 2017 to $283 billion in 2019.
One of BP’s operations involves selling of petrol to the public. BP has 18 700 petrol stations around the globe, with 8500 in the UK. Another of BP’s operations involves extracting oil, using its oil rigs. These are located in the seas around the UK, Norway, Australia, Angola, the Gulf of Mexico (USA) and off the coast of many other countries. Once the oil is extracted it is then transported to refineries.
BP strives to be more sustainable. BP has the aim of cutting its carbon emissions by 2050 to help reduce the effects of climate change. It is installing electric charge points for Police Scotland’s electric vehicles and is developing wind farms in America in partnership with an American company.
(i) Calculate the percentage change in BP’s revenue between 2017 and 2019.
Answer .................................................... %
[2]
(ii) Identify two factors that can affect a company’s revenue.
[2]
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Quality Textiles (QT)
Quality Textiles Ltd (QT) is a medium-sized, established business that manufactures clothes from its factory in Birmingham. Its clothes are sold to retail shops around the country. A summary of its profitability is shown in Table 1.
This year | Last year | Two years ago | |
Gross Profit Margin | 65% | 60% | 57% |
Net Profit Margin | 27% | 25% | 23% |
Table 1
QT wants to expand the business by using a bank loan to buy a large van to help with deliveries. It will use average rate of return (ARR) to assess which model of van it will buy. Further information is provided in Table 2, below. The new van will mean employing a driver, in addition to the five drivers already working for the business.
Standard Van | Superior Van | |
Price | £40 000 | £50 000 |
Total net profit for the life of the van | £60 000 | £70 000 |
Estimated life | 3 years | 4 years |
ARR | ? | 35% |
Table 2
QT’s cash flow forecast suggests it may struggle to pay the monthly van loan repayment. QT’s closing bank balance for the last five months is shown in Fig. 1.
QT had problems earlier in the year. It found its way into the local newspaper as part of an investigation into ethical practices in its business activities and supply chain.
(i) Calculate the average rate of return (ARR) for the Standard Van by using the information in Table 2.
Answer .................................................... %
[3]
(ii) Analyse one reason why QT should buy the Standard Van. Refer to Table 2 in your answer.
[3]
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Shanco plc has managed to reduce its transport costs from £0.7 million in 2019 to £0.6 million in 2020.
What percentage reduction in transport costs has Shanco plc achieved?
6%
7%
14.3%
16.7%
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Financial data for Tictal Ltd in 2020 is shown below.
Revenue £180 000
Cost of sales £45 000
Expenses £36 000
Tictal Ltd’s gross profit margin in 2020 was:
25%
45%
55%
75%
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An advertising agency wishes to upgrade its design software at a cost of £60 000. The net cash flow generated by the software for each of the next two years is forecast to be £60 000.
Assuming the forecasted figures are correct, the average rate of return for this upgrade will be:
33%
50%
67%
100%
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To support Padre Stores Ltd’s decision making, quarterly revenue data in 2020 has been calculated for each of the company’s three stores.
Revenue in 2020: | Store A | Store B | Store C |
Q1: Jan–Mar | £42 000 | £58 000 | £65 000 |
Q2: Apr–Jun | £48 000 | £60 000 | £50 000 |
Q3: Jul–Sep | £52 000 | £58 000 | £40 000 |
Q4: Oct–Dec | £60 000 | £60 000 | £60 000 |
The data shows that:
average revenue per store in Q2: Apr–Jun was £39 500
store A had an average revenue of £50 500 per quarter
store C took more revenue in 2020 than either of the other two stores
total revenue in Q1: Jan–Mar was better than in any other quarter
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Ricardo Costumes and Props (RCP)
Alessia and Natalia own Ricardo Costumes and Props (RCP). The business operates as a partnership. RCP makes a range of costumes and props that it sells to UK and EU theatres, schools and amateur dramatics groups.
Last year, RCP’s costumes and props were used in two very successful films. RCP’s reputation grew rapidly and its revenue increased from £1 600 000 in 2019 to £2 000 000 in 2020. More financial data for RCP in 2020 is shown in Table 1, below.
2020 | |
Revenue | £2 000 000 |
Cost of sales | £500 000 |
Salaries | £1 300 000 |
Rent | £100 000 |
Other expenses | £50 000 |
Table 1
Despite being profitable, RCP’s bank overdraft is getting bigger every month. Alessia and Natalia realise that they need to carefully consider RCP’s cash flow position.
Alessia and Natalia need to update the laser cutter and 3D printer they use to make some of the props. The total cost of these machines is likely to be over £100 000. Alessia and Natalia are unsure how to finance the purchase of the new machinery. Natalia has suggested they try and sell the old machines and use the money to buy new ones. Alessia thinks it might be better to gain extra capital by finding a new partner to join the business.
(i) Identify two variable costs which a business may incur.
[2]
(ii) Calculate RCP’s net profit for 2020.
Answer £ .................................................
[3]
(iii) Analyse one way Alessia and Natalia could use the data shown in Table 1 to improve their net profit margin.
[3]
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A motorcycle manufacturer doubled its spending on promotion. This has led to motorcycle sales increasing to £15 million from £12 million.
What is the percentage increase in motorcycle sales?
12.5%
20%
25%
50%
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A business will make a profit if it:
ends the year with a positive bank balance
exceeds its break-even quantity
has costs that are greater than its revenues
pays off all of its debts
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A company’s total costs in 2019 were £9 million. The company’s labour costs were 40% of the company’s total costs.
The company’s labour costs in 2019 were:
£3.6 million
£5.4 million
£12.6 million
£14.4 million
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Variable costs:
are not affected by changes in output
fall as output rises
increase as output rises
remain constant over time
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A furniture maker intends to purchase a new wood cutting machine. The expected cost and incomes generated by the machine for the next three years are shown in the table below.
Cost of machine | £6000 |
Income year 1 | £3000 |
Income year 2 | £3000 |
Income year 3 | £3000 |
The expected average rate of return for this purchase is:
£1000
£3000
16.67%
33.33%
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Finance performance data for Pico Ltd over the last three years is shown in the table below.
2017 | 2018 | 2019 | |
Revenue | £3.1 million | £3.3 million | £3.5 million |
Cost | £2.9 million | £2.9 million | £2.9 million |
According to the table, which of the following must be true?
Pico Ltd has improved its market share
Pico Ltd has decreased its prices year on year
Pico Ltd has made a profit in all three years
Pico Ltd has not paid its variable costs
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Luxury Cushions
Elizabeth owns a small business, Luxury Cushions (LC), making and selling quality cushions. She sells these to retail shops and direct to the public over the internet. When she first started, Elizabeth used social media to get herself well known. Her business really became successful when she sent some cushions to celebrities and they posted them on their Instagram accounts. Elizabeth regularly communicates to her 10000 Instagram followers when she has new designs to sell.
In 2019 LC earned £150000 in revenue and had a gross profit of £118000 and a net profit of £56800. Elizabeth has provided the following financial information:
Table 1 — Financial data for LC
Cushions made and sold in one month | Fixed costs each month | Average Selling price | Cost of each cushion filling | Cost of each cushion cover | Wage paid per cushion made |
250 | £7440 | £50 | £3 | £6 | £10 |
Elizabeth has the opportunity to expand her business by taking over a competitor and moving into larger premises. One of her customers suggested that she could use crowdfunding to raise the £30000 she needs. However, Elizabeth thinks that she might be better using a bank loan. Even though she would need to pay interest on the loan, her stable cash flow forecast shows she should be able to afford it.
(i) Calculate the gross profit margin for 2019.
Answer: ................................................ [2]
(ii) Calculate the net profit margin for 2019.
Answer: .................................................[2]
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Financial data for Pluck and Grow Ltd in 2018 is shown below.
Total revenue £68 000
Total labour costs £26 000
Total material costs £16 000
Other costs £10 000
In 2018 Pluck and Grow Ltd made:
a loss of £52 000
a loss of £42 000
a profit of £16 000
a profit of £26 000
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A tinned-soup manufacturer is considering extending its product range to include fresh soups.
Which one of the following is not likely to encourage the shareholders to vote for this extension to the product range?
The opportunity to combine ingredient costs and make higher profits
The opportunity to gain a reputation for producing healthy meals
The opportunity to have more customers than other soup manufacturers
The opportunity to increase the financial risks of the business
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Exobike made a gross profit of £9996 from selling 42 exercise bikes at £350 each.
What was Exobike’s gross profit margin?
68%
147%
£4704
£14700
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SP Dry Cleaners
Stuart and Pippa own a dry cleaning and launderette business called SP Dry Cleaners (SP). The pie charts below show the monthly variable costs for SP in 2017 and 2018.
Stuart and Pippa are looking to expand into clothing repair and have investigated two sewing repair businesses, HD Sewing and Fast Stitch, for sale. Pippa has stated she wants to see her investment in the sewing repair business returned within five years. Stuart has collected the following information on the two businesses.
Table 1 Financial data for HD Sewing and Fast Stitch
HD Sewing | Fast Stitch | |
Purchase price of the business | £80 000 | £65 000 |
Sales revenue per year | £90 000 | £82 500 |
Net profit per year | £25 000 | £22 000 |
Average rate of return | ? | 13.8% |
Identify one fixed cost a business could have.
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SP Dry Cleaners
Stuart and Pippa own a dry cleaning and launderette business called SP Dry Cleaners (SP). The pie charts below show the monthly variable costs for SP in 2017 and 2018.
Stuart and Pippa are looking to expand into clothing repair and have investigated two sewing repair businesses, HD Sewing and Fast Stitch, for sale. Pippa has stated she wants to see her investment in the sewing repair business returned within five years. Stuart has collected the following information on the two businesses.
Table 1 Financial data for HD Sewing and Fast Stitch
HD Sewing | Fast Stitch | |
Purchase price of the business | £80 000 | £65 000 |
Sales revenue per year | £90 000 | £82 500 |
Net profit per year | £25 000 | £22 000 |
Average rate of return | ? | 13.8% |
(i) Explain what is meant by ‘variable costs’.
[2]
(ii) Calculate how much SP spent on wages in 2018.
Answer £....................................................[2]
(iii) Analyse one change in SP’s dry cleaning chemical costs between 2017 and 2018. Refer to Pie charts 1 and 2 in your answer.
[3]
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SP Dry Cleaners
Stuart and Pippa own a dry cleaning and launderette business called SP Dry Cleaners (SP). The pie charts below show the monthly variable costs for SP in 2017 and 2018.
Stuart and Pippa are looking to expand into clothing repair and have investigated two sewing repair businesses, HD Sewing and Fast Stitch, for sale. Pippa has stated she wants to see her investment in the sewing repair business returned within five years. Stuart has collected the following information on the two businesses.
Table 1 Financial data for HD Sewing and Fast Stitch
HD Sewing | Fast Stitch | |
Purchase price of the business | £80 000 | £65 000 |
Sales revenue per year | £90 000 | £82 500 |
Net profit per year | £25 000 | £22 000 |
Average rate of return | ? | 13.8% |
Calculate SP’s Average Rate of Return (ARR) on the purchase of HD Sewing.
Answer ............................................................ %
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SP Dry Cleaners
Stuart and Pippa own a dry cleaning and launderette business called SP Dry Cleaners (SP). The pie charts below show the monthly variable costs for SP in 2017 and 2018.
Stuart and Pippa are looking to expand into clothing repair and have investigated two sewing repair businesses, HD Sewing and Fast Stitch, for sale. Pippa has stated she wants to see her investment in the sewing repair business returned within five years. Stuart has collected the following information on the two businesses.
Table 1 Financial data for HD Sewing and Fast Stitch
HD Sewing | Fast Stitch | |
Purchase price of the business | £80 000 | £65 000 |
Sales revenue per year | £90 000 | £82 500 |
Net profit per year | £25 000 | £22 000 |
Average rate of return | ? | 13.8% |
(i) Analyse one reason why SP should buy HD Sewing. Refer to data from Table 1 in your answer.
[3]
(ii) Analyse one reason why SP should buy Fast Stitch. Refer to data from Table 1 in your answer.
[3]
(iii) Recommend whether SP should buy HD Sewing or Fast Stitch to expand their business. Refer to data from Table 1 to support your judgment.
[3]
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