Workbook Answers: AQA AS/A-level Business

WORKBOOK ANSWERS
AQA AS/A-level Business

Topics 1.4–1.6
This Answers document provides suggestions for some of the possible answers that might be given for
the questions asked in the workbook. They are not exhaustive and other answers may be acceptable, but
they are intended as a guide to give teachers and students feedback.
Section 4 Decision-making to improve

operational performance
4.1 Setting operational objectives
1 2 marks for the definition below, or similar:
Turning inputs into outputs in order to meet customer needs.
2 Added value is the value of the finished product over and above the combined value of the inputs.
Possible ways in which a jeans manufacturer might add value include:
 design features of the jeans
 brand name, e.g. Levi
3 Operational objectives are the targets set to be achieved by the operations department in a specified
period of time.
A firm may be able to keep costs down if stock is bought in bulk, hence achieving an objective of cost
minimisation. However, this would mean they had large holdings of a specific type of stock and
therefore may not be able to change outputs quickly in response to a change in consumer tastes.
Hence a potential conflict between cost and flexibility.
4 AO1 Knowledge = 2 marks
AO2 Application = 3 marks
Operational objectives are the targets set to be achieved by the operations department in a specified
period of time.
Possible benefits to a large food manufacturer include:
 clear targets for all employees to work towards
 quality targets to meet food hygiene standards
 cost targets to keep prices down in a competitive market
AQA AS/A-level Business Topics 1.4–1.6 1

© Helen Coupland-Smith Philip Allan for Hodder Education
Section 4 Decision-making to improve operational performance
 reducing waste
AO3 Analysis = 4 marks
Operational objectives are the targets set to be achieved by the operations department in a specified
period of time.
Possible reasons might include:
 to enhance the reputation of JLR as an environmentally friendly business
 strong brand reputation and customer loyalty
 high added value allowing them to charge high prices
 reputation as a luxury brand
Analysis requires a line of argument to explain cause and effect.
One reason why JLR set ambitious operational targets such as minimising the negative impact on the
environment is because this gives all employees a clear focus. They will therefore work to meet this
objective, enhancing JLR’s reputation in a competitive market. This will make their cars stand out,
attracting customers. This gives the product high added value, allowing JLR to charge a premium price
for their luxury brand.
4.2 Analysing operational performance

Quantifiable information is presented in a statistical or numerical form and is therefore easy to analyse
and interpret.
Output 0 units 1,000 units 2,000 units 3,000 units
Fixed costs £25,000 £25,000 £25,000 £25,000
Variable £0 £3,000 £6,000 £9,000

costs
Total costs £25,000 £28,000 £31,000 £34,000
Unit costs £25,000 £28 £15.50 £11.34
Number of 0 10 15 20
employees
Labour 0 100 134 150

productivity

8 D 57
9 185,000 units x 0.70 = 129,500 units
Total costs = £168,000 + (129,500 x £5) = £815,500
£815,500/129,500 = £6.30
4.3 Making operational decisions to improve

performance: increasing efficiency and
productivity
Full capacity is when a firm’s actual output is the same as the maximum total output.
Possible benefits to a theme park include:
 lower unit costs as the fixed costs of operating each ride is spread among a greater number of
customers
 higher spend on additional items, e.g. food and drink
One possible benefit is that the fixed costs of operating rides, e.g. operators and the cost of purchasing
the ride itself, will be spread among a greater number of passengers. Therefore the unit cost will go
down. This will allow the leisure park to have higher profit margins which could be used to buy new
rides, ensuring the theme park continues to attract new and repeat customers.
Full capacity is when a firm’s actual output is the same as the maximum total output.
Possible disadvantages to a theme park include:
 long queues for rides and other facilities, e.g. restaurants and toilets
 staff feel pressurised and may not provide a friendly service

One disadvantage is that the theme park may not be able to effectively cope with this number of
visitors. This could lead to long queues for popular rides resulting in customer dissatisfaction. This
could lead to poor reviews and bad word of mouth advertising. This would damage the reputation of the
theme park and ultimately result in fewer visitors in the future.
Lean production is reducing waste within the operations function of a business to increase productivity.
13 Labour productivity is a measure of output per worker. Training will provide staff with the necessary
skills and knowledge to perform their job more efficiently and can therefore increase output per worker.
14 Labour-intensive firms have a higher proportion of workers than machinery within the production
process. In a capital-intensive industry there is a greater proportional use of machinery.
Just-in-time stock is where inventories arrive at the time they are needed to match production or
demand.
Possible benefits to a clothes retailer include:
 less capital tied up in holding stock allowing maximum space for displaying clothes on the shop
floor
 reduced risk of holding obsolete stock when certain lines go out of fashion
Just-in-time stock is where inventories arrive at the time they are needed to match production or
demand.
Possible disadvantages to a clothes retailer include:
 loss of sales if a customer wants a specific size or colour that is not in stock
 fewer impulse purchases as clothes are a shopping good

performance: improving quality
17 Quality assurance is where each employee takes responsibility for quality at each stage of the
production process as opposed to quality control, where responsibility for checking quality is assigned
to a specialist at the end of the process.
18 A quality product will meet customers’ expectations and therefore lead to customer satisfaction.
Satisfied customers will enhance the reputation of a business via positive word of mouth, whereas
dissatisfied customers will harm the business’s reputation. This has become an increasing issue with
growth in use of social media.

19 Suppliers provide goods and services to a business. If there is a good relationship between the
supplier and the business then the right goods, of the right quality, should be delivered on time. This
will impact on the business’s ability to provide a quality product, i.e. the supplier supplies quality raw
materials which are needed to produce the quality end product.
Quality assurance is where each employee takes responsibility for quality at each stage of the
production process.
Possible benefits to a toy manufacturer include:
 greater confidence by parents that toys are safe
 less wastage of materials and time spent reworking toys
 more motivated workers as responsible for achieving own quality standards
One benefit is that there will be fewer (or zero) faulty goods reaching the market, as they will be
checked at each stage of the process. This will enhance the reputation of the business as a safe and
quality manufacturer of toys. Parents will therefore be confident when buying toys for their children,
helping the business to build brand loyalty.
Quality problems exist when a product fails to meet customers’ expectations and needs.
Possible consequences at Harley-Davidson include:
 cost of recalling 46,000 bikes and fixing the problem
 damage to Harley-Davidson brand, which is associated with being a quality product
 potential legal action if bikers are injured as a result of losing control of their bikes
One possible consequence is damage to the reputation of Harley-Davidson. Customers associate the
brand with a quality image, which adds value to the products and generates brand loyalty. If goods are
recalled, customers may question the safety of the product and hence not wish to purchase the bikes in
the future, which would stop Harley-Davidson from being able to charge a premium price.


performance: managing inventory and supply
chains
Mass customisation is when the basic product is mass produced, but the customer is able to tailor-
make some aspects of it to meet their specific needs.
23 Mass-produced products will be manufactured quickly and make use of automation. Ready-made
products may even be held in stock for immediate dispatch and machinery will be set up to produce
these. If goods are produced to order then this will slow down the speed of response, as the goods will
not be held in stock and machinery may need to be altered/reprogrammed to meet any specific
requirements of the order. Hence the speed of response is slowed down.
24 Stock may be:
 raw materials, such as flour and yeast
 work in progress, such as dough that has been made but not yet baked
 finished goods, e.g. a sliced loaf of bread
Producing to order means that the meal will be cooked only once the customer has placed the order. A
benefit of this is that the food will be freshly prepared and can be made to meet the exact requirements
of the customer, e.g. cooked rare or without sauce. This will lead to a higher-quality end product and
hence greater customer satisfaction.
Dependability refers to the ability of the consumer to confidently rely on the supplier of a good or
service.
Possible benefits to an online book retailer include:
 customer satisfaction shown through online ratings and blogs
 fewer returns if deliveries are incorrect or late
 competitive advantage over larger rivals such as Amazon

One benefit is that the customer will receive the right product on time. This will lead to a greater level of
satisfaction. They are therefore likely to give positive feedback on the website. This will provide
confidence to other customers, ultimately leading to more new customers trying the website.
27 Buffer stock is the minimum level of stock a business wants to hold in order to ensure production is
never halted if stock replenishment is delayed. One benefit is that the business will be able to meet the
needs of the customer quickly and therefore not risk losing sales to competitors.
28 Buffer stock is the minimum level of stock a business wants to hold in order to ensure production is
never halted if stock replenishment is delayed. One disadvantage is that it costs to hold stock in terms
of warehousing, security and insurance. This will therefore be an additional expense to the business,
affecting profit margins.
29 B The minimum stock a business aims to hold
Inventory control charts are a diagrammatic representation of the amount of stock held, use rates and
ordering details.
Possible benefits to a sandwich shop of using inventory control charts on a daily basis include:
 it reminds the owner when to reorder stock and how much, to ensure that there are no
shortages
 ability to meet the needs of customers rather than having sold out of some ingredients, e.g.
cheese
One benefit to a sandwich shop is that it will reduce the risk of stock shortages. Therefore they will be
able to meet the needs of customers by providing them with a full range of choices from the menu. This
will lead to high rates of customer satisfaction. This could lead to loyalty from nearby office workers.
AO4 Evaluation = 10 marks
Buffer inventory is the minimum level of stock a business wants to hold in order to ensure production is
never halted if stock replenishment is delayed.
Reasons why it is necessary for all businesses to hold buffer stock include:
 to satisfy customer needs quickly
 to stop customers from going to a competitor if the business does not have what they want in
stock
 to ensure unforeseen circumstances do not cause a shortage of stock

 to reduce overreliance on suppliers
Reasons why it is not necessary for all businesses to hold buffer stock include:
 the business may be flexible enough to respond quickly to customer needs without buffer stock
 a business using job production will only need to buy stock and produce a finished good once
an order has been received
 a business that has an objective of cost minimisation will want to avoid the cost of holding
stock
Overall:
 the relationship with suppliers
 the distance from suppliers and risk of external influences, e.g. if importing from abroad what is
the stability in that country?
 the business objectives
 relationship with customers, including degree of loyalty
 number of competitors

Section 5 Decision-making to improve financial performance

financial performance
5.1 Setting financial objectives
Shareholders’ funds are the capital invested by shareholders in the business, plus any retained profit
not yet paid in dividends.
33 Cash-flow objectives are targets set for the amount and timings of cash inflows and outflows, in order
to achieve a closing balance that allows the business to continue to operate and meet day-to-day
expenses. One benefit is that it will encourage managers to review cash flow against the objectives in
order to take corrective action where necessary and therefore reducing the risk of liquidity problems.
34 Return on investment = operating profit/investment x 100
£890,000/2,000,000 x 100
44.5%
35 Cash flow is the flow of money into and out of a business over a period of time. It is therefore crucial to
short-term survival. Profit, however, is a longer-term concept of the surplus of revenue over total costs
within a given period of time.
36
a Gross profit = sales revenue – cost of sales
Sales revenue = selling price x quantity sold
£450 x 2,500 = £1,125,000
Cost of sales = £1,125,000 x 0.4 = £450,000
Gross profit = £1,125,000 − £450,000 = £675,000
b Operating profit = gross profit – expenses
Expenses = 2,500 x £100 = £250,000
Operating profit = £675,000 − £250,000 = £425,000
c Operating profit/sales revenue x 100
£425,000/£1,125,000 x 100 = 38%

5.2 Analysing financial performance

37 Expenditure budget is a limit set on the amount of money flowing out of a business to pay costs in a set
period of time. One benefit is that this will provide a guideline for managers to monitor actual
expenditure in relation to the budget. This will allow them to identify where the business might
overspend and therefore take corrective action.
38
Budget (£) Actual (£) Variance (£)
Sales revenue 195,000 205,000 10,000 F
Cost of sales 49,250 57,000 7,750 A
Wages and salaries 58,500 55,000 3,500 F
Marketing 10,000 10,000 0
Rent 35,000 35,000 0
Utilities 4,500 5,200 700 A
Other expenses 4,300 3,300 1,000 F
Budget profit = £195,000 – (£49,250 + £58,500 + £10,000 + £35,000 + £4,500 + £4,300) =

£33,450
Actual profit = £205,000 – ( £57,000 + £55,000 + £10,000 + £35,000 + £5,200 + £3,300) =

£39,500
Variance = £6,050 F
Income budget is a target for the amount of money coming into a business from sales in a set period of
time.
Possible benefits to a branch manager of a travel agents include:
 to set sales targets for individual travel agents within the branch
 to motivate self and team by having a target to work towards
 to review branch performance towards budgets in line with other similar-sized branches

One benefit is that the manager will have a clear goal to work towards. This can then be shared with all
of the travel agents within the branch to ensure they are all working towards a common goal. This will
provide a sense of purpose, motivating the team.
Income budget is a target for the amount of money coming into a business from sales in a set period of
time. Market research will help a start-up business identify potential demand for its products and the
amount customers are willing to spend. From this, the entrepreneur could forecast potential sales
revenue and use this to set an income budget.
Profit budget is a target set for the surplus of income over expenditure in a set period of time.
Competitors’ actions can affect the level of demand for a music shop and hence sales revenue and
profit. If, for example, a competitor lowered the price of top-selling CDs, then their demand would go
up, taking sales from the other store.
Cash-flow forecast is a prediction for the flow of money into and out of a business over a period of time.
43 Payables are money owed by the business, which will therefore flow out of the business at a point in
the future. Receivables are money owed to the business, therefore the flow will be into the business at
a point in the future.
44 Credit terms are the length of time a supplier will give a business to pay for goods received, e.g. 30 or
60 days. Negotiating credit terms will give a business a longer period of time within which to pay.
Therefore this will slow down the flow of money going out of the business, hence helping cash flow.
45
£ Month 1 Month 2 Month 3
Cash in
Cash sales 115,000 125,000 130,000
Credit sales 11,000 22,000 25,000
Total cash inflows 126,000 147,000 155,000
Cash out
Wages and salaries 40,000 40,000 40,000
Raw materials 38,000 38,000 39,500
Rent and rates 11,000 8,000 8,000
Utilities 2,250 0 0
Administration costs 500 500 500
Other expenses 3,500 1,500 1,500

Total cash out 95,250 88,000 89,500
Net cash flow 30,750 59,000 65,500
Opening balance (25,000) 5,750 64,750
Closing balance 5,750 64,750 130,250
Cash-flow forecast is a prediction for the flow of money into and out of a business over a period of time.
Possible benefits to an expanding business include:
 to identify any potential times of forecast negative closing balance, in order to plan for these or
take corrective action
 to identify whether the speed of the expansion is manageable or could threaten the survival of
the business
 it can be used to help raise finance to fund the expansion
One benefit is that it will allow the business to identify when cash is likely to flow out of the business as
it grows and look at the impact of this in terms of any time delays before additional money starts to flow
into the business. This would allow management to identify if there were any points where there could
be a negative balance. By identifying these in advance the manager could explain to a bank that this
was a short-term situation due to the expansion and therefore seek to arrange an overdraft.
Cash-flow problems occur when the flow of money into the business plus the opening balance is
insufficient to cover cash outflows, resulting in a negative closing balance.
Possible causes of this to Scoop include:
 Sales are likely to be seasonal, yet the onsite café is likely to incur fixed costs all year round.
 Stock will need to be supplied to the local stores, but they are likely to want credit terms.
 Stock will have to be made prior to the food markets, but cash from sales will not be made until
the day of the market.

One cause may be that stock will need to be supplied to local delicatessens and food stores, which will
mean that cash is flowing out of the business to pay for materials and wages etc. The small stores,
however, are likely to negotiate credit terms and will not pay until an agreed point of time in the future,
e.g. 1 month. Therefore the flow of cash into the business is delayed. There is hence a time lag
between cash outflows and cash inflows, leading to potential cash-flow problems.
Fixed costs stay the same regardless of the level of output.
49 Break even is the level of output at which total costs are equal to total revenue; at this point the
business is not making a profit or a loss. A benefit to a firm of knowing this is that it can use this
information to set targets for a minimum acceptable level of sales or to inform decisions about pricing.
50 B Break-even level of output goes down and margin of safety goes up
51
a Break-even = fixed costs/contribution per unit
£280,000
(£600,000/12,000) − £15
£280,000/£35 = 8,000 units
b Margin of safety = units sold – break-even output
12,000 – 8,000 = 4,000 units
c 4,000 units sold above break-even
Contribution per unit = £35
Profit = 4,000 units x £35 = £140,000
52 a 12 units
b 7,000
c Profit = total revenue – total costs
Profit = £11,000 – £9,400
Profit = £1,600

e Margin of safety = actual output – breakeven point
New break even point = 16
Margin of safety = 20–16 = 4 units
Profitability measures the financial performance of a business by looking at profit in relation to another
factor, e.g. sales revenue or investment.
54 Profitability is a ratio rather than a raw number and therefore gives a clearer indication of how well a
business is doing. For example, two businesses could both have a profit of £1m but one could have
achieved this on sales of £2m, the other on sales of £10m. The former is therefore achieving a greater
percentage profit in relation to sales and would be seen to be performing better.
55 a Gross profit margin = gross profit/sales revenue x 100
The Red Company
£0.52m/£1.45m x 100 = 35.9%
The Blue Company
£200,000/£350,000 x 100 = 57.1%
The Blue Company has lower profit but greater profitability.
b Operating profit margin = operating profit/sales revenue x 100
Operating profit = gross profit – expenses
The Red Company

(£0.52m − £0.38m)/£1.45m x 100 = 9.6%
The Blue Company
(£200,000 − £150,000)/£350,000 x 100 = 14.3%
The Blue Company has lower profit but greater profitability.
Profitability measures the financial performance of a business by looking at profit in relation to another
factor, e.g. sales revenue or investment.
Reasons why profitability is the most important measure include:
 It is of interest to many stakeholders including shareholders who will be involved in making

future decisions.
 It helps identify potential areas for improvement, e.g. where costs can be lowered to improve
performance.
 It is important when considering how any future expansion plans can be financed.
 It can be used to compare performance of identifiable areas within the business, e.g. branches
or product lines, helping decide which to invest in, support, close etc.
Reasons why profitability is not the most important measure include:
 Profitability may not be the main financial objective of the firm.
 Cash flow can be more important to ensure decisions made allow the business to survive.
Overall:
 It depends on the corporate and financial objectives of the business.
 Shareholders will have different views on short-term profitability v long-term growth/gains.
 Which measure of profitability is the best indicator?
5.3 Making financial decisions: sources of

finance
57 a A bank loan
The farmer would receive a lump sum of cash in order to be able to buy the tractor. This could then
be repaid to the bank in regular instalments, allowing the farmer to have the tractor now but spread
the cash outflows out over a period of time, potentially the life of the tractor.

b Retained profit
The market trader will need to be doing this on an ongoing basis and therefore it should be able to
fund this from the previous period’s surplus of sales over costs. This would mean additional costs
such as interest are not being charged.
c Overdraft
The negative cash balance should only be a short-term problem and therefore an overdraft would
be a suitable short-term solution. The hire business could withdraw the necessary money from its
current account and only pay interest on the amount overdrawn.
d Venture capital
The entrepreneur would receive the necessary cash to fund the building of the e-commerce site
without incurring high interest charges. In addition they may benefit from additional support and
expertise provided by the venture capitalist.
Debt factoring is when a business sells its debts to a financial institution at a reduced rate. One
advantage of this is that the business will receive a lump sum immediately. This is a cash inflow and
can help the business avoid cash-flow problems which may be more expensive to resolve using
alternative methods such as an overdraft.
Venture capital is finance supplied by a successful entrepreneur to support another business.
Possible benefits to a start-up entrepreneur include:
 Unlike some other sources of finance, interest does not have to be paid, which can help keep
costs down when setting up a business.
 A start-up business will have limited options, e.g. retained profit or debt factoring are not
options.
 The start-up entrepreneur will gain support and expertise in addition to the finance.
One benefit of using a venture capitalist is that they are already successful businesspeople with a
wealth of experience. This will benefit the entrepreneur as they will be able to gain advice and discuss
ideas with the venture capitalist. This can make decision-making easier and prevent the new
entrepreneur making what may be costly mistakes. This may allow the start-up to become established
more easily.
60
a Market size in 2015 = £180m
Market growth in 2016 = 19%

Market size in 2016 = £180m x 1.19 = £214.2m
b AO1 Knowledge = 2 marks
Crowdfunding is when a business uses the internet to invite a large number of potential investors to
provide small amounts of finance to a business.
Possible benefits to Mr Sherick’s Shakes include:
 a large number of potential investors who are willing to take a small risk in a growing market
but a new business
 no interest repayments (but does lose 23% equity)
 each investor is likely to have only a relatively small amount of power
 Mr Sherick maintains overall control as majority shareholder
One benefit of crowdfunding is that investments are likely to come from a large number of investors
each with only a small amount of equity. Mr Sherick has 280 investors, which means the majority of
these will have only a small part of the 23% equity and therefore little influence on the running of the
business. The largest investor, who financed half of the amount to be raised, still has little over 10%
equity. Mr Sherick, who is the entrepreneur, will therefore still be able to make his own decisions
despite having given away some equity in his business.
5.4 Making financial decisions: improving cash

flow and profits
61 Longer payment terms will mean that the customer will have a longer period of time between receiving
goods and having to pay for them. This may act as an incentive to the customer and therefore a
business may be willing to offer this in order to gain a competitive advantage, securing sales and loyal
customers.
62 Credit control is the process of ensuring customers pay for goods purchased within the payment terms
and that they are chased if they haven’t paid, to ensure cash is received. Poor credit control may mean
that sales are made but the customers do not pay within the terms and are not chased. Therefore the
cash is not flowing into the business. The sale is however included in sales revenue, hence the
business will be profitable but may have cash-flow problems.
An overdraft is a service provided by a financial institution that allows a business or individual to

withdraw money that they do not have from a current account.
64 Shorter payment terms will mean that the time given to a customer to pay for goods is less, e.g. 30
days instead of 60 days. One disadvantage of this is that the customer may choose to go to a
competitor who offers a longer payment term and the business will therefore see a fall in profits.

Payment terms are the length of time a customer is given to pay for goods or services purchased.
Possible reasons why a small house builder may find it difficult to negotiate longer payment terms with
suppliers include:
 A small company may have a low credit rating so the supplier sees them as high risk.
 Order quantities may be small, meaning the supplier does not have an incentive to offer longer
payment terms.
 The supplier itself may have cash-flow concerns.
Payment terms are the length of time a customer is given to pay for goods or services purchased.
Possible reasons why a small house builder may find it difficult to negotiate quicker payment terms
from customers include:
 The customer may be unwilling to pay until the house is complete and any snags sorted.
 The customer is likely to be waiting for a mortgage to make the payments, which tends not to
happen until the contract (and therefore the house) is completed.
Cash flow is the flow of money into and out of a business over a period of time.
Profit is the surplus of sales revenue over total costs in a given time period.
Reasons why any actions taken to improve cash flow in the short term will inevitably lead to lower
profits in the longer term include:
 Offering shorter payment terms will lead to a loss of customers.
 Customers may expect discounts for paying quickly, leading to falling sales revenue.
 Asking suppliers for longer payment terms could result in a loss of discounts, resulting in
higher costs.
 Debt factoring will only receive a percentage of the total debt.
 Overdrafts will incur high interest charges.
 Sale and leaseback is likely to be more expensive in the long run.

Reasons why any actions taken to improve cash flow in the short term will not inevitably lead to lower
profits in the longer term include:
 Sale of unnecessary assets will bring in cash without resulting in additional costs.
 Suppliers may be willing to offer longer payment terms in order to keep the sales.
 Customers could be rewarded for quicker payment with no financial rewards, e.g. first to be
told of future promotions.
 Costs of improving cash flow may be less than the costs of having cash-flow problems.
Overall:
 It depends on which methods are used.
 The severity of any impact may be affected by the relationship with customers and suppliers.
 Interest rates fluctuate.
 It depends upon whether the costs of improving cash flow outweigh the costs of experiencing
cash-flow problems.
68 Price elasticity of demand is a measure of how sensitive demand is to a change in price. If price was
lowered by 5%, demand would rise by (5% x −0.8) = 4%. If demand was 100 units, it would now be 104
units but price would be 5% lower, leading to an overall fall in revenue.
Capacity utilisation is the percentage of maximum output that is actually being produced.
70 Profitability is profit in relation to another factor, e.g. sales revenue. If staff are trained they will have
better skills and therefore be able to perform their jobs more efficiently. This could mean that more
goods can be produced with the same amount of input and hence sales revenue could increase while
wage costs stay the same, leading to an increase in profitability.
71
Marketing Finance Operations Human

management resources
Method 1 Improved Better cash- Lean Higher labour

point of sales flow production productivity
promotions management techniques
Method 2 Greater use of Cheaper Improved Less

public sources of quality absenteeism
relations finance assurance

Financial performance is the outcomes of the business in relation to the short- to medium-term targets
set by the finance department to be achieved in a given time period.
Reasons why these methods may turn around the financial performance of Hornby include:
 Problems have been partially blamed on suppliers, so new suppliers may be:
o more reliable, improving Hornby’s sales due to a better reputation
o cheaper, reducing Hornby’s costs
 Rationalisation of the European warehouse should reduce duplication and limit waste, leading
to greater efficiency and lower costs.
 Restructuring of management will lower costs.
Reasons why these methods may not turn around the financial performance of Hornby include:
 Restructuring may lead to lack of motivation and higher labour turnover in the future,
increasing recruitment and training costs.
 Rationalisation may reduce costs in the long run, but be expensive in the short term.
 The new head office is likely to require finance to be raised and see high initial capital
expenditure.
Overall:
 Short-term v long-term view
 Comparison of new supplier to old supplier
 What measures of financial performance are being used? Operating profit may increase but
return on investment will decrease.

Decision-making to improve human resource
Section 6
performance

human resource performance
6.1 Setting human resource objectives
73 Training involves equipping all employees with the necessary skills to carry out duties on a day-to-day
basis, whereas talent development is more forward-looking: it is identifying those employees with future
potential to make a bigger contribution and nurturing them to grow into new roles in the future.
74 Workforce planning involves matching employees’ skills and numbers to the needs of the business.
This however is difficult as the skills and numbers of employees will change on a regular basis and are
difficult to predict. For example, a business can carry out an audit of current staff and future needs but
will not be able to predict all of the potential changes, e.g. maternity or paternity leave, employees
leaving to join another company, legislation changes, technology changes etc.
75 Talent development involves identifying the future potential of the most promising employees and
nurturing this to help them grow. This will lead to greater employee engagement by these employees,
who feel valued and are therefore very committed to their current jobs as well as fulfilling their potential
in the future.
Human resource objectives are the targets set to be achieved by the human resource department in a
specified period of time.
Possible benefits to a high street bank include:
 to provide common goals for all employees within a branch and across branches
 to encourage managers to treat teams in a way that will meet these objectives, e.g. to
recognise talent and put into place training programmes for junior employees to learn new
skills to gain promotions in the future
 to provide quantifiable targets against which the branch managers and the whole bank’s
performance can be measured and reviewed, allowing branch managers to be praised for
meeting targets
One benefit is that the objectives will be shared between all bank employees from junior clerks up to
managers, giving everyone a common sense of purpose. This will provide motivation, encouraging all
employees to give their best to help achieve these objectives. The more engaged workers will therefore
be more committed to meeting the needs of their customers, giving the bank a good reputation for
customer service.

Section 6
performance
An autocratic leader will make decisions independently and inform the subordinates of the decision.
A democratic leader will consult with subordinates before making a decision.
Soft HRM is when employees are treated as an asset that can help the business and grow with it to
maximise the benefit of the relationship to both the employer and employee. A benefit of this is that it
will lead to a more engaged workforce, including kitchen staff and waiting staff, who will be more
committed to their work, providing a better service to the restaurant customers.
Hard HRM is when employees are treated as a resource to be utilised by the business to the maximum
gain of the business. One benefit of this is that control can be maintained by senior employees. In a
restaurant, for example, this might involve the head chef making all decisions on what will be on the
menu, and how food will be prepared and presented to the customer. This allows for high standards
and consistency to be maintained, often earning restaurants a good reputation for exacting standards,
e.g. a Michelin star.
6.2 Analysing human resource performance

81 Staff retention is the ability to keep employees working within the business. It is calculated as:
number of retained employees/average number of employees x 100
82 Labour productivity is output per worker. As productivity goes up, the cost of each worker will be
divided by a higher number of units produced. Therefore there is an inverse relationship: as
productivity goes up, labour cost per unit goes down.
83 Minimum wage is a lower limit set by the government on how much a business must pay an employee
based on age. As the minimum wage goes up, labour cost per unit is likely to also go up. Each
employee will produce the same level of output but be paid more.
84 a Total output/number of employees
30,000/17 = 1,765 units per employee
b Output/labour costs
30,000/(£850,000 x 0.40)
30,000/£340,000 = £0.88 per unit
c Employee costs/turnover x 100
£340,000/(30,000 x £45) x 100
£340,000/£1,350,000 x 100 = 25%

Section 6
performance
Labour turnover is the number of employees leaving a business as a percentage of the average size of
the workforce.
Possible benefits to an out-of-town electronics retailer include:
 Employees will have more experience within the business and therefore better knowledge of
store layout, product range etc.
 It saves spending on recruitment and training to replace workers who have left – this may be
difficult with the location being out of town.
 There is a more engaged workforce, as teams are established within departments such as
computers or kitchen appliances.
One benefit could be that employees are more experienced due to a longer length of service in the
store. They will therefore be familiar with the layout and also the stock. This will allow them to give
more help to customers who ask where goods are or about the technical features of an electrical good
such as a washing machine or television. This will provide the customer with more confidence when
making a purchase which is likely to be expensive and therefore not just purchased on impulse.
High retention rates would mean that the average employee has been in the business for a long period
of time, creating a largely stable workforce.
Reasons why high retention rates are the most important measure of human resource data to all firms
operating in a competitive service sector include:
 Long-serving staff will have a lot of experience and will therefore be able to meet customer
needs within a service sector.
 Businesses will gain a competitive advantage if customer service is better than others, which
can be achieved with experienced employees.
 Long-serving staff may have been promoted to more senior positions, e.g. store or department
manager, leading to greater engagement.
 In the service sector people can be seen as the most important of the 7Ps of marketing.
Reasons why high retention rates are not the most important measure of human resource data to all
firms operating in a competitive service sector include:

Section 6
performance
 Labour productivity has a bigger direct impact on labour costs per unit. This may help a
business compete on price, which might be important due to the degree of competition.
 High retention might make staff complacent and unwilling to adapt to change, which may mean
the business struggles to keep up with changes which are important in the service sector, e.g.
physical environment in stores or embracing technology, e.g. in banking.
Overall:
 It depends on the nature of the competition and also the service sector the business is in.
 Is high retention a cause of engagement or an effect of inertia?
 Measures are interrelated, so difficult to say one is the most important.
 It depends on the pace of change within the sector.
6.3 Making human resource decisions:

improving organisational design and managing
the human resource flow
Empowerment is a technique used to motivate employees by giving them greater control over their
work on a daily basis.
Job rotation is when employees with a number of different tasks within their job design switch between
tasks on a regular basis to reduce monotony.
89 Job rotation is when employees change tasks on a regular basis. This reduces boredom, as the range
of jobs makes the role more interesting. This will increase levels of motivation and therefore lead to
greater employee engagement as they will feel more committed to the workplace and achieving goals.
90 Hackman and Oldham’s model outlines how the job design is fundamental to the motivation of
employees. A business that understands this will be able to ensure that employees are motivated by
their roles and therefore the business achieves the objectives of employee engagement, high
productivity and low labour turnover.
91 B, task identity
92 A narrow span of control means that each manager is directly responsible for a small number of
subordinates.
93 Organisational design refers to the deliberate structure and procedures that are put in place to allow
the business to function and ensure all employees are in a position to contribute towards short- and
medium-term goals. This will ensure that all employees understand their position within the hierarchy,
as well as to whom they are responsible. This will help everyone fulfil their roles with more ease and a
greater level of clarity, ultimately leading to a more efficient workforce.

Section 6
performance
Delegating is the passing of authority down the hierarchy.
Possible benefits to a chain of ten used car showrooms include:
 Branch managers will have a better understanding of resource needs within their own
branches, leading to more accurate budgeting and target setting.
 There will be greater motivation of branch managers due to greater authority.
 Each manager will understand the issues relating to their own showroom better, e.g. forecourt
size, peak times, staff experience, customer characteristics, and can therefore make more
informed decisions.
One benefit is that each manager will have a better understanding of the resource needs of their own
showroom. For example, they will understand the skills of their workers and size of their showroom.
They will therefore be in a better position to make informed decisions about the resources needed,
including number of used cars to have in stock and when more salespeople will be needed. This will
make the business better able to match supply to demand and meet the needs of the customer.
Training is the process of equipping employees with the necessary skills and knowledge to carry out
their job roles effectively.
Recruitment is the processes involved in attracting new employees to join a business’s workforce,
including identifying a vacancy and producing recruitment documents such as a job description and
advertisement.
97 Internal recruitment is when the job vacancy is filled by somebody who is already employed within the
business in a different job role. External recruitment is when the new employee comes from outside the
business.
Human resource planning consists of an audit to assess the current size and skills of the workforce,
identifying future needs and planning how to ensure the business has the right number of employees
with the right skills to meet these future needs. This would mean the school had teachers who were
able to offer the subjects at the right level to meet the needs of the students.

Section 6
performance
Possible benefits to a supermarket chain of training all junior employees include:
 motivating employees who are likely to be on the minimum wage
 better customer service, as they will have skills to deal with customers on checkouts and the
shop floor
 greater productivity
One benefit is that junior employees will feel that the supermarket values them. They will therefore
show a higher level of commitment to their work. This will increase productivity, for example, serving
customers at the checkout more effectively. This will reduce queue lengths, giving customers a better
service. This will help gain loyalty in a competitive market.
Redeployment involves offering employees an alternative role as an alternative to redundancy when

their current position no longer exists.
Possible consequences to Tesco include:
 reducing negative publicity resulting from redundancy of 450 jobs
 more motivated employees, who see Tesco as trying to do the best for the employees who
work in the stores that are due to close
 reducing redundancy payments, which is important when experiencing losses as high as

£6.4bn
 saving recruitment costs and lower training costs of new employees in the stores remaining
open
One positive consequence could be a fall in redundancy payments. If the 450 employees were to be
made redundant this would cost Tesco a lot in terms of these payments. By redeploying some of these
employees, they will still be employed by Tesco and therefore will not be eligible for these payments.
This will save Tesco money, reducing the costs of the closures. This may help them return to
profitability more quickly.

Section 6
performance

improving motivation and engagement
101 Motivation is the driving force that makes employees work hard to achieve goals and perform well
in the workplace. Motivated employees will be more committed at work and are less likely to be absent.
They will therefore work harder, increasing the amount of labour productivity.
102 Motivation is the driving force that makes employees work hard to achieve goals and perform well
in the workplace. Motivated workers will be happier in the workplace and therefore want to stay with the
employer. They are therefore less likely to seek alternative employment, reducing labour turnover.
103 A time and motion study is the scientific study of the workplace to identify the most efficient way of
carrying out a task, or series of tasks, by observing the actions of the employees and the layout of the
workplace.
104 Piece rate is a payment system that rewards employees per unit produced.
105 An operator on a production line.
Esteem is a higher order need in Maslow’s hierarchy. It means the employee is made to feel good
about themselves as a result of achievements in the workplace.
Self-actualisation is the highest order need in Maslow’s hierarchy of needs. It means employees feel
challenged in the workplace by pushing themselves academically.
108
Need Example
Physiological Basic wage
Security Permanent contract
Social Member of a team
Esteem Office
Self-actualisation Promotion to a senior role
109 Hygiene factors will not alone motivate, but if not present will lead to dissatisfaction. Motivating
factors, however, are able to increase the motivation of workers, resulting in greater employee
engagement.
110 Both job enrichment and job enlargement involve increasing the number of tasks that form part of
an employee’s job design. However in job enrichment there is greater variety of tasks, not just more
tasks.

Section 6
performance
111 Team work can provide employees with a sense of belonging and increase the desire to achieve
goals. This can make workers more committed to achieving these goals for the good of the whole
team, hence increasing employee engagement.
112 D An employee who has satisfied their social needs can be motivated by an opportunity to
meet their self-esteem needs.
Employee engagement is the commitment of workers to their roles in order to achieve goals.
Possible ways in which this could improve performance in a fitness centre include:
 lower labour turnover, allowing customers to form a relationship with staff such as fitness
instructors who can monitor progress
 highly motivated staff enhancing the customer experience, resulting in higher number of
members
 less staff absenteeism, increasing productivity, classes run, speed of service etc.
An engaged workforce will be committed to their work. This means they are less likely to leave. The
fitness centre will therefore have a high retention rate. This will allow employees and customers to form
a relationship. This will in turn motivate members who see familiar faces and have trainers who
understand their training needs. They are therefore likely to keep being members for a long time and
recommend the centre to friends. This will help improve the performance of the centre as it will have
more members.
Financial methods are monetary rewards used to motivate employees.
Motivation is the desire to perform well to achieve goals in the workplace.
Reasons why financial methods of motivation are the best way to improve performance in all
manufacturing firms include:
 Taylor would argue that this would motivate employees who should be rewarded using a piece
rate payment system; this would be appropriate for production operatives.
 Maslow would argue that low-level workers, such as unskilled workers in a manufacturing
business, will be motivated by having their basic needs met, which includes wages.
 Financial rewards could be used to motivate employees to meet operational targets such as
zero defects.

Section 6
performance
Reasons why financial methods of motivation are not the best way to improve performance in all
manufacturing firms include:
 Not all employees will be motivated by financial rewards. Maslow would argue that once basic
needs are met workers will seek the next level of the hierarchy in order to increase satisfaction.
For managers this could include esteem, e.g. job title as operations manager or director.
 Herzberg would argue that money is not sufficient to motivate workers but that motivating
factors must be used which can be non-financial, such as greater responsibility.
Overall:
 Different theorists would have different views.
 It depends upon the job role of individuals and position in the hierarchy.
 Each worker is different, so it will depend on individual priorities.

improving employer–employee relations
115 A trade union is an external organisation with a remit to protect the well-being of its members by
representing them in negotiations regarding issues such as pay and working conditions. Works
councils also discuss these issues, but are internal to the organisation, providing a way for managers
and employee representatives to discuss issues.
In collective bargaining, negotiations between managers and employees are done through a
representative group such as a trade union, rather than on an individual basis. Negotiating as a group
increases the power of the employees.
Industrial action is the use of sanctions by employees to put pressure on employers during industrial
disputes.
118 Strikes
Work to rule
119 Industrial disputes occur when there is a breakdown in communications and negotiations between
employees and employers. The likely consequence of this will be the employees taking industrial action
such as work to rule. A cost of this will be a fall in labour productivity, having a knock-on effect of a fall
in sales or poor customer service.
Consultation is the process of discussing issues with employees to listen to their ideas before making
decisions. One benefit of this is that the views and opinions of all employees are factored into the
decision-making process. This is important for a small gym, as it is the employees who interact with the

Section 6
performance
customers on a daily basis, e.g. the receptionists and instructors, who will have a better idea of how the
gym works on a daily basis and what customers’ likes and dislikes are.
Works councils are internal groups of managers and employees within an organisation that meet to
discuss HR issues such as pay and working conditions.
Possible benefits to a car rental company include:
 It could discuss best practice across the five offices and set targets for all branches to make
improvements.
 To allow employees from different offices to be fairly represented in negotiations with

managers on a collective basis.
 To motivate employees to meet consistent standards when dealing with customers, who may
hire a car from one office but return it to another.
One benefit is that it will offer employee representatives from across all five offices the opportunity to
discuss HR issues with management. By doing this collectively, the employees will have more power
than if each office acted independently. Therefore the employees are more likely to be satisfied with
the outcome of any negotiations leading to greater employee engagement.
A trade union is an external organisation with a remit to protect the well-being of its members by
representing them in negotiations regarding issues such as pay and working conditions.
Reasons why it is crucial for all manufacturing firms to encourage employees to join a trade union in
order to ensure good employer−employee relations include:
 to provide a structure for communication between operatives on the shop floor, who may be
low-skilled manual workers, and management
 to allow for collective bargaining, giving workers greater power
 to help avoid industrial action, which could see production stopped and therefore an inability to
meet demand
Reasons why it is not crucial for all manufacturing firms to encourage employees to join a trade union
in order to ensure good employer−employee relations include:

Section 6
performance
 An internal works council could represent the specific needs of the business, i.e. not all
manufacturing is the same; it may be mass or niche, which could mean employees have
different needs.
 Leadership style and HR strategy, i.e. soft, may eliminate the need for TU membership.
Overall:
 It depends on the general relationship, leadership style and HR strategy.
 The type of manufacturing business, e.g. high tech, skilled workers or unskilled manual
workers, is likely to affect employer–employee relations.
123
a Operating profit margin = operating profit/sales revenue x 100
£61m/£443m x 100 = 13.8%
b AO1 Knowledge = 2 marks
Quality is when a good or service satisfies the needs of the customer.
Possible reasons why quality is important to Pret A Manger include:
 It prides itself on quality ingredients, which gives a competitive advantage.
 It operates in a competitive environment with other coffee shops such as Costa, so quality
is important to maintaining reputation.
 It is keen to look after stakeholders, which can be achieved with quality.
One reason quality is important to Pret A Manger is because it gives it a competitive advantage. By
priding itself on quality ingredients and produce that are made fresh every day it is able to satisfy
customer needs whilst charging a premium price. This allows it to maintain customer loyalty in a
highly competitive marketplace.
c AO1 Knowledge = 2 marks
Possible reasons why training is the most important factor in ensuring engaged employees at Pret A
Manger include:

Section 6
performance
 Maslow believes that offering employees opportunities to achieve the next need within his
hierarchy will lead to motivation. At Pret A Manger, employees’ esteem and self-
actualisation needs could be satisfied by training that provides all employees with the
chance to progress from team member to leader and then on to manager.
 New employees will have their security needs met by training to ensure they have the skills
and confidence to perform their roles successfully.
Possible reasons why training is not the most important factor in ensuring engaged employees at
Pret A Manger include:
 All employees are part of the performance-related pay scheme, with managers able to
achieve big bonuses equivalent to 30% of what is already a generous salary so money may
be more important.
 Employees may be engaged by the ability to make decisions to give out free cups of coffee,
satisfying esteem needs and also meeting Herzberg’s motivating factors.
Overall:
 Each employee is likely to be motivated, leading to greater engagement by different factors.

These will depend on personal objectives and also on place within the hierarchy.
 There is unlikely to be one single factor but a combination of factors.


Workbook Answers: AQA AS/A-level Business

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WORKBOOK ANSWERS

AQA AS/A-level Business

Section 4 Decision-making to improve

Turning inputs into outputs in order to meet customer needs.

Possible ways in which a jeans manufacturer might add value include:

 design features of the jeans

 brand name, e.g. Levi

4 AO1 Knowledge = 2 marks

AO2 Application = 3 marks

Possible benefits to a large food manufacturer include:

 clear targets for all employees to work towards

 quality targets to meet food hygiene standards

 cost targets to keep prices down in a competitive market

AQA AS/A-level Business Topics 1.4–1.6 1

5 AO1 Knowledge = 2 marks

AO2 Application = 3 marks

AO3 Analysis = 4 marks

Possible reasons might include:

 to enhance the reputation of JLR as an environmentally friendly business

 strong brand reputation and customer loyalty

 high added value allowing them to charge high prices

 reputation as a luxury brand

Analysis requires a line of argument to explain cause and effect.

4.2 Analysing operational performance

Output 0 units 1,000 units 2,000 units 3,000 units

Fixed costs £25,000 £25,000 £25,000 £25,000

Variable £0 £3,000 £6,000 £9,000

Total costs £25,000 £28,000 £31,000 £34,000

Unit costs £25,000 £28 £15.50 £11.34

Labour 0 100 134 150

AQA AS/A-level Business Topics 1.4–1.6 2

9 185,000 units x 0.70 = 129,500 units

Total costs = £168,000 + (129,500 x £5) = £815,500

4.3 Making operational decisions to improve

AO2 Application = 2 marks

AO3 Analysis = 2 marks

Possible benefits to a theme park include:

 higher spend on additional items, e.g. food and drink

Analysis requires a line of argument to explain cause and effect.

11 AO1 Knowledge = 2 marks

AO2 Application = 2 marks

AO3 Analysis = 2 marks

Possible disadvantages to a theme park include:

 staff feel pressurised and may not provide a friendly service

Analysis requires a line of argument to explain cause and effect.

AQA AS/A-level Business Topics 1.4–1.6 3

12 2 marks for the definition below, or similar:

15 AO1 Knowledge = 2 marks

AO2 Application = 3 marks

Possible benefits to a clothes retailer include:

16 AO1 Knowledge = 2 marks

AO2 Application = 3 marks

Possible disadvantages to a clothes retailer include:

 fewer impulse purchases as clothes are a shopping good

4.4 Making operational decisions to improve

AQA AS/A-level Business Topics 1.4–1.6 4

20 AO1 Knowledge = 2 marks

AO2 Application = 2 marks

AO3 Analysis = 2 marks