A-level Business (7132) · Paper 2: Business 2

01.1 [4 marks]

Using Appendix A, calculate GreenGrove plc's return on capital employed (ROCE) for 2024.

Capital employed = £82m + £58m = £140m. ROCE = £12m / £140m x 100 = 8.6% (2023 = 11.7%).

• 1 mark: capital employed = total equity + non-current liabilities.
• 1 mark: £140m.
• 1 mark: 12 / 140 x 100.
• 1 mark: 8.6% (accept 8.57%).

01.2 [4 marks]

GreenGrove plc's gross profit margin fell from 45% in 2023 to 40.2% in 2024. Using the information provided, explain one reason why this happened.

• Cost of sales rose by 19.7% (66 to 79) while revenue rose only 10% (120 to 132).
• Reason: higher ingredient and energy costs (freezers) increased cost per unit, and GreenGrove chose not to raise/cut prices - so each sale earned less gross profit.
• Alternative: sales mix or discounts to supermarkets competing with own-label - accept any reason linked to the data.
• Marks: 1 for a reason, 1 for application to GreenGrove/data, 2 for developed explanation of the effect on the margin.

01.3 [9 marks]

Analyse how the data in Appendix C and Appendix D might influence GreenGrove plc's pricing decisions.

• GreenGrove's PED of -0.7 is inelastic - a price rise would increase revenue (smaller % fall in volume), helping to offset rising costs.
• Own-label demand is elastic (-1.8) - price-sensitive shoppers have moved to cheaper ranges; GreenGrove's remaining buyers are less price sensitive (loyal/premium).
• Appendix C: health (46%) and environment (31%) are the main buying motives, not price (9%) - supports premium positioning and a modest price rise.
• BUT 52% buy less often because of price - a further rise could push marginal customers to own-label and shrink volume; the PED is an estimate and may become more elastic as substitutes increase.
• Could use selective pricing: protect entry-level products, raise prices on differentiated lines; or emphasise health benefits to keep demand inelastic.

01.4 [16 marks]

Using the data, recommend whether GreenGrove plc should borrow £30m to build a second factory. Justify your answer.

• Against: ROCE has fallen from 11.7% to 8.6%; borrowing £30m raises gearing from 41.4% to about 51.8% - higher interest costs and risk if interest rates rise.
• Against: market size fell 1.5% in 2024 after slowing growth since 2021 - extrapolation suggests no return to rapid growth; extra capacity could be under-used, raising unit costs.
• Against: price is the main reason customers buy less often (52%) - own-label competition squeezes margins (gross margin already down).
• For: if growth returns, economies of scale lower unit costs and help GreenGrove compete with own-label on cost; health/environment trends are long-term.
• For: GreenGrove's inelastic PED shows a loyal premium base - it may win share as weaker rivals exit.
• Evaluation: missing data (current capacity utilisation, projected NPV/payback, interest rate); a phased expansion or outsourcing/contract manufacturing could test demand with less risk. A strong judgement weighs falling returns and market stagnation against long-term growth potential.

02.1 [9 marks]

Analyse how SwiftDrop Ltd's use of piece rate might affect the quality of its service.

• Piece rate pays per parcel, so drivers maximise the number delivered (output rose 142 to 151 per day).
• Speed is rewarded but care is not - leaving parcels in unsafe places saves time; complaints rose from 18 to 27 per 10 000 (+50%).
• Pressure and long days increase stress and rudeness to customers; damages SwiftDrop's reputation with retailers who may switch contracts.
• Low earnings per parcel may contribute to high labour turnover - inexperienced drivers make more mistakes.
• BUT piece rate gives an incentive to complete rounds and can motivate some drivers (Taylor); quality could be protected by deductions for complaints or bonuses for customer ratings.

02.2 [9 marks]

With reference to Herzberg's two-factor theory, analyse why SwiftDrop Ltd's labour turnover is high.

• Hygiene factors are poor: insecure self-employed status, low pay per parcel, using own van (costs), supervision only through an app - causing dissatisfaction.
• Motivators are absent: no responsibility for routes, no recognition, no advancement, repetitive work - so no positive motivation to stay.
• Dissatisfied drivers leave for rivals or other jobs - turnover rose from 38% to 45%, costing £600 000 a year.
• Lena's plan (salary, company van) improves hygiene factors - removing dissatisfaction; team leaders could add recognition and some responsibility.
• BUT gig drivers may value flexibility; the labour market for drivers (shortages) also explains turnover, not only Herzberg's factors.

02.3 [16 marks]

To what extent will moving towards a more democratic leadership style, as described by the Tannenbaum Schmidt continuum, improve the performance of all businesses?

• Democratic styles (consult/join) use employees' knowledge and increase engagement - better decisions and lower turnover (e.g. drivers know routes).
• Engaged employees provide better customer service, raising quality and reputation.
• BUT slower decisions - unsuitable in a crisis or when decisions are urgent (emergency services, delivery targets on peak days).
• Depends on employees' skills and willingness to take responsibility - unskilled or temporary workforces may prefer clear instructions.
• Depends on culture and structure: power cultures, large spans of control or app-based management make consultation hard.
• Tannenbaum Schmidt suggests the best style depends on forces in the manager, subordinates and situation - so 'all businesses' is unlikely; judgement should identify the conditions that make a democratic move beneficial.

03.1 [2 marks]

Using Table 1, calculate Harbour Kitchenware Ltd's break-even output.

Contribution per pan = £40 - £22 = £18; £360,000 / £18 = 20,000 pans.

• 1 mark: contribution £18.
• 1 mark: 20,000 pans.

03.2 [2 marks]

Using Table 1, calculate Harbour Kitchenware Ltd's margin of safety.

26,000 - 20,000 = 6,000 pans.

• 1 mark: actual output - break-even output.
• 1 mark: 6,000 pans (own figure rule).

03.3 [4 marks]

Explain one effect on Harbour Kitchenware Ltd of a fall in the value of the pound against the euro.

• Exports: euro prices can stay the same while each euro converts into more pounds - higher revenue/margin on 40% of sales, or prices in euros can be cut to win sales.
• Imports: Swedish steel costs more in pounds - higher variable costs, lowering contribution.
• Net effect depends on the balance of euro revenue and euro costs - natural hedge.
• Marks: 1 knowledge, 1 application to Harbour, 2 developed chain of reasoning.

03.4 [9 marks]

Analyse the benefits to Harbour Kitchenware Ltd of changing from quality control to quality assurance.

• QA prevents defects at each stage instead of finding them at the end - fewer of the 6% rejected pans, cutting wasted materials, energy and labour.
• Lower unit costs raise contribution and lower break-even output, increasing the margin of safety.
• Fewer end-line inspectors needed - employee costs saved; operators given responsibility (Herzberg motivator) may be more engaged.
• More consistent quality improves reputation with department stores and EU retailers - supports premium pricing.
• BUT training costs and time; relies on operators' commitment - quality may suffer during transition.

03.5 [16 marks]

To what extent should all manufacturers hold low levels of inventory?

• For: low inventory reduces holding costs (storage, insurance, obsolescence), frees cash (Harbour's 9 weeks of sales ties up working capital), and exposes inefficiencies (lean/JIT).
• Against: buffer stock lets manufacturers meet sudden demand and guarantee quick delivery - a competitive advantage for Harbour with retailers.
• Against: supply-chain risk - imported materials, long lead times or disruption (pandemics, shipping) make low inventory dangerous.
• Seasonal demand (e.g. Christmas cookware) may require building inventory in advance.
• Depends on product (perishable/fashion v durable), reliability of suppliers, cost of stock-outs, cash position.
• Judgement: low inventory suits stable demand and reliable local suppliers; 'all' is unlikely - many should hold an optimal, not minimal, level.