3.3.1 Improving Cash Flow

3.3.1 Improving cash flow

Name:

Questions

Q1.

* Discuss the extent to which the sale of Kodak's assets would be the most suitable method of improving its cash flow.

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(Total for Question = 6 marks)

Q2.

* Using your knowledge of business, assess the extent to which improving cash flow will be important for Kodak. 10 marks

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(Total for Question is 10 marks)

Q3.

Shiftyjelly is a business which designs applications or 'apps' for smart phones and tablet computers. It currently employs two full-time and three part-time app developers. Each member of staff is paid a salary for their work.

(Source: adapted from

One of Shiftyjelly's most popular apps is Pocket Casts, an app which allows you to organise and download podcasts faster. It is sold online through Apple's App Store and is priced at £1. Apple is often slow to pay Shiftyjelly its share of the revenue when a sale is made. This has damaged Shiftyjelly's cash flow.

What is meant by the term cash flow?

(2)

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Q4.
Identify two cash outflows for a business such as Shiftyjelly.

(2)

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Q5.

Outline one method Shiftyjelly could use to improve its cash flow.

(2)

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Q6.

The Range is a national chain of discount stores in the UK which has expanded rapidly. It sells a variety of products from furniture to stationery. From October of each year a quarter of each store's floor space is used to stock Christmas products such as Christmas trees, lights and decorations. To do this The Range de-stocks its summer products, such as garden furniture and barbecues. This involves selling off its summer products at lower prices.

Which of the following is a cash inflow?

(1)

Select one answer.

APayments to suppliers.

BPurchasing assets.

CLonger credit terms for customers.

DTaking out a bank loan.

Q7.

Identify two reasons why The Range might want to establish more favourable credit terms with suppliers.

(2)

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Q8.

Explain one advantage to The Range of de-stocking its summer products.

(3)

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Q9.

(a) Which of the following is the best description of negative cash flow?

Select one answer.

(1)

A Cash inflow exceeds cash outflow

B Revenue is greater than costs

C Cash outflow exceeds cash inflow

D Costs are greater than revenue

(b) Identify three methods Hornby could use to improve its cash flow.

(3)

1 ......

2 ......

3 ......

(3)

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(d) Explain one disadvantage to Hornby from having large amounts of debt.

(3)

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(Total for question = 10 marks)

3.3.2 Improving profit

Questions

Q1.

Ecovation Ltd is a new company run by Edward and Michael. It manufactures birdfeeders in an environmentally friendly way. The wood that is used comes from sustainable sources and the birdfeeders are painted in a coating that does not damage the environment.

The company has raised £2 000 of share capital and this has allowed it to cover its fixed costs and make 400 birdfeeders per month. It sells its birdfeeders at a price of £8 each.

Edward and Michael intend to contract freelance sales teams to sell the product. They hope that freelancers will be more motivated than the sales people that they currently employ.

In the long-term Edward and Michael intend to expand the business, but are unsure whether they should raise more share capital or use debt.

(Source: adapted from

(a) What is meant by the term profit?

(2)

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(b) Ecovation's monthly fixed costs are £930, and variable costs are £1.80 per birdfeeder.

(i) Calculate the break-even point when each birdfeeder is priced at £8. Show your workings and the formula used.

(3)

(ii) Calculate the profit or loss that Ecovation will make if it sells its entire stock of 400 birdfeeders in one month. Show your workings and the formula used.

(3)

For each, explain the effect on the business.

Advantage

(1)

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Explanation

(3)

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Disadvantage

(1)

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Explanation

(3)

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(Total for Question = 16 marks)

Q2.

(a) What is meant by the term export subsidy?

(2)

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The Thai government also uses import protection to limit the amount of foreign made computers, such as Apple Macs, which are imported into Thailand.

(b) Describe the effects of import protection on computer manufacturers based in Thailand.

(4)

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In 2011 Dell increased the price of its range of laptop and notebook computers.

* (c) Assess the impacts of this price increase on Dell's ability to improve its profits.

(8)

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(Total for Question = 14 marks)

Q3.

Outline one method Kodak could use to reduce the size of its losses.

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(Total for Question = 2 marks)

Q4.

What is meant by the term revenue?

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(Total for Question = 2 marks)

Q5.

In 2011 budget airline Easyjet announced it was ordering 15 new aircraft. The new planes were faster and improved the company's productivity. Easyjet hoped to make a profit of £2 million per year from each of the new planes it had ordered.

(Source: adapted from

Which of the following is most likely to increase Easyjet's profits?

Select one answer.

(1)

Easyjet should increase:

Arevenue by more than costs

Bfixed costs

Cvariable costs by more than fixed costs

Dticket prices

Q6.

(Source: adapted from

Shiftyjelly is currently designing a new weather app for tablet computers such as Apple's iPad. The company wants to sell the app for £2. The estimated costs of developing the app are:

Fixed costs = £2 000

Variable costs = 40p per app

Below is a break-even chart for the new weather app.

Calculate Shiftyjelly's profit/loss if it manages to sell 3000 copies of its weather app. Show your workings and the formula used.

(3)

Q7.

Marks and Spencer sells clothes, furniture and food. It is recognised by customers as having very good levels of customer service.

In 2009 Marks and Spencer faced falling sales. It wanted to maintain its profits and looked at either cutting prices or increasing advertising.

Which of these two methods do you think would be more effective in allowing Marks and Spencer to maintain its profits and why?

(6)

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Q8.

The Saltash Toy Box is a small, independent toy retailer located in Cornwall. It cannot compete on price with larger toy retailers such as Toys R Us, but instead focused on customer service and allowing children to play with toys, in store, before parents buy them. In December 2009, the 'must-have' Christmas toy was the Go-Go Hamster. A Go-Go Hamster is a small motorised hamster which squeaks when it bumps into items of furniture. The Saltash Toy Box hoped that it would sell large quantities of this toy. Despite its efforts to compete, however, sales at the store remained low. The owner decided to change the focus of the business. In 2010, the Saltash Toy Box closed its only retail store and instead decided to focus on catalogues and its website as a way of making sales. It believed this would boost the company's profits and increase the productivity of its two staff.

(i) What is meant by the term 'profit'?

(2)

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(ii) Identify one method the Saltash Toy Box could use to increase profit.

(1)

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Q9.

(a)Which of the following is most likely to increase the revenue of National Express?

Select one answer.

(1)

A Higher number of passengers

B Lower fuel costs

C Employ more coach drivers

D Less spending on advertising

(b)State two methods that National Express could use to encourage people to try its products.

(2)

1 ......

2 ......

National Express has received poor feedback about unhelpful staff and rude coach drivers.

(c)Explain one disadvantage to National Express of providing poor customer service.

(3)

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The inter-city coach market, between places such as Leeds and London, is very competitive. National Express has to compete with train companies as well as other coach operators such as Megabus and Citylink. Prices for some coach tickets start from as little as £1.

(d)Describe why reducing costs could allow National Express to remain competitive.

(4)

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(Total for question = 10 marks)

3.3.3 Breakeven charts and analysis

Questions

Q1.

Shiftyjelly is currently designing a new weather app for tablet computers such as Apple's iPad. The company wants to sell the app for £2. The estimated costs of developing the app are:

Fixed costs = £2 000

Variable costs = 40p per app

Below is a break-even chart for the new weather app.

What is meant by the term break-even point?

(2)

......

Q2.

(Source: adapted from

Shiftyjelly is currently designing a new weather app for tablet computers such as Apple's iPad. The company wants to sell the app for £2. The estimated costs of developing the app are:

Fixed costs = £2 000

Variable costs = 40p per app

Below is a break-even chart for the new weather app.

(i) Using the break-even chart, state the number of apps Shiftyjelly must sell in order to break-even.

(1)

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(ii) Shiftyjelly is expecting to sell 3000 copies of its weather app. Calculate the margin of safety for this product. Show your workings.

(2)

Q3.

Shiftyjelly is currently designing a new weather app for tablet computers such as Apple's iPad. The company wants to sell the app for £2. The estimated costs of developing the app are:

Fixed costs = £2 000

Variable costs = 40p per app

Below is a break-even chart for the new weather app.

* Assess the extent to which break-even analysis is a valuable tool in allowing Shiftyjelly to plan the successful launch of its new weather app.

(8)

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Q4.

The company has raised £2 000 of share capital and this has allowed it to cover its fixed costs and make 400 birdfeeders per month. It sells its birdfeeders at a price of £8 each.

Edward and Michael intend to contract freelance sales teams to sell the product. They hope that freelancers will be more motivated than the sales people that they currently employ.

In the long-term Edward and Michael intend to expand the business, but are unsure whether they should raise more share capital or use debt.

(a) What is meant by the term profit?

(2)

......

(b) Ecovation's monthly fixed costs are £930, and variable costs are £1.80 per birdfeeder.

(i) Calculate the break-even point when each birdfeeder is priced at £8. Show your workings and the formula used.

(3)

(ii) Calculate the profit or loss that Ecovation will make if it sells its entire stock of 400 birdfeeders in one month. Show your workings and the formula used.

(3)

For each, explain the effect on the business.

Advantage

(1)

......

Explanation

(3)

......

Disadvantage

(1)

......

Explanation

(3)

......

(Total for Question = 16 marks)

Q5.

In 2013, the Uxbridge Travelodge had a margin of safety of 1,400 rooms.

(a) What is meant by the term margin of safety?

(2)

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The Uxbridge Travelodge has annual fixed costs of £100 000. The selling price of a room is £50 per night and the variable cost of a room is £10 per night.

(b) (i) Calculate how many hotel rooms had to be sold in 2013 for the Uxbridge Travelodge to break-even. Show your workings and the formula used.

(3)

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During 2013, the Uxbridge Travelodge sold 3,900 rooms.

(ii)Calculate the profit of the hotel in 2013. Show your workings and the formula used.

(3)

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*(c) Assess the usefulness of break-even analysis to a hotel company, such as Travelodge.

(8)

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(Total for question = 16 marks)

3.3.4 Financial growth

Questions

Q1.

∗Discuss the advantages to Beats Electronics of using new share capital to fund its expansion.

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(Total for question = 6 marks)

Q2.

Mulberry plc produces high-quality designer leather goods such as bags and belts. In the 1990s the company was facing collapse, but since then it has become one of British fashion's biggest success stories. Mulberry's successful turnaround was due to the appointment of Nicolas Knightly as design director. His bag designs became instant hits with high-profile celebrities such as Kirsten Dunst. Nicholas' most recent bag design is known as the 'Alexa'– so called because the company gave one in every size and colour to MTV presenter and model Alexa Chung (pictured above). Giving celebrities free bags has always been an essential part of Mulberry's marketing. It provides Mulberry with free publicity in fashion magazines and helps make the brand and its bags appear cool. The success of Mulberry's bag designs has led to large increases in demand. To cope with this the company has used internal sources of finance to fund improvements to its factory and has opened up new stores in places such as China and Singapore. Mulberry has decided to expand cautiously since its experience in the 1990s showed how easy it was for its designs to go out of fashion and lose customer appeal. At the time this led to large losses for the business.

* Discuss the benefits to Mulberry of using internal sources of finance to fund its expansion.

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(Total for Question = 6 marks)

Q3.

(i) Identify one internal source of finance which The Range might use to expand its business.

(1)

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(ii) Explain one benefit to The Range of using internal sources of finance for growth.

(3)

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Q4.

(a) Which of the following is the best description of negative cash flow?

Select one answer.

(1)

A Cash inflow exceeds cash outflow

B Revenue is greater than costs

C Cash outflow exceeds cash inflow

D Costs are greater than revenue

(b) Identify three methods Hornby could use to improve its cash flow.

(3)

1 ......

2 ......

3 ......

(3)

......

(d) Explain one disadvantage to Hornby from having large amounts of debt.

(3)

......

(Total for question = 10 marks)

Q5.

Dyson has invested £50 million in a digital motor factory in Singapore. It funded this investment using external sources of finance.

(a) Which of the following is an external source of finance?

Select one answer.

(1)

A Retained profit

B Selling assets

C Sales revenue

D Share capital

The Singapore Government has given Dyson an export subsidy.

(b) Outline one possible impact on Dyson of the export subsidy.

(2)

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(3)

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The product life cycle of a vacuum cleaner, such as the DC54, can be very short.

(d) In order to extend the product life cycle of its DC54 vacuum cleaner, Dyson considered the following two options:

Option 1: Increase promotion

Option 2: Improve the product.

Which of these two options do you think would be more effective in allowing Dyson to extend the product life cycle of its DC54 vacuum cleaner? Justify your answer.

(6)

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(Total for question = 12 marks)

Q6.

(a)What is meant by the term qualitative market research?