‘A’ LEVEL BUSINESS STUDIES

EXAM PREPARATION

PAPER 1 - 3 SETS

PAPER 2 - 3 SETS

TEACHER’S GUIDE

PAPER 1 AND 2

QUESTIONS BOOKLET AND SAMPLE

SOLUTIONS
Tinofamba nevanofamba
 PAPER 1 REVISION: NO.1
Section A [70 Marks]

Answer all questions.

1. (a) State any three different ways in which the size of a business might be measured. [3]
(b) Outline any three legal controls which might affect the way in which businesses operate. [3]

2. (a) Show the difference between the public sector and the private sector of an economy. [2]
(b) Why might some goods and services be provided by the public sector in your country? [2]

3. (a) What is an organizational chart? [2]

(b) Explain one reason why an organization chart would be useful to employees in a business. [2]

4. (a) How useful is oral communication in an organisation? [4]

(b) Comment on the importance of Trade Unions in employer/employee relations. [4]

5. (a) Distinguish between McGregor’s Theory X and Y. [4]

(b) How might the differences in he two theories be reflected in the leadership style of managers? [4]

6. State two reasons why the market for a product might decline in size. [2]

7. (a) Other than price, what other factors could cause an increase in the demand for mobile phones? [4]

(b) A business sells a product whose demand is relatively price inelastic.

Explain the effect on sales and revenue of a price increase. [3]

8. (a) Define the term product portfolio. [2]

(b) Explain the importance of the product life cycle in planning a product portfolio. [4]

9. (a) A company manufactures product X and the following data is shown:

Direct Costs per unit $70

Overheads $50 000
Current output 120 000 units
Selling Price $140
Full capacity output 150 000 units
From the above information, calculate the company’s capacity utilization. [2]

(b) (i) State two ways in which a business may achieve added value. [2]
(ii) Why is added value important for business? [2]
10. (a) Distinguish between assets and liabilities of a business. [4]
(b)Explain why businesses depreciate their fixed assets. [3]

11. Briefly explain ways in which a manufacturer of toys might find break-even analysis useful. [6]

12. The following information is provided for project Venus:

 Activity Preceding Activity Duration (days)

A – 5
B A 6
C A 3
D A 3
E B 2
F D 2
G B,C,F 9
H E 4
(a) Define the term critical path. [2]

(b) (i) Draw a network diagram for project Venus. [3]

(ii) State the project’s total duration [1]

Section B [30 Marks]

Read the following case study and answer all the questions that follow.
Power College
Power College is a private school owned by Shumi Power who is also the Head of the school. The school
has 500 students and charges $1 000 per term for each student. Shumi’s aim is to make a significant profit
every year but the last two years have been very difficult. Subject departments were over-spending while
the increase in fees was not enough to cover the college costs. This also meant that the school could not
update its equipment or maintain its buildings. Currently, Power College cannot accommodate more than
520 students.
Recently, labour turnover has been high and this has led to a decline in the examination success rates.
Those teachers who have been leaving highlighted a variety of reasons. Top of the list were lack of a
bonus system for good results and Shumi’s style of management. Shumi discussed school issues with the
Students Council before making changes. Teachers would only get to know about new policies through
the notice board. He did not even use the school’s e-mail system. Some Heads of Departments resigned
because they never knew how much they had to spend on text books yet they were the first to be criticized
when results were bad. Worse still, they were even criticised when the results were good.

From the look of things, Shumi needs to act fast to arrest the situation or else, his school’s enrollment will
soon go down.

Shumi has been told about another school in town, Golden, which is up for sale since the owners decided
to retire. He has given it a thought and after evaluating a takeover, he made up his mind. The takeover
would go ahead and a new post for Deputy Head of school would be created. The Deputy Head would be
responsible for training new teachers and introducing a job evaluating system.

13. Evaluate how communication between management and staff might be more effective within Crystal
College. [10]
14. Analyse the benefits to Power College of introducing budgets managed by Head of Departments. [10]
15. Discuss the possible advantages and disadvantages to Power College of taking over Hamlet
School.[10]
 PAPER 1 REVISION: NO.2
Section A [70 Marks] 2014/1

Answer all questions

1 (a) Define the following terms:

(i) management buy-out [2]

(ii) contracting out [2]

(b) Distinguish between a public limited company and a public corporation . [4]

2. (a) List any two types of production methods. [2]

(b) How can a manufacturer of cellphones improve he productivity of his workers? [4]

3. Explain any two communication problems that are beyond the receiver’s control. [4]

4 (a) State and explain any two non-financial methods of motivation. [4]
(b) Comment on Hezberg’s ideas on motivation. [5]

5 Is democratic leadership necessarily a good management style? [4]

6 (a) What is niche marketing? [2]

(b) Evaluate the usefulness of market skimming. [4]

7 A firm has to decide between two alternate projects. The costs and the expected profitability
of each of each of these is given below:
Project Cost If successful If unsuccessful

X 20 000 60 000 3 000

Y 35 000 85 000 (20 000)
If there is a 60% chance of Project X being successful and a 50% chance of Project Y being successful,

(a) draw a decision tree of the options above. [3]

(b) Which project should the firm choose? Justify you answer. [4]

8 (a) What is benchmarking? [2]

(b) Assess the significance of maintaining quality in a business organisation. [5]

9 (a) Outline two advantages of the payback method. [2]

(b) (i) What is investment appraisal? [2]

(ii) Analyse the importance of Net Present Value as a method of evaluating projects. [4]

10 Show how a producer of flour can benefit from bulk-buying economies of scale. [3]

11 (a) Identify two stakeholders who are interested in the accounts of a firm. [2]
 (b) Define the following terms:

(i) zero budgeting, [1]

(ii) cost center. [1]

12 Distinguish between money market and capital market. [4]

Section B [30 Marks]

Read the following case study and answer all the questions that follow.
Golden Mobiles Limited
Choice Mobiles Limited is a medium sized public limited company. It manufactures high quality mobile
handsets for a niche market in their own country.
The Board of Golden Mobiles Limited, like those of similar businesses, is thinking about how to respond
to globalisation. The Board has already decided that they will open retail facilities in both developing and
developed countries.

In anticipation of these future developements, Nissi, the Chief Executive Officer, has carried out a
business enviromental analysis. He is positive that the firm’s strengths can outweigh its weakneses and
can enable them to take advantage of the opportunities lying ahead. He feels that they cannot even be
deterred by the possible threats in the larger market.

Anotidaishe, the Marketing Manager, however, thinks that the issue of pricing would be more critical.
Currently, prices in the market range from $15 to $100 per model. She gave information on the impact of
the recent price changes on the level of demand for their main product and that of their main competitor
as shown on the table.

% change in price % change in demand

Golden Mobiles Limited's main product +20 -14

Main Competitor's product -20 +24

In light of the new developments, Shumirai, the Human Resources Manager, also needs to prepare for the
planned international expansion. However, he thinks that it will be difficult to achieve a workforce so
loyal and committed as the present one. Most employees have worked for Golden Mobiles Limited for a
long time.

13 (a) (i) Calculate the price elasticity of demand for Golden Mobiles Limited’s main product. [2]
(ii) Comment on your answer in (a) (i) [4]

(b) Show how Golden Mobiles Limited’s price elasticity of demand is different from that of its main
competitor. [4]

14 Examine the possible factors that the Chief Executive Officer should analyse concerning the business
environment. [10]

15 Discuss the pricing factors that the Marketing Manager should put into consideration when selling
their product in the new market. [10]
 PAPER 1 REVISION: NO.3

Section A [ 70 Marks ]

Answer all questions.

1 What is meant by the term corporate culture? [2]

2 Discuss the role played by the primary sector in the economy of your country. [4]

3 a) Distinguish between economic and political constraints. [4]

b) To what extent should the government be concerned about the activities of multinational
companies. [5]

4 a) State any two methods of stock control. [2]

b) How might the production manager of a detergent company find benchmarking useful? [4]

5 How might a saw milling firm benefit from training? [4]

6 a) What is the difference between leadership and management? [2]

b) Evaluate the effectiveness of autocratic leadership. [4]

7 a) State any two communication barriers that lie with the sender. [2]
b) Explain the limitations of vertical communication in a tall organisational structure. [4]

8 a) Explain how a manufacturer of soft drinks might find price elasticity of demand useful. [3]
b) The following information shows the effect of a price change, from $10 to $15, to a product
produced by Nyakunika Ltd.

Price ($) Expenditure on Advertising ($) Sales (units)

10 5 000 20 000
15 6 000 22 000
Calculate the promotional elasticity on demand for this product. [2]

9 a) Explain the two classes under which products are grouped. [4]
b) Why might a clothes manufacturing firm be prepared to sell its product at a price below the
total cost of producing it? [4]

10 a) List any two factors which might influence the relocation of a shoe manufacturer. [2]
b) Evaluate the usefulness of the flow production method. [4]

11 a) What are the functions of the stock exchange? [3]

b) For what reasons might a business make provisions for
i) Bad debts, [2]
ii) Depreciation? [2]
12 a) The following are marks obtained by Business Studies student in a given test:

60 50 70 60 80 40 30 10 60 90

20 40 60 80 90

From the given set of marks, distinguish between the mode and the mean. [4]

b) What are the benefits of linear programming? [3]

Section B [ 30 Marks ]

Read the following case study and answer all the questions that follow.

Golden Deal Furniture

Chings and Hunter own a furniture workshop, Golden Deal Furniture (GDF), in partnership. The business
produces home furniture using high-technology equipment. For the past 10 years, all the furniture has
been sold exclusively to Power Dealers under the brand name ” Good Living”. This arrangement has
suited both the workshop and the retail chain. It has helped GDF to earn a fair and regular income.

Recent developments in the business environment have called for quick action from GDF. The demand
for home furniture has been falling. The suppliers of timber have changed their discount terms from 20%
on goods worth $6 000 or more to 20% on goods worth $8 000 or more. Any purchases less than $8 000
would now attract a discount of only 12 %.

The partners have the idea to incorporate that is, converting their partnership into a limited company, and
then explore the foreign markets. They can start producing and distributing office furniture through agents
in neighbouring countries. On the contrary, Excellence Financial Services, GDF’s financier and advisor,
has another option of specialising in the provision of school furniture since there has been an increase in
demand for school furniture.

However, the viability of each option has been assessed and the following information on the expected
returns for the next 4 years has been made available.

Year Venturing into the Export Market Specialising in school furniture

0 ($200 000) ($100 000)

1 $80 000 $100 000
2 $120 000 $150 000
3 $150 000 $120 000
4 $150 000 $80 000
13 a) Calculate the Average Rate of Return (ARR) for each of the above options. [4]
b) Comment on the usefulness of the discounted cash flow method in this case. [6]

14 Discuss the benefits that Golden Deal Furniture might enjoy by incorporating. [10]

15 Evaluate the problems that are faced by single product firms. [10]
 PAPER 2 REVISION: NO.1

Section A: Data Response [25 marks]

Answer all questions.

1 Read the passage below and answer the questions that follow.

Adbel (Pvt) Ltd

Adbel (Pvt) Ltd is a cellular network service provider in a country with three cellular network providers.
It is registered as a private limited company. Adbel manufactures and sells recharge cards to customers
subscribing to its cellular network. With a subscriber base of 200 000, the company is ranked third in the
country. There are one million subscribers in the country and the markets leader’s market share is 45%.

Although Adbel has been realising modest profits since its inception three years ago, of late the company
has been experiencing a decline in sales. It is estimated that if management does not take action, the
subscriber base is likely to decline to 15% by year end. The subscriber base for rival firms has been
growing and this has prompted a board meeting for Adbel. In the board meeting, the Technical director
suggested that more base stations be constructed. The effect would be to increase the company’s network
coverage, earn economies of scale, become more competitive and attract more subscribers. “We could
even purchase recharge card materials at a discount if we bought them in bulk.”

A major setback faced by the directors is how to raise $3 000 needed for the construction of more base
stations. The forecasted net cash flows for this investment are shown in the table below.

End of Year Net Cash Flows 10% Discount Factors

1 $1 200 0.91
2 $1 400 0.83
3 $1 800 0.75
4 $1 600 0.68
Despite the setbacks likely to be faced in raising the needed capital, all the directors agree that growth
will ensure survival. They have tabled the following strategies for survival.

 merge with the second-largest network service provider in the country.

 offer a rights issue.
 subcontract manufacturing of recharge cards.
The directors are resolute that if adopted, these strategies will revive the declining market share.

(a) Explain the meaning of the term economies of scale ( line 12) as used in the passage. [3]

(b) Calculate
(i) Adbel (Pvt) Ltd’s market share. [2]
(ii) the Net Present Value (NPV) of constructing more base stations using the discount factors
provided. [4]
 (c) How and to what extent might your calculations in 1 (b) influence the decision to construct
more base stations. [6]
(d) Evaluate the three survival strategies Adbel directors wish to adopt. [10]

Section B: Essays [75 marks]

2 With reference to Taylor and Hezberg’s motivation theories, evaluate the importance of financial as a
way of improving the productivity of shopfloor workers. [25]

3 (a) Explain the criteria that a business might use to assess the effectiveness of its communication
systems. [12]

(b) Critically examine the importance of informal communication to businesses. [13]

4 To what extent do you agree with the statement that “product quality guarantees business success”? [25]

5 (a) Explain the usefulness of the elasticity of demand concept to managers of a business. [10]
(b) Discuss how and why a marketing manager might change a firm’s promotional activities at different
stages of a product’s life cycle. [15]

6 Evaluate the usefulness of the Profit and Loss Account and Balance Sheet to managers of a business.
[25]

7 Discuss the likely effects of changes in technology to businesses in your country. [25]

8 An operations manager has decided to change from a batch to a flow production process.

(a) Explain how this change might be viewed by:

(i) production workers,

(ii) customers of the business [10]

(b) Evaluate the significance of the flow production technique to a manufacturer of motor vehicles. [25]

9 (a) Explain the factors a finance manager might consider when selecting appropriate sources of finance.
(b) Evaluate the role of the Stock Exchange to the economy of your country. [15]

10 Evaluate the importance of the following techniques to an organisation.

(a) Boston Matrix, [9]

(b) Lean Production, [8]
(c) Linear Programming. [8]
 PAPER 2 REVISION: NO.2
Section A: Data Response [25 marks]

Answer all questions.

1. Read the passage below and answer the questions that follow.

Power Tools Ltd

Power Tools Ltd is a medium-sized business that manufactures farm equipment. It started by making
simple hand tools aimed at the newly resettled small-scale farmers and later on diversified into modern
farm equipment. Currently, two of the best selling product lines are the “Straight Harrow”, which sells
well to the medium-scale farmers and the “Automated Combine Harvester”, which is popular with large-
scale farmers.

Despite the successful launch of these two product lines, Power Tools Ltd has been affected by serious
problems that have threatened its continued existence. Its total sales have grown at a slower rate in recent
years compared to that of the whole market. Shareholders have raised concern over the firm’s lack of
clear business objectives.

The Human Resources Director, Nissi Power, is concerned about the rising staff turnover. During one of
the exit interview, one of the workers complained that workers are never given a chance to express their
opinions. The worker also disclosed that management set production targets and introduced new ones
without consulting the workers.

The directors have suggested that Power Tools Ltd embark on Research and Development to introduce a
new combine harvester that will also mill grains into finished products. This equipment will be produced
at low costs and is expected to appeal to both domestic and foreign farmers.

The following are the projected cash flows and the discount factors at 10%.

Year Cashflows ($ million) Discount Factors (at 10%)

0 (400) 1
1 200 0.91
2 300 0.83
3 300 0.75
It is hoped that the introduction of the new equipment will help reduce Power Tool Ltd’s viability
problems. The other directors have tasked the Finance Director to calculate the net present value of the
new equipment.

(a) Explain the term “staff turnover” (line 13) as used in the passage. [13]

(b) Using the information in the passage calculate:

(i) pay back period. [3]

(ii) net present value. [4]

(c) Analyse the information in the passage and recommend to the directors of Power Tools Ltd whether
the new combine harvester should be accepted. [5]

(d) Evaluate how communication between management and staff might be made more effective within
Power Tools Ltd. [10]

Section B: Essays [75 Marks]

2 (a) Discuss the contribution of ratio analyis to the effective management of working capital. [10]
(b) Evaluate the methods a business might use to improve its liquidity. [15]

3 With reference to appropirate theories, evaluate the importance of strategies management might use to
improve the productivity of employees. [25]

4 (a) Explain how ethical issues might influence business objectives. [10]

(b) To what extent is Management by Objectives important as a means of ensuring and developing a
more effective management team? [15]

5 Two giant supermarkets have proposed to merge.

(a) Discuss the factors the two supermarkets might have considered before making the decision to
merge.

(b) Critically discuss the likely impact of the merger on each of the following stakeholders:

(i) government,
(ii) workers,
(iii) customers. [15]
6 Discuss how changes in technology might affect businesses in your country. [25]

7 (a) Discuss the factors a firm might consider when choosing a source of finance. [10]

(b) Evaluate possible methods a firm might use to finance the purchase of machinery. [15]

8 (a) Why might a manufacturer not be keen to use flow production techniques? [10]
(b) Evaluate how value analysis might affect the success of a business. [15]

9 A clothing manufacturer is considering entering the fashion market.

(a) Discuss the factors that might influence the manufacturer’s marketing strategy. [10]
(b) Evaluate the methods the manufacturer might use to collect the information from the fashion
market. [15]

10 (a) Assess the importance of bench marking as a method of ensuring quality. [10]
(b) Evaluate the contribution of product quality to the success of a business. [15]
 PAPER 2 REVISION: NO. 3
Section A: Data Response [25 marks]

Answer all questions in this section.

Read the passage below and answer all the questions that follow.

Yasha Power is a sole proprietorship established ten years ago by Yasha, a retiree from a leading hotel. It
provides catering services for special occasions like weddings, graduation ceremonies and seminars. The
business has a staff compliment of two chefs and four waiters.

Yasha has always wanted his business to remain small. His major reason has been to allow him to retain
control of the business. He believes that sales and profit of the business have always been steady due to
his personal involvement. His employees, however, want Yasha to let the business grow. They view
growth as a way of ensuring higher salaries and job security.

Tom’s philosophy of wanting the business to remain small contradicted with that of his employees who
expected the business to grow. He now intends to dispose of the business and has made this known to his
employees. The employees are worried about the possibility of job losses, even though Yasha has assured
them that their jobs will be secure under a new owner. Most of the workers now regret having been
employed by Yasha Power in the first place.

Meanwhile, Yasha has engaged an accountant to prepare the final accounts shed of sale of the business.
The following is an extract of The Statement of Financial Position (Balance Sheet) drawn by the
accountant.

Yasha Power

Statement of Financial Position (Balance Sheet) extract as at 31 December 2013

Non-current Assets $
Equipment 50 000
Motor vans 40 000
Goodwill 10 000

Current Assets
Inventory (stock) 20 000
Trade receivables (debtors) 20 000
Cash 10 000

Current Liabilities
Trade payables (Creditors) 20 000
Bank overdraft 10 000

Tom is looking forward to disposing of the business at the best possible value.
 (a) From the information in the passage, calculate the

(i) current ratio, [3]

(ii) quick (acid test) ratio. [3]

(b) Comment on the liquidity position of Yasha Power, from your results in (a). [3]
(c) Explain why employees of Yasha Power should worry about the sale of the business. [6]
(d) Evaluate the importance of growth to a business such as Yasha Power . [10]

Section B: Essays [75 marks]

Answer any three questions from this section.

2 (a) “Businesses only aim at maximising profit.” Discuss this assertion. [12]
(b) How might government economic policies impact on business objectives in your country? [13]

3 Assess the importance of the following human resource functions:

(a) human resource planning, [9]

(b) job evaluation, [8]
(c) performance appraisal. [8]

4. (a) Why might the market for clothes be segmented? [10]

(b) Evaluate the usefulness of elasticity of demand to a producer of soft drinks. [15]

5 With the aid of a relevant diagram, evaluate the usefulness of the Boston Matrix. [25]

6 (a) Why might it be difficult for a firm to collect relevant information about the market for its
product? [10]

(b) To what extent is Cost Benefit analysis a useful technique in decision making? [15]

7. To what extent is Break-even analysis a useful technique in decision-making? [25]

8 (a) Distinguish between last in, first out (LIFO) and first in, first out (FIFO) methods of
stock valuation. [10]

(b) Assess the importance of profit and loss accounts to a stationary manufacturing concern. [15]

9. Evaluate the methods a business might use to manage its inventory (stock). [25]

10. Evaluate the significance of small businesses to the economy of your country. [25]
 QUESTION AND SOLUTIONS
PAPER 1 REVISION: NO.2 SOLUTIONS
1 (a) Define the following terms:

(i) management buy-out [2]

This is when shares are bought from company’s shareholders by the managers of the
business (company), so that they become the owners.

(ii) contracting out [2]

this happens when a business cedes some of its non-core activities to another company so
that it concentrate on core competences

(b) Distinguish between a public limited company and a public corporation . [4]

A public limited company belongs to the public whereas a public corporation belongs to the
public sector. Examples of public limited company includes OK Zimbabwe Limited whilst
public corporations include Zimbabwe Broadcasting Corporation. (ZBC)

2. (a) List any two types of production methods. [2]

 job
 flow
 batch

(b) How can a manufacturer of cellphones improve the productivity of his workers? [4]

Productivity of workers can be improved through training or increasing their wages and salaries.
Another is that of improving working conditions and involving them in the decision making
process.

3. Explain any two communication problems that are beyond the receiver’s control. [4]

Communication problems that are beyond the receivers control include network problems and
use of wrong channel of communication. Wrong channel will make the receiver unable to
understand the message.
4 (a) State and explain any two non-financial methods of motivation. [4]

The first non-financial method for motivation is including workers in the decision making
process. Workers also need to work where there is security to their jobs. Delegation of duties and
job rotation are other non-financial methods of motivation.

(b) Comment on Herzberg’s ideas on motivation. [5]

Herzberg’s ideas on motivation include hygiene factors and motivating factors. What this means
is whenever motivating factors are lacking, productivity will fall, for example, delegation or
promotional prospects. However if these are lacking at least hygiene factors should be provided
and these include increase in salaries or payment of bonuses.

5. Is democratic leadership necessarily a good management style? [4]

Democratic leadership is to a certain extend a good management style. It improves rapport

between managers and workers and encourages worker initiativeness. Democratic leadership
improves effective communication between workers and managers. However democratic
leadership at times is not a good management style because it is time consuming due to
consultations. Sensitive issues do not require involvement of all the people.

6 (a) What is niche marketing? [2]

It is the process of identifying and exploiting a small segment of a larger market by developing
products to suit it.

(b) Evaluate the usefulness of market skimming. [4]

It is a pricing strategy that is used when introducing a product in the market at a higher price and
this will help in maximizing profits before competitors enter the market. It usually works well
when demand is inelastic. It attracts customers who believe that high prices means high quality.

8. (a) What is benchmarking? [2]

It is when management identifies the best firm in the industry and then compares the
performance standards for improvement purposes.

(b) Assess the significance of maintaining quality in a business organisation. [5]

There are a lot of benefits to an organisation that maintains quality because it improves its image
and reputation. Customers will also spread the good image of the company hence there will be an
increase in sales and profits. Organisations that maintain quality always attracts a large customer
base. However a company that maintain quality is usually affected by high training costs of its
employees. It is also costly for the organisation sourcing quality raw materials which might be
expensive.
9. (a) Outline two advantages of the payback method. [2]

-it provides a quick initial screening device

-easy to use and calculate

(b) (i) What is investment appraisal? [2]

It is an investment technique which seeks to see the wisdom behind accepting or rejecting or
project.

(iii) Analyse the importance of Net Present Value as a method of evaluating

projects. [4]

This method takes into account the time value of money and it considers the whole life of the
project. The NPV rate of discount can be varied to allow for different economic conditions.
However it also need to be noted that it is a difficult method compared to payback method. Its
final result depends heavily on the rate of discount used.

10. Show how a producer of flour can benefit from bulk-buying economies of scale. [3]

The producer will buy wheat in large quantities thereby receiving bulk-buying discounts. This
discount will be passed on to the consumers buy getting flour at a cheaper price. When demand
for flour is elastic, the producer will realise more revenue.

11. (a) Identify two stakeholders who are interested in the accounts of a firm. [2]

-employees
-shareholders
-Creditors .e.t.c
(b) Define the following terms:
(i) zero budgeting, [1]

It is a budgeting process in which activities are analysed as if they are being started for the first
time.

(i) cost centre. [1]

It is a entity to which costs can be attributed

12. Distinguish between money market and capital market. [4]

The money market is a financial market where short term funds are raised, for example
overdrafts whilst the money market is a financial market where long term funds are raised, for
example debentures.
 QUESTION AND SOLUTION

Read the following case study and answer all the questions that follow.

Plastic Trades Ltd

Plastic Trades Ltd is a company that manufactures quality plastic products in Zimbabwe which
sells profitably in the local market. Amongst its products are plumbing materials, domestic
utensils and gadgets, poultry and irrigation equipment. Most of the company’s raw materials and
chemicals are imported from South Africa and China.

In a recent strategic planning board meeting, several ideas were brought up and analysed. The
marketing manager suggested that the company would generate more revenue by opening up
trade opportunities in the Southern African Development Community (SADC).

However, the finance manager is worried about the financing of the project due to the current
unfavourable financial position of the company.

Mr Power, the Chief Executive Officer for Plastic Trades Ltd, keen to launch their products in
the neighbouring countries said, “ I am aware our firm is facing liquidity problems, but let me
assure you not to worry much because our long time friends in the finance sector are prepared to
give us the support we need. Our major challenge is the fluctuating exchange rates.” She then
advised the Finance Manager to file a loan application with their bank.

The bank requested the company’s financial statements in response to a loan application by the
company. The information submitted to the bank revealed that the company’s current assets
stood at $185 million and its current liabilities amounted to $190 million. The company also
owns a number of buildings in the city centre, machines of high value and shares in other
reputable companies.

13 (a) (i) Calculate Plastic Trades Ltd’s current working capital. [2]

(ii) Why would a profitable company like Plastic Trades Ltd have liquidity
problems? [4]

(b) Briefly comment on the usefulness of any two items of financial information
required by the bank before it issues a loan to Plastic Trades Ltd. [4]
14 To what extend will Plastic Trades Ltd find the internet useful in marketing its
products? [10]

15 “Our major challenge is the fluctuating exchange rates.” How are fluctuations in
exchange rates likely to affect production at Plastic Trades Ltd? [10]
 SOLUTION
13.a. (i) working capital = current assets less current liabilities
$ 185m – $190m = -$5m/ ($5)

(ii) Buying expensive equipment using limited cash

Tying too much cash in inventory and trade receivables
Purchasing purchases for cash whilst selling on credit

b. Statement of financial position

-assessing liquidity
-assessing gearing ratio
-assessing value of assets for security purposes
Income statement
-to assess performance ie profitability

14. There is need to highlight the benefits and demerits of the internet referring to Plastic
Trades Ltd plus a sound evaluation.

15. First define what is an exchange rate ie the price of one currency in terms of another.

Advantages of appreciation of local currency

 Cheap to access foreign currency
 Plastic trades can produce at low cost
 Output will increase
 Fewer units of local currency will buy more of South African Rand and Chinese
Yuan

Disadvantages of appreciation of local currency

 Some of the business units producing goods for exports might have to close down.
 Exports will become less competitive hence export revenue falls

Advantages of depreciation of local currency

 Exports become competitive
 Rise in demand for Plastic Trades products

Disadvantages of depreciation of local currency

 Expensive to acquire foreign currency
 Cost of production will go up

Lastly a sound evaluation of the fluctuations of the exchange rates plus recommendation.

Tinofamba nevanofamba
0774-453126 [calls] 0783-727157[whatsapp]