AS & A Level Business (9609)
Finance and accounting Banker
41 questions · about 18% of the marks we indexed · examined in 9 of 9 sessions.
Practice questions
Original questions written by HomiLabs in the style of the exam, with answers and mark schemes. They are not
Cambridge past paper questions and have not been reviewed by Cambridge. Try each one before opening the answer.
Q1Costs, contribution and break-even · Core · Paper 2 style · 5 marksCoolBreeze makes ceiling fans in Gujrat. Its fixed costs are Rs 1,800,000 per month. Each fan sells for Rs 900 (to retailers) and has variable costs of Rs 600.
- (a) Calculate the break-even level of output per month for CoolBreeze. [3]
- (b) Calculate CoolBreeze's margin of safety in units if it sells 7,500 fans a month. [2]
Show answer
- (a) 6,000 fans
Contribution per unit = 900 − 600 = Rs 300 (M1). Break-even = fixed costs ÷ contribution per unit = 1,800,000 ÷ 300 (M1) = 6,000 fans (A1).
- (b) 1,500 fans
Margin of safety = actual output − break-even output (M1) = 7,500 − 6,000 = 1,500 (A1).
- (a) Define the term 'contribution per unit'. [2]
- (b) Explain one limitation of break-even analysis for a business that sells umbrellas. [3]
Show answer
- (a) The selling price of one unit minus the variable cost of producing that unit; the amount each unit contributes towards fixed costs and then profit.
1 mark: selling price − variable cost per unit; 1 mark: amount available to pay fixed costs / contribute to profit.
- (b) Break-even analysis assumes all output is sold at a constant price; umbrella sales are highly seasonal and the business may cut prices at the end of the rainy season, so actual sales and revenue may differ greatly from the chart, making the break-even point misleading. Also accept: costs not linear (bulk discounts), fixed costs change, single product assumption, only as accurate as data.
1 mark for knowledge of the term/concept; up to 2 marks for explaining it in the context of the business (application).
Bag Bazaar makes school bags. Its fixed costs are Rs 960,000 per month. Each bag sells for Rs 2,400 and has variable costs of Rs 1,600.
- (a) Calculate how many school bags Bag Bazaar must sell each month to make a profit of Rs 400,000. [3]
- (b) Explain one reason why Bag Bazaar may not achieve its target profit even if it sells this number of bags. [3]
Show answer
- (a) 1,700 bags
Contribution per bag = 2,400 − 1,600 = Rs 800 (M1). Required contribution = 960,000 + 400,000 = Rs 1,360,000 (M1). Output = 1,360,000 ÷ 800 = 1,700 bags (A1).
- (b) Variable costs may rise — e.g. the price of imported zips and fabric rises after a fall in the rupee — reducing contribution per bag below Rs 800, so the same sales give less profit. Also accept: price cuts to sell that many bags, fixed costs rise.
1 mark for knowledge of the term/concept; up to 2 marks for explaining it in the context of the business (application).
Sitara Shoes normally sells school shoes at Rs 1,600 a pair. Variable costs are Rs 950 a pair and fixed costs are fully covered by current sales. A supermarket chain offers to buy 2,000 extra pairs at Rs 1,150 a pair. Sitara Shoes has spare capacity.
- (a) Calculate the total contribution Sitara Shoes would earn from the special order. [3]
- (b) Explain one non-financial factor Sitara Shoes should consider before accepting the order. [3]
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- (a) Rs 400,000
Contribution per pair = 1,150 − 950 = Rs 200 (M1). Total = 2,000 × 200 (M1) = Rs 400,000 (A1). (Fixed costs are already covered, so this adds Rs 400,000 to profit.)
- (b) Existing customers who pay Rs 1,600 may find out that the chain store paid only Rs 1,150 and demand lower prices too, damaging relationships and future revenue. Also accept: capacity/whether the order affects delivery to regular customers, chance of repeat orders, effect on brand image, workforce overtime.
1 mark for knowledge of the term/concept; up to 2 marks for explaining it in the context of the business (application).
GreenCup is a café chain. Its fixed costs are Rs 600,000 a month. It sells coffee at Rs 500 a cup. The variable cost per cup has risen from Rs 260 to Rs 300 because of higher milk and coffee bean prices.
- (a) Calculate the change in GreenCup's monthly break-even output caused by the rise in variable costs. [3]
- (b) Explain one way GreenCup could reduce its break-even output. [3]
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- (a) Break-even rises from 2,500 to 3,000 cups, an increase of 500 cups.
Old: 600,000 ÷ (500 − 260) = 2,500 (M1). New: 600,000 ÷ (500 − 300) = 3,000 (M1). Increase = 500 (A1).
- (b) Raise its price: if customers are loyal to its organic coffee and demand is price inelastic, a higher price increases contribution per cup, so fewer cups are needed to cover the Rs 600,000 of fixed costs. Also accept: cut variable costs (cheaper supplier), cut fixed costs (cheaper rent).
1 mark for knowledge of the term/concept; up to 2 marks for explaining it in the context of the business (application).
Juicy Fresh sells cartons of mango juice to shops at Rs 400 each. It sells 30,000 cartons a month. Variable cost is Rs 220 a carton and fixed costs are Rs 4,500,000 a month. The marketing manager forecasts that if the price rises to Rs 440, sales will fall to 26,000 cartons a month.
- (a) Calculate the change in Juicy Fresh's monthly profit if it raises its price to Rs 440 and the marketing manager's forecast is correct. [4]
- (b) Evaluate whether Juicy Fresh should raise its price to Rs 440. [12]
Show answer
- (a) Profit rises from Rs 900,000 to Rs 1,220,000: an increase of Rs 320,000.
Current profit = 30,000 × (400 − 220) − 4,500,000 = Rs 900,000 (M1 A1). New profit = 26,000 × (440 − 220) − 4,500,000 = Rs 1,220,000 (M1). Change = +Rs 320,000 (A1).
- (b) For: the calculation shows profit rises by Rs 320,000 a month (about 36 %) because contribution per carton rises from Rs 180 to Rs 220, outweighing the 13 % fall in volume; break-even falls from 25,000 to about 20,455 cartons, so the margin of safety rises from 5,000 to about 5,545 cartons. Against: the forecast of 26,000 cartons may be wrong — if demand is more price elastic (rivals keep prices at Rs 400), sales could fall further; below about 24,545 cartons at Rs 440 the profit would be lower than now (break-even at Rs 440 is 4,500,000 ÷ 220 ≈ 20,455 cartons); lost market share may be hard to regain and retailers may give less shelf space; unit costs may rise as output falls if some costs are semi-variable. Judgement: raise the price only if the forecast is reliable (e.g. based on test pricing) and the brand is strong enough; otherwise a smaller rise or improving the product first.
Use the calculation and contribution concept; consider reliability of forecast, PED, competitors, market share, brand, long-term effects. Mark scheme: AO1 knowledge 2, AO2 application 2, AO3 analysis 2, AO4 evaluation 6. Level 3 (9–12): developed analysis in context plus a supported judgement that answers the question for this business (e.g. 'it depends on…' weighed, with a clear conclusion). Level 2 (5–8): developed analysis with some, limited or unsupported evaluation. Level 1 (1–4): knowledge and some application; little or no analysis.
TrekGear makes camping tents. Its fixed costs are Rs 3,150,000 a year and the variable cost of each tent is Rs 1,250.
- (a) Calculate the price TrekGear must charge for each tent to break even at 4,500 tents a year. [3]
- (b) TrekGear sets this price and sells 6,000 tents. Calculate its margin of safety in sales revenue. [3]
- (c) Calculate what TrekGear's profit would be at 6,000 tents. [2]
Show answer
- (a) Rs 1,950
At break-even, total revenue = total cost: 4,500 × P = 3,150,000 + 4,500 × 1,250 (M1). Fixed cost per tent = 3,150,000 ÷ 4,500 = Rs 700 (M1). P = 700 + 1,250 = Rs 1,950 (A1).
- (b) Rs 2,925,000
Margin of safety = 6,000 − 4,500 = 1,500 tents (M1); × Rs 1,950 (M1) = Rs 2,925,000 (A1).
- (c) Rs 1,050,000
Each tent beyond break-even adds its contribution: 1,500 × (1,950 − 1,250) = Rs 1,050,000 (M1 A1).
Extract from the statement of financial position of Medico Pharmacies (Rs million): inventory 7.6; trade receivables 6.2; cash 4.6; total current assets 18.4; current liabilities 11.5.
- (a) Calculate Medico Pharmacies' current ratio and acid test ratio. Give your answers to 2 decimal places. [4]
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- (a) Current ratio 1.60 : 1; acid test ratio 0.94 : 1
Current ratio = current assets ÷ current liabilities = 18.4 ÷ 11.5 (M1) = 1.60 (A1). Acid test = (current assets − inventory) ÷ current liabilities = (18.4 − 7.6) ÷ 11.5 (M1) = 0.94 (A1).
Mehran Electronics, income statement extract for the year (Rs million): revenue 84.0; cost of sales 50.4; operating expenses (overheads) 21.0.
- (a) Calculate Mehran Electronics' gross profit margin and operating profit margin. [4]
- (b) Mehran Electronics' operating profit margin was 18 % last year. Explain one possible reason for the change. [2]
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- (a) Gross profit margin 40 %; operating profit margin 15 %
Gross profit = 84.0 − 50.4 = 33.6 (M1); GPM = 33.6 ÷ 84.0 × 100 = 40 % (A1). Operating profit = 33.6 − 21.0 = 12.6 (M1); OPM = 12.6 ÷ 84.0 × 100 = 15 % (A1).
- (b) Operating (overhead) expenses have risen relative to sales, e.g. higher rent or advertising for new stores, so less of each rupee of revenue is left as operating profit.
1 mark: valid reason (overheads up / gross margin down); 1 mark: explained.
Karakoram Cement, latest accounts (Rs million): operating profit 27; total equity 120; non-current liabilities 60.
- (a) Calculate Karakoram Cement's return on capital employed (ROCE) and gearing ratio. [4]
- (b) Explain whether Karakoram Cement should finance a new kiln with a further Rs 40 million long-term loan. [4]
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- (a) ROCE 15 %; gearing 33.3 %
Capital employed = equity + non-current liabilities = 120 + 60 = 180 (M1). ROCE = 27 ÷ 180 × 100 = 15 % (A1). Gearing = non-current liabilities ÷ capital employed × 100 = 60 ÷ 180 × 100 (M1) = 33.3 % (A1).
- (b) New gearing = 100 ÷ 220 × 100 = 45.5 %, which is above 40 %, so the company would become highly geared; interest payments would rise when interest rates are high, increasing risk. However, ROCE (15 %) may be above the interest rate, so borrowing could increase returns to shareholders if the kiln earns a similar return. Judgement: possible, but risky — consider equity or a smaller loan.
1 mark: new gearing calculated or recognised as rising above 40–45 %; 1 mark: risk of interest burden; 1 mark: compare ROCE with interest rate; 1 mark: judgement.
Royal Furnishings sells furniture to hotels on credit. Data for the year (Rs million): revenue 60; cost of sales 36; opening inventory 5; closing inventory 7; trade receivables at year end 9.
- (a) Calculate Royal Furnishings' inventory turnover ratio (times per year). [2]
- (b) Calculate Royal Furnishings' days' sales in receivables. Give your answer to the nearest day. [2]
- (c) Royal Furnishings gives customers 30 days' credit. Explain one way it could improve its days' sales in receivables. [2]
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- (a) 6 times
Average inventory = (5 + 7) ÷ 2 = 6 (M1). Inventory turnover = cost of sales ÷ average inventory = 36 ÷ 6 = 6 times (A1).
- (b) 55 days
Trade receivables ÷ revenue × 365 (M1) = 9 ÷ 60 × 365 = 54.75 ≈ 55 days (A1).
- (c) Chase overdue customers or offer a small discount for payment within 30 days, so cash is collected sooner and receivables fall from about 55 days towards 30. Also accept debt factoring, stricter credit checks.
1 mark: valid method; 1 mark: explained effect.
Saffron Weaves plc (an invented company), latest year: profit for the year after tax Rs 450 million; number of shares issued 150 million; total dividends paid Rs 180 million; current share price Rs 40.
- (a) Calculate Saffron Weaves plc's dividend per share and dividend yield. [3]
- (b) Calculate Saffron Weaves plc's dividend cover. [2]
- (c) Explain what the dividend cover tells a potential shareholder. [2]
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- (a) Dividend per share Rs 1.20; dividend yield 3 %
DPS = total dividends ÷ number of shares = 180 ÷ 150 = Rs 1.20 (M1 A1). Dividend yield = DPS ÷ share price × 100 = 1.20 ÷ 40 × 100 = 3 % (A1).
- (b) 2.5 times
Dividend cover = profit for the year (after tax) ÷ total dividends = 450 ÷ 180 (M1) = 2.5 times (A1).
- (c) Profit is 2.5 times the dividend paid, so the dividend is well covered — it could be maintained even if profit fell, and 60 % of profit is retained for reinvestment.
1 mark: interpretation of 2.5 (dividend affordable/safe); 1 mark: retained profit / sustainability of dividend.
Horizon Hotels (Rs million): operating profit 2024: 36, 2025: 33. Capital employed 2024: 240, 2025: 300. In October 2025 the company opened a new resort in Swat, financed by a Rs 60 million loan.
- (a) Calculate Horizon Hotels' ROCE for 2024 and 2025. [4]
- (b) Evaluate whether ratio analysis gives an investor enough information to decide whether to buy shares in Horizon Hotels. [12]
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- (a) 2024: 15 %; 2025: 11 %
ROCE = operating profit ÷ capital employed × 100 (M1). 2024: 36 ÷ 240 × 100 = 15 % (A1). 2025: 33 ÷ 300 × 100 = 11 % (M1 A1).
- (b) Useful: ROCE fell from 15 % to 11 % after the Rs 60 million investment in the new resort, suggesting capital is being used less efficiently; ratios allow comparison over time and with rivals, and liquidity/gearing ratios show risk. Limitations: the new resort opened late in 2025, so its full profit is not yet included — ROCE may recover; ratios use historical data, while investors care about the future (tourism forecasts, security situation, exchange rates); no industry benchmark is given; accounts can be window-dressed; non-financial factors (brand, management quality, reviews, location) matter. Judgement: ratios are a useful starting point but not enough; the investor needs trend data over several years, competitor ratios, investor ratios (dividend yield, P/E) and qualitative information about the resort's prospects.
Use the ROCE result and the timing of the investment; limitations of ratio analysis; other information needed; judgement. Mark scheme: AO1 knowledge 2, AO2 application 2, AO3 analysis 2, AO4 evaluation 6. Level 3 (9–12): developed analysis in context plus a supported judgement that answers the question for this business (e.g. 'it depends on…' weighed, with a clear conclusion). Level 2 (5–8): developed analysis with some, limited or unsupported evaluation. Level 1 (1–4): knowledge and some application; little or no analysis.
Noor Traders, a wholesaler, has current liabilities of Rs 400,000. Its current ratio is 1.5 : 1 and its acid test ratio is 0.9 : 1.
- (a) Calculate the value of Noor Traders' inventory. [3]
- (b) Noor Traders uses Rs 100,000 of its cash to pay suppliers (trade payables). Calculate the new current ratio. Give your answer to 2 decimal places. [3]
- (c) Explain why this payment improves the current ratio even though the business has less cash. [2]
Show answer
- (a) Rs 240,000
Current assets = 1.5 × 400,000 = Rs 600,000 (M1). Current assets − inventory = 0.9 × 400,000 = Rs 360,000 (M1). Inventory = 600,000 − 360,000 = Rs 240,000 (A1).
- (b) 1.67 : 1
Current assets = 600,000 − 100,000 = 500,000 (M1); current liabilities = 400,000 − 100,000 = 300,000 (M1); ratio = 500,000 ÷ 300,000 = 1.67 (A1).
- (c) Equal amounts are removed from current assets and current liabilities; because the ratio is above 1, the liabilities fall by a larger proportion (25 %) than the assets (about 17 %), so the ratio rises.
1 mark: both CA and CL fall by the same amount; 1 mark: proportional effect when the ratio is above 1.
- (a) Define the term 'capital expenditure'. [2]
- (b) Explain one difference between capital expenditure and revenue expenditure for a printing business. [3]
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- (a) Spending on non-current assets that will be used in the business for more than one year, such as buildings, machinery and vehicles.
1 mark: purchase of non-current/fixed assets; 1 mark: used for more than one year (with example).
- (b) Capital expenditure buys long-lasting assets, e.g. a new printing press used for ten years; revenue expenditure is spending on day-to-day running costs used up within the year, e.g. ink, paper and wages. Revenue expenditure is recorded as a cost in the income statement, capital expenditure on the statement of financial position.
1 mark each: correct meaning of each with printing examples; 1 mark: the difference (time period / accounting treatment).
Fashion Avenue is a clothing retailer that owns its head office building in Lahore. It needs Rs 25 million to open 5 new stores and is considering several sources of finance, including crowdfunding.
- (a) Identify one internal source of finance available to Fashion Avenue. [1]
- (b) Explain the term 'sale and leaseback'. [3]
- (c) Explain one disadvantage to Fashion Avenue of using crowdfunding to raise finance. [3]
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- (a) Retained earnings (also accept sale of assets / sale and leaseback / reducing inventory).
1 mark: retained earnings or sale of assets.
- (b) Selling a non-current asset, such as a building, to another organisation and immediately renting (leasing) it back, so the business raises a lump sum of cash but keeps using the asset. Fashion Avenue could sell its Lahore head office to a property company and lease it back.
1 mark: sell an asset; 1 mark: lease/rent it back and continue to use it; 1 mark: application.
- (c) If the target (Rs 25 million) is not reached, Fashion Avenue may receive nothing; the campaign also makes its expansion plans public, so rival retailers can copy its new store concept. Also accept: cost of the platform fee and rewards, time-consuming.
1 mark for knowledge of the term/concept; up to 2 marks for explaining it in the context of the business (application).
- (a) Analyse two factors City Metro Buses should consider when choosing a source of finance to buy 10 electric buses costing Rs 300 million. [8]
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- (a) 1. Cost of finance: a bank loan at 17 % interest would add large interest payments each year, reducing profit; a government green grant would be cheaper (no repayment), so City Metro should check eligibility. 2. Gearing and risk: the company already has large loans; more debt raises gearing and the risk of being unable to repay if passenger numbers fall, so leasing the buses or issuing shares may be safer. Also: amount needed, use (long-term asset → long-term finance), legal form, control.
Factors: cost, amount, time period/use, existing gearing, legal structure, control, flexibility, availability of grants. Mark scheme: AO1 knowledge 2, AO2 application 2, AO3 analysis 4. Level 2 (5–8): two developed chains of analysis, each clearly applied to this business. Level 1 (1–4): knowledge and/or application with undeveloped or generic analysis. Evaluation earns no extra marks.
- (a) A pharmacy chain with 15 branches wants to open 10 more branches. Evaluate whether retained earnings are the best source of finance for this expansion. [12]
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- (a) For: no interest or repayment, so no extra cash outflow; no loss of control (no new shareholders); no gearing increase; quick to access. Against: may not be enough — opening 10 branches needs large sums for leases, fit-out and inventory; using all retained profit leaves little for emergencies and working capital (medicine inventory); shareholders may want dividends; opportunity cost. Alternatives: bank loan (if ROCE > interest rate, increases returns), leasing equipment, issuing shares, supplier credit for inventory. Judgement: retained earnings are the best starting point but probably insufficient; a mix — retained earnings plus a medium-term loan or phased opening — is likely best, depending on the amount of profit retained and the current gearing.
Compare retained earnings with alternatives on cost, control, risk, amount, time; judgement for pharmacy chain. Mark scheme: AO1 knowledge 2, AO2 application 2, AO3 analysis 2, AO4 evaluation 6. Level 3 (9–12): developed analysis in context plus a supported judgement that answers the question for this business (e.g. 'it depends on…' weighed, with a clear conclusion). Level 2 (5–8): developed analysis with some, limited or unsupported evaluation. Level 1 (1–4): knowledge and some application; little or no analysis.
Silk Route Café, budget and actual figures for March (Rs): Sales revenue — budget 1,500,000, actual 1,380,000. Total costs — budget 1,100,000, actual 1,050,000.
- (a) Calculate the variance for sales revenue, total costs and profit for Silk Route Café in March, stating whether each is favourable or adverse. [3]
- (b) Explain one benefit to Silk Route Café of setting budgets. [3]
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- (a) Sales revenue: Rs 120,000 adverse; total costs: Rs 50,000 favourable; profit: Rs 70,000 adverse.
Revenue 1,380,000 − 1,500,000 = −120,000 A; costs 1,050,000 − 1,100,000 = 50,000 F; profit budget 400,000, actual 330,000 → 70,000 A. (1 mark each with correct F/A.)
- (b) Budgets set targets for each month, so the owner can compare actual results with the plan; the adverse revenue variance in March alerts her quickly to falling sales so she can act, e.g. by promoting evening meals. Also accept: control of spending, motivation, coordination, planning.
1 mark for knowledge of the term/concept; up to 2 marks for explaining it in the context of the business (application).
TileWorks budgeted to make 10,000 boxes of floor tiles in April with a material cost of Rs 4,500,000. It actually made 11,000 boxes, and the actual material cost was Rs 5,200,000.
- (a) Calculate the flexed budget for material costs and the material cost variance, stating whether it is favourable or adverse. [3]
- (b) Explain why comparing actual material costs with the original budget would be misleading. [3]
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- (a) Flexed budget Rs 4,950,000; variance Rs 250,000 adverse.
Budgeted material cost per unit = 4,500,000 ÷ 10,000 = Rs 450 (M1). Flexed budget = 11,000 × 450 = Rs 4,950,000 (M1). Variance = 5,200,000 − 4,950,000 = Rs 250,000 adverse (A1).
- (b) The original budget was for 10,000 units but 11,000 were made; comparing Rs 5.2 million with Rs 4.5 million shows a Rs 700,000 adverse variance, but most of that is due to the higher output, not inefficiency. The flexed budget shows the true overspend is only Rs 250,000, which may be due to higher material prices or wastage.
1 mark: different output levels; 1 mark: the original variance overstates the problem (with figures); 1 mark: flexed variance reflects efficiency/price.
- (a) Evaluate whether zero-based budgeting is suitable for a private university. [12]
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- (a) Benefits: each department (e.g. engineering, business, administration) must justify every rupee from zero each year, which removes wasteful spending carried forward from previous budgets, and allocates funds to priorities such as new courses and IT; encourages managers to think about value for money. Drawbacks: very time-consuming for many departments and academics; managers may exaggerate needs; may favour short-term savings over long-term research; requires skilled managers; may create conflict between faculties. Alternatives: incremental budgeting (simple but may continue waste), flexible budgets. Judgement: suitable for discretionary areas (marketing, administration, events) or every few years, but full annual ZBB for all departments is likely too costly; depends on whether the university faces financial pressure.
Explain ZBB vs incremental; benefits and costs in the university context; judgement. Mark scheme: AO1 knowledge 2, AO2 application 2, AO3 analysis 2, AO4 evaluation 6. Level 3 (9–12): developed analysis in context plus a supported judgement that answers the question for this business (e.g. 'it depends on…' weighed, with a clear conclusion). Level 2 (5–8): developed analysis with some, limited or unsupported evaluation. Level 1 (1–4): knowledge and some application; little or no analysis.
Paragon Stationers, data for the year (Rs million): revenue 42.0; purchases 27.0; opening inventory 4.0; closing inventory 6.0; operating expenses 9.5.
- (a) Calculate Paragon Stationers' cost of sales for the year. [2]
- (b) Calculate Paragon Stationers' gross profit and operating profit. [2]
- (c) Explain one reason why a business with a high operating profit could still run short of cash. [3]
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- (a) Rs 25.0 million
Cost of sales = opening inventory + purchases − closing inventory (M1) = 4.0 + 27.0 − 6.0 = Rs 25.0 million (A1).
- (b) Gross profit Rs 17.0 million; operating profit Rs 7.5 million
Gross profit = 42.0 − 25.0 = Rs 17.0m (B1). Operating profit = 17.0 − 9.5 = Rs 7.5m (B1).
- (c) Profit is recorded when sales are made, not when cash is received; if Paragon sells to schools on 90 days' credit, it may have high profit but little cash to pay suppliers and wages. Also accept: cash spent on non-current assets or inventory, loan repayments.
1 mark for knowledge of the term/concept; up to 2 marks for explaining it in the context of the business (application).
Hilltop Foods, statement of financial position extract (Rs million): non-current assets 85; current assets 30; current liabilities 18; non-current liabilities 25.
- (a) Calculate Hilltop Foods' working capital (net current assets). [1]
- (b) Calculate Hilltop Foods' net assets and state the value of total equity. [3]
- (c) Hilltop Foods holds inventory of frozen food that cost Rs 2 million but, because it is close to its sell-by date, can now only be sold for Rs 1.2 million. Explain how this inventory should be valued and the effect on profit. [3]
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- (a) Rs 12 million
30 − 18 = Rs 12 million (B1).
- (b) Net assets = total equity = Rs 72 million
Net assets = non-current assets + current assets − current liabilities − non-current liabilities (M1) = 85 + 30 − 18 − 25 (M1) = Rs 72 million; total equity equals net assets = Rs 72 million (A1).
- (c) Inventory is valued at the lower of cost and net realisable value, so it should be recorded at Rs 1.2 million, not Rs 2 million. Writing it down by Rs 0.8 million reduces the value of current assets and reduces profit for the year by Rs 0.8 million.
1 mark: lower of cost and net realisable value; 1 mark: value Rs 1.2m; 1 mark: profit and current assets fall by Rs 0.8m.
Tandoor Express is a restaurant chain. It opened 6 new branches in 2025 (now 20 branches). Data (Rs million): 2024 — revenue 120, gross profit 54, operating profit 14.4. 2025 — revenue 150, gross profit 58.5, operating profit 12.
- (a) Calculate Tandoor Express's gross profit margin and operating profit margin for 2024 and 2025. [4]
- (b) Evaluate whether raising menu prices is the best way for Tandoor Express to improve its profitability. [12]
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- (a) GPM: 2024 45 %, 2025 39 %. OPM: 2024 12 %, 2025 8 %.
GPM = GP ÷ revenue × 100: 54 ÷ 120 = 45 % and 58.5 ÷ 150 = 39 % (M1 A1). OPM = OP ÷ revenue × 100: 14.4 ÷ 120 = 12 % and 12 ÷ 150 = 8 % (M1 A1).
- (b) Evidence: revenue grew 25 % after opening 6 new branches, but both margins fell — GPM from 45 % to 39 % (food costs rising faster than prices, or discounting) and OPM from 12 % to 8 % (higher overheads such as rent of new branches). Raising prices: would restore gross margin if demand is price inelastic (loyal customers, strong brand), but in a competitive casual-dining market customers may switch to rivals, reducing volume and revenue. Alternatives: cut food costs (bulk buying across 20 branches, reduce waste, menu engineering), control overheads (close loss-making branches, renegotiate rents), increase sales per branch (delivery apps, promotions at quiet times). Judgement: a small, targeted price rise on popular dishes may help, but the main problem is costs after rapid expansion, so cost control is likely more effective; depends on PED and rivals' prices.
Use calculated margins to diagnose the cause; weigh price rise vs cost control vs volume; PED; judgement. Mark scheme: AO1 knowledge 2, AO2 application 2, AO3 analysis 2, AO4 evaluation 6. Level 3 (9–12): developed analysis in context plus a supported judgement that answers the question for this business (e.g. 'it depends on…' weighed, with a clear conclusion). Level 2 (5–8): developed analysis with some, limited or unsupported evaluation. Level 1 (1–4): knowledge and some application; little or no analysis.
Kids Corner sells children's clothes. Cash-flow forecast (Rs): opening balance on 1 July 150,000. Cash inflows — July 620,000; August 540,000; September 710,000. Cash outflows — July 580,000; August 690,000; September 640,000.
- (a) Calculate the net cash flow and closing balance for each month. [4]
- (b) Explain one way Kids Corner could deal with the negative net cash flow in August. [3]
Show answer
- (a) July: net +40,000, closing 190,000. August: net −150,000, closing 40,000. September: net +70,000, closing 110,000.
Net cash flow = inflows − outflows (M1). July 620,000 − 580,000 = +40,000; closing 150,000 + 40,000 = 190,000 (A1). August −150,000; closing 40,000 (A1). September +70,000; closing 110,000 (A1).
- (b) Arrange a short-term bank overdraft for August, when it buys school uniforms in bulk, to cover the outflow until September sales come in. Also accept: delay payment to suppliers, ask for supplier credit, reduce purchases, sell surplus inventory.
1 mark for knowledge of the term/concept; up to 2 marks for explaining it in the context of the business (application).
Pak Agro Supplies sells seeds and fertiliser to farmers on credit until harvest. Current assets: inventory Rs 3,600,000; trade receivables Rs 2,900,000; cash Rs 500,000. Current liabilities: Rs 4,300,000.
- (a) Calculate Pak Agro Supplies' working capital. [2]
- (b) Explain how debt factoring could improve Pak Agro Supplies' cash flow. [3]
- (c) Explain one danger of holding too much working capital. [2]
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- (a) Rs 2,700,000
Current assets = 3,600,000 + 2,900,000 + 500,000 = 7,000,000 (M1). Working capital = 7,000,000 − 4,300,000 = Rs 2,700,000 (A1).
- (b) A factoring company would pay Pak Agro around 80–90 % of the Rs 2.9 million owed by farmers immediately, instead of waiting until harvest when farmers pay, so it has cash now to buy fertiliser; the cost is the factor's fee, which reduces profit.
1 mark for knowledge of the term/concept; up to 2 marks for explaining it in the context of the business (application).
- (c) Money tied up in excess inventory or cash earns no return (opportunity cost); for example, unsold seed stock may go out of date.
1 mark: idle resources/opportunity cost; 1 mark: example or consequence.
- (a) Evaluate whether cash flow is more important than profit for a new event-management company. [12]
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- (a) Cash flow more important: new firms often fail from lack of cash, not lack of profit; the company must pay venues, caterers and staff in advance of events, while clients may pay after the event; without cash it cannot pay suppliers and may be forced to close even with profitable bookings; banks are cautious with new firms. Profit important: over time the business must be profitable to survive, reward owners and attract investment; a positive cash flow from loans or owners' capital cannot last if events are priced below cost. Judgement: in the first year cash flow is more important for survival (manage deposits, payment terms, overdraft), but profit becomes the key measure of long-term success; both are linked — managing deposits from clients can help both.
Difference between cash and profit; timing of payments for events; survival vs long-term; judgement. Mark scheme: AO1 knowledge 2, AO2 application 2, AO3 analysis 2, AO4 evaluation 6. Level 3 (9–12): developed analysis in context plus a supported judgement that answers the question for this business (e.g. 'it depends on…' weighed, with a clear conclusion). Level 2 (5–8): developed analysis with some, limited or unsupported evaluation. Level 1 (1–4): knowledge and some application; little or no analysis.
Golden Biscuits is considering a new oven costing Rs 12 million. Expected net cash flows (Rs million): Year 1: 3.0; Year 2: 4.0; Year 3: 4.5; Year 4: 4.5; Year 5: 3.0. The oven has no value at the end of Year 5.
- (a) Calculate the payback period for the new oven. Give your answer in years and months. [2]
- (b) Calculate the average rate of return (ARR) for the new oven. [3]
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- (a) 3 years 1 month
Cumulative cash flow: end Y1 3.0m, Y2 7.0m, Y3 11.5m (M1). Remaining 0.5m ÷ 4.5m × 12 = 1.33 ≈ 1 month → payback 3 years 1 month (A1).
- (b) 11.7 %
Total net cash flow = 19.0m; total profit = 19.0 − 12.0 = 7.0m (M1). Annual average profit = 7.0 ÷ 5 = 1.4m (M1). ARR = 1.4 ÷ 12.0 × 100 = 11.7 % (A1).
Fresh Fields, a fruit exporter, is considering building a cold store costing Rs 16 million. Expected net cash flows (Rs million): Year 1: 5.0; Year 2: 6.0; Year 3: 6.0; Year 4: 4.0. Discount factors at 10 %: Year 1 0.909; Year 2 0.826; Year 3 0.751; Year 4 0.683.
- (a) Calculate the net present value (NPV) of the cold store project. [4]
- (b) Explain one reason why the NPV result may be unreliable. [2]
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- (a) Rs 0.739 million (about Rs 739,000)
PVs: 5.0 × 0.909 = 4.545; 6.0 × 0.826 = 4.956; 6.0 × 0.751 = 4.506; 4.0 × 0.683 = 2.732 (M1 M1 for discounting). Total PV = 16.739 (M1). NPV = 16.739 − 16.0 = Rs 0.739 million (A1).
- (b) The cash flows are forecasts four years ahead; fruit harvests, electricity prices or the rental demand for cold storage may differ, and the 10 % discount rate may change if interest rates rise.
1 mark: forecasts uncertain / discount rate choice; 1 mark: explained with context.
Al-Noor Retail has Rs 22 million to invest and must choose one project. Expected net cash flows (Rs million): Project A (automated warehouse line): Year 1: 9; Year 2: 9; Year 3: 9. Project B (two new stores): Year 1: 4; Year 2: 9; Year 3: 15. Discount factors at 8 %: Year 1 0.926; Year 2 0.857; Year 3 0.794.
- (a) Calculate the NPV of each project at a discount rate of 8 %. [4]
- (b) Evaluate which project Al-Noor Retail should choose. [12]
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- (a) Project A (automated line): Rs 1.193 million. Project B (new store openings): Rs 1.327 million.
A: 9 × (0.926 + 0.857 + 0.794) = 9 × 2.577 = 23.193; NPV = 23.193 − 22 = 1.193 (M1 A1). B: 4 × 0.926 + 9 × 0.857 + 15 × 0.794 = 3.704 + 7.713 + 11.910 = 23.327; NPV = 1.327 (M1 A1).
- (b) Financial: both have positive NPV; B is slightly higher (Rs 1.327m vs Rs 1.193m) but the difference is small. A has a slightly quicker payback (about 2 years 5 months vs about 2 years 7 months) but returns much more cash early (Rs 18m in two years versus Rs 13m) and steadier cash flows, so it is less risky; B depends on large, uncertain cash flows in Year 3 from new stores. Non-financial: A (automation in the warehouse) may cause redundancies and resistance but improves efficiency and accuracy; B builds market presence and brand, supporting growth objectives; B's forecasts depend on market research reliability and competition. Judgement: given the small NPV difference, choose A if the company is short of cash or risk-averse; choose B if its objective is growth and the store forecasts are reliable. A sensitivity check of B's Year 3 cash flow is needed.
Use NPV results (payback A: 2 + 4/9 years ≈ 2 years 5 months; B: 2 + 9/15 years ≈ 2 years 7 months) plus payback/risk and qualitative factors (objectives, staff, market). Supported decision. Mark scheme: AO1 knowledge 2, AO2 application 2, AO3 analysis 2, AO4 evaluation 6. Level 3 (9–12): developed analysis in context plus a supported judgement that answers the question for this business (e.g. 'it depends on…' weighed, with a clear conclusion). Level 2 (5–8): developed analysis with some, limited or unsupported evaluation. Level 1 (1–4): knowledge and some application; little or no analysis.
