EDEXCEL GCSE BUSINESS · PAPER 2
Exam Practice: Understanding Business Performance
Understanding business performance · Making financial decisions · Lesson 2 of 2 · 17 marks · 25 minutes
Name Date
Answer all questions. Show your working in calculations.
Question 1 DEFINE [1 mark]
Define the term 'average rate of return'.
Question 2 CALCULATE [2 marks]
A business buys new equipment costing £50,000. It expects total returns of £70,000 over 5 years. Calculate the average rate of return. You are advised to show your working.
Question 3 OUTLINE [2 marks]
Outline one limitation of using financial information to make business decisions.
Question 4 EXPLAIN [3 marks]
Explain one benefit to a business of using qualitative data alongside financial data.
Question 5 JUSTIFY [9 marks]
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SOURCE Crest Hotels Ltd has £200,000 to invest. Option 1: Build 10 new rooms, with an ARR of 12%. Option 2: Build a spa, with an ARR of 9%. Customer reviews often mention that the hotel is "often fully booked" and that guests "wish there was a spa". A new hotel with a large spa has just opened nearby. |
Justify which one of these two options Crest Hotels Ltd should choose.
Answers
Check your answer only once you have written one.
Question 1 [1 mark]
The average annual profit from an investment, expressed as a percentage of the cost of the investment.
▸ Average yearly profit as a % of the cost of investment 1 mark
Question 2 [2 marks]
Total profit = £70,000 - £50,000 = £20,000. Average annual profit = £20,000 ÷ 5 = £4,000. ARR = (£4,000 ÷ £50,000) × 100 = 8%
▸ Correct method: ((total returns - cost) ÷ years) ÷ cost × 100 1 mark
▸ Correct answer: 8% 1 mark (award 2 marks for the correct answer with no working)
Question 3 [2 marks]
It does not include non-financial factors (1), such as staff morale or customer satisfaction, which can also affect whether a decision succeeds (1).
▸ A limitation identified, e.g. backward-looking / ignores non-financial factors / forecasts may be wrong 1 mark
▸ Developed 1 mark
Question 4 [3 marks]
Qualitative data can explain why the financial figures have changed (1). For example, customer reviews might show that sales fell because of poor service rather than high prices (1). This helps managers make the right decision to fix the real problem (1).
▸ A benefit identified 1 mark
▸ First linked point of explanation 1 mark
▸ Second linked point of explanation 1 mark
Question 5 [9 marks]
Option 1 has the higher ARR of 12%, so on financial grounds it is the better investment. Reviews saying the hotel is "often fully booked" suggest there is demand for more rooms, so the forecast returns are likely to be achieved. However, ARR relies on forecasts and ignores competition: the new hotel with a spa could attract guests away. Option 2 has a lower ARR of 9%, but the qualitative data shows guests want a spa, and it would help Crest compete with the new hotel. This could protect bookings for its existing rooms, a benefit not captured in the spa's ARR. On balance Crest should choose Option 1, because it has the higher ARR and strong evidence of demand, while its hotel is already full. However, this depends on how many guests the new competitor attracts; if bookings start to fall, the spa may become the better choice.
▸ AO2 (Application, 3 marks): uses the context - 12% vs 9% ARR, reviews, the new competitor Level 1-3
▸ AO3a (Analysis, 3 marks): chains of reasoning using both financial and qualitative data Level 1-3
▸ AO3b (Evaluation, 3 marks): a justified choice with a supported judgement Level 1-3