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NCEA Level 2 Business Studies study materials
NCEA Level 2 Business Studies study resources

NCEA Level 2 Business Studies practice questions

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Question 1Business Studies achievement standards (Level 2)

A New Zealand business records $12,000 of sales on credit. Under accrual accounting, when should the revenue be recognised?

  1. When the sale is made and the goods or services are delivered Correct answer.
  2. When the business receives a bank loan to cover costs
  3. When the end-of-year financial statements are prepared
  4. When the customer actually pays the invoice

Explanation

Accrual accounting recognises revenue when it is earned, that is, when goods or services are transferred to the customer, regardless of when cash changes hands. Cash timing affects the cash flow statement, not the timing of revenue recognition in the income statement.

Question 2Business Studies achievement standards (Level 2)

Which item would be classified as a current asset on a business's balance sheet?

  1. A delivery van used for five years
  2. The owner's personal residential property
  3. A ten-year mortgage secured against the premises
  4. Inventory expected to be sold within the next trading cycle Correct answer.

Explanation

Current assets are resources the business expects to convert to cash or use within one year or the normal operating cycle, so inventory held for resale qualifies. Long-lived assets such as vehicles and long-term loans are non-current, and personal owner assets are not business assets.

Question 3Business Studies achievement standards (Level 2)

A firm's break-even point is 2,000 units. It currently sells 2,500 units at $20 each with variable costs of $12 per unit. What is its margin of safety in units?

  1. 2,500 units
  2. 4,500 units
  3. 500 units Correct answer.
  4. 2,000 units

Explanation

Margin of safety is the excess of actual or planned sales over the break-even quantity. Here 2,500 actual units minus 2,000 break-even units gives 500 units, showing how far sales can fall before a loss occurs.

Question 4Business Studies achievement standards (Level 2)

A business sells 3,000 units at $15 each and has fixed costs of $18,000 and variable costs of $9 per unit. What is the contribution per unit?

  1. $9
  2. $24
  3. $6 Correct answer.
  4. $15

Explanation

Contribution per unit equals selling price minus variable cost per unit: $15 − $9 = $6. This contribution first covers fixed costs and any surplus becomes profit, so it is the key figure in break-even calculations.

Question 5Business Studies achievement standards (Level 2)

A business owner invests $50,000 of their own savings into the company and the company later fails with unpaid debts. Which feature of a registered company protects the owner's personal assets?

  1. Partnership agreement
  2. Unlimited liability
  3. Sole trader status
  4. Limited liability Correct answer.

Explanation

Limited liability means shareholders of a registered company can generally lose only the capital they invested, not their personal assets, if the company cannot pay its debts. Unlimited liability applies to sole traders and ordinary partners, exposing personal assets.

Question 6Business Studies achievement standards (Level 2)

A bakery buys a new oven for $40,000 that will be used for eight years. Why is the purchase recorded as a capital expenditure rather than revenue expenditure?

  1. It benefits more than one accounting period and is a non-current asset Correct answer.
  2. It is smaller than the business's annual revenue
  3. It can be resold for cash at any time
  4. It is paid for in a single cash transaction

Explanation

Capital expenditure acquires or improves an asset that delivers benefit across multiple periods, so the oven is recorded as a non-current asset and depreciated over its useful life. Revenue expenditure covers day-to-day running costs consumed within one period.

Question 7Business Studies achievement standards (Level 2)

Which document is sent by a seller to a buyer to request payment after goods have been supplied on credit?

  1. Purchase order
  2. Credit note
  3. Statement of account
  4. Invoice Correct answer.

Explanation

An invoice is issued by the seller when goods or services are supplied on credit, showing quantities, prices and payment terms, and it requests payment. A credit note reduces an amount already charged, and a purchase order is the buyer's request to buy.

Question 8Business Studies achievement standards (Level 2)

A business uses the straight-line method to depreciate equipment costing $30,000 with an expected residual value of $6,000 and a useful life of four years. What is the annual depreciation charge?

  1. $7,500
  2. $6,000 Correct answer.
  3. $4,500
  4. $9,000

Explanation

Straight-line depreciation is (cost − residual value) ÷ useful life: ($30,000 − $6,000) ÷ 4 = $6,000 per year. The residual value is excluded because it is expected to be recovered at the end of the asset's life.

Question 9Business Studies achievement standards (Level 2)

A firm's cash flow statement shows a large profit on the income statement but a fall in its bank balance. Which explanation is most consistent with this?

  1. The firm paid off a long-term loan during the year
  2. The firm increased the selling price of its products
  3. Profits were earned but customers have not yet paid their accounts receivable Correct answer.
  4. Depreciation of equipment was recorded as an expense

Explanation

Profit is measured on an accrual basis, so sales on credit raise profit before cash is received. A build-up in accounts receivable therefore explains why profit can rise while the bank balance falls.

Question 10Business Studies achievement standards (Level 2)

A business sets a target profit of $30,000. Its contribution per unit is $10 and fixed costs are $50,000. How many units must it sell to reach the target profit?

  1. 80,000 units
  2. 3,000 units
  3. 5,000 units
  4. 8,000 units Correct answer.

Explanation

Target sales in units equal (fixed costs + target profit) ÷ contribution per unit: ($50,000 + $30,000) ÷ $10 = 8,000 units. Fixed costs must be covered before any profit is generated.

Question 11Business Studies achievement standards (Level 2)

Which of the following best describes the purpose of a trial balance?

  1. To record transactions as they occur
  2. To prove that total debits equal total credits in the ledger Correct answer.
  3. To show the market value of the business
  4. To calculate the profit for the period

Explanation

A trial balance lists ledger balances and checks that total debits equal total credits, helping detect arithmetic errors. It does not itself calculate profit or value the business, and recording transactions is the role of journals and ledgers.

Question 12Business Studies achievement standards (Level 2)

A company issues 10,000 new shares at $2 each. How does this transaction affect the balance sheet?

  1. Assets increase by $20,000 and liabilities increase by $20,000
  2. Assets and equity both decrease by $20,000
  3. Assets increase by $20,000 and equity increases by $20,000 Correct answer.
  4. Equity increases by $20,000 and liabilities decrease by $20,000

Explanation

Issuing shares brings cash into the business, increasing assets, and increases share capital, which is part of equity. The accounting equation (assets = liabilities + equity) stays balanced because both sides rise by the same amount.

Question 13Business Studies achievement standards (Level 2)

Which statement accurately describes the difference between a budget and a cash flow forecast?

  1. A cash flow forecast records actual past transactions, while a budget predicts the future
  2. A budget plans expected income and expenditure, while a cash flow forecast tracks expected timing of cash receipts and payments Correct answer.
  3. A budget only covers capital items, while a cash flow forecast covers revenue items
  4. A budget and a cash flow forecast are identical documents with different names

Explanation

A budget sets financial targets for income and expenditure over a period, whereas a cash flow forecast focuses specifically on when cash is expected to come in and go out. A business can be profitable on budget yet still face a cash shortfall, which the forecast highlights.

Question 14Business Studies achievement standards (Level 2)

A business's actual sales were $95,000 against a budget of $100,000. Which statement correctly describes this variance?

  1. A favourable variance of $5,000
  2. An adverse variance of $5,000 Correct answer.
  3. An adverse variance of $95,000
  4. A favourable variance of $100,000

Explanation

Actual sales below budget produce an adverse variance because income is lower than planned. The variance is the $5,000 difference between the $100,000 budget and $95,000 actual.

Question 15Business Studies achievement standards (Level 2)

Which of the following is an example of a fixed cost for a small manufacturer in the short term?

  1. Sales commission paid per unit
  2. Packaging for each item sold
  3. Raw materials used in each unit
  4. Lease payments on the factory building Correct answer.

Explanation

Fixed costs do not vary with output in the short term, and a factory lease is payable regardless of production volume. Raw materials, packaging and per-unit commissions all rise as output increases and are variable costs.

Question 16Business Studies achievement standards (Level 2)

A café owner wants to compare the profitability of two product lines. Which measure best shows the percentage of each sales dollar that contributes to covering fixed costs and profit?

  1. Contribution margin ratio Correct answer.
  2. Gross profit margin
  3. Current ratio
  4. Return on equity

Explanation

The contribution margin ratio expresses contribution (sales minus variable costs) as a percentage of sales, showing how much of each sales dollar is available to cover fixed costs and generate profit. This makes it useful for comparing product lines with different cost structures.

Question 17Business Studies achievement standards (Level 2)

A business has current assets of $60,000 and current liabilities of $40,000. What is its current ratio, and what does it indicate?

  1. 1.5:1, indicating long-term solvency
  2. 2.0:1, indicating excessive cash holdings
  3. 0.67:1, indicating liquidity problems
  4. 1.5:1, indicating the business can cover short-term debts with current assets Correct answer.

Explanation

The current ratio is current assets divided by current liabilities: $60,000 ÷ $40,000 = 1.5:1. A ratio above 1 shows current assets exceed current liabilities, suggesting the business can meet short-term obligations as they fall due.

Question 18Business Studies achievement standards (Level 2)

Which combination best describes the marketing mix elements commonly known as the 4Ps?

  1. Product, Price, Place, Promotion Correct answer.
  2. Product, People, Price, Performance
  3. People, Process, Product, Profit
  4. Price, Profit, Place, Planning

Explanation

The traditional marketing mix comprises Product, Price, Place and Promotion, the four controllable elements a business combines to meet customer needs in a target market. Service marketing extends this with People, Process and Physical evidence.

Question 19Business Studies achievement standards (Level 2)

A firm segments its market by dividing customers according to age, income and occupation. Which type of segmentation is this?

  1. Geographic segmentation
  2. Demographic segmentation Correct answer.
  3. Behavioural segmentation
  4. Psychographic segmentation

Explanation

Demographic segmentation groups customers by measurable population characteristics such as age, income, gender and occupation. Geographic uses location, behavioural uses purchasing habits, and psychographic uses attitudes and lifestyle.

Question 20Business Studies achievement standards (Level 2)

A business reduces its selling price from $50 to $45 and finds that sales volume rises from 1,000 to 1,300 units. Which statement best analyses the effect on total revenue?

  1. Revenue rises by $3,500 because only the price change matters
  2. Revenue is unchanged because the price cut offsets volume
  3. Revenue falls by $5,000, suggesting demand is price inelastic
  4. Revenue rises by $8,500, suggesting demand is price elastic over this range Correct answer.

Explanation

Original revenue was $50 × 1,000 = $50,000 and new revenue is $45 × 1,300 = $58,500, a rise of $8,500. Because a price cut increased total revenue, demand is price elastic in this range, so the percentage rise in quantity exceeds the percentage fall in price.

Question 21Business Studies achievement standards (Level 2)

A manufacturer introduces automated machinery that reduces labour hours per unit. Which is the most likely short-term effect on its cost structure?

  1. Lower fixed costs and higher variable costs per unit
  2. Higher variable costs and higher fixed costs
  3. No change to fixed or variable costs
  4. Lower variable costs per unit and higher fixed costs Correct answer.

Explanation

Automation replaces labour, a variable cost, with machinery, which creates depreciation and maintenance charges that are fixed. Unit variable costs therefore tend to fall while total fixed costs rise, changing the break-even point.

Question 22Business Studies achievement standards (Level 2)

Which statement best explains why a business might prefer equity finance over a bank loan for expansion?

  1. Equity finance always costs less than borrowing
  2. Equity finance does not require regular interest payments, reducing cash flow pressure Correct answer.
  3. Equity finance is repaid within twelve months
  4. Equity finance keeps full ownership and control with existing owners

Explanation

Raising equity through issuing shares brings in funds without fixed interest or repayment obligations, which eases pressure on cash flow during expansion. The trade-off is that existing owners dilute their ownership and share control and profits with new shareholders.

Question 23Business Studies achievement standards (Level 2)

A business's income statement shows gross profit of $80,000 and operating expenses of $95,000. What does this indicate?

  1. The business broke even
  2. The business made an operating loss of $15,000 Correct answer.
  3. The business made an operating profit of $15,000
  4. The business made a gross loss of $15,000

Explanation

Operating profit equals gross profit minus operating expenses: $80,000 − $95,000 = −$15,000, an operating loss. Gross profit itself is positive, so the shortfall arises from expenses exceeding gross profit.

Question 24Business Studies achievement standards (Level 2)

A firm's stakeholders include shareholders, employees and the local community. Which statement best reflects the stakeholder concept?

  1. The local community has no legitimate interest in business activity
  2. A business should consider the interests of groups affected by its decisions, not only owners Correct answer.
  3. Employees are not stakeholders because they are paid wages
  4. Only shareholders' financial returns matter to business decisions

Explanation

The stakeholder concept holds that a business affects and is affected by many groups, including owners, employees, customers, suppliers and the community, and should weigh their interests. This contrasts with a shareholder-only view focused purely on profit.

Question 25Business Studies achievement standards (Level 2)

A business operating in a competitive market decides to differentiate its product through superior customer service. Which outcome most directly supports this strategy?

  1. The business no longer needs to monitor competitors
  2. Customers become willing to pay a premium price, improving margins Correct answer.
  3. Fixed costs automatically fall as service improves
  4. The business can reduce its marketing spending to zero

Explanation

Differentiation through service creates perceived value that can justify a higher price and build customer loyalty, supporting better margins. It does not eliminate marketing costs, reduce fixed costs automatically, or remove the need to watch competitors.

Question 26Business Studies achievement standards (Level 2)

A New Zealand sole trader wants to expand into a second retail site and is comparing funding options. Which source of finance is most likely to be classified as short-term finance for this purpose?

  1. A grant from a regional economic development agency
  2. A ten-year mortgage secured against the new premises
  3. An overdraft facility from the trading bank Correct answer.
  4. Retained earnings accumulated over several years

Explanation

Short-term finance is normally repayable or reviewable within about twelve months, and a bank overdraft is the classic example because it is designed to cover temporary cash shortfalls. Mortgage finance, grants and retained earnings are longer-term or permanent sources.

Question 27Business Studies achievement standards (Level 2)

A small business records the following for the year: opening stock $8,000, purchases $52,000, closing stock $10,000. What is the cost of goods sold?

  1. $52,000
  2. $54,000
  3. $70,000
  4. $50,000 Correct answer.

Explanation

Cost of goods sold equals opening stock plus purchases minus closing stock, so $8,000 + $52,000 − $10,000 = $50,000. This figure is then deducted from sales revenue to find gross profit.

Question 28Business Studies achievement standards (Level 2)

A business decides to set up as a company rather than a sole trader. Which feature is a direct consequence of this legal structure?

  1. The business must publish its full customer list each year
  2. The owners lose the right to vote on major decisions
  3. The owners pay no tax on the profits they receive
  4. The owners have limited liability for the debts of the business Correct answer.

Explanation

A registered company is a separate legal entity, so shareholders' liability is generally limited to the amount they have invested. Sole traders, by contrast, are personally liable for business debts.

Question 29Business Studies achievement standards (Level 2)

A manager prepares a document listing the expected monthly cash receipts and payments for the next six months. What is this document called?

  1. A statement of financial position
  2. A trial balance
  3. A cash budget Correct answer.
  4. An income statement

Explanation

A cash budget forecasts the timing of cash inflows and outflows over a future period, allowing the business to anticipate shortfalls. It focuses on liquidity rather than profit.

Question 30Business Studies achievement standards (Level 2)

A business wants to measure how efficiently it uses its total assets to generate sales. Which ratio should it calculate?

  1. Current ratio
  2. Equity ratio
  3. Gross profit margin
  4. Asset turnover ratio Correct answer.

Explanation

Asset turnover compares sales revenue with total assets and shows how many dollars of sales each dollar of assets produces. It is a measure of efficiency rather than profitability or liquidity.

Question 31Business Studies achievement standards (Level 2)

A firm's market research shows that customers value fast delivery more than low prices. Which element of the marketing mix should the firm prioritise adjusting?

  1. Place Correct answer.
  2. Price
  3. Promotion
  4. Product

Explanation

Delivery speed is a distribution decision, so it falls under place in the marketing mix. The firm should review its distribution channels and logistics to meet this customer priority.

Question 32Business Studies achievement standards (Level 2)

An employee repeatedly arrives late and misses deadlines. Which human resource process should the manager follow first?

  1. A transfer to a more senior role
  2. A formal performance management or disciplinary procedure Correct answer.
  3. A pay increase to improve motivation
  4. Immediate dismissal without any discussion

Explanation

Fair process requires the manager to address performance issues through a documented procedure, giving the employee notice of concerns and an opportunity to respond. This protects both parties and meets good-faith obligations.

Question 33Business Studies achievement standards (Level 2)

Which statement best describes the purpose of a business's mission statement?

  1. It lists the qualifications required for each job
  2. It sets the selling price of each product
  3. It records the daily cash position of the business
  4. It states the long-term reason the business exists and what it aims to achieve Correct answer.

Explanation

A mission statement communicates the organisation's overarching purpose and values to stakeholders, guiding strategy and decision-making. It is broad and long-term rather than operational.

Question 34Business Studies achievement standards (Level 2)

A business sells 2,000 units at $25 each. Variable costs are $15 per unit and fixed costs total $12,000. What is the business's profit?

  1. $50,000
  2. $20,000
  3. $38,000
  4. $8,000 Correct answer.

Explanation

Contribution per unit is $25 − $15 = $10, so total contribution is 2,000 × $10 = $20,000. Deducting fixed costs of $12,000 gives a profit of $8,000.

Question 35Business Studies achievement standards (Level 2)

A business's gearing ratio has risen sharply after taking on a large loan. Which risk does this increase most directly?

  1. Reduced control for existing shareholders
  2. A fall in the number of shares issued
  3. Loss of limited liability for directors
  4. Greater exposure to interest rate rises and fixed repayment obligations Correct answer.

Explanation

Higher gearing means a larger share of finance comes from debt, so interest payments and repayments become fixed obligations regardless of trading performance. Rising interest rates therefore increase financial risk.

Question 36Business Studies achievement standards (Level 2)

A manufacturer's fixed costs rise because it has leased additional factory space. How does this affect the break-even point, assuming selling price and variable cost per unit are unchanged?

  1. The break-even point rises because more units must be sold to cover the higher fixed costs Correct answer.
  2. The break-even point falls because contribution per unit increases
  3. The break-even point falls because fixed costs are spread over more units
  4. The break-even point stays the same because fixed costs do not affect contribution

Explanation

Break-even units equal fixed costs divided by contribution per unit. If fixed costs increase while contribution per unit is unchanged, more units are needed to break even, so the break-even point rises.

Question 37Business Studies achievement standards (Level 2)

A business discovers that its competitor has launched a nearly identical product at a lower price. Which strategic response best reflects a differentiation approach?

  1. Adding features and service guarantees that give customers a reason to pay more Correct answer.
  2. Withdrawing the product from the market immediately
  3. Cutting its own price below the competitor's to win volume
  4. Reducing product quality to lower its costs

Explanation

Differentiation competes by offering something customers perceive as uniquely valuable, allowing a premium price. Matching the competitor's low price would instead be a cost leadership response.

Question 38Business Studies achievement standards (Level 2)

A firm's accounts receivable collection period has increased from 30 days to 60 days. What is the most likely effect on the business?

  1. Fixed costs increase because of the delay
  2. Gross profit margin falls immediately
  3. The business's gearing ratio rises automatically
  4. Cash is tied up in debtors for longer, increasing pressure on liquidity Correct answer.

Explanation

A longer collection period means customers are paying more slowly, so cash remains locked in receivables. This reduces available cash and can create liquidity strain even if sales remain strong.

Question 39Business Studies achievement standards (Level 2)

A business wants to motivate staff using Herzberg's theory. Which action would be classified as a motivator rather than a hygiene factor?

  1. Offering opportunities for challenging work and recognition Correct answer.
  2. Paying a competitive base salary
  3. Providing a safe and comfortable physical workplace
  4. Ensuring clear company policies and supervision

Explanation

Herzberg classified achievement, recognition, responsibility and challenging work as motivators that create genuine satisfaction. Pay, working conditions, policy and supervision are hygiene factors that prevent dissatisfaction but do not motivate.

Question 40Business Studies achievement standards (Level 2)

A business's statement of financial position shows total assets of $250,000 and total liabilities of $90,000. What is the owners' equity?

  1. $340,000
  2. $250,000
  3. $160,000 Correct answer.
  4. $90,000

Explanation

The accounting equation states that assets equal liabilities plus equity, so equity is $250,000 − $90,000 = $160,000. This represents the owners' residual claim on the assets.

Question 41Business Studies achievement standards (Level 2)

A business switches from paying staff a fixed hourly wage to a piece rate. Which is the most likely outcome?

  1. Fixed costs will increase significantly
  2. The business will no longer need to supervise staff
  3. Staff will definitely earn less than before
  4. Output per worker may rise, but quality control becomes more important Correct answer.

Explanation

Piece rates reward output directly, which can increase productivity but also encourages speed over quality. The business therefore needs stronger quality control to protect standards.

Question 42Business Studies achievement standards (Level 2)

A business's sales are highly seasonal, peaking in December. Which action best manages the liquidity risk this creates?

  1. Reducing stock levels to zero before December
  2. Extending credit terms to all customers during the quiet months
  3. Arranging an overdraft facility to cover the low-sales months Correct answer.
  4. Spending all December profits immediately on new equipment

Explanation

Seasonal businesses face predictable cash shortfalls outside peak periods, so a pre-arranged overdraft provides a flexible buffer. Planning finance in advance avoids forced borrowing at high cost.

Question 43Business Studies achievement standards (Level 2)

A business's income statement shows sales of $200,000, cost of goods sold of $120,000 and operating expenses of $50,000. What is the net profit margin?

  1. 15% Correct answer.
  2. 40%
  3. 60%
  4. 25%

Explanation

Net profit is $200,000 − $120,000 − $50,000 = $30,000. Dividing by sales of $200,000 gives a net profit margin of 15%.

Question 44Business Studies achievement standards (Level 2)

A business decides to outsource its customer service function to a specialist provider overseas. Which is the most significant risk it should evaluate?

  1. An immediate increase in its fixed asset base
  2. The elimination of all employment obligations
  3. A guaranteed reduction in its total costs
  4. Loss of direct control over service quality and brand reputation Correct answer.

Explanation

Outsourcing transfers day-to-day control of a customer-facing function to a third party, so service standards and brand reputation depend on the provider's performance. Contracts and monitoring are needed to manage this risk.

Question 45Business Studies achievement standards (Level 2)

A firm's sales revenue rises by 20% while its total costs rise by 8%. What can be concluded about its profitability?

  1. Profit is unchanged because both figures moved
  2. Profit cannot be assessed without knowing the number of employees
  3. Profit has fallen because costs have risen
  4. Profit has increased because revenue has grown faster than costs Correct answer.

Explanation

Profit is the gap between revenue and costs. When revenue grows proportionally faster than costs, the gap widens, so profit increases. The relative growth rates matter more than the absolute figures.

Question 46Business Studies achievement standards (Level 2)

A business plans to enter an overseas market. Which factor is an example of a political or legal influence in a PESTLE analysis?

  1. The rate of inflation in the target country
  2. Changes to import tariffs in the target country Correct answer.
  3. The average age of consumers in the target country
  4. New production technology becoming available

Explanation

Import tariffs are government-imposed trade rules, so they belong to the political and legal dimension of PESTLE. They directly affect the cost and feasibility of exporting.

Question 47Business Studies achievement standards (Level 2)

A company reports a return on equity of 18% while its main competitor reports 12%. Which interpretation is most defensible?

  1. The company pays a larger dividend per share than its competitor
  2. The company has higher sales revenue than its competitor
  3. The company has lower financial risk than its competitor
  4. The company generates more profit per dollar of shareholder funds than its competitor Correct answer.

Explanation

Return on equity compares profit with the shareholders' investment, so 18% indicates more profit generated per dollar of equity than the competitor's 12%. It says nothing directly about revenue size, risk or dividends.

Question 48Business Studies achievement standards (Level 2)

A business's cash flow forecast shows a negative closing balance in month three, but the business expects to be profitable for the year. Which action is most appropriate?

  1. Ignore the forecast because annual profit is positive
  2. Reduce the selling price to generate more cash quickly
  3. Arrange additional finance or adjust payment timings to cover the month-three shortfall Correct answer.
  4. Increase production to raise sales in month three

Explanation

A cash shortfall in a single month can threaten solvency even when annual profit is expected, so the business must plan finance or reschedule payments to bridge the gap. Profit and cash timing are distinct concepts.

Question 49Business Studies achievement standards (Level 2)

A business is choosing between two mutually exclusive projects. Project A has a higher expected net profit but requires a large immediate cash outlay; Project B has a lower expected net profit but generates cash inflows immediately. Which consideration is most relevant to the decision?

  1. Only the total expected net profit of each project
  2. The age of the business's existing machinery
  3. The timing of cash flows and the business's current liquidity position Correct answer.
  4. The number of employees each project would require

Explanation

When projects differ in both profitability and cash timing, the business must weigh the size of returns against its ability to fund the initial outlay and remain liquid. A profitable project is unviable if the business cannot finance the upfront cost.

Question 50Business Studies achievement standards (Level 2)

A firm's gross profit margin is stable at 40%, but its net profit margin has fallen from 12% to 6%. Which explanation is most consistent with these figures?

  1. The cost of goods sold has risen sharply relative to sales
  2. The selling price of the product has been reduced
  3. Operating expenses such as administration and marketing have increased Correct answer.
  4. The business has reduced its interest payments

Explanation

A stable gross profit margin means the relationship between sales and cost of goods sold is unchanged. The decline in net profit margin must therefore come from higher operating expenses or other costs below the gross profit line.