Students must start practicing the questions from CBSE Sample Papers for Class 12 Entrepreneurship with Solutions Set 3 are designed as per the revised syllabus.
CBSE Sample Papers for Class 12 Entrepreneurship Set 3 with Solutions
Time Allowed: 3 Hours
Maximum Marks: 70
General Instructions:
The question paper contains 4 sections -A, B, C, and D.
- Section A contains Multiple choice questions.
- Section B-2 marks
- Section C- 3 marks
- Section D-5 marks
Section – A (18 Marks)
Question 1.
Victor industries has been one of the leading companies in the Mobile phone industry in India. The company decided to launch a new Model AI 1 which will have in built the latest software to encourage hands-free use and enhance the customer experience through 3D photos. They are also looking into ideas to use eco-friendly recyclable materials for the body of the phone which will cause less environmental damage. Identify the two factors of the PESTEL model from the above case study. [1]
(A) Economic, Social
(B) Ecological, Technological
(C) Legal, Economic
(D) Social, Political
Answer:
(B) Ecological, Technological
Explanation: Technological is influenced by government spending on research, new discoveries and development, government and industry focus of technological effort, speed of technological transfer and rates of obsolescence. Ecological considers the ways in which the organization can produce its goods or services with minimum environmental damage.
Question 2.
Ab Ltd. was into manufacturing security cameras for household and commercial buildings. Their Research and development team came up with a new idea of manufacturing drones as security cameras which will give a 360-degree view of the entire building. They needed huge finance for the same. The company MD Sharath heard of this group of venture capitalists who are ready to invest in new ideas. He sought an appointment with them and started preparation of a business plan to be presented before them. His plan was to make an informative power point presentation showing key graphs of financial trends. It was meant to trigger discussion among the members. Which format of a business plan is Sharath using? [1]
(i) Elevator Pitch
(ii) A pitch deck with an oral narrative
(iii) A written presentation for external stakeholders
(iv) An internal operational plan
(A) (i), (ii)
(B) (ii) only
(C) (iii), (iv)
(D) (iii) only
Answer:
(B) (ii) only
Explanation: A pitch deck with oral narrative is a hopeful, entertaining slide show and oral narrative that is meant to trigger discussion and interest potential investors in reading the written presentation, i.e. the executive summary and a few key graphs showing financial trends and key decision-making benchmarks.
Question 3.
When total current assets exceed total current liabilities, it refers to. [1]
(A) Gross Working Capital
(B) Temporary Working Capital
(C) Both (A) and (B)
(D) Net Working Capital
Answer:
(D) Net Working Capital
Explanation: Net working capital is the difference between a business’s current assets and its current liabilities. Net working capital is calculated using line items from a business’s balance sheet. Generally, the larger your net working capital balance is, the more likely it is that your company can cover its current obligations. When a positive net working capital is derived, it means that a company has enough funds to take care of their current financial needs or obligations.
Question 4.
Both mergers and acquisitions are enterprise growth strategies but how they come into existence makes them different from each other. Which of the given statements below justifies the given statement? [1]
(A) Merger is always friendly, whereas acquisition is always hostile.
(B) Merger may be friendly, whereas acquisition is always hostile.
(C) Merger is always depending on synergy, whereas acquisition is never based on synergy.
(D) Merger is consensual, whereas acquisition is forced.
Answer:
(D) Merger is consensual, whereas acquisition is forced.
Explanation: Mergers and Acquisitions (M&A) is a potential strategy for ensuring the accelerated growth of a business. There are various reasons that firms may choose to grow through M&A instead of expanding internally. Mergers occur in a consensual setting, where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties.
Question 5.
Hemant approached his father seeking? 5,00,000 for his new venture. He had planned to start a computer assembling unit. Though his father was in a position to give him the money he still insisted that he should take a loan from the bank which will make him more responsible. When Hemant approached the bankers, they asked for a business plan. Hemant was not sure who can help him in the preparation of the business plan. Who among the following can prepare the business plan? [1]
(A) Lawyers
(B) Accountants
(C) Marketing consultants
(D) All of the above
Answer:
(D) All of the above
Explanation: A business plan represents all aspects of the business planning process declaring vision and strategy alongside sub-plans to cover Marketing, Finance, Operations, Human resources, Legal compliance, Intellectual property rights, etc.
As such preparing a business plan draws on a wide range of knowledge from many different business disciplines, requiring, the entrepreneur to consult with many other expert professional sources in its preparation like Lawyers, Accountants, Marketing consultants, Engineers, Internet sites Officially appointed or/and set-up Banks, Specialized financial institutions or Agencies to promote entrepreneurship, Friends, relatives, mentors, etc.
Question 6.
Sudha started her small-scale business of making Pickles along with few of her neighbors using their free time at home. They named their venture ‘Home Sweet Home. They were able to supply the entire district. One of the members suggested that they should expand and start selling to other states. When she discussed the same to her husband, he suggested that they have to properly look into the environment analyzing the competitors. He suggested Sudha to sum [1]
(i) Formulate policies
(iii) Environment scanning
(ii) Tap useful resources
(iv) Image building
(A) (i), (iv)
(B) (ii) only
(C) (iii) only
(D) (ii), (iii), (iv)
Answer:
(C) (iii) only
Explanation: Environmental scanning refers to the careful monitoring of an organization’s internal and external environment for detecting early signs of opportunities and threats that may influence its current and future plans. This is the core idea behind environmental scanning.
Question 7.
What will be the Gross working capital for Ojas Ltd. from the details given below? [1]
(i) Stock- ₹1,00,000
(ii) Debtors – ₹2,50,000
(iii) Creditors – ₹82,600
(iv) Cash – ₹38,000
(v) Short-term Investments – ₹2,00,000
(vi) Short-term Loan – ₹1,42,000
(vii) Long-term Investments – ₹3,00,000
(viii) Outstanding expenses- ₹50,000
(A) ₹5,88,000
(C) ₹5,00,000
(B) ₹6,88,000
(D) ₹6,00,000
Answer:
(A) ₹5,88,000
Explanation: Gross Working capital = Stock + Debtors + Cash + Short-term Investments = ₹1,00,000 + ₹2,50,000 + ₹38,000 + ₹2,00,000 = ₹5,88,000.
Question 8.
Sambhav thought of an idea to produce solar bins through which the garbage will get decomposed automatically using solar energy. He went through the process of studying pros and cons of making such bin before launching it. Out of the following, identify the stage of the creative process discussed above: [1]
(A) Illumination
(B) Incubation
(C) Innovation
(D) Creativity
Answer:
(B) Incubation
Explanation: Incubation is the subconscious assimilation of information. This is the transition period. The entrepreneur starts thinking about the idea and implementation in his subconscious mind.
Question 9.
A number of people who took their meals and the total billing for each of the 5 weeks are in the following table. [1]
| Week | No. of people taking meals | Average amount billed (in L) |
| 1 | 120 | 150 |
| 2 | 60 | 205 |
| 3 | 70 | 146 |
| 4 | 80 | 221 |
| 5 | 90 | 240 |
Based on the given information what will be the Unit Price?
(A) ₹120
(B) ₹170
(C) ₹180
(D) ₹190
Answer:
(D) ₹190
Explanation: Unit Price = Total Billed Amount/ No. of Customers
= 79800/420
= ₹190
Question 10.
Assertion (A): While assessing the market, the supply position is also studied by entrepreneurs.
Reason (R): Market assessment will require a study of prevailing innovations. [1]
(A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(B) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A).
(C) Assertion (A) is true but Reason (R) is false.
(D) Assertion (A) is false but Reason (R) is true.
Answer:
(B) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A).
Explanation: While assessing the market, supply position is also studied by entrepreneurs. By supply position what is meant is the complete picture of quantities of the product made available in the market by all the existing players. It should take into account future supplies from possible entrants in the field. Market assessment will require a study of prevailing innovations and changes being carried out by existing entrepreneurs. Technological advancements in the field have to be analyzed because they may change the quality and influence the cost and price ultimately.
Question 11.
Ganga Dhar was working as the production manager in a German company. The company was producing remote-operated high-end kitchen equipment. He resigned from his job and returned to his hometown, Patna. In Patna, he met his old friend Aditya, who had been managing his factory producing steel utensils with old technology. Ganga Dhar encouraged Aditya for the production of high-end kitchen equipment. He also promised to help Aditya by providing funds and expertise so that the production unit run by Aditya can develop into a big production house and its investors may get high returns on investment. Ganga Dhar is: [1]
(A) Angel investor
(C) Both (a) and (b)
(B) Venture capitalist
(D) Neither (a) nor (b)
Answer:
(A) Angel investor.
Explanation: A business angel or informal investor or an angel investor, is an affluent individual who provides capital for a business start-up and early-stage companies having a high-risk, high-return matrix usually in exchange for convertible debt or ownership equity. They fill the gap in start-up or early-stage financing between “friends and family”, by providing seed funding and formal venture capital.
Question 12.
Assertion (A): Manufacturers use the product franchise to govern how a retailer distributes its products.
Reason (R): Manufacturing franchise opportunities typically require that a business owner purchases and distributes the products for one specific company. [1]
(A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(B) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A).
(C) Assertion (A) is true but Reason (R) is false.
(D) Assertion (A) is false but Reason (R) is true.
Answer:
(C) Assertion (A) is true but Reason (R) is false.
Explanation: Manufacturers use the product franchise to govern how a retailer distributes its products. The manufacturer grants a store owner the authority to distribute goods by the manufacturer and allows the owner to use the name and trademark owned by the manufacturer. The store owner must pay a fee or purchase a minimum inventory of stock in return for these rights. Some tire stores are good examples of this type of franchise.
Question 13.
Assertion (A): Working capital is also called circulating capital.
Reason (R): The money circulates in various forms of current assets in a continuous manner. [1]
(A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(B) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A).
(C) Assertion (A) is true but Reason (R) is false.
(D) Assertion (A) is false but Reason (R) is true.
Answer:
(A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
Explanation: Money needed to fund the normal day-to-day operations of a business is known as working capital.
Read the following passage and answer the questions from 14 to question 18.
Gopal was a chemical engineer working for a company selling insect killer spray by the name ‘Mosquito Hunter’. He was aware that this product is not good for health and could harm the health of the users. Thus, he was constantly looking for ways to improve the product.
Filled with innovative zeal and enthusiasm, he worked hard and developed a mosquito repellent that produces sonic waves to drive away mosquitoes. It is non-smoky and does not emit any kind of fragrance or odor. It was safe to use as the sonic waves do not affect human beings or plants. He decided to name his product ‘Good sleep’.
The product was to be packed in a corrugated box with an extension cord as free gift. Its price was fixed at? 300 per unit. The corrugated box will display all the necessary information such as the ingredients list, weight, manufacturing date, expiry date, etc. A replacement warranty for one year will be given as an introductory offer. He decided to sell this product through agents who will sell to both, the wholesalers and retailers depending upon the market to be catered.
Question 14.
Which element of marketing is highlighted in the following lines used by Gopal?
“He decided to name his product Good sleep”. [1]
(A) Promotion
(B) Place
(C) Product
(D) None of these
Answer:
(C) Product
Explanation: A product is a commodity, produced or built to satisfy the need of an individual or a group. The product can be intangible or tangible as it can be in the form of services or goods. It is important to do extensive research before developing a product as it has a fluctuating life cycle, from the growth phase to the maturity phase to the sales decline phase.
Question 15.
Which element of marketing is highlighted in the following lines used by Gopal?
“The product was to be packed in a corrugated box with an extension cord as free gift”. [1]
(A) Promotion
(B) Place
(C) Product
(D) None of these
Answer:
(A) is correct.
Explanation: Promotion is a marketing communication process that helps the company to publicize the product and its features to the public. It is the most expensive and essential component of the marketing mix, which helps to grab the attention of the customers and influence them to buy the product.
Most of marketers use promotion tactics to promote their products and reach out to the public or the target audience. The promotion might include direct marketing, advertising, personal branding, sales promotion, etc.
Question 16.
Which component of the product mix is highlighted in the following lines?
“The corrugated box will display all the necessary information such as ingredients list, weight, manufacturing date, expiry date, etc.” [1]
(A) Branding
(B) Packaging
(C) Labelling
(D) None of these
Answer:
(C) Labelling.
Explanation: A label provides complete information regarding the product. It mainly includes the ingredients of the product, its usage, and caution in use cares to be taken while using it, date of manufacturing, batch number, etc.
Question 17.
Which of the following is the quality of a good brand name? [1]
(A) Short, simple, and easy to pronounce
(B) Noticeable, easy to recognize, and remember
(C) Pleasing, impressive when uttered
(D) All of the above
Answer:
(D) All of the above
Explanation: While selecting a brand name, an entrepreneur should choose a name that is short, simple and easy to pronounce, noticeable, easy to recognize and remember, pleasing, impressive when uttered, neither obscene, negative, offensive or vulgar, adaptable to packaging, labeling requirements, to different advertising media and languages, linked to a product, symbolically eye-catching, etc.
Question 18.
‘Brand’ is a_______. [1]
(A) Comprehensive term
(B) Limited term
(C) Narrow term
(D) All of the above
Answer:
(A) Comprehensive term
Explanation: ‘Brand’ is a comprehensive term. It is used to denote a name, term, sign, symbol, design or combination of them to identify the products of one firm and differentiate them from those of the competitors.
Section – B (12 Marks)
Question 19.
Name and define the form of business organization in which the liability of its members is limited. State one more feature of this form of business organization.
OR
State the conditions when a sole proprietorship form of business is considered most suitable. [2]
Answer:
Joint stock company: It is an association of persons who contribute money in the shape of shares and the company gets a legal entity and enjoys a permanent existence.
It has the following features:
(1) Voluntary association: A single person cannot constitute a company. At least two persons, voluntarily, must join hands to form a private company, while a minimum of seven persons are required for a public company.
(2) Artificial person: A company is created by law. Though it has no body and no conscience, it still exists as a person, having a distinct personality of its own. Because like a human being it can buy, sell and own property, sue others, be sued by others, it is called as an artificial person.
(3) Separate legal entity: A company has an independent status, different from its members. This implies that a company cannot be held liable for the actions of its members and vice versa. A company has a distinct entity separate from its members.
(4) Common seal: Being an artificial person, a company cannot sign the documents. Hence, it uses a common seal on which its name is engraved. Putting the common seal on papers, is equivalent to that of the signatures of a human being, making them binding on the company.
(5) Limited liability: The liability of the shareholders of a company is normally limited to the number of shares held or guarantees given by them.
(6) Transferability of shares: No shareholder is forever wedded to the company. Subject to certain conditions, the shares are freely transferable. Private companies do impose some restrictions on the transfer of shares.
(7)Diffusion of ownership and management: In this form of organization, entrepreneurs should clearly understand there exists a separation of ownership from management. As the shareholders could be scattered across the country here, they give the right to the directors to manage the company’s affairs.
(8)Number of members: In the case of a private company, the minimum number of required members are 2 and the maximum number of members is 50 (excluding employees), in case of public company, the minimum requirement is 7, and no limit on the maximum number.
(9) Limitation of action: The scope of this artificial person is determined by the Indian companies act, memorandum of association, and articles of association, any work done beyond what is stated in these documents can lead to the winding up of the process of the company.
(10) Winding up: The mode of incorporation and termination (winding up) is both as per the Companies Act only. It’s born out of law and can be liquidated only by law.
OR
The success or failure of an enterprise depends upon the intelligence, competence and sensible decision¬ making capacity of the entrepreneur. Before opting for sole proprietorship, an entrepreneur should carefully compare and evaluate pros and cons of this form. Basically, this type of form is suitable when:
- Capital requirement is limited
- Confidentiality/secrecy is important
- Market is local
- Goods are of artistic nature or demand a customized approach
- Quick decision-making is necessary
- Size of the venture is small.
Question 20.
Fizz and Lime is an established beverage company that started bottling: Wheat Grass Juice; Bitter gourd with Jamun and Amla with Aloe vera. It is planning to expand externally without compromising the unique taste of these drinks. Bellagio Juices got exclusive rights to manufacture and sell Wheat Grass and Amla, Aloe vera under the name Fizz and Lime. Bellagio Juice had to use only the ingredients supplied by Fizz and Lime to produce, bottle and distribute the two drinks.
(1) Identify and explain the form of external expansion adopted by Fizz and Lime.
(2) State any one feature of this form of expansion. [2]
Answer:
Manufacturing Franchise Opportunity These types of franchises provide an organization with the right to manufacture a product and sell it to the public, using the Franchisor’s name and trademark. This type of Franchise is found most often in the food and beverage industry.
Most bottlers of soft drinks receive a franchise from a company and must use its ingredients to produce, bottle, and distribute the soft drinks. Franchisee must use the ingredients given by the Franchisor to produce, bottle, and distribute the soft drinks.
Question 21.
Read the following passage identify and explain the concept that helped the company to succeed.
‘Safe Wheelers’ is an upcoming cab service. The promoters knew that they are entering a highly competitive market. They gathered information on existing cab services and changing customer preferences and incorporated those observations into their operations. In order to reach the customers promptly, they developed an ‘app’ to book, track and trace the cabs 24×7. To create an environment of trust all drivers were grouped into two shifts: 6 a.m.- 6 p.m. for female drivers and 6 p.m.- 6 a.m.for male drivers. GPS systems were installed in all cabs to monitor their movements. The fare payment was either by an e-wallet or through the ‘Safe Wheelers Smart Card. As soon as the services were launched, they were a grand success. [2]
Answer:
Environment Scanning
Careful monitoring of an organization’s internal and external environment for detecting early signs of opportunities and threats that may influence its current and future plans. In a rapidly changing environment, one rule of thumb applies: If you don’t adapt, you nontenure. This is the core idea behind environmental scanning.
The means by which organizations gather information on changing conditions and incorporate those observations into a process where necessary changes are made. The right information, combined with the right adaptations, can determine an organization’s future viability. If an entrepreneur is not aware of the environment surrounding his/her business, he/she is sure to fail.
Question 22.
Explain briefly the elements in the innovation process.
OR
Explain how does franchising help Startups? [2]
Answer:
(1) Analytical Planning: Carefully identifying the product or service, features, design and resources.
(2) Resource Organisation: obtaining the required resources, materials, technology, human or capital resources.
(3) Implementation: Applying the resources in order to accomplish and deliver the results.
(4) Commercial Application: Provision of value to customers, reward employees and satisfy the stakeholders.
OR
Franchising help startups because already the product carries a name in the market already which is the most difficult part of a business to establish. Startups take up training to understand the product and franchisors make franchises fully conversant with the product/services that they have to offer.
The start-ups can grow fast without having to increase labor, operating costs, and blocking running expenses because normally buyers straight walk up to them. Franchisors’ efforts to boost their franchises are always sincere, so there is no clash of interest.
Question 23.
‘Tata’ manufactured a motor car ‘Nano’ for the common man which is very low in price. Name and explain the behavioral characteristic that develops the idea of ‘Tata’ into an available and successful project. [2]
Answer:
Vision and Creativity: Creativity is the most striking behavioral characteristic for an entrepreneur. He should be able to develop an idea through a process of creativity and build something of value. Creativity in innovating a solution and vision. The entrepreneur should be able to creatively identify an idea to generate a valuable solution to a problem.
Once the solution is identified their vision to convert the solution into a business opportunity helps them to move forward, overcoming all the obstacles. They constantly overcome adversity, exercise control over the business, make a significant difference, etc.
Question 24.
State any two points that a venture capital must consider before extending venture capital to an entrepreneur.
OR
It is an organized mechanism meant for the effective and smooth transfer of financial resources from the investors to the entrepreneurs. Identify and explain the mechanism. [2]
Answer:
Due Diligence: It refers to the process of investing the merits of a project or prospective investment. It includes the qualification of the founding entrepreneur, size and growth characteristics of the venture market, existing and potential competition, technical feasibility, etc.
Cost of Venture Capital: The cost of venture capital depends upon the investor’s perception of risk. The venture funds investor generally demands a larger stake in equity in an earlier stage than a later stage. Investors in the early stage expect 30% to 50% of compound annual returns.
OR
The mechanism is capital market: Capital market provides a platform to raise productive capital. It plays a very vital role of a financial intermediary. A capital market may be defined as an organized mechanism meant for the effective and smooth transfer of money capital or financial resources from investors to entrepreneurs.
Capital markets are the most important source of raising finance for entrepreneurs as this market can mobilize financial resources on a nationwide scale, secure the required foreign capital and know-how to promote economic growth at a faster rate, ensure the most effective allocation of the mobilized financial resources by directing the same either to such projects which are capable of the highest yield or to the underdeveloped priority areas where there is an urgent need to promote balanced and diversified industrialization.
The needs of entrepreneurs who actually use the savings for productive purposes are varied. The capital market satisfies the tastes of savers and the needs of investors through its various financial instruments and institutions.
Section – C (15 Marks)
Question 25.
Komal has started an herbal toothpaste manufacturing unit. She has decided on the logo, packaging format and labeling of the product. Her friend Neha asked her whether she has taken care of the legally recognized exclusive rights of other manufacturers in the industry before taking the above-stated decisions. Identify and give the meaning of the concept about which Neha asked Komal. [3]
Answer:
Neha asked Kamal about intellectual Property Rights. An entrepreneur whilst selecting a product should take care of intellectual property rights. Intellectual property (IP) rights are legally recognized exclusive rights to creations of the mind. Under this law, owners are granted certain exclusive rights to a variety of intangible assets. Common types of intellectual property rights include copyrights, trademarks, patents, industrial design rights, and trade secrets.
Question 26.
Describe briefly the formats for the business plan that a start-up may have.
OR
Explain any three components of a financial plan. [3]
Answer:
It is common, especially for start-ups, to have four formats as follows for the same business plan.
Elevator pitch: It is a three-minute summary of the business plan’s executive summary. This is often used as a teaser to awaken the interest of potential funders, customers, or strategic partners. A pitch deck with oral narrative: A hopeful, entertaining slide show and oral narrative that is meant to trigger discussion and interest of potential investors in reading the written presentation, i.e.
The executive summary and a few key graphs showing financial trends and key decision-making benchmarks. A written presentation for external stakeholders: A detailed, well-written, and pleasingly formatted plan targeted at external stakeholders. An internal operational plan: A detailed plan describing planning details that are needed by management but may not be of interest to external stakeholders.
OR
The components of the financial plan are explained below:
(1) Proforma investment decisions: This part of the financial plan relates to how the enterprise’s funds are invested in different assets so that the enterprise is able to earn the highest possible returns on investment. An estimate of various components of capital nature i.e. fixed assets and of working capital should be clearly mentioned in this part of a business plan.
This part helps to understand the total amount of finance required by the entrepreneur. Inadequate funds or excess funds, both have the capacity to severely damage the financial fortune of a business. Therefore, these decisions must be taken with utmost care.
(2) Proforma financing decisions: This section summarizes all the projected sources of funds available to the venture to raise finance from, which you have already studied in a previous class. The entrepreneur’s job is to ensure the selection of the best overall mix of financing for the enterprise so that the cost of capital and the financial risk stands minimized and return on investment and profitability stand maximized.
(3) Proforma income statement: The proforma income statement is the projected net profit calculated from projected revenue minus projected costs and expenses. Basically, it summarizes all the profit data during the first year of operations of the new enterprises. In preparing the proforma income statement, ‘sales by month’ must be calculated first, making use of forecasting techniques as the basis.
(4) Proforma cash flow: Profit and cash flow are not the same, when from sales we subtract expenses, the result is profit and when from cash receipts we subtract cash payments, the resultant figure is the cash flow. Proforma cash flow reflects the projected cash available with the enterprise as a result of subtracting projected cash disbursements from projected cash accumulations.
Cash flows only when actual payments are received or made. Mere sale which might be on credit, will not generate cash. Similarly, all bills are not paid immediately by the enterprises.
(5) Proforma balance sheet: This document helps the enterprise to reflect the position of the business at the end of its first year. A summary of the projected assets, liabilities and net worth of the entrepreneur is depicted through the proforma balance sheet.
(6) Break-even point: Every firm wants to maximize its profits. The break-even point is the level of volume of production at which firm neither makes a profit nor a loss. Here, the total revenue is equal to the total cost of a firm, at the given level of capacity.
The break-even analysis is a useful technique for determining how many units must be sold or how much sales volume must be achieved in order to break even. It helps to indicate the volume of sales needed to cover total variable and fixed expenses by the new enterprise
(7) Economic and social variables: In view of the social responsibility of business, the ! abatement costs, i.e. the cost of controlling the; environmental damage should also be stated 1 in the plan. It’s always advisable to mention in the business plan, the socio-economic benefits expected to acquire from the proposed investment like employment generation, import substitution, export promotion, local resource utilization, development of the area, etc.
Question 27.
‘Golden Sweets’ was a partnership firm, owned by Swati and Sushma. ‘Asam Sweets’ was another partnership firm owned by Vipan and Pranav. Swati and Sushma were sharing profits in 1: a 2 ratio and Vipan and Pranav were sharing profits in 2: a 3 ratio. Both the firms were situated in a famous market of Guwahati and were doing competitive business.
Pranav the partner of ‘Asam Sweets’ observed that many of their customers were from far-off areas and if branches of ‘Asam Sweets’ are opened in other parts of the city; the firm may earn huge profits. Similar was the situation of ‘Golden Sweets’. One day in a function at a common friend’s house, the partners of both firms met.
The partners of both firms knew that the internal expansion of their respective firms will be costly. Hence, they decided the merger of the two firms. For this purpose, they decided to meet again to finalize the conditions of the merger. Finally, on 1.1.2016, their respective firms were merged and a new firm Asam Golden Sweets’ was formed with all four partners Swati, Sushma, Vipan, and Pranav.
Their new profit-sharing ratio was 1:2:2: 3. During the year ended 31.12.2016, the new firm opened four new branches in different parts of the city and earned a profit of 30% on sales.
(1) Identify the type of merger adopted by the two firms and also give its meaning.
(2) Also give the names and meanings of two other types of mergers. [3]
Answer:
(1) Type of merger that took place is a Horizontal merger: Horizontal merger is a merger occurring between companies in the same industry. A horizontal merger is a business consolidation that occurs between firms that operate in the same space, often as competitors offering the same goods or services. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry.
(2) Other two types of mergers:
Conglomerate: A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.
Market extension mergers: A market extension merger takes place between two companies that deal in the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base.
Product extension mergers: A product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.
Vertical merger: A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.
Question 28.
“The operation plan regulates the orderly movement of goods through the entire manufacturing cycle.’In light of the given statement explains any three elements of the operation plan. [3]
Answer:
The following are the elements of the plan:
Routing: Routing is a process concerned with determining the exact route or path a product/ service has to follow right from raw material till its transformation into a finished product. Scheduling: Scheduling, simply means the fixation of time, day, and date when each operation is to be commenced and completed.
In general, it’s the determination of the time that should be required to perform each operation. The process of initiating production in accordance with the pre-conceived production plan is said to be dispatching. This includes issuing necessary orders instructions, guidelines, and/or information to work pertaining to giving practical shape to the production plan Follow-Up: Follow-up or expediting function relates to evaluation and appraisal of work performed.
A properly planned follow-up procedure is helpful in dispatching errors and defects in the work. The follow-up element helps the entrepreneurs in developing ways to review the present situation with regard to materials, work-in-progress and finished goods, evolving ways to expedite the performance of those departments which lag behind, and removing obstacles in the way of production by suggesting remedial measures.
Inspection: Inspection is the art of comparing materials, products or performance with established standards. This element helps the entrepreneur to set up laboratories or evolve strategies/methods to ensure the predetermined quality of product/service. Shipping: This section goes beyond the manufacturing process and describes the flow of goods/ services from production to the consumers.
This part is a detailed presentation by the entrepreneur explaining the chronological steps in completing a business transaction efficiently and profitably. The operation plan is greatly affected by the Nature of the venture, Type of product/service, Scale of operation, and Technology involved.
Question 29.
What is meant by the Break-even point? Why is it important for an entrepreneur to calculate the break-even point? State any four reasons.
OR
“Angel investment is a common second round of financing for high-growth start-ups or early-stage companies.” Comment on the given statement from the perspective of an entrepreneur. [3]
Answer:
The break-even point is the level of volume of production at which the firm neither makes a profit nor a loss. Here, the total revenue is equal to the total cost of a firm, at the given level of capacity. Thus, the calculation of BEP is quite useful for the entrepreneur as it helps in assessing:
(1) The minimum level of output to be produced.
(2) The effect of change in the quantity of output upon the profits.
(3) The selling price of the product.
(4) The profitable options in the line of production.
Thus, the break-even analysis is a useful technique for determining how many units must be sold or how much sales volume must be achieved in order to break even. It helps to indicate the volume of sales needed to cover total variable and fixed expenses by the new enterprise.
OR
A business angel or informal investor or an angel investor is an affluent individual who provides capital for a business start-up and early-stage companies having a high-risk, high-return matrix usually in exchange for convertible debt or ownership equity. The job of an angel investor is invaluable.
They fill the gap in start-up or early-stage financing between “friends and family”, by providing seed funding and formal venture capital. Although it is usually difficult to raise more than a few thousand from friends and family, even the venture capitalist is least interested to make investments. Thus, angel investments are a common second round of financing for high-growth start-ups or early-stage companies.
Section – D (25 Marks)
Question 30.
What is a franchise agreement? Explain the main ingredients of a franchise agreement.
OR
What are the factors to be kept in mind while fixing the price of a commodity or service? [5]
Answer:
A franchise agreement is a legal document that binds the franchisor and franchisee together. This document explains what the franchisor expects from the franchisee in running the business. The agreement is designed to assure that all of the franchises within an organization are treated equitably. The expectations must be uniform throughout the system. The main ingredients of a franchise agreement:
Contract explanation: The contract explanation is the part of the agreement that outlines the type of relationship a franchisee is entering into with the franchisor. Operations Manual: The operations manual is the section of the agreement that details the guidelines that the franchisee must legally follow in operating the business as outlined by the franchisor.
From time to time amendments may be made and the franchisee must be prepared to adjust operations accordingly. The franchisee needs to be aware that the contents of the document are confidential. Proprietary statements: Proprietary statements outline how the franchise name is to be used, as well as the marketing and advertising procedures in place that the franchisee will be required to follow.
Also, the franchisor documents how much the franchisee will be required to contribute towards national advertising efforts. Ongoing site Maintenance: Ongoing site maintenance is another item that is outlined in the agreement. Included in it are the types and time frames regarding various maintenance items and upgrades that must be made to the franchisee’s location.
OR
Factors to be kept in mind while fixing the price of a commodity or service is:
Pricing objectives: What is the objective of a firm, this is a very important factor that helps in deciding the price. If the objective of a company is profit maximization then generally high prices are fixed. If the objective is sales maximization then prices are kept low.
If the firm wants, to capture big share in the market then it has to keep its price low so that a greater number of people are attracted to purchase the product. If the firm has to survive in a competitive market then it has to keep its price low by offering discounts.
Product cost: The price should be fixed in such a manner that it is able to cover the product cost. Product cost comprises of fixed cost and variable cost. Fixed cost remains constant irrespective of change in output whereas variable cost varies with change in output. In case of a competitive market, price should be so fixed that it is able to at least cover the variable cost.
Extent of the competition in market: When a firm does not face any competition then it can enjoy complete freedom in fixing the price. But when the competition is more than price is fixed keeping in mind, the price of the competitor’s product. For example, Pepsi company cannot fix the price of its drinks without considering the price of Coke.
Customer’s demand and utility: When the demand of a product is inelastic then the company can fix up high prices but if the demand is. elastic then the price has to be brought down. If the product is highly demanded then high prices can be fixed but in case of less demand low price have to be fixed. If product is offering higher utility then high price can be charged from customer as customer is ready to pay more. Whereas if utility is low, high price cannot be charged.
Government and legal regulations: To protect the interest of general public, the government has all the right to control the prices of Various products and services by including the products in the category of essential commodities. With government intervention, there can be a check on a monopolist as he cannot charge unfairly high price for essential commodities.
Marketing methods used: The price of the product also gets affected by various techniques of methods of marketing used to promote the products. If a company is using intensive advertising to promote the sale of product then it will charge high price. Other marketing methods which affect price of a product like type of packing, salesman employed, customer support services, etc.
Question 31.
‘The most critical element for success in business is Finance’. Explain. Discuss any three mushrooming sources available to an entrepreneur to raise finance. [5]
Answer:
The most critical element for success in business is Finance. The significance of finance in an enterprise is that it acts as a lubricant in the process of production. It assists in the formation of new businesses and allows businesses to take advantage of opportunities to grow and expand. Some of the mushrooming sources available to an entrepreneur to raise
finance are as follows:
(1) Capital markets: Capital Markets play a very vital role of a financial intermediary. A capital market may be defined as an organized mechanism meant for the effective and smooth transfer of money capital or financial resources from the investors to entrepreneurs.
Here, productive capital is raised and made available for industrial purposes. Capital markets are the most important source of raising finance for entrepreneurs as this market can, Mobilize financial resources on a nation-wide scale.
(2) Angel investors: A business angel or informal investor or an angel investor, is an affluent individual who provides capital for a business start-up and early stage companies having a high-risk, high-return matrix usually in exchange for convertible debt or ownership equity.
Apart from investing funds, most angels provide proactive advice, guidance, industry connections and mentoring start-ups in its early days. Their objective is to create great companies by providing value creation, and simultaneously helping investors realize a high return on investments.
(3) Venture capital: Venture capital is a type of private equity capital provided as seed funding to early-stage, high-potential, high risk, growth up companies/entrepreneurs who lack the necessary experience and funds to give shape to their ideas. Venture capital is an equity based investment in a growth-oriented small to medium business to enable the investors to accomplish objectives, in return for minority shareholding in the business or the irrevocable right to acquire.
Question 32.
“An entrepreneur who fails to scan the business environment is unlikely to survive in the long run.” Explain this statement.
OR
What is meant by a ‘Business Plan’? State any one importance of writing a business plan for each of the given interest groups: [5]
(a) Investors
(b) Entrepreneurs
Answer:
The above statement is correct because scanning the business environment provides the following benefits:
Identification of opportunities to get first-mover advantage: By keeping in touch with the changes in the external environment, an enterprise can identify opportunities and find strategies to capitalize on the opportunities at the earliest.
For example, Volvo, the Swedish brand, has 74% share in the luxury bus segment as it had entered India earlier. Formulation of strategies and policies: It helps in identifying threats and opportunities in the market. These can serve as the basis of formulation of strategies to counter threats and capitalize on opportunities in the market.
Tapping useful resources: If the company has a thorough knowledge of the external environment, it can tap raw materials, technology and even financial resources from the market at economical prices, at the right time. Better performance: Proper understanding of the various elements of the external environment is necessary to take timely action to deal with threats and avail opportunities for the purpose of improvement in the performance of the firm.
Sensitisation of entrepreneurs to cope up with rapid changes: A keen watch on the trends in the environment would help sensitize the entrepreneur to changing technology, competition, government policies and changing needs of the customers. For example, trends in clothing.
Image building: If a company is sensitive to the external environment, it will come out with new products and services to meet the requirements of the customers. This would build the image or reputation of the firm in the eyes of the general public. For example, call-radio taxis with additional features like GPS systems, online booking, etc.
OR
The business plan is a comprehensively written down document prepared by the entrepreneur describing formally all the relevant external and internal elements involved in starting a new venture.
(1) Investors: As investors/lenders focus on the four Cs of credit: character, cash flow, collateral and equity contribution. It is the business plan which reflects the entrepreneur’s credit history, the ability to meet debt and interest payments, and the amount of personal equity invested, thus, serving as an important tool in funds procurement.
(2) Entrepreneurs: It helps in determining the viability of the venture in a designated market and provides guidance to the entrepreneur in organizing his/her planning activities as such identifying the resources required, enabling obtaining of licenses if required, etc.,
working out with legal requirements as desired by the government, providing for selfassessment and self-evaluation. A business plan makes entrepreneur to think through various scenarios and plan ways to avoid obstacles.
Question 33.
Calculate the breakeven point for multiple products from the following information:
| Product | X | Y | Z |
| Sales price | ₹15 | ₹20 | ₹35 |
| Variable cost per unit | ₹9 | ₹13 | ₹18 |
| Sales mix percentage | 20% | 20% | 60% |
Total fixed cost = ₹40,000
Answer:
Calculation of contribution margin per unit
| Product | X | Y | Z |
| Sales price | ₹15 | ₹20 | ₹35 |
| Variable cost per unit | ₹9 | ₹13 | ₹18 |
| Contribution margin in per unit | ₹6 | ₹7 | ₹17 |
Weighted average contribution margin per unit for sales mix = sum of (product contribution x % sales mix)
Calculation of weighted average contribution margin per unit
| Product | X | Y | Z |
| Sales price | ₹15 | ₹20 | ₹35 |
| Variable cost per unit | ₹9 | ₹13 | ₹18 |
| Contribution margin in per unit | ₹6 | ₹7 | ₹17 |
| Sales mix | 20% | 20% | 60% |
| Weighted average contribution margin per unit | ₹1.20 | ₹1.40 | ₹10.20 |
Sum of weighted average = ₹1.20 + ₹1.40 + ₹10.20
= ₹10.20
&=\frac{\text { Total fixed cost }}{\text { Weighted average per unit }} \\
&=\frac{₹ 40,000}{₹ 12.80}
\end{aligned}\)
Product unit break even point = Total break even point x Sales mix
Calculation of Product Break Even Point
| Product | X | Y | Z |
| Sales mix | 20% | 20% | 60% |
| Total break-even units | 3,125 | 3,125 | 3,125 |
| Product break-even point | 625
units |
625
units |
1,875
units |
Calculation of Break-Even Point in Rupees
| Product | X | Y | Z |
| Product break-even point (units) | 625 | 625 | 1,875 |
| Price per unit (T) | 15 | 20 | 35 |
| Product sales (T) | 9,375 | 13,125 | 67,500 |
Break even sales = ₹9,375 + ₹13,125 + ₹67,500
= ₹90,000