Case Study Glossary
Term
Definition
Board of Directors
The formal meetings of the executive directors of the company at which
decisions are taken about the business (e.g. trading, investment, strategy)
and issues relating to the company (e.g. dividends, shareholdings)
Chairman
The director that chairs the meetings of the Board and the Annual General
Meeting with shareholders
Costings
The likely costs involved in a product or project
Diversify /
Diversification
Getting involved in business activities that are in different markets (e.g.
products, customers) compared with the original business.
Downturn
A reduction in the strength of the economy – i.e. a less favourable
macroeconomic environment
Ethics
Factory units
Purpose-built units that are designed to house businesses –often built as
clusters of units on what is known as a business park or industrial estate
Family business
A business that is controlled (and usually managed) by members of a family
Finance Director
Executive director responsible for managing the financial affairs of the
business (e.g. budgeting, cash flows, investment appraisal)
Garden grab
A method of acquiring land on which it is possible to build new homes.
Gardens are classified as “brownfield” sites, not “Greenfield” sites. The
crucial distinction means that gardens can be acquired as potential sites for
new house building (greenfield sites are more much harder to buy – due to
planning restrictions imposed by the green belt)
Geographical spread
The geographical area covered by the business – i.e. the locations where LC
plc build properties
Green belt
In UK town planning, the green belt is a policy for controlling urban growth.
The idea is for a ring of countryside where urbanisation will be resisted for
the foreseeable future, maintaining an area where agriculture, forestry and
outdoor leisure can be expected to prevail
Institutional shareholders
Organisations such as pension schemes, fund managers, insurance
companies and other professional investors who invest in shares as part
managing an investment portfolio. Institutional investors typically hold the
majority of shares in a quoted company, although an individual institution
may only hold a small proportion
Interest groups
Stakeholder groups who have an external interest in the activities of
business. E.g. local residents opposed to property development in their
locality
Term
Definition
Living standards
How well people are able to live. It is linked to the amount of money they
earn (disposable income). Typically measured by economists as GDP per
person
Macroeconomic
environment
The overall strength (or otherwise) of the economy. The variables (taken
together) which influence demand in the economy. Key macroeconomic
variables for LC plc would be:
Interest rates / availability of credit
Consumer spending
Business investment
Unemployment
Motion
A decision taken at a Board Meeting which had legal power
Non-executive Directors
Members of the Board of Directors who do not have Executive
responsibility. They attend Board Meetings, but don’t have day-to-day
responsibility for business decision-making. Main role should be to provide
advice for the Board and to focus on corporate governance issues
Operations Director
Executive director responsible for managing the production & operations
side of the business (e.g. project managing each property development;
probably employment issues too)
Outbid
Where a business is unable to match the price being offered by competitors
– e.g. unable to match the price being paid for property development land
Owner occupied
The owner of the property lives in it! “Owner occupied” is a classification of
UK housing tenure used by the UK government to monitoring the UK
housing stock. Other classifications are:
- Private rented
- Rented from registered social landlords
- Rented from local authorities
Planning Director
Executive Director responsible for planning. Unclear what roles this would
include at LC plc – probably legal issues relating to proposed property
developments; perhaps contractual arrangements with suppliers?
Planning laws
Legislation which determines the areas on which property (e.g. residential,
commercial, industrial) can be developed
Planning permission
Permission granted by local authorities for a property development.
Obtaining permission often takes a long time, and the process is costly for
substantial developments where a developer meets local resistance
Private company
Companies whose shares are owned privately. A common form of business
organisation.
Private equity company
Another kind of professional investor. Also known as a “venture capitalist”
Private shareholders
Individuals, businesses or other organisations that own shares for their own
account (e.g. an adult investing in a portfolio of shares bought from the
London Stock Exchange)
Term
Definition
Property development
Usually associated with investing in, and developing, commercial property
(e.g. retail outlets, office blocks)
Public limited company
A form of limited company, usually shortened to “plc”, whose share capital
may be offered for sale on a recognised stock exchange.
Risk
The chance (probability) that the expected-for returns from an investment
are not achieved. A high-risk project has a high probability that the returns
will not occur, and perhaps significant losses will be incurred
Shares
The means by which ownership of the company is divided. A shareholding is
a number of shares – often expressed as a percentage (e.g. “20% of the
shares”). In a company, normally one share has one voting right. So
someone with a 20% shareholding will control 20% of the voting rights on
company decisions
Social environment
Factors relating to the size and structure of society that impact the market.
For example, the number of adults living alone (single-person households);
the relative attractiveness of city-living compared with those who want to
live in the suburbs or country
Starter houses
New houses built to be priced as affordable for new entrants to the housing
market (i.e. lower-price, basic facilities, smaller)
Comprehension worksheet
Question
Answer
What was the original business
activity of Layton Construction
(“LC”)?
House-building
Originally focused on building houses in Hampshire before
widening the geographic reach of the business
Who are the three Layton children
who became involved in the
business?
Barbara
Gary
Sarah
The three new markets suggested by Residential flats (1-2 bedrooms) [Barbara]
the three children as being suitable
Factory units [Gary]
for LC diversification were?
Commercial property – shopping malls [Sarah]
How many people were there on the 7
Board of Directors at the important
Four executive directors (Jim, Barbara, Gary & Sarah)
meeting in 1988?
Three non-execs – Brenda + two family friends
The main concerns raised by Jim at
the Board Meeting were?
Risky diversification into other property development
markets
Lack of finance in the business to support diversification
Opposition to the proposal to raise finance by floating the
company on the Stock Exchange in order to raise finance
(wanted to retain control within the family)
How was the decision to float the
company achieved?
Three Layton children voted for the change in ownership
structure (60%) supported by two non-execs
Note: this change would require a 75% majority of
shareholders
After the flotation, what proportion
of LC plc did Jim & Brenda own?
None – they decided to sell their shares (probably a
substantial sum given they had 20%) and retire to Spain
Post flotation, who had control of
the company?
No-one
The three Layton children had 40% of the shares combined,
with the remained with private and institutional shareholders
(including a venture capitalist with 11%)
How did the LC plc business develop
as a quoted company?
Strong growth despite some economic downturns
Diversified into a broader range of property development
- Still active in traditional owner-occupied housebuilding
- Small shopping malls (commercial property)
- Residential flats
- Small factory units on industrial estates
Question
Answer
Geographical spread of operations also significantly widened,
though remaining with a focus on the south east
LC plc had been trying to gain a
share of development opportunities
along the M11 corridor and Thames
Gateway since 2000. Why had they
not been successful?
Main reason – being outbid in the prices offered to
landowners
Also frustrated by increasingly stringent planning regulations
and opposition from interest groups
What change in land-acquisition
strategy was proposed by Gary in
2007?
A move towards using Garden Grabbing as a way of acquiring
land for residential development
+ using technology to identify potential sources of land
What concern was raised about
Garden Grabbing
A question of ethics – using commercial persuasion to
encourage property owners to part with their spare garden
land
How much did LC plc pay for its first
purchase of land under the Garden
Grab strategy?
£2.5m
Before starting the development,
what issue arose
A downturn in the economy prompted by a rise in interest
rates (heralding the start of the collapse in property prices)
Exam Style Questions
This worksheet provides you with a series of exam-style questions based on the Layton Construction case study.
These questions are not meant to provide a complete list of all the possible questions that the examiner might throw at you. It is up to you to
make sure that your revision covers all the main areas you have studied on the course. However, this guide will help you to see how the
information in the case can be used to respond to the kind of questions you will be set. We have focused on the key areas raised in the case.
Business Ownership
What this part of the specification is about:
You need to understand and be able to explain the advantages and disadvantages of different forms of business ownership, including:
 Sole trader
 Partnership
 Private limited company
 Public limited company
 Co-operatives
 Not-for-profit or charity
 Franchise
You need to understand that different types of business ownership create different opportunities and constraints and how the type of
ownership affects business objectives and decisions.
Sample questions
Outline responses
Describe two advantages and
disadvantages of Layton
Construction Limited being owned
by family members
Advantages
Disadvantages
Ownership and control of the business is retained
within the family
Shareholders are likely to have common values –
sharing an ethos and beliefs about how things
should be done
Potentially quicker decision-making: family
members can discuss issues informally and come
to agreement easier
Less pressure to take profits out of the business
via dividends
Decisions may be taken for personal rather than
legitimate business reasons
Restricts ability of the business to raise finance –
shares have to be sold to existing or other family
members
Business is less attractive to outside investors whilst
family retains control
Family shareholders may have all their “eggs in one
basket” – e.g. too reliant on the returns and success
of the company
Describe the main advantages of
Layton Construction becoming a
public limited company in 1988
and floating on the Stock Market
Advantages
The most important advantage – Layton
Construction gets access to new capital to develop
the business. The diversification plans of the three
Layton children would require Layton
Construction to access substantial new sources of
finance. Banks would be more likely to lend to the
business too if Layton broadened its shareholder
base and increased the amount of share capital in
the business
A float made it easier for the Layton family
investors to realise their investment. E.g. Jim &
Brenda were able to sell their shares on the open
market and retire to Spain.
Disadvantages
Most importantly, the Board of Layton Construction
plc now have to consider much wider shareholders'
interests when running the company - which are
likely to differ from the family's objectives when the
business was run privately. For example, external
shareholders are likely to emphasise objectives
relating to profit growth and dividend payouts.
Layton could offer employees extra incentives by
granting share options.
The costs of flotation can be substantial and there are
also ongoing costs such as higher professional fees.
Being a publicly quoted company can provide
customers and suppliers with added reassurance
Public companies have to comply with a wide range
of additional regulatory requirements and meet
accepted standards of corporate governance
Increased risk of takeover – though any potential
purchaser would need to gain the support of the
three Layton children
Layton Construction gains a higher public profile –
potentially useful when negotiating contracts with
suppliers and marketing the various property
developments
The business may become vulnerable to market
fluctuations beyond its control. There is little that
Layton Construction management can do if the
property development sector becomes unpopular
(share price may fall) or if overall market sentiment
drives the value of the business down.
Sources of Finance
What this part of the specification is about:
You need to understand and be able to explain the options available for different types of businesses when selecting appropriate sources of
finance to fund business decisions. You need to know the differences between the different sources and their advantages and disadvantages.
In particular, you need to know about:
 Internal versus external sources, giving examples.
 Short term versus long term sources of finance, giving examples.
You also need to understand how the type of ownership influences business decisions regarding finance.
Sample questions
Suggested answers
Explain, with examples from Short term finance is usually only available to business for periods of up to one year. i.e. it will need to be repaid
the case study, the
within that time. Examples include trade credit (amounts owed to suppliers) and bank overdrafts.
difference between shortterm finance and long-term For Layton Construction, the business will make extensive use of a variety of sources of short-term finance.
finance.
For example, the business will:
- Bank overdraft – likely to be substantial
- Owe money to suppliers of building equipment and services (trade creditors)
- Credit from sub-contractors (trade creditors)
- Leasing of construction equipment (leasing / hire purchase)
Long-term finance is available for periods of over 1 year and is generally suited to financing assets such as plant
and machinery, land and buildings. Good examples include mortgages (loans to buy property), finance leases and
bank loans. Share capital is also a source of long-term finance
Again, as a complex & substantial business, Layton Construction will utilise a range of long-term sources:
-
-
Share capital: raised during the stock market flotation in 1988 + potentially additional share sales since
then. This would have been substantial – likely to be £20m++
Mortgages – raised to finance the purchase of land. A crucial source of finance for a property developer –
the value of the land can be used as security for the finance raised until profits are realised by selling the
completed property development
Bank loans: another important source for a property development; may also be secured against specific
property developments
Explain, with examples from Internal finance is generated from within the business
Layton Construction, the
Examples:
difference between internal
- Profit earned on individual property developments (when completed and sold) – this is known as retained
finance and external
profits
finance.
- Interest and other returns received on amounts held in cash or as investments
- Sale of surplus assets – e.g. disposing of surplus land or other property assets that are acquired during the
course of business
For Layton Construction, retained profits will be the most important source of internal finance
External finance is provided by individuals or organisations outside of the business
Examples:
- Equity finance raised from the issue and sale of new shares to investors (via the Stock Market)
- Bank loans and overdraft facilities
- Mortgages
- Trade creditors
Budgeting and Budgetary Control
What this part of the specification is about:
You need to be able to:
 Construct simple budgets from given figures and interpret them.
 Understand the different types of budgeting available, i.e. historic and zero-based budgeting, including their advantages and
disadvantages.
 Understand the budgeting process in different contexts and for different types of business.
 Understand the purpose of budgetary control and variance analysis and be able to apply them effectively.
You also need to understand how budgetary control helps businesses to co-ordinated their future marketing, production and human resources.
Sample questions
Suggested answers
Discuss the importance of
budgeting to a business like
Layton Construction
Budgeting will be an important role within the finance department at Layton Construction. It will be closely
linked with the planning team.
Why so important?
Layton Construction is a public company, whose financial results will be reported on every six months, It is vital
that the company has strong financial control processes (a requirement of the Stock Exchange). Budgeting plays
a key role in that.
Layton takes a risk with each property development that it commits to, with substantial fixed costs and financial
outlays up-front. There is a significant uncertainty about what the financial returns will be from each project
until it is:
(a) Completed (total costs incurred)
(b) Sold (total revenue determined)
For all projects in progress, it is essential that strong budgetary control is maintained so that the project
managers (and Board of Directors at the higher level) can track actual costs and revenues against target (budget)
If a project were to incur substantial adverse variances against budget (e.g. costs higher than budget; or sales
lower than budget), the effect on Layton Construction’s financial performance may be significant
Cash flow budgeting is particularly important:
- In a typical property development, most of the cash outflows arise at the start (e.g. purchase of land) and
in the middle of the project (e.g. paying suppliers, labourers). The cash inflows typically arise at the end of
the project – once a customer can purchase a flat, occupy an industrial unit or lease a unit in a shopping
mall
- Because of the negative cash flows throughout much of a project, it is essential that costs are kept under
control and that the timing of cash flows is properly anticipated by the business.
- The cash flow budget therefore needs to link closely with regular and accurate/prudent cash flow
forecasting
Break-Even Analysis
What this part of the specification is about:
You need to be able to:
 Classify business costs into fixed and variable.
 Know the formula for calculating break-even.
 Construct a break-even chart (although you will not be asked to construct a break-even chart in its entirety in the exam).
 Calculate break-even using given data and comment on how a business’ break-even point can be changed.
 Describe how break-even calculations can be used in business decision-making, e.g. location, purchase of capital.
 Identify the limitations of break-even analysis.
You will also need to understand the importance of forecasting in calculating break-even.
Breakeven is a popular area for the Unit 3 examiner to test your understanding with some calculations. We have included a breakeven
worksheet for the garden plot development so that you can practice this important area
Sample questions
Suggested answers
Describe some examples of
fixed costs that might be
incurred by Layton
Construction.
Fixed costs are costs that do not change as output changes.
Many of Layton Constructions costs will be fixed. The costs incurred will be determined by the scale and
complexity of the development.
Examples:
Fixed costs of buying a plot of land
Business rates & property insurance
Overheads associated with operating the Head Office and other regional offices (e.g. regional sales teams)
Legal and other professional fees
Costs of operating as a public limited company (e.g. publication of annual accounts)
Identify two variable costs
that might be incurred by
Layton Construction.
Variable costs are costs that do change with output.
For Layton Construction, it is a little tricky working out what would be a variable cost of a particular
development. How can units be identified (in order to calculate the breakeven level)?
One way to approach this is to consider a typical residential housing development:
The fixed costs associated with the development would include the cost of buying the land and marketing the
development to potential house-buyers. These are fixed in that they stay the same regardless of how many
houses or flats are built.
The variable costs (i.e. those which change with the number of units built) would include:
- Fixtures and fittings added to each unit (e.g. bathrooms, kitchens, plumbing, heating etc)
- The labour costs of work done on each unit
Explain why it is important
for Sarah to know the
breakeven output on the
first garden plot
development
Key reasons include:
- The development is the first garden plot project – so Layton Construction has no experience of seeing
the actual profits or losses that can arise on such a project
- The amount invested is significant (£2.5m)
- Economic uncertainly means that it is difficult to be certain of the minimum selling price that will be
achieved for each of the 15 proposed units
Identify one limitation of
using break-even analysis
for a business such as
Layton Construction.
The main limitations include:
 Forecasting variable costs accurately – the cost of materials or wage rates may increase unexpectedly,
which will affect the accuracy of the break-even analysis.
 Forecasting fixed costs accurately – for example, there may be unforeseen costs associated with
modernising the factory’s production process.
 The actual selling price to be achieved. After a period of sustained increases in property prices, Layton
Construction is facing a period of significant reductions in selling prices as the housing market bubble
bursts
Cash-Flow Forecasts and Statements
What this part of the specification is about:
You need to be able to:
 Calculate and interpret figures within a cash-flow statement or forecast.
 Understand the mechanics of cash-flow.
 Identify and explain the possible causes of cash-flow problems.
 Understand and suggest strategies for resolving cash-flow problems.
You will also need to understand the importance and role of cash-flow forecasting in helping a business to improve future marketing,
production, finance and human resource activities.
Sample questions
Suggested answers
Explain, using examples, the
difference between cashflow and profit.
Cash-flow refers to the amounts of money flowing into and out of a business over a given period of time.
Profit, on the other hand, is the difference between the sales revenue generated and the total costs incurred by
a business.
In the property development industry, the differences between cash flow and profit can be significant.
For example, Layton Construction will incur significant cash outflows at the start of a development project, but
these will not be initially recognised as costs in the profit and loss account.
Take the example of the purchase of land for the garden plot development (£2.5m). This will be a cash outflow.
However, the £2.5m will be shown as an asset in the Layton Construction balance sheet (i.e. not a cost) until the
development is completed and the houses begin to be sold.
Another example would be the purchase of building materials and the payments to construction workers. The
payments are made as required. However, the costs are held as an asset in the accounts as “work-in-progress”
until they are released into the profit and loss account when the development is completed.
Describe two benefits for a
business such as Layton
Construction of drawing up
a cash flow forecast.
This is a really important activity for Layton Construction –since the business invests in projects which involve
substantial cash outflows upfront, with cash inflows coming much later.
Drawing up a cash-flow forecast will have a number of benefits for the company, including:
 It will allow Layton Construction to identify any possible cash-flow problems well in advance, e.g.
insufficient cash inflow from sales of completed plots to cover expenses that are due to be paid in any
particular month.
 As a quoted company, Layton Construction will be required to make a statement in its accounts that the
business has sufficient cash flow facilities available to allow the business to continue as a going concern.
The cash flow forecast is essential to supporting this statement.
 Layton Construction is likely to have significant and complex banking and mortgage arrangements – it
will need to be able to produce cash flow forecasts for each of its business activities and to consolidate
those for the company as a whole as part of the process of keeping their banks informed about the
business
Suggest one reason why
Layton Construction may
experience cash flow
problems.
The most likely cause of cash flow problems include:
 Lower than expected selling prices or delayed completions on developed units. This is the big risk for
Layton Construction – that the expected cash inflows from sales revenues prove less than budgeted or
that the sales do not occur quickly after the building work is done.
 The next most likely cause of cash flow problems is when the construction costs prove to be larger than
expected. For example, Layton Construction may need to pay more than expected to acquire land; or
building sub-contractors experience cost-overruns which they are able to pass on.
Importance of Accurate Record Keeping and Technology
What this part of the specification is about:
You need to understand and be able to explain the importance to businesses of keeping accurate financial records. You also need to
understand the consequences of failing to do this.
You need to have a clear understanding of the advancement of modern technology within the financial business environment, referring to
accounts packages, spreadsheets, databases and order tracking. You need to understand how ICT can be used within a business, and its
advantages and disadvantages.
You also need to appreciate the effect of modern technology on business efficiency and competitive advantage, including its effects on:
 Staff performance and productivity.
 Average direct and indirect costs.
 Quality and branding.
Sample questions
Suggested answers
Identify and briefly explain
two reasons why a business
should keep accurate
financial records.
Reasons for keeping accurate financial records include:
 In order to measure the business’ performance – it would be impossible to work out how
profitable the business is, for example, without full and accurate records.
 In order to monitor the business’ performance – it would also be impossible to analyse the reasons
why the business is doing well or badly.
 In order to ensure that customers pay on time and debts are paid when they fall due – otherwise,
the business will not receive payment for services and risk legal action if it does not or cannot pay
its bills.
 Legal reasons – accounts of limited companies need to be prepared and published annually,
according to the Companies Act 1985. They also need to be audited to ensure that they give a true
and fair view.
Identify one internal user and
one external user of financial
information about Layton
Construction.
Internal users (i.e. those within the business) include:


The Board of Directors – as a quoted company, the Board will spend considerable time looking at
the historical and future financial performance of the company
Project managers – vital that they have accurate and up-to-date information about the costs and
revenues of each development project
External users (i.e. those outside the business) include:




Gary Layton suggested that
Barbara’s planning team use
technology to identify
properties with large gardens.
Describe two ways in which
technology could be used as
part of the Garden Grab
strategy
Most importantly – shareholders of Layton Construction plc
Banks and other lenders – who will monitor the company closely, particularly during an economic
downturn
Suppliers – including sub-contractors
Government departments – the Inland Revenue, Customs and Excise.
There are two key tasks involved in the garden plot strategy:
(1) Identifying the potential plots
Role for technology:
Use satellite images (e.g. Google Maps) of target locations to identify potentially suitable properties
Searching online and other digital databases (e.g. Land Registry)
(2) Marketing to potential land and property owners
Role for technology:
Direct marketing to acquired names and addresses (direct mailing campaigns)
Online advertising
Analysis of the Current Market Position
What this part of the specification is about:
You need to identify, understand and explore the importance of SWOT analysis in helping a business to achieve its marketing objectives.
You also need to understand the importance of marketing tools and their role in helping a business make the right marketing decisions.
You also need to be able to conduct simple investigations into the case study organisation and the market in which it operates, using:
 SWOT analysis
 PEST analysis
 SLEPT analysis
Sample questions
Suggested answers
Using evidence from the
case study, complete a
SWOT analysis of the icecream diversification
opportunity for Layton
Construction
Strengths:
 Long-established property development business
 Quoted company status – access to capital raising
 Risk diversified across main property sectors (residential, commercial & industrial)
Weaknesses:
 Frequently outbid on land purchases (though potentially a strength –i.e. not paying too much!)
Opportunities:
 Expansion of residential property development using brownfield sites (garden grab)
 Further geographical expansion
Threats:
 Economic downturn, particularly in property market, threatens profitability and cash flow
 Competitive threat from much larger and better-financed developers
Using the information
provided in the case study,
carry out a SLEPT analysis
for Layton Construction.
Social:
 Changes in household structures affect demand for residential property (e.g. more single-person
households; ageing population needing more secure housing
 Changes in shopping habits – migrating away from high street shopping to online
Legal:
 Tougher planning permission guidelines for greenbelt, commercial and industrial developments
 More relaxed planning permission for brownfield sites – driven by Govt desire for substantial increase in
the housing stock
Economic:
 Severe economic downturn – reducing consumer disposable incomes
 Collapse of the residential property market – substantial fall in selling prices
 Decline in commercial property market – weaker consumer spending has reduced demand for new retail
space
 Higher rate of business failure putting pressure on industrial unit returns and rents
 Credit crunch – tightening availability of finance for businesses (particularly bank loans / overdrafts +
substantial reduction in availability of mortgage finance)
Political:
 Political pressure to increase UK housing stock (positive)
 Political pressure to relieve the effects and problems of the economic downturn
Technology:
 Property development not subject to significant technological change
Economic Conditions and Market Conditions
What this part of the specification is about:
You need to understand the various external influences on a business and how these affect decisions regarding future development.
These cover the basic principles of:
- Economic indicators, e.g. inflation, unemployment, exchange rates, and interest rates.
- Changes in the competitive structure of the market, e.g. increased or decreased competition.
- Unpredictable external influences on the market
You also need to identify, analyse and explain how these factors combine to affect a business’ strategic plans and decisions regarding the
future.
Sample questions
Suggested answers
Analyse the main
implications for Layton
Construction of the severe
economic downturn in the
UK
Areas to be explored:
Weaker consumer spending:
- Translates directly into weaker retail sales
- High number of retailer business failures (effect on Layton Construction rents?)
- Increase in supply of available retail units = lower demand for new retail space (Layton’s business is
developing new commercial space)
Collapse of the housing market (important)
- Collapse of the residential property market – substantial fall in selling prices
- Reduces the profitability of existing residential developments – e.g. the first garden grab
development. The development costs are fixed (e.g. based on original price paid for land + cost of
work undertaken so far)
- Reduces the potential returns from future developments (what assumptions should Layton make
-
about selling prices and the timing of sales.
May help by reducing the price that Layton pay for land in the future
Credit crunch (sources of finance) (also important)
Tightening availability of finance for businesses (particularly bank loans / overdrafts + substantial reduction
in availability of mortgage finance)
Layton Construction share price likely to have fallen significantly – in line with other property developers.
Significant adverse effect on the ability of Layton to raise new finance through the issue of shares (rights
issue)
Ethical, Legal, Social, Political and Environmental Factors
What this part of the specification is about:
You need to understand that, in order to stay competitive, businesses need to be seen to have an awareness of non-financial
considerations. In particular, you need to have an understanding of:
 The difference between laws and ethics and how they affect business decisions.
 The differences between legal and ethical responsibility.
 The impact of changing social trends on companies and their business focus.
 The importance of environmental responsibility in the strategic and day-to-day conduct of business.
You also need to know about the cost-benefit approach to these aspects of the external environment as an approach adopted by many
businesses.
Sample questions
Suggested answers
Briefly explain, using
examples, the difference
between legal and ethical
responsibility.
The law provides a foundation for business responsibility, i.e. businesses must ensure that any decisions
made are within the law or risk prosecution.
Accepting ethical responsibilities usually requires businesses to go further than this, by doing what is
accepted as being morally correct.
The main ethical issue raised in the case study is the approach taken to the obtaining land using garden
grab.
Discuss whether Layton
Construction is behaving
responsibly in relation to
the garden grab strategy
Start by making the distinction between legal & ethical responsibility:
Legally responsible?
A well established technique in the residential development market (see this link from The Ecologist)
Appendix 4 letter: perfectly reasonable and legal – an approach inviting property owners to participate in
discussions
Ethical responsibility?
Arguments against?
- Damaging to the local environment of many villages and towns – gardens provide a key habitat for
animals and plants; large gardens are part of the heritage of the nation
- Home owners may feel under pressure to agree, particularly if other nearby homeowners agree
- Offer may involve inflated expectations of the price that will be offered
Arguments for?
- UK has a shortage of suitable housing stock
- Large gardens are often unused – much better to convert them into pleasant residential
accommodation
Stakeholders
What this part of the specification is about:
You need to understand that there are a number of different groups of individuals who may have a stake in the decision-making process of
a business, including:
 Owners
 Employees
 Suppliers
 Customers
 Pressure groups
 Local community
You need to understand how these different groups can impact on the decision-making process.
Stakeholder Summary for Layton Construction
Stakeholder group
Shareholders
Lenders
Employees
Customers
Interest in Layton Construction
Share price & dividend
Financial performance
Risk that the business will be able to continue as a going
concern
Corporate social responsibility
Profitability & cash flow
Risk of defaulting on debts (bank loans, mortgages etc)
Security of employment
Remuneration
Quality of product & customer service
After-sales service is particularly important
Potential conflicts with other stakeholders
Lenders – who may have security over company assets
Directors and managers – external shareholders may
wish to see the company take different strategic
decisions
Shareholders – who will want to receive a dividend
Management & shareholders – conflict over pay
Management – disputes over quality of service provided
Suppliers
Commercial terms for supplying the business
Risk that they will not be paid
Local communities
Directly affected by the property development process
– before, during (disruption) and after
Concerns over damage to local environment (e.g. effect
of garden grab, congestion)
Profits earned (corporation tax)
Collection of VAT , PAYE & NHI on behalf of government
Planning authorities (local government)
Government
Management – disputes over the value, status and
quality of work performed
Timing of payments
Management – e.g. disputes over planning permissions
Concerns over disruption from development
Management – particularly over planning applications
Tips for the exam

Get hold of some exam style questions before the exam and have a go – The OCR website contains some specimen materials to give you
a feel for the exam and your teacher should be able to supply you with similar questions to those you will be facing in a few weeks’ time.
Becoming more familiar with the format and the kind of questions you will face will hopefully allow you to settle down more quickly for
the real thing. Practising the exam discipline of sticking to time allocations for questions is an effective way of revising in the run-up to the
exam and will help you to develop the skill of making each word count.

Try to get hold of the relevant mark schemes too – your tutor should have these. They are designed to help those marking the exam
rather than those answering it so they won’t give you model answers. However, they will help you understand what marks are awarded
(and not awarded) for, which may give you a clearer picture of what you have to do.

Know the case study inside out - the OCR Applied Business Unit 3 paper is based on a pre-released case study – Layton Construction - that
you should receive several weeks before the day of the exam, so you have no excuse. This will make your answers more relevant to the
case study and improve your chances of picking up application marks. It should also allow you to pick up evaluation marks if you can
devise solutions that are relevant to Layton Construction, the business in the case, rather than firms in general.

Read the questions carefully, highlight trigger words and note the mark allocation – it is vital that you understand exactly what you
should be doing before you begin to write, as the time allocation means you can’t afford to waste time making irrelevant points. Suddenly
realising that you have misunderstood the question half way through the answer may also make you panic and affect your performance on
the rest of the paper.

Use the mark allocation as a guide to how much time you should be spending on each question – make sure that you pay attention to
the marks allocated to each element of the question and use this to allocate the time spent on each question appropriately. The Unit 3
exam is 1 hour and 30 minutes long and is worth a total of 100 marks – that’s less than 1 minute to earn each mark. In reality you have
even less time than this to think and write down your answers if you allow yourself ten minutes to read and consider the questions
properly and then five minutes to read back answers to check for mistakes (see below). That makes it more like forty-five seconds for each
mark - in other words an eight-mark question equals six minutes spent! The mark allocation for each part-question and each question in
total is clearly indicated next to each question, so use it to divide your time up sensibly – that way you’ll have a better chance of picking up
marks for each question.

Don’t be tempted to go over your time allocation for individual questions once you’ve worked this out - those odd minutes here and
there soon add up! Extra time spent waffling on, repeating yourself or giving extra examples will rarely earn you many marks, and these
are unlikely to make up for missing out questions elsewhere. Being and feeling organised will help you feel calm and in control, which has
to be a better state for remembering subject matter than getting flustered and panicking.

Start your answer to each question with a concise but comprehensive definition of the key term, concept or theory that is the subject of
the question you are answering - a quick glance of any GCE Applied Business mark scheme will confirm that examiners will award at least
some of the marks available if candidates can demonstrate an understanding of the key terms and theories used, so it’s worth defining the
relevant concepts, even if you don’t feel totally confident about answering the question as a whole. In addition to this, students often
struggle to begin their answers and end up wasting time rewriting parts of the question without earning any marks. A concise definition is
a more effective way of ‘getting going’ by increasing your confidence (and that of the examiner) in your ability, as well as earning you
valuable marks.

Identify key trigger words in questions – underline them if necessary - these are the words that tell you what to do so it’s important that
you understand them. Make sure you understand the difference between outline, explain and evaluate, for example. The question may
be asking you to do more than one thing, e.g. ‘outline two possible trade restrictions……… and evaluate their effectiveness.’ It may seem
obvious now but exam stress and the desire to finish the paper may cause you to overlook vital instructions.

Remember that this is an applied course - apply your answers to the circumstances given in the questions by giving relevant examples
wherever possible.

Make sure you also understand the key terminology for your particular unit – answering questions on SWOT, break-even and
stakeholders etc. will be tricky to say the least if you don’t know what these terms mean. The day of the exam is not the best time to start
recalling the meaning of concepts and theories explained weeks and months ago – refer to and update the glossary of terms as you go
along and test yourself regularly. Try using these terms in your answers too – not only will the examiner be impressed by your knowledge
but speaking the language of the subject cuts out lengthy explanations.
Layton Construction
Garden Plot Development – Breakeven Exercise
Part 1
Sarah’s original costings for the garden plot development showed that Layton Construction
would make a “considerable profit” at the price the company planned to sell the newly built
properties.
Her assumptions were as follows:
Number of plots sold
15
Selling price per plot
£375,000
Variable cost per plot
£75,000
Fixed cost of land purchase
£2,500,000
Marketing and other fixed costs
£500,000
Tasks:
Calculate:
(a) The expected sales revenue if all 15 plots are sold
(b) The expected profit on the development assuming that Sarah’s assumptions prove
accurate
(c) The breakeven output using the assumptions above
(d) The margin of safety based on selling all 15 plots
Part 2
As a result of the economic downturn, Layton Construction finds it hard to sell the 15 plots
(all of which are completed). It is forced to offer a discount on the selling price in order to
encourage house-buyers. As a result, Sarah has to adjust her assumptions for the financial
returns from the development.
Her revised assumptions are as follows:
Number of plots sold
10
Selling price per plot
£325,000
Variable cost per plot
£75,000
Fixed cost of land purchase
£2,500,000
Marketing and other fixed costs
£500,000
Tasks:
Calculate:
(a) The revised profit or loss on the development assuming the above assumptions
prove direct
(b) The new breakeven output and margin of safety
(c) The difference between the original and revised profit on the development
SOLUTION
Layton Construction
Garden Plot Development - Breakeven
Original
Budget
15
375
75
3000
Economic
Downturn
10
325
75
3000
Profit and loss account
Sales revenue (£'000)
Variable costs
CONTRIBUTION
Fixed costs
PROFIT / LOSS
5625
1125
4500
3000
1500
3250
750
2500
3000
-500
Breakeven calculations
Contribution per plot
Breakeven output
Margin of safety
300
10
5
250
12
-2
Assumptions
Number of plots
Selling price per plot (£'000)
Variable costs per plot (£'000)
Fixed costs - inc land purchase (£'000)
OCR AS Applied Unit 3 – Exam Topics
Recent key topics examined in Unit 3 are:
Specification Area
June 2006
Jan 2007
June 2007
Jan 2008
Jun 2008
Business
Ownership
Advantages /
Disadvantages of private
limited company
Identification of internal
and external stakeholders
Stakeholder conflicts
Objectives for a start-up
business
Appropriateness of sole
trader
Internal and external
stakeholders
Private ltd companies
versus public companies
Identification of
stakeholders
Defining a sole trader
Problems operating as a
sole trader
Defining a franchise
Advantages /
Disadvantages of setting
up as a franchise
Meaning & significance of
limited liability
Evaluation of decision to
become private company
Defining & identifying
stakeholders + how they
are judged
Discussion of influence of
stakeholders
Conflict of interest
Sources to finance
acquisition of new
machinery
Stakeholder conflicts
Definition of leasing
Alternative methods of
financing fixed assets
Completion of partfinished budget &
calculation of variances
Purpose and benefits of
budgeting
Calculation and
interpretation of variances
Completion of budget
Calculation of expected
profit
Identification of items
missing from a budget
Definition of fixed &
variable costs
Completion &
interpretation of breakeven chart
Defining break-even
Categorising fixed &
variable costs
Calculation of break-even
output & margin of safety
Calculation of projected
profit
Usefulness of break-even
Sources of Finance
Budgeting and
Budgetary Control
Definition of budget
Purposes of budgets
Benefits of using variance
analysis
Calculation and
interpretation of variances
Break-Even
Analysis
Cash-Flow
Forecasts and
Statements
Definition of cash flow
forecast
Benefits of producing a
cash flow forecast
Completion of part-
Detailed calculations of
profit and loss and breakeven
Completion of cash flow
statement
Identification of cash flow
problems from data
provided
Specification Area
June 2006
Jan 2007
June 2007
Jan 2008
Jun 2008
Ways in which ICT could
be used
Advantages of using ICT
Costs associated with the
introduction and use of
ICT
Three business activities
that can be computerised
Analysis of case for and
against computerisation
Implications of social and
political change on the
business
Completion of a partial
SWOT analysis
Role of SWOT in achieving
marketing objectives
finished cash flow forecast
Interpretation of cash flow
data & problems
Advantages of using
spreadsheets for cash flow
forecasts & budgets
Importance of accurate
record-keeping
Importance of
Accurate Record
Keeping and
Technology
Analysis of the
Current Market
Position
Economic
Conditions and
Market Conditions
Impact of the external
environment on the
business
SWOT analysis on the case
study business
Assessment of impact of a
new competitor
Assessment of three
potential options
Evaluation of business
proposal
Completion of SLEPT
analysis
Completion of a PEST
analysis
Discussion of social and
economic issues arising
from a decision
Evaluation of effects of
changing business
environment
The main themes in the Layton Construction plc case study for June 2009 are:

Main point
Definitions of three
economic terms
Evaluation of the effect on
the business of changing
economic conditions