CBSE Class 12 Business Studies Solved Question Paper- 2020 Set 2

Business Studies
Code No. 66/C/2

Time allowed: 3 hours
Maximum Marks: 80

General Instructions :
Read the following instructions very carefully and strictly follow them :
(i) This question paper comprises five sections – A, B, C, D and E. There are 34 questions in the question paper. All questions are compulsory.
(ii) Section A – Question nos. 1 to 20 are very short answer type questions, carrying 1 mark each.
(iii) Section B – Question nos. 21 to 25 are short answer type I questions, carrying 3 marks each.
(iv) Section C – Question nos. 26 to 28 are short answer type II questions, carrying 4 marks each.
(v) Section D – Question nos. 29 to 31 are long answer type I questions, carrying 5 marks each.
(vi) Section E – Question nos. 32 to 34 are long answer type II questions, carrying 6 marks each.
(vii) Answers should be brief and to the point.
(viii) There is no overall choice in the question paper. However, an internal choice has been provided in one question of 3 marks, one question of 4 marks, three questions of 5 marks and two questions of 6 marks. Only one of the choices in such questions have to be attempted.

SECTION A

1. Which of the following is a component of economic environment?
(A) Concern with quality of life
(B) Rates of saving and investment
(C) Extent of government intervention in business
(D) Birth and death rates

Answer: (B) Rates of saving and investment

Economic Environment refers to all the forces that have an economic impact on business activities. We know that business is an economic organization. Therefore, its survival and growth are dependent on economic factors. The economic environment includes various factors, such as inflammation, interest rate, price level, money supply in the market, etc.

2. The principles of management are said to be flexible as:
(A) they aim at influencing behaviour of human beings.
(B) they are general guidelines to action, but do not provide readymade solutions to management problems.
(C) they can be modified by the manager when the situation so demands.
(D) their application is dependent upon the prevailing situation at a particular point of time.

Answer: (D) their application is dependent upon the prevailing situation at a particular point of time.

Principles of management are not rigid. These principles can be modified as per the need of the organisation. They are flexible and give managers enough discretion to modify and apply them as per the situation.

3. State, giving reason, whether the following statement is true or false :
‘‘A rule is the prescribed way or manner in which a task has to be performed considering the objective.’’

Answer: False; A method is a prescribed way or manner in which a task has to be performed.

4. The objective of management which consistently creates economic value for various constituents of society is :
(A) Organisational objective
(B) Social objective
(C) Personal objective
(D) Both Social and Personal objective

Answer: (B) Social objective

Social Objectives refer to the objectives which are desired to be achieved for the benefit of society. Every organisation has a social responsibility to fulfil during its existence. Some of the social obligations of an organisation include implementing environment friendly practices in the production process, providing basic amenities to employees such as healthcare, education, etc.

5. Identify the type of organisation structure from the organisational chart given below of Swastika Industries Ltd. located in Uttarakhand :

Answer: Swastika Industries Ltd. have Divisional Organisation Structure, as jobs related to one product are grouped under one department.

6. Which of the following is NOT a step in the process of planning? 
(A) Making assumptions about the future.
(B) Evaluating different proposals in light of the objectives to be achieved.
(C) Allocation of jobs to members of each department.
(D) Seeing whether activities are performed as per schedule or not.

Answer: (D) Seeing whether activities are performed as per schedule or not.

Under the function of directing, the managers need to check whether activities are performed as per schedule or not, therefore it is not a step in the process of planning.

7. Which statement is NOT correct, with respect to ‘Organisation Structure’?
(A) Ensures coordination among human and physical resources.
(B) Ensures smooth flow of communication.
(C) Specifies relationship between people, work and resources.
(D) Establishes standards for controlling

Answer: (B) Ensures smooth flow of communication.

Organisation Structure allocates authority and responsibility; lays down the pattern of communication and coordination; facilitates proper control over the operation of a business enterprise; facilities the growth and development of the enterprise and makes an organisation adaptable to changes.

8. Using external sources for filling vacant positions :
(i) Gives a wider choice.
(ii) Simplifies the process of selection.
(iii) Instils a competitive spirit among the existing employees.
(iv) Does not infuse fresh talent in the organisation.
Choose the correct option from the following :
(A) (i) and (ii)
(B) (i) and (iii)
(C) (i), (iii) and (iv)
(D) (ii) and (iv)

Answer: (B) (i) and (iii)

External sources for filling position provides wider choice, qualified personnel, fresh talent and induces competitive spirit among the existing employees.

9. For delegation to be effective, it is necessary that authority granted must be commensurate with assigned __________ .

Answer: Responsibility

10. State the objective of financial management. 

Answer: The primary and most important objective of financial management is to maximize wealth of equity shareholders, which means maximising the market price of equity shareholders. 

11. ‘Temptations’ is a food joint in Imperial Mall in Bengaluru. It is becoming popular among students and working people due to healthy, on-the-go dishes on its menu like ‘Paneer Wrap’, ‘Chickpeas Salad’, ‘Grilled Sandwiches’, etc. It has now decided to open two new branches in other parts of Bengaluru.
Which financial decision has been discussed in the above case?
(A) Long-term investment decision
(B)Short-term investment decision
(C) Dividend decision
(D) Financing decision

Answer: (A) Long-term investment decision

The size of assets, profitability, and competitiveness are all influenced by investment decisions. These decisions generally involve vast amounts of investment and are mostly irreversible except when there is a huge cost. Therefore, once the decisions are made, it is almost impossible for a business to avoid such decisions, and they need to be managed with extreme caution.

12. ____________ test is a measure of an individual’s potential for learning new skills.
(A) Personality
(B) Aptitude
(C) Intelligence
(D) Interest

Answer: (B) Aptitude

Aptitude tests are conducted to determine ability and capacity of the candidate to learn the skills required to perform the specified jobs. These tests also help to know how a candidate will perform in future.

13. Organisations which choose to diversify their operations require __________ fixed capital. (more/less)

Answer: more

14. While the product _____________ sets the lower limit of the price, the utility provided by the product sets the upper limit of price, which a buyer would be prepared to pay.

Answer: cost

15. State, giving reason, whether the following statement is true or false :
‘‘Advertising refers to short term incentives which are designed to encourage the buyers to make immediate purchase of a product.’’

Answer: False; Sales promotion refers to short-term incentives which are designed to encourage the buyers to make immediate purchases of a product.

16. Aarushi purchased a pack of biscuits. When she opened it, she felt the biscuits were stale. She carefully read the label on the pack of biscuits which mentioned :
‘‘If you are not satisfied with the product quality, write to our Customer
Care Cell at
Bell Foods Pvt. Ltd.
B/321, Jalandhar, Punjab.’’
The biscuit company has set up its own consumer service and grievance cell to promote and protect the following right :
(A) Right to Safety
(B) Right to be Heard
(C) Right to be Informed
(D) Right to Consumer Education

Answer: (B) Right to be Heard

Right to be Heard states that a consumer has the right to be heard or advocate his/her interest or represent himself/herself. In simple terms, if a consumer has been exploited by a business or has a complaint regarding a business, good, or service, then he/she has the right to be heard and assured that his/her interest would be taken into consideration.

17. The process of classification of products into different groups on the basis of their important characteristics refers to which of the following marketing functions?
(A) Grading
(B) Standardisation
(C) Product designing
(D) Marketing planning

Answer: (A) Grading

The process of classification of products into different groups on the basis of its characteristics such as quality, size, etc. Grading ensures that goods belong to a particular quality and helps in realising higher prices for high-quality output.

18. Arnav has recently started a business to sell computers. He hired a shop in Nehru Place in New Delhi, where he assembles various components to make computers and supplies them as per order. He performs a series of composite but separate functions simultaneously and ensures that computers are delivered in time as per orders. These functions are performed by all managers at all times.
The feature of management highlighted above is :
(A) Management is a continuous process.
(B) Management is pervasive.
(C) Management is dynamic.
(D) Management is a group activity.

Answer: (A) Management is a continuous process

Management is a continuous process. It means that the process of business management goes on until the company exists, as it helps in achieving the organisational goals. Every manager of an organisation has to perform the different functions of management in a series (planning, organising, staffing, directing, and controlling).

19. Who among the following is NOT considered a consumer under the Consumer Protection Act, 1986 ?
(A) A person who buys any goods for a consideration which has been paid.
(B) A person who avails of any service for a consideration which has been promised.
(C) A person who avails of a service for a commercial purpose.
(D) Any user of goods when such use is made with the approval of the buyer.

Answer: (C) A person who avails of a service for a commercial purpose.

Any individual who obtains any goods or avails service for resale or commercial use is not considered as a consumer under the Consumer Protection Act, 1986.

20. The package of KRM Rawa Idli Mix describes the procedure of cooking idlis in three easy steps. It also specifies its ingredients, instructions for storage and serving.
The function performed by the label in the above case is :
(A) Describing the product and specifies its contents.
(B) Identification of the product or brand.
(C) Helping in promotion of products.
(D) Providing information required by law.

Answer: (A) Describing the product and specifies its contents.

Since the customers cannot meet each and every customer personally, labelling is used to communicate and share information about the product to the customer. All the information related to the product such as content, price, instructions to use, etc., is printed on the product by the manufacturer.For example,labels of ready-to-eat food products have a complete description of how to serve the food.

SECTION B

21. Explain the following steps in the process of staffing :
(a) Performance Appraisal
(b) Promotion and Career Planning
(c) Compensation

Answer: Staffing is that part of management which is concerned with obtaining, utilizing, and maintaining capable people to fill all positions in the organization from top-level to bottom level. It involves the scientific and systematic procurement, allocation, utilization, conservation, and development of human resources.

The steps in the process of staffing are as follows:

a)  Performance Appraisal: After training the employees and having them on the job for some time, there should be an evaluation done on their performance. Every organization has its means of appraisal whether formal or informal. Appraisal refers to the evaluation of the employees of the organization based on their past or present performance by some pre-decided standards. The employee should be well aware of his standards and his superior is responsible for proving feedback on his performance. The process of performance appraisal thus includes specifying the job, performing appraisal performance, and providing feedback.

(b) Promotion and Career Planning: It has now become important for all organizations to deal with career-related issues and promotional routes for employees. The managers should take care of the activities that serve the long-term interests of the employees. They should be encouraged from time to time, which will help the employees to grow and find their true potential. Promotions are an essential part of any employee’s career. Promotion refers to the transferring of employees from their current positions to a higher level increasing their responsibilities, authority and pay.

(c) Compensation: Every organization needs to set up plans for the salary and wages of the employees. There are several ways to develop payment plans for employees depending on the significance of the job. The worth of the job needs to be decided. Therefore, all kinds of payments or rewards provided to the employees are referred to as compensation. The compensation may be in the form of direct financial payments, such as salary, wages, bonuses, etc., or indirect payments like insurance or vacations provided to the employee. 

22. Explain the following as significance of ‘planning’
(a) Planning provides direction.
(b) Planning reduces the risk of uncertainty.
(c) Planning establishes standards for controlling.

Answer: Planning is a blueprint of the course of action to be followed in the future. It is also a mental exercise that requires imagination, foresight and sound judgment. It is thinking before doing. It is a preparatory step and it refers to detailed programs regarding the future course of action.

(a) Planning provides direction: Planning is involved in deciding the future course of action. Fixing goals and objectives is the priority of any organization. By stating the objective in advance, planning provides unity of direction. Proper planning makes goals clear and specific. It helps the manager to focus on the purpose for which various activities are to be undertaken. It means planning reduces aimless activity and makes actions more meaningful.

(b) Planning reduces the risk of uncertainty: Every business enterprise has to operate in an uncertain environment. Planning helps a firm to survive in this uncertain environment by eliminating unnecessary action. It also helps to anticipate the future, and prepare for the risk by making necessary provisions.

(c) Planning establishes standards for controlling: Planning lays down the standards against which actual performance can be evaluated and measured. Comparison between the actual performance and predetermine standards help to point out the deviation, and take corrective actions to ensure that events confront plans. In case of any deviation, the management can take remedial measures to improve the results.

OR

Explain the following as importance of delegation :
(a) Effective management
(b) Better coordination
(c) Facilitation of growth

Answer: Delegation of authority means the division of authority, position, and power flowing downwards to the subordinate. It can also be defined as subdivision and sub-allocation of formal authority to the subordinates to achieve the desired result. In fact, it is the base of the superior-subordinate relationship.

(a) Effective management: Delegation make it possible for the managers to distribute their workload amongst subordinates. With the reduction of workload, a manager can give more time for strategic planning and for making policy. Delegation enables managers, to assign routine work to their subordinates and managers to concentrate on challenging jobs.

(b) Better coordination: The three-element of delegation helps to define power, duties, and answerability related to the various job positions. It provides clarity in duties to be performed and avoids overlapping or duplication of work.

(c) Facilitation of growth: Delegation allows the lower-level management to show their capability. It helps the organization to grow. It acts as a good training ground and prepares subordinates during diversification and expansion of business.

23. Vaibhav Sharma was working as the Production Manager in Crescent Pharmaceuticals Pvt. Ltd. To get his son admitted in school he wanted to take leave from the office but on the same day, an important meeting with the Chief Executive Officer (CEO) of the company was scheduled to discuss about some new medicines to be manufactured. Considering the significance of the meeting, he did not take leave. The CEO appreciated his exemplary behaviour as he gave priority to the organisational interest over his personal interest.
Name and explain the principle of management being followed by Vaibhav Sharma in the above case.

Answer: Subordination of Individual Interests to General Interests Principle is being followed by Vaibhav Sharma.

According to this principle, the interest of the organization as a whole must prevail over the interest of the individual. It must be the interest of the organization that should be placed above the interest of employees. It is the duty of the manager to reconcile them. If reconciliation is impossible, then general interest must supersede individual interest. A manager must sacrifice his interest. Manager can achieve their objectives when the organization recovers from financial crises. For example, there is a company that wants maximum output from its employees by providing less salaries. There are employees on the other hand who want to get the maximum salary while working the least. In both situations, the interests of the company will supersede the interest of any one individual. As the interests of the workers and stakeholders are more important than the interests of any one person. 

24. ‘Stay Fit’, a probiotic drink was launched in the market by Dabal India Ltd. and is available in various cities across the country. Doctors are recommending it as it is very useful for the stomach. The company is also using various tools to inform and persuade customers about its product. It has recently started free distribution of its samples to encourage the customers to know about its benefits to buy this probiotic drink in future.
The company has also appointed a large number of salespersons, who contact the prospective buyers and communicate with them to make sales. This way, the company is able to develop personal rapport with its customers.
In order to create awareness and to increase its popularity among school children, it also organises workshops for students and teachers. It also arranged visits of students and teachers to the factory to create awareness about the standards of hygiene adopted in processing and packaging, etc. This helps the company to build a positive image of its product in the society. This way the company is using a combination of communication tools to inform and persuade customers about their firm’s product. 
Identify and explain these tools.

Answer: 1. Personal Selling: Personal Selling is used as company has appointed a large number of salespersons, who contact prospective buyers and communicate with them to make sales. The process of informing customers and persuading them to purchase products through personal communication is known as Personal Selling.It is a two-way communication and involves direct face-to-face communication. Salespersons are appointed by companies to create product awareness and preferences with the aim of making sales.Personal selling is flexible as the sales person can change the presentation of the product according to the needs of the purchasing situation. There is direct and face-to-face contact between salespersons and customers in personal selling, direct and immediate feedback is given by the customers. 

2. Sales Promotion: The company has distributed free samples to encourage customers to know about the product. This comes under Sales Promotion.Short-term incentives, which are offered to encourage the buyers to make an immediate purchase of a product or service is known asSales Promotion. Sampling is distribution of free samples of a product through sales representatives. Usually, daily products, like detergents, soaps, toothpaste, etc., are distributed using this method. This method is generally used at the time of launch of a new product by a company. For example, get mini lipstick free with Maybelline New York Lipstick.

3. Public Relations: Public Relations is used by the company as it organises workshops for students and teachers. It also arranged visits of students and teachers to the factory to create awareness about the standards of hygiene adopted in processing and packaging, etc. 
The deliberate, planned, and sustained effort to establish and maintain mutual understanding between an organisation and its public is known as Public Relations It is a continuous activity and its aim is to create and manage relations with the public successfully. 

25. Currently, the banking sector in the Indian economy is facing lots of problems. The rates of interest that banks are paying on deposits have sharply decreased; as a result banks are able to collect lesser amounts of deposits.
Due to the policies of the Reserve Bank of India, lending rates have also decreased. The automobile industry is also facing a lot of problems and thus they have also reduced the prices of cars. This has encouraged people to take car loans from banks as the interest rates on loans, along with prices of cars in the automobile sector are declining.
Due to this position of tight liquidity, ‘The Oberoi Bank Ltd.’ decided to raise funds by issuing an unsecured, short-term instrument which could be purchased by corporations, companies and individuals.

(a) Identify and explain the money market instrument used by ‘The Oberoi Bank Ltd.’ to raise funds.
(b) Also explain the money market instrument used by the banks to maintain Cash Reserve Ratio.

Answer:(a) Certificate of Deposit is used by ‘The Oberoi Bank Ltd.’ to raise funds.

A time or deposit that can be sold in the secondary market is known as a Certificate of Deposits (C.D.). It can be issued by a bank only and is a bearer certificate or document of title. A Certificate of Deposit is a negotiable and easily transferable instrument. The banks issue the Certificate of Deposits against the deposit kept by the institutions and companies. The time period of a Certificate of Deposits ranges from 91 days to one year. CDs can be issued to companies, corporations, and individuals during a period of tight liquidity. It is that time when the bank’s deposit growth is slow, but the credit demand is high.

(b) Call Money is short-term finance whose maturity period varies from 1 day to 15 days.It is used mostly by banks. As per RBI guidelines, commercial banks are required to maintain a minimum cash balance with RBI, known as Cash Reserve Ratio(CRR). CRR is changed by RBI from time to time, which affects the availability of funds with commercial banks to be given as loans. Call money is used by banks to maintain the CRR. Besides banks, other organisations like mutual funds companies, insurance companies, etc. also deal with call money. The market of call money takes place over the telephone. The liquidity of call money is just next to cash. 

SECTION C

26. Alka is working in the Accounts Department of ‘Modern Locks Ltd’. Her mother is not well and to attend to her she wanted to take leave for one week.
For this, she went to the Senior Accountant, Manoj and discussed her problem. At that time Manoj was simultaneously checking the Balance Sheet of the company. Since his mind was preoccupied in some work, he did not listen to Alka attentively and could not understand her problem. Alka was quite disappointed with the behaviour of Manoj.
(a) Identify the type of communication barrier discussed above.
(b) Also explain any three barriers of the same type.

Answer: (a) The communication barrier discussed above is Lack of Attention. 

Communication can be less effective, and the message can be misunderstood if proper attention is not given to it. This inattention may arise due to the preoccupied mind of the receiver. For example, a superior gave instructions to operate a new software, however, the subordinate was preoccupied with other personal issues. Such lack of attention makes the communication process one-way and ineffective.

(b) Barriers which arise on the account of emotional and psychological status of the sender and receiver of the message are known as Psychological Barriers. For example, a person who is under stress cannot communicate properly.

Some of the common forms of Psychological Barriers are as follows:

1. Premature Evaluation: The tendency of forming a judgement before listening to the entire message is known as premature evaluation. This distorts understanding and acts as a barrier to effective communication. This can also lead to prejudices against communication.
2. Loss by Transmission and Poor Retention: There is loss of or transmission of inaccurate information when communication passes through various levels or channels in the organisation. It is more common in the case of oral communication. Poor retention also acts as a barrier when people are unable to retain the information for a long time.
3. Distrust: Lack of mutual trust between the sender and the receiver also acts as a barrier to communication. Parties involved in communication cannot understand the message in an original sense when they do not believe each other.
   

27. The Government of India, in an effort to eliminate plastic waste, imposed a nationwide ban on single-use plastic. The ban would most likely target plastic cutlery, straws, cups and glasses.
As a result of this ban, the businesses have been forced to change their practices. ‘Viman Airlines’ decided to stop giving small water bottles on its flights. 

Various firms have come up in the country that are making biodegradable plastic out of starch, wheat hay or petrochemicals. Thus competition in this upcoming industry is immense. 

Businesses are also focusing on developing techniques to produce alternatives for plastic bags. ‘Carlos Technologies Ltd.’, a leading engineering company, has planned to design and deliver hi-tech machines that can scale up production of bags made from newspaper to replace plastic bags. Many companies are placing orders for such machines. This has added challenges before smaller firms making paper bags. In various enterprises, employees are being trained to operate such hi-tech machines. This will provide human resource with higher competence.

Customers have also become more demanding due to increased awareness and are forcing sellers to adopt bags which are not made of plastic.
Identify and explain the impact of the above Government policy on Business and Industry.

Answer: The impact of the above Government Policy on Business and Industry are as follows:

1. Increasing competition:  Competition is increasing as various firms have come up in the country that are making biodegradable plastic out of starch, wheat hay or petrochemicals. 
2. More demanding customers: Increased competition in the market also increased the choice of customers. Customers have also become more demanding due to increased awareness and are forcing sellers to adopt bags which are not made of plastic.
3. Rapidly changing technological environment: There is rapidly changing technological environment as businesses are focusing on developing techniques to produce alternatives for plastic bags. They have planned to design and deliver hi-tech machines that can scale up production of bags made from newspaper to replace plastic bags. Many companies are placing orders for such machines. 
4. Necessity for change: There is a necessity to change as every firm is coming up with the idea of producing bio-degradable plastics. Even Viman Airlines has stopped using plastic water bottles on its flights.
5. Need for developing human resources: Employees are being trained to operate hi-tech machines, which will provide human resource with higher competence.
   

28. Give any four points explaining the role of financial management.

Answer: Financial Management is concerned with the management of the flow of funds and involves decisions related to the acquisition and application of funds in long-term and short-term assets. It is concerned with two aspects: procurement of funds as well as usage of finance.

1. Size as well as the composition of fixed assets: Financial management plays a significant role in determining the size and composition of fixed assets of a business. Such as the decision of investing rupees 80 crores in fixed assets by capital budgeting will realize the fixed assets by the same amount.
2. Quantum of current assets: Financial management decisions can influence the quantum of current assets. The quantum of current assets has to determine the amount of current investment, as well as its breakup into cash inventories and receivables.
3. Amount of long-term and short-term finance: Financial management takes decisions regarding the proportion of long-term and short-term finance. An organization raises more for the long-term basis if it wants to remain more liquid. But long-term debts adversely affect the profitability of the business because debts are costly as compared to short-term debts.
4. Breakup of long-term finance into debt of equity: Financial management decisions also help in fixing the ratio between debt and equity in long-term finance. As for the amount of debt, equity share capital and preference share capital are affected by the financial financing decision.
5. All items in the profit and loss account: Financial management decisions also affect the items in the profit and loss account of the business. For example, the use of more debts means higher interest expense and the use of more equity means higher dividend payments.

OR

What is meant by financial planning? Explain its objectives.

Answer: Financial planning is the process of estimating the requirement of finance of a business specifying the sources and ensuring the availability of enough funds at the right time. 

Financial planning is essential for the preparation of a financial blueprint for a business organization. Its main objective is to ensure that ample funds are available at right time. If enough funds are not available the firm will not be able to honour its commitments and carry out its plans. On the other hand, if more funds are available, it will add costs and encourage wasteful expenditure. Financial management aims to choose the best investment and financing alternatives by focusing on their cost and benefits. 

Financial Planning includes three main aspects:

• Estimation of quantum of finance, i.e., total finance requirements of the business.
• Determination of pattern of financing, i.e., form and proportion of various securities to be issued to raise the required amount.  
• Utilization of finance, by laying down policies and procedures. 

Objectives of Financial Planning

• To ensure availability of funds whenever required: The main object type of financial planning is that sufficient funds should be available in the company for different purposes such as the purchase of long-term assets, to meet day-to-day expenses, etc. It ensures the timely availability of finance.
• To see that firm does not raise resources unnecessarily: Excess funding is as bad as inadequate or shortage of funds. If there is surplus money, financial planning must invest it in the best possible manner. As keeping financer resources ideal is a great loss for an organization.
  Financial planning includes both short-term as well as long-term planning. Long-term planning focuses on a capital expenditure plan. It is normally done for 3 to 5 years. Whereas short-term financial plans are called budgets, and they are for one year or less.
  

SECTION D

29. Sun Industries Ltd. is a leading company in India which manufactures steel. Its plants are located in Jamshedpur and Bokaro. Currently it produces about three million tonnes of saleable steel. As the demand for steel is growing, it is planning to expand the capacity of the existing steel plants. It is estimated that it will require < 1,800 crore of
fixed capital and < 200 crore of working capital. To raise the funds, the company is considering whether it should issue equity shares or 7% debentures of < 2,000 crore. Presently the capital structure is comprising of equity only. The Finance Manager of the company suggested that since the stock markets are undergoing a bearish phase, it should issue debentures.
(a) Is it justified to raise funds by issuing debentures? Give reason in support of your answer.
(b) Explain the impact of issue of debentures on the risk faced by the company.
(c) Explain the impact of ‘cost of debt’ and ‘cost of equity’ on the capital structure of the company.

Answer: (a) Yes, it is justified to raise funds by issuing debentures because Capital Structure should be a mix of borrowed funds(debt) and owner’s funds(equity). The ideal ratio of Equity to Debt should be 2:1. Secondly, the market is bearish, so the value of the issued shares would be undervalued, so raising funds through debentures would be better.

(b) The impact of issue of debentures on the risk faced by the company are:

• Debenture issued will be a liability on which interest has to be paid irrespective of the company’s profit.
• Issuing debenture would be cheaper as compared to equity because interest paid on the debt (debenture) is a deductible expense for computation of tax.
• Raising funds from debentures would be more risky as compared to equity because interest payment and return of principal amount is obligatory.

(c) Cost of debt:  Cost of debt directly influence the extent of debt to be used in the capital structure. If the interest rate on debt is less, then more debt is preferred as compared to equity. However, in case of higher cost of debt, company prefers more of equity.  

Cost of equity: Shareholders expect a rate of return from equity, which is affected by use of debt capital. Use of more debt in capital structure raises the financial risk faced by shareholders. Increase in risk also increases the desired rate of return. So, debt should be used only to a limited level. Any use beyond that level also raises the cost of equity and share price may decrease in spite of increased EPS.   

OR

From last many years, in the month of November, due to sudden rise in the pollution levels in Delhi and other parts of northern India, there has been an increase in the demand for air purifiers. Inderprastha Technologies Ltd., a manufacturer of air purifiers wants to encash this opportunity and wants to raise its investment in stock. It is
expected that this decision would increase the rate of profitability of the business. Due to this many competitors have recently entered in this industry. In order to increase the sales, the company has started selling air purifiers on liberal credit terms. It is not affecting the profits of the company since the production cycle of the product is short.
Identify and state any two factors that ‘Inderprastha Technologies Ltd.’ will keep in mind before deciding its working capital requirements. Also, state three other factors which should be kept in mind while deciding the working capital requirements of a company.

Answer: The two factors that ‘Inderprastha Technologies Ltd.’ will keep in mind before deciding its working capital requirements are:

• Technology and Production Cycle: A company using labour-intensive techniques requires more working capital because it has to maintain enough cash flow for making payments to labour. However, a company using capital-intensive techniques requires less working capital because the investment made by the company in machinery is a fixed capital requirement, and also there will be less operating expenses. 
• Level of Competition: If there is competition in the market, then the company will have to follow a liberal credit policy for supplying goods on time. For this, it will have to maintain higher inventories, resulting in more working capital requirements. However, if there is less competition in the market or a company is in a monopoly position, then it will require less working capital, as it can dictate its own terms according to its requirements.
  

The three factors which should be kept in mind while deciding the working capital requirements of a company are: 

1. Business Cycle Fluctuation: A market flourishes during the boom period which results in more demand, more stock, more debtors, more production, etc., ultimately leading to the requirement for more working capital. However, the depression period results in less demand, less stock, fewer debtors, less production, etc., which means that less working capital is required. 
2. Operating Efficiency: If a company has a high degree of operating efficiency then it will require less working capital; however, if a company has a low degree of operating efficiency then it will require more working capital. (Operating cycle of a firm is the time period from the purchase of raw material to the realisation from debtors). Hence, it can be said that the length of the operating cycle directly affects the requirements of the working capital of an organisation.
3. Growth Prospects: If a firm is planning on expanding its activities then it will require more working capital, as it needs to increase the scale of production for expansion, resulting in the requirement of more inputs, raw materials, etc., ultimately increasing the need for more working capital. 
   

30. State any five merits of internal sources of recruitment.

Answer: Making use of existing staff to fill up vacant jobs is known as Internal source of recruitment. Those employees are recruited for positions who are already working in the organisation. Internal recruitment includes promotion and transfer. In promotion, there is a vertical shift of employees, whereas, in transfer, there is a shift of employees from one place or department to another. Internal source of recruitment motivates the existing employees to improve their performance and is also a cheaper method of recruitment, as employees are already working and already well-versed with the working conditions of the organisation.

Internal recruitment or filling vacancies within the organization have the following advantages:

1. Higher Motivation level: Internal recruitment may help the employees to boost their performance. Promotions at a higher level lead to a chain of promotions at the lower levels. This also increases their status and pay, and motivates the employees to improve their performance. This increases their motivation and commitment to the organization. The employees, thus remain loyal and satisfied with the organization.
2. Simple Process: Internal recruitment makes the process of selection and placement simple. The working of the employees can be evaluated in a better way. This type of recruitment is better as the employees know about the organization well.
3. Develops future managers: Transfer is a method through which employees are trained for higher jobs. The people who are transferred within the organization do not need induction or orientation training.
4. No over or under-staffing: Another benefit of transfers is that the organization can shift employees from one department to another where there is a shortage.
5. Economical: The process of internal recruitment is cheaper in comparison with external sources.

OR

Give the meaning of ‘motivation’. State any four features of motivation. 

Answer: The process of stimulating and inspiring people at work to contribute to the best of their capability for the achievement of organisational objectives is known as Motivation. Motivation is the inner psychological force that activates and compels a person to behave in a particular manner. It is a process of inductive individual desire towards a goal. Human beings drive satisfaction when the goal is achieved. Both financial and non-financial factors motivate employees in the organization.

The features of Motivation are as follows:

1. Motivation is an internal feeling: It is a psychological concept and it cannot be forced on the employees. It is an internal feeling, generated within an individual, which compels him to behave in a particular manner. Feelings like needs, desires, urges, etc., influence human behaviour to act in a particular manner.
2. Motivation produces goal-directed behaviour: Employees’ behaviour is influenced by motivation in such a way that they can achieve their goals. Motivation helps to achieve both organisational as well as individual goals. For example, if a person wants to get a promotion, then he will work harder to achieve the goals effectively and efficiently.
3. Motivation can be either negative or positive: Motivation can be either positive in form of rewards, like additional pay, incentives, promotion, recognition, etc., or negative in the form of force, like punishment, threat of demotion, etc. Positive motivation provides incentives to an individual to achieve the goal, whereas negative motivation creates fear in the mind of individuals in order to influence their behaviour to act in a desired manner.
4. Motivation is a complex process: Humans are heterogeneous in their expectations, perceptions and reactions. A particular type of motivation may not have the same effect on all individuals as it is difficult to predict their behaviours. Therefore, motivation is a complex task.
5. Continuous process: As human needs are unlimited, completion of one need gives rise to another, and it goes on. Therefore, motivation is a continuous process, and it does not end with the satisfaction of a particular need.

31. Explain any five characteristics of coordination. 

Answer: Coordination is the force that connects all managerial functions and ensures the smooth and efficient functioning of an organization. All the activities of an organization such as purchase, production, sales, and finance are connected through this link of coordination, which enables and helps in the continuous working of an organization.

Characteristics of Coordination are as follows:

1. Coordination assimilates group efforts: Coordination combines diverse business activities into a purposeful group activity, ensuring that all people work in one direction to achieve organizational goals. It provides a common focus to
   group effort so that the performance is as it was planned and scheduled. 
2. Coordination assures unity of action: Coordination directs the activities of different departments and employees towards the achievement of common goals and brings unity in individual efforts. It performs as the binding force between departments and assures that all action is aimed at achieving the organizational goals. In an enterprise, the production department needs to coordinate its work with the sales department so that production takes place to the demand in the market. 
3. Coordination is a continuous process: Coordination is essential in every stage of managerial functions. Starting right from the stage of planning, it continues till controlling. It is a continuous process that is required at all levels, in all the departments till the organization continues its operation. In an enterprise, which makes shoes, first, they need to come up with a good plan. Then they have to make sure that there is an adequate workforce and continuously monitor whether production is proceeding according to plans. The marketing department also needs to prepare its promotional and advertising campaigns so that it can increase its sales.
4. Coordination is an all-pervasive function: Coordination is in nature. It integrates the activities of all levels and departments as they are dependent on each other to maintain balance in the organization. To achieve organizational objectives harmoniously, the purchase, production, and sales departmental efforts have to be coordinated properly. For example, in a textile company, the purchasing department is responsible for procuring fabric. Then the production department performs their task and finally, sales can take place. If the quality of fabric purchased is of poor quality or is not according to the specifications of the production department, further sales will also decline, which will lead to loss. In the absence of coordination, there is a lot of chaos, delays, and duplication in the organization.
5. Coordination is the responsibility of all managers: In an organization, every manager needs to perform the function of coordination. It is equally important at all three levels of management, i.e. top, middle and lower levels. Top-level managers need to coordinate with their subordinates to make sure that all the policies for the organization are carried out properly. Middle-level management is the one that coordinates with both the top level as well as the lower-level managers. The operational level or the lower level management coordinates the activities of its workers to ensure that work proceeds according to plans.

OR

Is management a profession? Explain.

Management as a Profession

Profession means a vocation requiring specialized knowledge, practical training, service motive and a code of conduct. A Profession is an addicted group of individuals who obey ethical standards and hold themselves out and are accepted by the public as having special knowledge and skills.

The essential features of a profession are:

• Specialized Knowledge:  All professions are based on a well-defined body of knowledge that can be acquired
  through instruction.
• Formal Education and Training: Almost all professions provide specialized education and training in their respective field. The professionals have to complete their education and training to get a job. There are various universities and formal institutions for attaining a complete education. For example, a doctor needs to complete his formal education and training to practice his knowledge before providing his services to the people. 
• Service Motive: The basic motive of a profession is to serve their client’s interests by rendering dedicated and committed service. All professionals are also anticipated to serve society rather than simply earn profit.
• Statutory Body: A legally recognized body regulates all professions. All professions are affiliated with a professional association that regulates entry, grants certificates of practice, and formulates and enforces a code of conduct.

We can say management has some features of the profession such as:

1. Management has a transmittable body of specialized knowledge. Management is growing all over the world as a discipline. It is based on a systematic body of knowledge comprising well-defined principles based on a variety of business situations. This knowledge can be attained at different colleges and professional institutes and through several books. 
2. Some specialized institutions provide education and training in management. Having completed their education and training, students get placed as managers. Management is taught at different institutions, few of these have been set up with the definite purpose of providing management education, for example, the Indian Institutes of Management (IIMs) in India.
3. The elementary purpose of management is to help the organization to achieve its stated goal. This may be profit-making for a business enterprise and service for a hospital. But, profit maximization as the only objective of management will not help the company. Having a good management team that works effectively and efficiently will serve society by offering a better quality of products at reasonable prices. Alike other professional managers are also anticipated to serve society rather than simply earning profit for the owner.
4. A legally recognized body regulates all professions. Managers also have their associations (e.g., All India Management Association). There is no compulsion for managers to be members of such an association. However, management associations are not statutory bodies. 
   

SECTION E

32. InfoMed Ltd. is a growing IT firm with rapidly increasing market share. It has recently been awarded ‘The Best Organisation to Work in India – 2019’ and is the most sought after by job-seekers. In this company, rules and procedures to be followed by employees have been clearly laid down by the top management. There is no ambiguity in the role that each member has to play, as the duties are specified.
During lunch time, all employees of the organisation get together in the canteen. This time is much awaited by every employee as it allows them to share their feelings with others. This leads to the success of the organisation.
(a) Identify and explain the types of organisation being discussed in the above case.
(b) State two advantages of each type of the organisation identified in (a)above which have not been discussed in the above para.

Answer: (a) Formal Organisation is discussed in the above case. 

Formal organisation refers to the official structure of well-defined jobs, each being a measure of authority and responsibility. This organisational structure is designed by the management to accomplish a particular task. In formal organisation positions and authority of each level are clearly defined. It is deliberately designed to enable people to work together for achieving common objectives. It is a deliberate determination by which people accomplish goals by adhering to the norms laid by the structure. In this kind of organisation, each person is responsible for their performance.

(b) Informal Organisation: Informal organisation refers to a network of social relations, which emerges on its own due to formal roles and relationships amongst people. Informal organisations emerge from within the formal organisation when people interact beyond their official defined roles. When people have frequent contact, they cannot be forced into a rigid formal structure. It means the informal organisation is not pre-planned.

The following are the advantages of informal organisation:

• Faster Communication: Informal organisation follows the independent channel of communication because there is no prescribed official channel. It leads to a faster spread of information as well as quick feedback. Sometimes, management also uses such communication to transmit certain information, which the formal system fails to convey.
• Fulfill social needs: Informal organisation satisfies the social needs of the members, which are not satisfied in formal organisation. This enhances their job satisfaction, as it gives them a sense of belongingness.
• Help in achieving organisational objectives: It contributes towards the fulfillment of organisational objectives by compensating for inadequacies in the formal organisation. Informal organisation provides feedback about the work experience as they discuss their views and ideas with superiors.

OR

‘Good Looks Ltd.’ are the manufacturers of cosmetics. The company enjoyed a pre-eminent position in the business and has grown in size. Till recently the company had been doing good business; but after the entry of competitors the market share of ‘Good Looks Ltd.’ has declined. One of the reasons for this was that all decisions were taken by the higher management. This has resulted in the concentration of all decision-making process at the apex of the management hierarchy. Worried about the decline in market share and profit, the company appointed ‘Structures Consultants India Ltd.’ as a consultant to suggest improvements in the organisation’s decision-making process. The consultant suggested that the decision-making responsibilities may be divided among hierarchical levels. They said that if decision-making authority will be shared with the lowest levels and is consequently placed near the point of action, it will help in quick decision-making and this will help the company in adapting itself to the dynamic operating conditions. They stated that the philosophy of dispersal of authority
propagates the belief that people are competent, capable and resourceful and can assume the responsibility of effective implementation of their decisions.
(a) Identify and give the meaning of the concept based on which ‘Structures Consultants India Ltd.’ gave their recommendations to ‘Good Looks Ltd.’. 
(b) Explain any four points of importance of the concept identified in (a) above.

(a) The concept based on which ‘Structures Consultants India Ltd.’ gave their recommendations to ‘Good Looks Ltd.’ is Decentralisation. Decentralisation implies assigning all the decision-making functions to the lower level of the hierarchy, and that would remove the need for higher management, i.e., the decision-making authority is divided between all the levels of the hierarchy. Both of these situations are unrealistic, and therefore both centralization and decentralization are needed in the working of an organization.

(b) Importance of Decentralisation:

• Develops initiative among subordinates: Since the lower levels of management have to make decisions on their own and perform the tasks with the help of their capabilities, they become more confident and self-reliant. It also enables them to stay focused and find the answers to solve all the different kinds of problems they might have to face. Decentralization is helpful for the subordinates to develop and identify themselves, and also to find their potential to become strong leaders.
• Develops managerial talent for the future: The experience that a subordinate gain from handling different kinds of tasks and situations is equally important that one receives from the training based on skills and talent. Decentralization gives the subordinates a purpose to prove themselves and helps them build their potential to qualify for a more ambitious position through promotion. It is also a means to identify those persons who are not ready and need more training and development. Thus, it is an opportunity for the subordinates to implement their training in real-life situations.
• Quick decision-making: In centralization, the decisions are taken by the top level of management, which has to be transferred down to the lower levels. This transfer of information has to go through several levels, which could slow down the response and hence the decision-making. However, in decentralization, the decisions are taken even at the lower levels, so they are already updated, and therefore, there is no need for the information to travel through long channels for their approval. This makes communication quick and easy and also saves up a lot of time for the organization. Besides this, the information is more accurate, as there is no need for it to pass through all the levels of management. 
• Relief to the Top management: Decentralization reduces direct management of the subordinates at the hands of the superiors, as the subordinates are free to act and manage the given activities by the restriction set by the top management. The top management can focus better on the policy decisions, i.e., future decisions, rather than being concerned with both policy and operational decisions. They can invest their time in thinking and planning for the future of the organization without being worried about daily activities. Thus, decentralization is helpful as the superiors do not have to check up on all the decisions made by the lower levels every single time.
  

33. Explain any four points that highlight the importance of ‘controlling’ function of management.

Answer: Controlling means comparing the actual performance of an organisation with the planned performance and taking corrective actions if the actual performance does not match the planned performance. Controlling cannot prevent the deviation in actual and planned performance; however, it can minimise the deviations by taking corrective actions and decisions that can reduce their recurrence. 

1. Accomplishing Organisational Goals: Controlling is a goal-oriented process as it aims at determining whether the pre-determined plans are being performed accordingly and whether required progress is made towards the achievement of the objectives. With the help of controlling, an organisation can keep the business activities on the right track and can achieve the organisational goals effectively and efficiently, and take the necessary corrective actions if required.

2. Judging Accuracy of Standards: An effective controlling process can help an organisation in verifying whether or not the firm has set the standards accurate. It also helps in keeping a check on the changes taking place in the business environment and making required changes in the standards whenever it is necessary.

3. Making Efficient Use of Resources: Controlling helps an organisation in reducing wastage of resources, as it aims at ensuring that every activity of the firm is performed according to the pre-determined goals.

4. Improving Employee Motivation: As controlling process includes comparing the pre-determined goals of an organisation with its actual performance, it properly communicates the role of employees in advance. It means that the employees know in advance on what standards their performance will be measured, compared, and appraised. This set of pre-determined goals motivates them to give a better performance.

5. Ensuring Order and Discipline: An efficient control system in an organisation can help its managers in creating an atmosphere of discipline and order in the firm. Besides, controlling also helps in keeping a continuous check on the employees so they can minimise undesirable activities, such as theft, corruption, fraud, etc.

OR

Explain any four non-financial incentives.

Answer: Non-financial incentives refer to incentives or rewards which cannot be measured in terms of money. All the needs of individuals are not satisfied by money only. Psychological, social, and emotional factors also play an important role in providing motivation. 

Some of the common non-financial incentives are:

1. Status: Status refers to reducing the position and prestige associated with a job in the organization. Higher status helps to satisfy safety and social need, esteem needs, and self-actualization needs. Management provides status symbol facilities to its employees to motivate them. For example, costly furniture, well-furnished AC cabins, a car, etc.
2. Organizational climate: It refers to the characteristics which describe an organization and distinguish one organization from the other. Characteristics include individual autonomy, reward orientation, open communication, etc., which directly influence individual behaviour in a positive direction. Management helps to create an organizational climate and tries to motivate employees in this healthy working organizational climate.
3. Career advancement opportunity: Every individual wants growth and development in his life. When employees are provided opportunities to grow, then they feel more satisfied and become more committed to organizational goals. For example, the opportunity for promotion works as a tonic in encouraging employees to improve their performance.
4. Job Enrichment: It is concerned with designing jobs that include a great variety of work. Varieties of work make the work more challenging and interesting. Instead of doing routine jobs, enriched jobs offer opportunities for recognition and growth. It also improves job satisfaction and motivates employees. 
5. Employees Recognition Program: When an employee performs well, then he wants to be praised by his superiors and fellow employees. When such appreciation is given to the employee, then he feels motivated to perform better in the future.  Employees are rewarded in the form of congratulations and through the distribution of certificates and mementos, displaying employee’s achievements, etc.

34. Sankalp and Kavi, students of 12 th class with ‘Business Studies’ as an elective subject were discussing the elements of marketing mix. Sankalp said that one of the important elements of marketing mix is related to the
amount received for the goods sold or services rendered. Kavi requested Sankalp in knowing the name of that element. Sankalp also added that this element is also affected by various factors. Kavi asked Sankalp to explain these factors for which Sankalp agreed.
State any six factors which affect this element of marketing mix as explained by Sankalp to Kavi.

Answer: The element of the marketing mix as explained by Sankalp to Kavi is Price Mix.

Price is the value of a product or service passed on by the buyer to the seller. As a customer is very sensitive about the price of a product, it is a crucial element of the marketing mix. A slight shift by the organisation in the price of a product can shift the customers towards the competitor’s product. Therefore, Price Mix is an important decision and is related to the fixing of the price of a product or service. 

Factors Affecting Price Determination are: 

1. Pricing Objectives: The objective of a firm is an essential factor that plays a major role in deciding the price of a good or service. Usually, the basic objective of an organisation is profit maximisation. Besides this, other pricing objectives of an organisation are as follows:

• Survival in a Competitive Market: For surviving in a competitive market, organisations have to decrease the price of their products or services by offering discounts to the customers. 
• Obtaining Market Share Leadership: If an organisation wants to capture a big market share, then it is essential for the firm to keep the price of the products or services low. In this way, more people will be attracted to the product or service. 
• Attaining Product Quality Leadership: Sometimes organisations charge high prices for a product or service to cover the cost of product and research and development. 

2. Extent of Competition in the Market: The next factor that an organisation has to keep in mind while determining the price of a product or service is the competition level in the market. If an organisation does not face any competition in the market, then it is free to fix any price for the product or service, as the company has a monopoly in the market. However, if the competition is tough, then the organisation has to fix the price of the product or service after keeping the competitor’s price in mind. For example, HUL cannot fix the price of Surf Excel without taking the price of Tide (a P&G product) and other detergents into consideration.

3. Product Cost: The next important factor to keep in mind while deciding the price of a product or service is the cost of the product or service. The price of the product fixed by the organisation must cover the total cost of the product. Here, total cost includes fixed cost and variable cost of the product. Fixed Costs are the cost of a product or service, which does not change whether the production level gets low or high. For example, rent of the building, cost of machinery, etc. Variable Costs are the cost of a product or service, which changes with the change in production level. For example, labour wages, cost of raw materials, fuel, electricity, power consumption, etc. The organisation fixes the price of a product or service after calculating the total cost. If there is high competition in the market and the firm has to capture a big share in the market, in this case, it has to fix the price, which can at least cover the variable cost. The fixed cost of the product or service can be ignored for a while.

4. Demand and Utility of a Customer: Another factor to keep in mind while deciding the price of a product or service is its demand. When the demand for a product is elastic, it means that there are various substitutes for that product available in the market, and thus the organisation has to bring down the price of the product. However, when the demand for a product is inelastic, it means that there are very less substitutes for that product available in the market, and thus the organisation can fix a high price for the product.

Also, when the demand for a product or service is high, then the organisation can charge a high price from the customers. But, when the demand for a product or service is low, then the organisation has to lower its price also. Similarly, if a product is offering higher utility to the consumers, then they are willing to pay a high price for the same; hence, it easy to charge a high price for those products. However, if a product is offering lower utility to the consumers, then the organisation cannot charge a higher price from them.

5. Marketing Methods Used: Different organisations use different techniques of methods of marketing to promote their products or services, and these methods affect the pricing decision of the organisation. If an organisation uses intensive advertising techniques to promote a product or service, then it can charge a higher price from the customers. Some of the other marketing techniques affecting the price of a product or service are distribution system, customer support services, type of packaging, etc.

6. Government and Legal Regulations: The government has every right to control the price of a product or service, which includes products that come in the category of essential commodities, such as Drugs, LPG, food items, etc., to protect the interest of the general public. These regulations and government interventions help in keeping a check on the monopolists so that they do not charge an unfairly high price from the customers.