🔁 Review🛠️ Skill BuilderMultiple choice sections are Review. Case study sections are Skill Builders.
A self-grading practice test for Unit 1 — Tasks 5–8: 60 questions on business ethics and stakeholders, supply chains and production processes, business structures and liability, leadership roles and departments, and the problem-solution fit pitch, followed by a full free-response question with a scoring guide. The first 30 questions stand alone; the last 30 come in AP-style sets of three or four questions built on one business scenario. Tap an answer to see instantly whether you're right, with an explanation. These are practice questions (not the ones on your real test), so focus on the reasoning behind each answer.
1. How does the accounting department’s work most directly support the finance department?
Answer: B. Accounting records day-to-day transactions, while finance makes forward-looking money decisions, such as whether an expansion is affordable, and it needs accurate records to make them well. The first two wrong choices reverse the two departments’ roles, and hiring and training are the work of human resources.
2. Little Acorns Child Care drafted a code of conduct for its teachers: “Teachers must sign children in and out, may not post photos of children online, and must report any injury to a parent the same day.” Based on what a code of conduct contains, what is the draft still missing?
Answer: D. A code of conduct is a written document of rules, expectations, standards, and consequences. The draft states rules but never says what happens when one is broken. A reward for following the rules is an incentive, a vision statement describes the future an organization hopes to create, and a code that governs employees’ conduct doesn’t need parents to sign it.
3. Prairie Line Bus Co. lists “student safety” and “respect for family privacy” among its core values. Parents are split over a plan to put video cameras inside its buses: some say cameras would prevent bullying, and others say recording children invades their privacy. Which statement best describes this situation?
Answer: B. An ethical dilemma arises when core values conflict with business goals or with each other. Here safety and privacy pull in opposite directions, so the company can’t fully honor both. A dilemma doesn’t require a profit goal, and a choice can be legal and still conflict with a company’s values. Cameras aren’t an incentive, which is a reward for a behavior or a result.
4. Crunchwell makes granola bars and sells them to Northline Supply, which resells them to 500 gas stations, where drivers buy them. If Crunchwell began selling its bars directly to the gas stations, which stage of its supply chain would it skip?
Answer: C. Northline buys from the manufacturer (Crunchwell) and sells to retailers (the gas stations), so it is the distributor. Selling straight to the stations removes that middle stage. The gas stations are still the retailers, Crunchwell is still the manufacturer, and Crunchwell still needs oats and other raw materials to make its bars.
5. Which business best shows the idea of “profits with purpose”?
Answer: B. Profits with purpose means a business earns a profit and acts ethically toward the people it affects at the same time. Giving everything away earns no profit to keep the business going, a donation doesn’t make up for hiding unsafe factories, and cutting safety training to raise profit puts a quick gain ahead of the company’s workers.
6. Which risk does a general partner face that a sole proprietor does not?
Answer: A. General partners have joint and several liability: a creditor can collect a business debt that one partner took on from any of the partners. A sole proprietor also pays business debts from personal savings, so that risk isn’t new. Partnerships can borrow from banks, and a general partnership has no board of directors.
7. Which opening line would best start a problem-solution fit pitch for a dog-walking app?
Answer: A. A problem-solution fit pitch starts with a real customer problem, ideally backed by evidence, and then shows how the solution fits it. Features, a vision, and the team’s structure can come later in a pitch, but none of them tells judges whether customers have a problem worth solving.
8. Which situation is the best example of an ethical dilemma for a business?
Answer: D. An ethical dilemma is a situation in which a core value conflicts with a business goal. The pet food maker’s value of animal health pulls against its goal of higher profit. Choosing between two equally reliable shippers, or between repairing and replacing equipment, is an ordinary business decision with no value at stake, and losing sales to a cheaper rival is a competitive problem, not a conflict over values.
9. As a company grows from a handful of people into specialized departments, which pair best describes a benefit and a new challenge?
Answer: A. As a business grows, one person can’t do every job well, so work is divided among specialists who build expertise. The new challenge is that departments then have to work together toward the same goals. Specialization means employees don’t all do every job, leaders still make decisions, and departments have nothing to do with liability, which depends on the business’s legal form.
10. Bellweather Creamery makes about 300 wheels of cheese a year by hand, using milk from its own goats. Which change would move it furthest toward mass production?
Answer: B. Mass production makes large quantities of standardized products with machines and repeatable steps. Adding skilled people who work by hand keeps the process artisan, switching milk changes an input rather than the process, and a price increase changes what customers pay, not how the cheese is made.
11. Which business would most likely buy its ingredients from a large national food distributor rather than from local farms?
Answer: A. A business’s competitive advantage shapes its supply chain choices. Large distributors usually offer lower cost and efficiency, which fits a business that competes on price. Local suppliers offer freshness, quality, and a fit with a local mission, which is exactly what the cafe, the juice bar, and the bakery promise their customers.
12. Which task belongs to the operations department at Stonewall Frozen Pizza rather than to research and development?
Answer: A. Operations runs the production process and the systems that deliver the product, such as how the production line is arranged. Testing a new crust, developing a gluten-free pizza, and improving the sauce recipe are all ways of developing and improving products, which is the work of research and development.
13. Ironwood Cabinets plans to move its factory from the town of Millbrook to a new building 60 miles away. Which of the following describes an effect on an external stakeholder?
Answer: D. External stakeholders are outside the organization but affected by it: customers, suppliers, lenders, government, and the community. The diner is part of the Millbrook community. Workers, board members, and supervisors are internal stakeholders, even when the effect on them, such as a longer commute, happens outside of work.
14. Which responsibility belongs to the human resources department at a warehouse company?
Answer: A. Human resources handles hiring, training, pay, and employee relations, so a training program for new forklift drivers is its job. Recording payments in the books is accounting, redesigning how work flows through the warehouse is operations, and forecasting revenue for a lender is finance.
15. Brightcoat Paints could save $3 million this year by switching to a cheaper pigment that makes its paint fade within two years. Its leaders reject the switch. Which reasoning best explains their decision?
Answer: A. Decisions that maximize short-term profit don’t always align with long-term success. A company that plans to last has a reason to avoid risky shortcuts to quick profits, because losing customers’ trust would cost far more over time than the $3 million it saves now. Nothing in the scenario says the pigment is illegal; profits with purpose means earning a profit ethically, not giving up profit; and the leaders’ reasoning is about lasting trust, not the size of the savings.
16. Which business owner is the best fit to remain a sole proprietor?
Answer: C. A sole proprietorship fits one owner who wants full control and simplicity when risk is low, because the owner’s personal assets are on the line for the business’s debts. A roofer facing lawsuits needs liability protection, a founder raising $30 million needs a structure that can sell stock, and a business with two co-owners isn’t a sole proprietorship, which by definition has one owner.
17. At Trailmark Outdoor Gear, a corporation, which task would most likely belong to the chief financial officer (CFO)?
Answer: A. The CFO leads the company’s finances, including forward-looking decisions about how to pay for growth, such as choosing between a loan and savings. Recording daily transactions is routine accounting work, introducing a product line is a marketing job led by the chief marketing officer, and overseeing daily operations is the chief operating officer’s job.
18. During a pitch, a team shows that 30 customers in a pilot paid $12 each for its custom phone stand. A judge points out that each stand costs the team $14 to make. Which concern does the judge’s point raise?
Answer: B. Judges’ questions often probe costs. The pilot is evidence that customers will pay $12, but at $14 a stand, every sale loses $2 ($14 cost − $12 price), so the team needs to raise its price, cut its cost, or both. Thirty paying customers is real evidence of demand, they already paid $12, and selling more stands at a loss only makes the loss bigger unless the cost per stand actually falls.
19. A student team pitches a service that picks up students’ laundry on Monday and returns it, folded, by Thursday. A judge asks, “How will you make sure every bag comes back on time?” Which answer best addresses the judge’s concern?
Answer: D. The judge is asking about operations: how the service will be delivered reliably. Tagging bags, a set route, and a backup driver describe a process that gets bags back on time. A survey result, enthusiasm, and a lower price may all belong somewhere in the pitch, but none of them explains how the team will deliver on its Thursday promise.
20. In the supply chain for Stride running shoes, which of the following is an example of the flow of information?
Answer: D. A supply chain includes flows of goods, information, and payments. Sales data moving from the store back to the maker is information, and it tells the maker what to produce. Trucking shoes to a warehouse and turning hides into leather are flows of goods, and paying an invoice is a flow of payments.
21. Keystone Print Shop has one large-format printer. When it breaks down, all banner orders stop until it is repaired. Which action would most directly reduce this supply chain risk?
Answer: A. This is a production risk: one machine is the only way the shop turns its inputs into finished banners. A backup arrangement keeps production going during a breakdown. A second vinyl supplier protects against running out of materials, not against a broken printer; depending on one ink company adds a new single-source risk; and higher prices don’t keep banners coming off a broken printer.
22. Maya owns $5,000 of stock in Coastal Kites, Inc., a corporation. Leo invested $5,000 as one of the general partners of Breakwater Boats, a general partnership. Both businesses fail, and each owes its creditors far more than it owns. Which statement is true?
Answer: C. Shareholders have limited liability, so Maya can lose the money she invested but not her personal savings or property. General partners have unlimited liability, so Leo’s personal assets can be used to pay the partnership’s debts. The other choices give both owners the same protection, or reverse which owner has it.
23. Lakemont Hospital’s employee handbook includes three items. (1) “Patient safety comes before speed.” (2) “Nurses must scan a patient’s wristband before giving any medication; skipping the scan leads to retraining or suspension.” (3) “Units with no medication errors for a full quarter earn a team bonus.” Which choice correctly classifies the three items, in order?
Answer: D. Item 1 states a guiding principle, so it is a core value. Item 2 is a written rule with a clear standard and a consequence, the kind of statement a code of conduct contains. Item 3 rewards a result, so it is an incentive. Calling item 1 a code mistakes a principle for a rule, since it sets no specific standard or consequence, and calling item 3 a code mistakes a reward for a rule.
24. Juniper Dental, a two-dentist office, wants to outsource one function to a specialized company. Which function is the best candidate?
Answer: C. Outsourcing means hiring another business to handle a function, usually to gain expertise or cut costs, at the price of some control. That trade-off makes the most sense for a specialized function the office lacks expertise in and that patients don’t experience directly, like insurance claims. Handing off cleanings, the front desk, or treatment decisions would give up control over the parts of the business patients care about most.
25. During a two-week pilot of a homework-planner app, 50 students signed up, but usage data showed that most of them opened the app only to check the school lunch menu, a minor feature. What should the team conclude for its pitch?
Answer: D. Problem-solution fit means the solution actually solves the customer’s problem, and test results should inform the team’s decisions. Sign-ups show interest, but the usage data shows students aren’t using the planner itself. Leaving the result out would mislead judges, and piling on features doesn’t explain why students skip the main one; revising and retesting does.
26. Two partners who run Pine Ridge Painting, a general partnership, convert the business into a limited liability company (LLC). Which disadvantage do they take on by making this change?
Answer: D. An LLC requires more paperwork to form and keep up than a partnership does; that is the main cost of the change. Personal liability for the business’s lawsuits is the problem the owners are leaving behind, not one they take on. An LLC can borrow from a bank, and it cannot sell shares of stock at all.
27. Larch Street Coffee pays well above market prices to buy beans directly from six farms that meet strict growing standards, and its menus name each farm. How does Larch Street use its supply chain to compete?
Answer: B. A supply chain can be a competitive advantage in two main ways: lowering costs and passing savings on to customers, or sourcing for quality. Larch Street pays more, not less, so it isn’t competing on cost, and buying from six farms doesn’t give it more volume to spread costs over. Nothing says the farms sell only to Larch Street, so rivals aren’t blocked from buying beans.
28. Which decision at a bicycle company is part of supply chain management?
Answer: D. Supply chain management oversees the flow of goods, information, and payments from source to destination, such as timing parts deliveries so production doesn’t stall or pile up. Choosing cyclists for ads is marketing, testing new materials is product development, and setting a retail price is a pricing decision, not a decision about moving inputs and products.
29. The owner of Copper Pot Diner tells her staff that food safety comes first. Which of her actions would most undermine that message?
Answer: B. Leaders set the tone, and public recognition encourages whatever behavior it rewards. Praising a cook for skipping a safety check tells everyone that speed matters more than safety, the opposite of the owner’s message. Celebrating a milestone, thanking an employee in public, and rewarding a safe choice are all ways leaders encourage ethical behavior.
30. Harborview Hotel is a service business. Which of the following is part of its supply chain?
Answer: C. A supply chain is the network that provides everything needed to create and deliver a good or service, and services have supply chains too. A hotel can’t deliver a night’s stay without clean linens, so the laundry company is one of its suppliers. A blogger’s reviews and an agency’s billboards are part of marketing, and a fire inspector is a government stakeholder, not a provider of what the hotel needs to serve guests.
Questions 31–34 refer to the following.Voltway Bikes Voltway Bikes is a limited liability company (LLC) owned by three members, all in their thirties, who design electric bikes and assemble about 2,000 a year in a rented workshop. The members want to build a factory that could make 30,000 bikes a year, which would cost about $20 million. Their bank has agreed to lend only $3 million. An investment firm has advised them to convert Voltway into a corporation and sell shares to raise the rest. Under that plan, they would also hire several executives, including a chief technology officer (CTO), a chief information officer (CIO), and a chief operating officer (COO).
31. Which statement best explains why becoming a corporation would help Voltway pay for the factory?
Answer: A. A corporation is owned by shareholders and can sell stocks and bonds, which gives it the most ways to raise money; an LLC can’t sell stock. An LLC can borrow, as Voltway’s $3 million bank offer shows, so borrowing isn’t what changes. Corporate shareholders don’t take on unlimited liability, and a corporation involves more paperwork than an LLC, not less.
32. If Voltway becomes a corporation and sells shares to outside investors, what would the three founders most likely give up?
Answer: B. In a corporation, shareholders elect a board of directors that oversees the company’s leadership and strategy and can replace the CEO. Once outside investors own shares, the founders answer to that board, so they give up some control. The board oversees leaders rather than running daily work, a corporation can still borrow from a bank, and becoming a corporation doesn’t take away the owners’ liability protection.
33. After the conversion, which group would become new internal stakeholders of Voltway?
Answer: C. Internal stakeholders are directly involved in running the organization: owners (in a corporation, the shareholders), managers, employees, and the board of directors. The bank is a lender, and the motor suppliers and the investment firm are outside businesses, so all three are external stakeholders.
34. Once the new executives are hired, which assignment would be a mistake?
Answer: C. The CTO is responsible for externally facing technology, the technology customers use, so the riders’ app belongs to the CTO, not the CIO. The CIO oversees internal systems, like the one employees use to log hours and order parts; the COO runs daily operations, such as the production schedule; and the software in the bikes’ displays is technology riders use, so it also belongs to the CTO.
Questions 35–38 refer to the following.Gear Swap For their culminating pitch, Hana and Luis proposed Gear Swap, a business that would buy outgrown youth sports gear, clean and repair it, and rent it to families for $25 a season. Gear Swap’s stated core value is “safe play for every kid.” During their pilot, parents asked whether Gear Swap would also rent used helmets, but a coach warned that a helmet can be weakened by a past hit even when it looks fine. Their evidence:
Evidence
Result
Survey of 150 parents at youth soccer games
108 parents (72%) said buying new gear every season is a burden
Interviews with 12 parents
Most said they would rent gear if it were clean and fit well
Four-week pilot
50 families received a free gear fitting; 18 of them then paid $25 to rent a season’s gear
Founders’ forecast
“We expect 500 families to sign up next year.”
35. What percentage of the families in the pilot paid to rent gear?
Answer: B. Pilot conversion = families who paid ÷ families in the pilot = 18 ÷ 50 = 36%. 64% is the share who did not pay (32 ÷ 50), 12% divides the 18 paying families by the 150 surveyed parents instead of the 50 pilot families, and 72% is the survey result, which measured something different.
36. A classmate tells Hana, “Your survey proves that families will pay to rent gear.” Which response is most accurate?
Answer: B. A survey in which people say they have a problem shows that the problem exists, not that they will pay for a particular solution. The pilot, in which families actually paid to rent, is the evidence of willingness to pay. A bigger sample doesn’t change what the survey measured, and interviews record what parents say, while the pilot shows what families actually did with their money.
37. Which decision about helmets is most consistent with Gear Swap’s core value?
Answer: C. When a business goal, here giving customers what they ask for, conflicts with a core value, the value should guide the decision. A helmet can be weakened even when it looks fine, so a visual inspection can’t protect kids, a lower price doesn’t make a helmet safer, and a waiver shifts the risk to families instead of removing it. Leaving used helmets out of the rental line keeps “safe play for every kid.”
38. Which item in Gear Swap’s evidence table is not evidence at all?
Answer: B. Evidence comes from what real customers say or do. The survey, the interviews, and the pilot all come from real parents, so each one is evidence of something. A forecast is the founders’ own expectation about the future, not a record of what customers said or did, so it can’t support fit no matter how confident it sounds.
Questions 39–42 refer to the following.Clearwater Recycling Clearwater Recycling collects recycling from 18,000 homes with a fleet of 14 trucks. It sorts what it collects and sells bales of flattened cardboard to a paper mill, which turns them into new shipping boxes. Its core values are “safety first” and “every bin, every week.” Owner Teresa Vance wants to add a monthly bonus for drivers, and her managers have proposed three designs:
Plan
How a driver earns the $300 monthly bonus
A
Finish the route at least one hour early on 15 or more days
B
Collect more tons of material than any other driver
C
Have zero missed bins and zero safety incidents all month
39. Which behavior is Plan A most likely to encourage?
Answer: A. Incentives motivate the behavior they reward. Plan A rewards finishing early, with no check on how, so it can push drivers to speed and skip bins, which conflicts with both “safety first” and “every bin, every week.” Taking extra care and checking bins closely take more time, which works against the bonus, and collecting extra material is what Plan B rewards.
40. Suppose Plan B led some drivers to toss trash in with the recycling to add weight. How would this most likely affect the paper mill?
Answer: C. A problem at one stage of a supply chain travels to the stages that depend on it. Trash mixed into the loads makes Clearwater’s sorting harder and lowers the quality of the bales the mill buys, so the mill gets material that is harder to turn into boxes. Extra weight from trash isn’t extra cardboard, nothing suggests Clearwater’s costs would fall, and a supplier’s quality problems reach the businesses that buy from it.
41. A manager warns that Plan C could tempt drivers to hide minor accidents, such as a scraped mailbox, to keep the bonus. Which change to Plan C would best address this?
Answer: A. An incentive should reward the methods a company values, not just a result. If honestly reporting a scraped mailbox costs a driver the bonus, Plan C rewards hiding incidents. Rewarding prompt reporting keeps safety in the plan while rewarding honesty. A bigger bonus raises the temptation to hide incidents, dropping the safety condition abandons “safety first,” and doubling the penalty for reported incidents makes hiding even more tempting.
42. In the paper mill’s supply chain, Clearwater acts as a
Answer: D. The mill turns Clearwater’s cardboard bales into new boxes, so Clearwater provides the mill’s raw materials. A distributor buys finished goods from manufacturers and sells them to retailers, a retailer sells to consumers, and the mill, not Clearwater, is the manufacturer of the boxes.
Questions 43–46 refer to the following.Ashford Leather Goods Ashford Leather Goods makes two lines of wallets. Its Heritage line is cut and stitched by hand by three master leatherworkers, and customers can order custom sizes and monograms. Its Everyday line is made on machines in Ashford’s small factory, in standard sizes only. Both lines use leather from the same tannery.
Heritage line
Everyday line
Wallets made per month
300
12,000
Cost to make one wallet
$38
$9
Price
$140
$35
Custom sizes or monograms?
Yes
No
43. One of the three leatherworkers breaks her wrist and will miss two months of work. Which line will be affected more, and why?
Answer: B. An artisan process depends on skilled people working by hand in limited quantities, so losing one of three leatherworkers cuts Heritage output by about a third. The Everyday line runs on machines, so one person’s absence matters much less there, even though it makes more wallets. The shared tannery has nothing to do with a worker’s injury.
44. To sell more Heritage wallets, the owner is thinking about moving Heritage production onto the factory’s machines. What would Ashford most likely give up?
Answer: D. Moving Heritage to machines would shift it toward mass production: more wallets at a lower cost per wallet, but in standard sizes. Ashford would give up custom sizes, monograms, and the handmade uniqueness that customers pay $140 for. Machines make wallets faster, not slower, nothing suggests a different leather, and machine-made wallets can still be inspected for flaws.
45. Which customer request fits the Heritage line better than the Everyday line?
Answer: A. Each line fits a different competitive strategy. Heritage competes on customization and craftsmanship, so a small order of monogrammed wallets fits it. Large orders of identical wallets, the lowest price, and a standard item shipped fast all fit the Everyday line, whose machines turn out 12,000 standard wallets a month at $9 each.
46. Costs such as rent and machine payments at Ashford’s factory stay about the same each month. If a large customer canceled and Everyday output fell from 12,000 to 6,000 wallets a month, what would most likely happen to the cost to make one Everyday wallet?
Answer: B. Economies of scale work in both directions. Fixed costs such as rent and machine payments don’t shrink when output falls, so spreading them over 6,000 wallets instead of 12,000 doubles the fixed cost carried by each wallet. The leather in each wallet stays the same, but that doesn’t offset the higher share of fixed costs, and fewer machine hours or more time per wallet don’t lower the rent or the machine payments.
Questions 47–50 refer to the following.Fernhill Web Studio Fernhill Web Studio builds websites for small businesses. Until this year, its designers reported to two art directors, who reported to the CEO, Dana Ruiz. In January, Dana removed job titles and the art director roles and organized all 32 employees into self-managed teams called circles. Fernhill’s core value is “honest work,” and one circle is now deciding whether to build a website for a client whose diet pill makes health claims the circle believes are false. Dana compared results from the first six months:
Measure
Last year (traditional structure)
This year (circles)
Average days to start a new project
9
4
Projects finished on time
92%
93%
Employees who say they enjoy their work
61%
83%
Client complaints about not knowing who leads their project
5
31
47. Under Fernhill’s new structure, how would a designer most likely end up working on a new client’s website?
Answer: B. Fernhill has moved from a traditional hierarchy to a holacracy: a decentralized structure with no job titles, in which self-managed teams, or circles, decide how their work gets done. The art director roles and the titles are gone, and assigning work from the top down or through job descriptions is how a traditional hierarchy operates.
48. Which result in the table is the strongest evidence that the circles helped Fernhill’s employees?
Answer: D. Self-managed teams give employees more say over their own work, and the rise in employees who enjoy their work, from 61% to 83%, measures their experience directly. Faster project starts and on-time rates describe how projects go for clients, a 1-point change is too small to show much, and the rise in client complaints is a problem, not a benefit.
49. Client complaints about not knowing who leads their project rose from 5 to 31. Which change would best fix this while keeping the circles?
Answer: C. Without titles or managers, it can be unclear who is responsible for what. A holacracy removes job titles, not responsibility: circles can still assign roles. Naming one contact for each client makes it clear who leads a project without bringing back the hierarchy. Rehiring art directors abandons the circles, one person handling every call can’t keep up with a 32-person studio, and a call center wouldn’t know who in each circle leads a client’s project.
50. Which approach should the circle use to decide whether to build the diet-pill client’s website?
Answer: D. Business leaders resolve an ethical dilemma with a stakeholder analysis: they weigh how each option would affect everyone involved, such as the pill’s buyers, the client, and Fernhill’s own employees, and then choose the option most consistent with the organization’s values. Shifting responsibility to the client, picking the most money, and deferring to the paying customer each consider only one interest.
Questions 51–54 refer to the following.Kindling Camp Stoves Kindling Camp Stoves builds camping stoves in its Colorado factory and sells them on its website and through 40 outdoor stores. It buys steel from two mills, but every stove needs a fuel valve that Kindling buys from a single maker overseas. Finished stoves go by the truckload to a warehouse in Nevada, run by another company, which receives them and ships each online order within a day. This spring, a shipping delay held up valve deliveries for six weeks. During the delay, Kindling’s website kept showing stoves as “in stock, ships tomorrow.”
Supply chain stage
Who handles it
Raw materials
Two steel mills, in Ohio and Indiana
Parts
One valve maker overseas
Production
Kindling’s factory in Colorado
Storage and shipping
A warehouse company in Nevada
Sales
Kindling’s website and 40 outdoor stores
51. Which link in Kindling’s supply chain poses the greatest risk of stopping production?
Answer: C. Depending on a single source for a key input is a major supply chain risk: if the valve maker can’t deliver, no stove can be finished. Steel comes from two mills, so a problem at one mill wouldn’t stop production. A warehouse problem would delay shipping rather than production, and stores ordering less is a sales problem, not a supply problem.
52. During the six-week valve delay, which effect on Kindling’s customers was most likely?
Answer: B. A disruption at one stage moves down the supply chain. Without valves, the factory couldn’t finish stoves, so fewer stoves reached the warehouse and the stores, which delays orders and can send customers to competitors. Extra steel doesn’t make unfinished stoves cheaper, and a warehouse can’t quickly ship stoves it never receives.
53. Which response to the website’s “in stock, ships tomorrow” message is most consistent with business ethics?
Answer: D. Ethical businesses disclose accurate information to stakeholders, even when it’s unflattering, and customers deciding whether to buy need the real ship date. Refunding complainers afterward still misleads everyone who orders, hiding the delay to protect sales trades customers’ trust for short-term revenue, and a “selling fast” message spins the problem instead of explaining it.
54. Why does Kindling send finished stoves to the Nevada warehouse instead of shipping online orders straight from its factory?
Answer: C. The Nevada warehouse is a distribution center: a facility that receives goods and quickly reships them, which leaves the factory free to focus on building stoves. A business that buys products and resells them to stores is a distributor, valves are installed during production at the factory, and a warehouse has no effect on what steel costs.
Questions 55–57 refer to the following.Lantern Escape Rooms Lantern Escape Rooms was started by three friends, ages 24 to 27, who agreed to run it together and split the profits equally. They have never filed any paperwork with the state. Jonah designs the puzzles, Mei builds the rooms and props, and Callum makes the short videos that promote Lantern online. None of them enjoys working with numbers, and the business’s receipts, bills, and payroll are months behind. Last month’s results:
Measure
Last month
Views of Lantern’s online videos
48,000
Visits to the booking page
2,400
Bookings started
600
Bookings completed and paid
90
55. What did the three friends need to do to form Lantern as a general partnership?
Answer: C. A general partnership forms without any filing: when two or more people run a business together and share its profits, they are partners, even with no written agreement. Filing with the state to list owners as members is how an LLC forms, and boards of directors and shares of stock belong to corporations.
56. The partners want to add a fourth partner. Based on how partners usually divide roles, which candidate would best complement the current team?
Answer: A. Partners usually divide roles based on skills, experience, and preferences. Jonah, Mei, and Callum already cover puzzles, building, and promotion, but no one handles the money, which is why receipts, bills, and payroll are months behind. An accountant fills that gap, while another builder, video editor, or puzzle designer would duplicate skills the team already has.
57. Which result from last month best shows how well Lantern’s sales effort turned interest into purchases?
Answer: C. Marketing creates awareness and interest, and sales converts that interest into purchases. Video views and page visits measure marketing’s reach, and started bookings show interest. Only 90 of the 600 people who started a booking paid (15%), which suggests the problem lies in closing the sale, such as a confusing checkout, rather than in drawing attention.
Questions 58–60 refer to the following.Bayside Snack Distributors Bayside Snack Distributors buys chips, jerky, and candy from about 60 snack makers, most of them small, and sells them to 400 convenience stores. Its trucks deliver to each store weekly, and stores reorder through Bayside’s app. A large chip company has offered Bayside $50,000 a year to stop carrying Ridge Crisps, a small, fast-growing chip brand that competes with it. Bayside’s core values include “a fair shot for every maker.”
58. Why would a small snack maker sell through Bayside instead of selling directly to the 400 stores?
Answer: C. A distributor buys products from manufacturers and sells them to retailers. For a small maker, reaching 400 stores alone would take its own sales staff and delivery trucks; Bayside’s weekly routes and reorder app do that job. Bayside doesn’t make the snacks or sell to shoppers, and selling through it doesn’t change what each bag costs the maker to produce.
59. If Bayside accepted the offer and dropped Ridge Crisps, how would this most directly affect Ridge Crisps?
Answer: A. An exclusive or restrictive agreement in a supply chain can block a competitor’s access to customers, creating a barrier to competition. Without Bayside, Ridge Crisps loses its main way into those 400 stores. The large chip company would keep selling through Bayside, the $50,000 would go to Bayside, and a distributor decides which brands it offers stores, so being dropped matters.
60. If Bayside accepted the offer, which stakeholders would be most directly harmed?
Answer: D. A stakeholder analysis looks at how a decision helps or harms each group. Ridge Crisps loses access to 400 stores, and shoppers lose a chip they choose to buy; both are external stakeholders. Drivers carrying one fewer brand are barely affected, and the large chip company and Bayside’s owners are the ones who expect to gain from the deal.
On the real exam, free-response questions are graded against a scoring guide that awards points for specific, scenario-based reasoning. Write your answers to all six parts first, then open the scoring guide and grade yourself. 12 points possible.
Saltwater Surfboards
Tessa Moreno, 38, owns Saltwater Surfboards, a sole proprietorship in a beach town. She and her two employees, Rafe and June, shape every board by hand from a foam blank, which takes about eight hours, and then send the boards to Coastline Glassing, a nearby shop that coats them in fiberglass and resin. Saltwater makes about 30 boards a month, and customers can order any length or shape. Its core values are “craft you can feel” and “look after the crew.”
Saltwater’s waitlist has grown to three months, and some customers cancel rather than wait. Tessa is considering a five-year lease on a computer-controlled shaping machine that cuts a board’s basic shape in about one hour; Rafe and June would then finish each board by hand. With the machine, Saltwater could make about 120 boards a month. The lease costs $3,600 a month, and Tessa would sign it in her own name.
To speed up finishing, Tessa plans to pay Rafe and June $60 for each board they finish instead of an hourly wage. Finishing fills the air with foam dust, and the shop’s safety rule requires a respirator and a break every two hours. Coastline Glassing does excellent work, but it can glass only about 80 of Saltwater’s boards a month.
Before deciding, Tessa tested demand. She offered the 60 customers on her waitlist a “machine-shaped, hand-finished” board, delivered in two weeks at the same price; 27 of them paid a $100 deposit, and 9 said they would buy only a fully hand-shaped board. Tessa plans to present the machine plan at her bank’s small-business pitch night, and her draft slide reads: “Our three-month waitlist proves customers will buy machine-shaped boards.”
Table 3. Saltwater Surfboards monthly costs
Hand-shaped (now)
With the shaping machine (full use)
Boards made per month
30
120
Fixed costs per month (rent, insurance, tools)
$6,000
$6,000
Machine lease per month
—
$3,600
Foam blank and other materials, per board
$110
$110
Glassing by Coastline, per board
$70
$70
Shaping and finishing labor, per board
$220
$60
(A) Using Table 3, calculate Saltwater’s total cost per board (i) for the current hand-shaped process at 30 boards a month and (ii) with the shaping machine at its full use of 120 boards a month. Show your work. [2 points]
(B) (i) Using information from Table 3, explain why Saltwater’s cost per board would fall with the machine. (ii) Describe one thing Saltwater could give up by moving away from a fully hand-shaped process, using evidence from the scenario. [2 points]
(C) Tessa plans to pay Rafe and June $60 for each board they finish. (i) Identify one behavior this pay plan could encourage that conflicts with one of Saltwater’s core values. (ii) Explain why the pay plan would encourage that behavior. (iii) Recommend one change to the plan that would better fit Saltwater’s core values, and explain how it helps. [3 points]
(D) Explain one financial risk Tessa personally takes on by signing the five-year machine lease while Saltwater is a sole proprietorship. [1 point]
(E) Saltwater outsources its glassing to Coastline. Recommend whether Saltwater should keep outsourcing its glassing if it leases the machine, and justify your recommendation by describing one benefit and one drawback of outsourcing that apply to Saltwater. [2 points]
(F) Tessa’s draft slide says, “Our three-month waitlist proves customers will buy machine-shaped boards.” (i) Explain why the waitlist alone does not support this claim. (ii) Describe the strongest evidence in the scenario that customers would buy machine-shaped boards, and explain why it is stronger. [2 points]
Show the scoring guide
A (2 points)
1 point for (i), with work shown: ($6,000 + 30 × ($110 + $70 + $220)) ÷ 30 = $18,000 ÷ 30 = $600 per board. Accept any correct method, such as $6,000 ÷ 30 = $200 of fixed cost per board, plus $400 of per-board costs, for $600.
1 point for (ii), with work shown: ($6,000 + $3,600 + 120 × ($110 + $70 + $60)) ÷ 120 = $38,400 ÷ 120 = $320 per board. Accept any correct method, such as $9,600 ÷ 120 = $80 of fixed cost per board, plus $240 of per-board costs, for $320. An answer that leaves out the machine lease ($6,000 + $28,800 = $34,800 ÷ 120 = $290) does not earn the point.
Sample full-credit answer: (i) Hand-shaped: total monthly cost = $6,000 + 30 × ($110 + $70 + $220) = $6,000 + 30 × $400 = $6,000 + $12,000 = $18,000, and $18,000 ÷ 30 = $600 per board. (ii) With the machine: total monthly cost = $6,000 + $3,600 + 120 × ($110 + $70 + $60) = $9,600 + 120 × $240 = $9,600 + $28,800 = $38,400, and $38,400 ÷ 120 = $320 per board.
B (2 points)
1 point for explaining, with information from Table 3, why the cost per board falls. Accept either reason: economies of scale, because the fixed costs ($6,000 plus the $3,600 lease) are spread over 120 boards instead of 30, so fixed cost per board drops from $200 to $80; or lower labor per board, because the machine cuts the basic shape, so shaping and finishing labor falls from $220 to $60 per board.
1 point for describing a trade-off of leaving the artisan process that is tied to the scenario, such as losing some of the hand-shaped craftsmanship and uniqueness that “craft you can feel” promises, or losing customers who want fully handmade boards (9 waitlist customers said they would buy only a fully hand-shaped board). A cost-only answer, such as “the lease is expensive,” does not earn the point.
Sample full-credit answer: (i) The cost per board falls mainly because of economies of scale. The fixed costs, $6,000 plus the $3,600 lease, are spread over 120 boards instead of 30, so the fixed cost in each board drops from $200 ($6,000 ÷ 30) to $80 ($9,600 ÷ 120). Labor per board also falls from $220 to $60, because the machine cuts each board’s basic shape. (ii) Saltwater could give up some of the hand-shaped craftsmanship that makes each board unique and that its value “craft you can feel” promises. Some customers care about this: 9 people on the waitlist said they would buy only a fully hand-shaped board.
C (3 points)
1 point for identifying a behavior that conflicts with a named core value, such as rushing the finishing and sending out boards with flaws (against “craft you can feel”), or skipping respirators or breaks to finish more boards (against “look after the crew”).
1 point for explaining why the plan encourages the behavior: the pay rewards the number of boards finished, not how carefully or safely they are finished, so working faster earns more even when quality or safety slips. Accept any explanation that ties the behavior to what the incentive rewards.
1 point for recommending a change consistent with the core values and explaining how it helps. Examples: pay the $60 only for boards that pass a quality check; keep an hourly wage and add a bonus for boards with no customer complaints; put the respirator and break rules in a written code of conduct with clear consequences; or publicly recognize safe, high-quality work. Simply dropping the plan, with no explanation of how that protects the values, does not earn the point.
Sample full-credit answer: (i) Rafe and June could skip their respirators and breaks to finish more boards each day, which conflicts with “look after the crew,” since foam dust is a health risk. (ii) The plan pays $60 for every board they finish, no matter how carefully or safely they finish it, so every break or minute spent putting on safety gear costs them money. The incentive rewards the result (more boards) without any check on the method. (iii) Tessa should pay the $60 only for boards that pass her quality check and write the respirator and break rules into a code of conduct with clear consequences. Then the pay rewards careful, safe work instead of speed alone.
D (1 point)
1 point for explaining that a sole proprietor has unlimited liability, so if Saltwater can’t keep up the $3,600 monthly payments (up to $216,000 over five years), Tessa’s personal assets, such as her savings, car, or home, could be used to pay what is owed. Saying only that the lease is expensive, without connecting the debt to her personal assets, does not earn the point.
Sample full-credit answer: As a sole proprietor, Tessa has unlimited liability, because she and the business are not legally separate. If Saltwater can’t keep up the $3,600 monthly payments, up to $216,000 over the five years, the leasing company could collect from her personal savings, her car, or even her home.
E (2 points)
1 point for recommending either option (keep outsourcing, or bring glassing in-house) and describing a benefit of outsourcing that applies to Saltwater, such as Coastline’s excellent work and expertise, or not having to buy glassing equipment or hire and train glassers.
1 point for describing a drawback of outsourcing that applies to Saltwater, such as less control over timing and capacity: Coastline can glass only about 80 boards a month, fewer than the 120 the machine could produce, so glassing could become a bottleneck that keeps the waitlist long. Accept other scenario-based drawbacks, such as depending on one outside shop for a step every board needs.
Sample full-credit answer: Saltwater should keep outsourcing its glassing for now, but plan for more capacity. Coastline does excellent work, and outsourcing means Saltwater doesn’t have to buy glassing equipment or hire and train glassers, so the team can focus on shaping and finishing. The drawback is less control over timing: Coastline can glass only about 80 Saltwater boards a month, but the machine could produce 120, so glassing could become the new bottleneck. Before the machine arrives, Tessa should ask Coastline for more capacity or find a second glassing shop.
F (2 points)
1 point for explaining that the customers joined the waitlist for hand-shaped boards, so the waitlist shows demand for the current product (and that long waits are a real problem), not that customers will pay for a machine-shaped board. Mentioning that 9 waitlist customers said they would buy only a fully hand-shaped board is a strong example but is not required.
1 point for identifying the deposit test, in which 27 of the 60 waitlist customers (45%) paid a $100 deposit for a machine-shaped, hand-finished board, and explaining that it is stronger because customers paid money for the new product, which is real buying behavior rather than interest. Naming the deposits without explaining why paying is stronger evidence does not earn the point.
Sample full-credit answer: (i) The customers on the waitlist signed up for Saltwater’s hand-shaped boards, so the waitlist shows demand for the current product and that the long wait is a real problem. It doesn’t show that they will accept a machine-shaped board; in fact, 9 of them said they would buy only a fully hand-shaped one. (ii) The stronger evidence is the deposit test: 27 of the 60 waitlist customers (45%) paid a $100 deposit for a machine-shaped, hand-finished board. Paying money for the new product is real customer behavior, which is stronger evidence than being interested or being on a list.
