AP Business Unit 4 Practice Test: Management and Strategy
🔁 Review🛠️ Skill BuilderMultiple choice sections are Review. Case study sections are Skill Builders.
A self-grading practice test for Unit 4 — Management and Strategy: 50 questions on hiring for core competencies, compensation and retention, key performance indicators and benchmarks, strategy and the PACED decision-making model, and Porter’s Five Forces and SWOT analysis, followed by a full free-response question with a scoring guide. The first 35 questions stand alone; the last 15 come in AP-style sets built on one business scenario. Tap an answer to see instantly whether you’re right, with an explanation.
1. Tomás supervises the night shift at a grocery chain’s warehouse. He doesn’t set company strategy, but each night he assigns 15 workers to loading docks and moves forklifts to wherever trucks are waiting so that every store’s order ships by 5 a.m. Which statement best describes Tomás’s role?
Answer: C. Management means coordinating people and resources toward the business’s goals, and managers at every level do it. Tomás matches workers and forklifts to waiting trucks so that every order ships on time, which is exactly that job. Managing doesn’t require setting company strategy, and supervisors who carry out plans made higher up still manage. A title or authority by itself isn’t what makes the work management; the coordinating is.
2. The owner of Sudsy Express Car Wash is changing how its 14 attendants receive tips. Instead of getting cash at the end of each shift, they will receive tips through the payment app with each paycheck. Which approach best demonstrates effective business communication?
Answer: B. Effective business communication states the message clearly, explains the reasons, and gives people a chance to ask questions and respond, which matters most when a change affects pay. A staff meeting with time for questions does all three. A notice on the day of the change gives no reasons and no chance to respond, passing the news through shift leads risks a garbled or incomplete message, and a long legal document buries the few details the attendants actually need.
3. Ridgeview Medical Center is hiring a patient-services coordinator. Which qualification on the job posting is a core competency rather than a specific skill?
Answer: C. Specific skills are narrowly defined and useful for particular tasks, while core competencies are broad and transferable. Solving problems calmly when plans change is useful in almost any job. Using one scheduling program, one billing system, or one piece of lift equipment is tied to particular tools and tasks at this center, so each of those is a specific skill.
4. To save on pay, Spoke & Chain Bicycles hires a mechanic who has never worked on electric bikes, even though e-bike repairs are now half of the shop’s work. The owner decides there’s no time to train him. What is the most likely result?
Answer: A. Hiring an employee who lacks the skills a role needs, and then not training him, hurts quality and can threaten the business. Half of the shop’s work is e-bikes, so slow or faulty e-bike repairs would frustrate customers and send them to competitors. His lower wage doesn’t mean lower overall costs, because the savings are likely erased by extra hours, redone work, and lost customers. He can’t stick to regular bikes when half the jobs are e-bikes, and he doesn’t bring the skill the shop most needs.
5. Lunaria Jewelry, an online shop with three employees, needs a new website with a secure checkout. After launch, the site will need small updates just a few times a year, and no one on the team can build websites. Which way of filling this skills gap fits best?
Answer: B. A business can fill a skills gap by developing the skill on its own team or by hiring or outsourcing. For one big project followed by occasional small jobs, outsourcing to a freelancer brings expert skills without a full-time salary and benefits. A full-time developer would cost far more than the ongoing work justifies, teaching herself would leave the shop without a working site for a year, and a weekend course won’t prepare a clerk to build a secure checkout.
6. Pell & Moss, a five-person accounting firm, can’t match the salaries that large firms in its city pay. Which policy would best help it attract and keep talented young accountants?
Answer: C. Training can help a small business attract and keep employees even against larger firms that pay more, because it offers growth potential and raises the employee’s skills and future earnings. Paying for certification courses and exams does that. The risk, which the firm has to weigh, is that a newly certified employee leaves for a better-paying job. Experienced accountants still compare salaries, a one-time $500 bonus does little to keep anyone, and leaving new hires to train themselves makes the firm less attractive.
7. Owen sells hot tubs at Cascade Spas. He earns a base salary of $1,800 a month plus a 5% commission on everything he sells. In June, he sold $64,000 of hot tubs. What was his gross pay for June?
Answer: D. Commission = 5% × $64,000 = $3,200, so gross pay = $1,800 + $3,200 = $5,000. $3,200 is the commission alone without the base salary, $2,120 treats 5% as 0.5% ($1,800 + $320), and $1,890 applies the 5% to his base salary instead of to his sales ($1,800 × 1.05). Because commission rises with sales, it motivates Owen to sell more.
8. Skyward Survey, a two-year-old drone-mapping company, promises its 8 employees an equal split of 10% of the company’s annual profit. This year it had revenue of $1,200,000 and profit of $240,000. How much does each employee receive from profit sharing?
Answer: A. The profit-sharing pool is 10% × $240,000 = $24,000, and $24,000 ÷ 8 = $3,000 each. $24,000 is the whole pool, not one employee’s share; $30,000 splits all of the profit ($240,000 ÷ 8) instead of 10% of it; and $15,000 takes 10% of revenue instead of profit ($120,000 ÷ 8). Profit sharing gives employees a stake in the company’s success, which helps a young company attract and keep workers before it can pay high salaries.
9. Imani has two job offers. Harbor Logistics offers a $52,000 salary and no retirement plan. Kestrel Health offers a $50,000 salary and will put an amount equal to 5% of her salary into a retirement account for her each year. Counting salary and the retirement contribution, which offer is worth more each year, and by how much?
Answer: B. Compensation includes what employees receive beyond their paycheck. Kestrel: $50,000 + (5% × $50,000) = $50,000 + $2,500 = $52,500, which beats Harbor’s $52,000 by $500. Harbor by $2,000 compares salaries only and ignores the benefit, $2,500 counts the retirement contribution but forgets Kestrel’s lower salary, and $4,500 adds the $2,000 salary gap instead of subtracting it. Imani may also weigh intangible benefits, such as growth potential and role fit.
10. Swift Basket, a grocery delivery service, made 2,000 deliveries in March, and 100 of them arrived late. In April, it made 3,000 deliveries, and 300 of them arrived late. What was Swift Basket’s on-time delivery rate for March and April combined?
Answer: C. On-time deliveries = (2,000 − 100) + (3,000 − 300) = 1,900 + 2,700 = 4,600 of 5,000, and 4,600 ÷ 5,000 = 92%. 92.5% averages the two monthly rates (95% and 90%) as if both months had the same number of deliveries, but April had more. 8% is the combined late rate (400 ÷ 5,000), not the on-time rate, and 7.5% averages the two monthly late rates (5% and 10%).
11. Last year, Glacier Rink sold $240,000 of the $1,200,000 in ice-skating admissions sold in its metro area. This year, it sold $270,000 of the area’s $1,500,000. Which statement is accurate?
Answer: D. Market share = the business’s sales ÷ total market sales: $240,000 ÷ $1,200,000 = 20% last year, and $270,000 ÷ $1,500,000 = 18% this year. Glacier’s sales grew 12.5%, but the whole market grew 25%, so its share fell even though its sales rose. That is a drop of 2 percentage points; 10% is the relative drop (2 ÷ 20), not a change in percentage points. Sales growth alone can’t show market share, and share holds steady only if sales grow as fast as the market.
12. Last year, Summit Trail Tours, a guided hiking company, had revenue of $250,000, cost of goods sold (COGS) of $165,000, and operating expenses of $50,000. What was its gross profit margin?
Answer: B. Gross profit = $250,000 − $165,000 = $85,000, and gross profit margin = $85,000 ÷ $250,000 = 34%. 14% is the operating profit margin ($35,000 ÷ $250,000), which also subtracts operating expenses; 66% is COGS as a share of revenue; and 51.5% divides gross profit by COGS instead of by revenue ($85,000 ÷ $165,000).
13. Elm Street Bakery compares four KPIs with the averages for similar bakeries: per-unit cost of a loaf, $1.90 (average $1.75); gross profit margin, 46% (average 42%); customer satisfaction, 4.6 out of 5 (average 4.4); and on-time wholesale deliveries, 97% (average 95%). Which KPI is the bakery’s weakest result compared with its benchmark?
Answer: B. For a cost KPI, lower is better. Elm Street’s per-unit cost of $1.90 is $0.15 above the $1.75 average, so it is the one KPI that trails its benchmark. Its gross profit margin (4 percentage points above), customer satisfaction (0.2 points above), and on-time deliveries (2 percentage points above) all beat their benchmarks, because for those KPIs higher is better. Treating a higher number as better for every KPI hides the bakery’s one weak spot.
14. Petal Post, a flower subscription service, has a new strategy: earn more from the customers it already has by keeping subscribers longer and selling them add-ons such as vases and chocolates. Which KPI is most directly aligned with this strategy?
Answer: D. Businesses choose KPIs aligned with their strategic priorities. Customer lifetime value, the estimated total revenue a business can expect from a single customer over time, rises when subscribers stay longer and buy add-ons, which is exactly this strategy. CAC tracks the cost of winning new customers, market share tracks position against rivals, and order accuracy tracks an operations goal.
15. In October, Lantern Noodle Bar had $54,000 in sales from 4,500 transactions. It served about 3,000 different customers, and its gross profit was $21,600. What was its average transaction size?
Answer: C. Average transaction size = sales ÷ number of transactions = $54,000 ÷ 4,500 = $12.00. $18.00 divides sales by customers instead of transactions, but many customers came in more than once. $4.80 divides gross profit by transactions ($21,600 ÷ 4,500), and $7.20 divides gross profit by customers ($21,600 ÷ 3,000); transaction size is measured with sales, not profit.
16. Kingfisher Swim School defines its customer acquisition rate as the percentage increase in new customers compared with the prior year. It signed up 400 new students last year and 500 this year, and it now has 2,000 students in all. What is this year’s customer acquisition rate?
Answer: C. Percentage increase = (new − old) ÷ old = (500 − 400) ÷ 400 = 100 ÷ 400 = 25%. 20% divides the increase by this year’s 500 instead of last year’s 400, 5% divides it by all 2,000 students, and 125% is this year’s count as a percentage of last year’s (500 ÷ 400) without subtracting the starting 100%.
17. After hiring four more drivers, Ridgeback Couriers raised its on-time delivery rate from 90% to 98%. Over the same period, its delivery cost per package rose from $5.00 to $8.00. Which conclusion is best supported by these two KPIs?
Answer: A. KPIs should be read together. The on-time rate rose 8 percentage points, and the cost per package rose ($8.00 − $5.00) ÷ $5.00 = 60%. Whether the trade is worth it depends on whether better service wins or keeps enough customers to cover the higher cost. 37.5% divides the $3.00 increase by the new cost ($8.00) instead of the old one, and calling the change a clear success or a clear failure judges one KPI in isolation.
18. FitFuel, a meal-prep delivery service, spends an average of $150 on marketing, advertising, and sales to win each new customer. Customers pay $40 a month and, on average, cancel after 3 months. Which conclusion is best supported?
Answer: B. Customer lifetime value = $40 × 3 months = $120, which is less than the $150 customer acquisition cost, so FitFuel spends more to win each customer than that customer brings in, and that is before counting the cost of the meals. $480 assumes customers stay a full year, and comparing $150 with four months of payments ($160) ignores that customers leave after three. $120 is the right lifetime value, but it is revenue, not profit, and it doesn’t even cover the $150 spent to win the customer.
19. The owner of Saffron Grill wants to raise weekday revenue 20% by December. Her plan is to win the lunch business of the staff at the hospital two blocks away, so she offers a 10% discount to diners who show a hospital badge. Which of the following is data she would use to judge whether her plan is working?
Answer: A. Businesses use data to define a strategy, judge whether it is working, and adjust their tactics. Weekly counts of badge discounts are data that show whether hospital staff are actually coming in. The 10% badge discount is a tactic, winning the hospital staff’s lunch business is the strategy, and raising weekday revenue 20% is the goal.
20. Riverstone Climbing Gym is overcrowded at peak hours. Its managers have listed three possible fixes and agreed that any fix must cost less than $25,000, be ready by fall, and keep the gym welcoming to beginners. Now they are scoring each fix on those three standards, using contractors’ quotes and a survey of members. Which PACED step are they completing now?
Answer: D. PACED stands for Problem, Alternatives, Criteria, Evaluation, and Decision. Listing the three fixes was the Alternatives step, and agreeing on cost, timing, and beginner-friendliness was the Criteria step. Scoring each fix against those criteria with specific evidence, such as quotes and survey results, is the Evaluation step. The Decision step comes next, when they recommend one fix and support it with reasoning.
21. To choose between opening a second location and adding a catering service, the owners of Basil & Rye Deli list three criteria: startup cost, expected yearly profit, and how many months it would take to earn back the investment. Which change would most improve their list of criteria?
Answer: A. All three criteria are financial. A strong PACED analysis weighs financial, operational, market, and organizational considerations, such as whether the staff can handle catering, how much demand exists near a new location, and how each option fits the deli’s mission (an intangible criterion that still counts even without a KPI). Another financial measure adds nothing new, judging on profit alone would ignore the other considerations PACED is meant to weigh, and the point of criteria is to judge options on evidence rather than on preference alone.
22. Harborlight Ferries is choosing between two new maintenance schedules for its boats. Which of its criteria could be measured with a KPI and compared with a benchmark?
Answer: D. Criteria are the standards used to evaluate alternatives, and KPIs are the quantitative measures used to track performance against those standards. On-time departures can be measured as a percentage and compared with a goal or last year’s rate. Family history, reputation, and fit with the owners’ vision are intangible criteria. Not every criterion has a KPI, but intangible criteria still count in the evaluation.
23. Willow & Pine Hardware is considering a tool-rental counter that would cost $54,000 to set up. It expects the counter to add $9,000 a month in revenue and $3,000 a month in recurring costs for staff and repairs. Based on these projections, how many months of added profit would it take to recover the setup cost?
Answer: C. Added profit each month = $9,000 − $3,000 = $6,000, and $54,000 ÷ $6,000 = 9 months. 6 months divides by the added revenue and ignores the recurring costs ($54,000 ÷ $9,000), 4.5 months adds the costs to the revenue instead of subtracting them ($54,000 ÷ $12,000), and 18 months divides by the recurring costs ($54,000 ÷ $3,000).
24. Barkley’s Pet Supply is using the PACED model to boost sales during its slow winter season, and it has narrowed its options to a loyalty program or a pop-up shop at the mall. Which statement best completes the Decision step?
Answer: A. The Decision step recommends a course of action and supports it with reasoning tied to the criteria and to specific evidence from the case, here the lower cost and the data on repeat buyers. A choice based on what feels exciting rests on preference, a claim about what tends to work for most retailers is a general observation rather than evidence about this store, and listing pros and cons without choosing never completes the decision.
25. Cobalt Coffee Roasters is using PACED to decide whether to open a café downtown or in a growing suburb. Before comparing the two locations, the owner completes a Porter’s Five Forces analysis of the coffee market in each area. How does this help her PACED analysis?
Answer: C. Porter’s Five Forces helps a business understand its external environment, so its findings can inform the criteria and the evaluation in a PACED analysis, for example, how many rival cafés each area has or how easily new ones could open. It doesn’t make the decision for her; it rates outside forces, not the café’s internal strengths; and the problem (where to open) was defined before the analysis began.
26. Orchard Hill, a wedding venue, set a goal of booking 40 weddings next year by becoming the top choice for budget-minded couples. Three months in, its website inquiries are up 50%, but just 1 in 20 inquiries turns into a booking, compared with 1 in 8 last year. What is the best next step?
Answer: B. Businesses use data to judge whether a strategy is working and to adjust their tactics. More inquiries suggest the budget-friendly message is reaching couples, but far fewer of them book, so the problem is in turning interest into bookings, such as how quickly the venue responds, how it quotes prices, or how it runs tours. It’s too early to abandon a strategy that is drawing interest, keeping the same tactics ignores the drop in bookings, and more inquiries haven’t produced more weddings.
27. Before opening a second store, the owner of Tangle Yarn Co. wants to know how hard it would be to earn a profit in another city’s craft-supply market, given the competitors, suppliers, customers, and alternatives there. Which tool fits this purpose best?
Answer: A.Porter’s Five Forces is a framework for evaluating how competitive a market is, and how attractive, by examining rivalry, new entrants, substitutes, buyers, and suppliers. A skills gap analysis looks inward at the team, PACED is a process for choosing among alternatives rather than a way to rate competitors, and a KPI dashboard tracks an existing business’s own performance, not the structure of a new market.
28. Northgate Hearing is the only clinic within 70 miles that fits a certain type of custom hearing aid, and patients who switch clinics must pay for a new fitting. How strong is the bargaining power of buyers in Northgate’s market?
Answer: B. Bargaining power of buyers is customers’ ability to influence prices and terms. With no other clinic within 70 miles and a cost to switch, patients have little leverage, so buyer power is weak. A high price doesn’t by itself give buyers power, every business earns its revenue from customers, and what suppliers charge is supplier power, a different force.
29. Starlight Cinema is the only movie theater in a small city. Which development is an example of the threat of substitutes for Starlight?
Answer: B. The threat of substitutes is the availability of alternative products or services that meet the same need. Streaming new movies at home is a different way to watch a film, so it substitutes for a theater ticket. A new cinema is a new entrant, studios demanding a bigger share is supplier power, and moviegoers comparing prices is buyer power.
30. In which market is the threat of new entrants most likely to be the highest?
Answer: D. The threat of new entrants depends on how easily new competitors can enter the market. Dog walking has almost no barriers to entry, with no license and almost no startup cost, so new walkers can appear at any time. Licenses, costly infrastructure, and huge startup costs are high barriers that keep the threat low in the other three markets.
31. In its Five Forces analysis, Metro Cab Co. rates the threat of substitutes as strong because ride-share apps now operate throughout its city. How should this finding appear in Metro Cab’s SWOT analysis?
Answer: D. Five Forces findings feed a SWOT analysis, especially its opportunities and threats, and a strong force often corresponds directly to a threat. Ride-share apps are an external condition Metro Cab doesn’t control. Losing riders is the effect of the threat, not an internal weakness; building an app is a possible strategy in response, not a classification; and a SWOT covers external opportunities and threats as well as internal strengths and weaknesses.
32. Each item below raises costs for Pine Hollow Diner. Which one belongs in the Threats quadrant of its SWOT analysis?
Answer: C. Threats are external conditions the business doesn’t control that may hurt it, and unfavorable changes in government regulation are a standard example, so the minimum wage law is a threat. The other three raise costs too, but they come from the diner’s own team, equipment, and operations, which it controls, so they are weaknesses. Raising costs doesn’t decide the quadrant; where the cause comes from does.
33. More shoppers in the region are avoiding single-use plastic. How should this trend be classified in the SWOT analyses of ReFill Station, which sells soap in refillable bottles, and CupCo, which makes plastic party cups?
Answer: A. Shifts in society, like the other PESTEL factors, are external, so they belong in a SWOT as opportunities or threats, not as strengths or weaknesses. The same trend can help one business and hurt another, so it is an opportunity for ReFill Station and a threat for CupCo. Whether an outside trend is an opportunity or a threat depends on how it affects each business, not on how widely it spreads.
34. Hollyhock Candy, a small chocolate maker, is little known outside its hometown. A popular gift-box company has just announced that it is looking for small candy makers to feature in the holiday boxes it ships to 50,000 subscribers, so Hollyhock plans to apply and get its chocolates in front of more shoppers. Which SWOT combination does this strategy use?
Answer: D. Low brand recognition is an internal weakness, and a gift-box company looking for small candy makers is an external opportunity. Hollyhock uses the opportunity to fix the weakness, a weakness/opportunity pairing. The scenario names no strength, and the gift-box company’s search is a chance to grow, not a threat.
35. The owner of Mile Marker Tire lists “Our biggest competitor just closed its local store” under Strengths in her SWOT analysis. Which correction is accurate?
Answer: B. Strengths are internal advantages the business controls, while opportunities are external conditions that may help it succeed, and reduced competition is a standard example of an opportunity. A change that helps sales is still external, the closing helps Mile Marker rather than hurting it, and weaknesses are internal disadvantages, not outside events.
Questions 36–40 refer to the following.Renata Okafor owns Tidy Tails Mobile Grooming, which grooms dogs in six vans that drive to customers’ homes. This year her strategy was to grow by winning new customers: she spent $24,000 on online ads, paid $6,000 in commissions to a salesperson who signs up new customers at pet stores, and gained 500 new customers. She also spent $9,000 to replace a van’s generator. Of the 2,000 customers Tidy Tails had at the start of the year, 1,400 were still booking appointments at year-end. Her KPI dashboard:
KPI
Last year
This year
Industry average
Revenue
$640,000
$736,000
—
Customer acquisition cost (CAC)
$40
?
$50
Customer retention rate
84%
?
80%
Average customer satisfaction (out of 5)
4.7
4.4
4.5
Gross profit margin
45%
44%
40%
36. What was Tidy Tails’ customer acquisition cost (CAC) this year?
Answer: C. CAC = total marketing, advertising, and sales costs ÷ new customers = ($24,000 + $6,000) ÷ 500 = $60. $48 leaves out the salesperson’s commissions ($24,000 ÷ 500), $78 adds the generator, which isn’t a marketing or sales cost ($39,000 ÷ 500), and $15 divides by all 2,000 customers at the start of the year instead of the 500 new ones. For a cost KPI, lower is better, so $60 is worse than both last year’s $40 and the $50 industry average.
37. What was Tidy Tails’ customer retention rate this year?
Answer: C. Retention rate = customers still active ÷ customers at the start = 1,400 ÷ 2,000 = 70%, down from 84% and 10 percentage points below the 80% industry average. 30% is the share of customers lost (600 ÷ 2,000), 56% divides by 2,500 and so includes the 500 new customers, who weren’t there to be kept, and 95% counts the new customers as kept ((1,400 + 500) ÷ 2,000).
38. Next year, Renata’s strategic goal is to become the highest-rated mobile groomer in her county. Which benchmark would best show whether her satisfaction rating is meeting that goal?
Answer: B. A benchmark should fit the strategic goal. To be the highest-rated groomer in her county, Renata has to outscore the groomers her local customers can choose from, so their ratings are the standard to compare against. Beating last year’s 4.7 would show improvement but not her rank, and national averages or national chains aren’t the businesses she has to beat locally.
39. Which conclusion is best supported by Renata’s dashboard?
Answer: A. Revenue grew ($736,000 − $640,000) ÷ $640,000 = 15%, but KPIs must be read together: average satisfaction fell from 4.7 to 4.4, below the 4.5 industry average, a warning that future sales could suffer if unhappy customers leave. Calling the business healthy judges two KPIs in isolation. Gross profit margin slipped 1 percentage point, but at 44% it is still above the 40% average. The satisfaction drop is 0.3 points on a 5-point scale (about 6% of last year’s 4.7), not 0.3%.
40. Renata wants to change how she pays her salesperson so that the pay plan better supports the business’s results. Based on the dashboard, which change fits best?
Answer: D. Commission motivates employees by tying pay to results, but right now it rewards every sign-up, even customers who never come back. Meanwhile, CAC has risen to $60, above the $50 industry average, and retention has fallen to 70%, below the 80% average, so Tidy Tails is paying more to win customers while struggling to keep them. Paying commission after a second visit pays only for customers who return, which rewards bringing in customers who stick around. A bigger commission per sign-up would push CAC even higher, a flat salary removes the incentive to find customers at all, and commission on all six vans’ revenue ties his pay mostly to work he doesn’t control.
Questions 41–45 refer to the following.Wickford Candle Works hand-pours candles and sells about 4,000 a month at $20 each, online and through gift shops. Its mission is “clean-burning candles made from 100% natural soy wax.” A poor soybean harvest has raised the cost of soy wax by 50%, from $2.00 to $3.00 per candle; all of its other production costs (jar, wick, label, and labor) total $9 per candle. Owner Abigail Novak is using the PACED model to compare three alternatives:
A: Raise the price
B: Switch to blended wax
C: Sign a 2-year wax contract
Price per candle
$22
$20
$20
Expected candles sold per month
3,800
4,000
4,000
Wax cost per candle
$3.00
$2.20
$2.50
One-time cost
None
$6,000 for new labels and testing
None
Other effects
Some gift shops may stop carrying the candles
The wax is part soy and part paraffin, so the candles can no longer be called 100% soy
Wickford must buy a set amount of wax each month for 2 years at $2.50, even if wax prices fall
41. Which statement best defines the problem for the first step of Abigail’s PACED analysis?
Answer: D. The Problem step defines what is wrong, ideally with evidence. Wax now costs $1.00 more per candle, and $1.00 × 4,000 candles = $4,000 less gross profit each month. Raising the price and finding cheaper wax are possible alternatives, so those statements jump ahead to solutions, and the poor harvest is the outside cause, not a statement of the problem Wickford has to solve.
42. If Abigail chooses Alternative A and the sales estimate is accurate, what will Wickford’s monthly gross profit from candles be?
Answer: A. Under Alternative A, each candle earns $22 − $3.00 wax − $9 of other costs = $10, and $10 × 3,800 = $38,000. $40,000 ignores the 200 lost sales (4,000 × $10), $41,800 uses the old $2.00 wax cost (3,800 × $11), and $72,200 subtracts the wax but forgets the $9 of other production costs (3,800 × $19). For comparison, doing nothing gives 4,000 × $8 = $32,000, B gives 4,000 × $8.80 = $35,200 (plus its one-time $6,000), and C gives 4,000 × $8.50 = $34,000, so A leads on this financial criterion if the sales estimate holds.
43. Abigail compares the alternatives on an organizational criterion: fit with Wickford’s mission. Which statement judges Alternative B on this criterion using specific evidence from the case?
Answer: B. Each alternative should be judged against the criteria using specific evidence from the case. Wickford’s mission promises 100% natural soy wax, and Alternative B’s blended wax would break that promise. Claims about what customers generally prefer or what is usually risky are general observations, not evidence from this case. The $0.80 savings is real evidence, but it belongs to the cost criterion, not to mission fit.
44. Abigail adds a market criterion: keeping the gift shops that carry Wickford candles. Which KPI could she use to measure this criterion?
Answer: D.Customer retention rate, the share of gift shops that keep ordering, directly measures whether Wickford keeps those customers, which is the risk the table lists for Alternative A. Per-unit cost and gross profit margin are financial measures, and order accuracy tracks how well shipments are filled, not whether the shops stay.
45. Abigail chooses Alternative A. Which follow-up plan best reflects how businesses use data after making a decision?
Answer: A. After a decision, businesses plan their tactics, choose a few ways to track success, and decide how long to pursue the plan before reconsidering. Tracking sales and gift-shop reorders, then reviewing after three months, does that. Locking in the price for two years ignores what the data might show, switching after one complaint reacts to a single anecdote instead of the data, and staff opinions about fairness aren’t a measure of results.
Questions 46–50 refer to the following.Marisol Ibarra owns Green Light Driving School in Kessler Falls, a fast-growing suburb. To analyze the local market for teen driver education, she wrote these notes for a Porter’s Five Forces analysis and a SWOT analysis:
Note
What Marisol found
1
Opening a driving school requires a state license, which takes about a year to get, and cars fitted with a second brake pedal, which cost about $40,000 each.
2
Three other driving schools in Kessler Falls compete for teen students, and two of them often run price promotions.
3
Only one insurance company in the state covers cars used for driving lessons, and it raised Green Light’s premium 30% this year.
4
Under current state law, parents may teach their teens all of the required practice hours instead of paying a school.
5
A new state law taking effect next year will require every driver under 18 to complete 6 hours of lessons with a licensed instructor.
6
Green Light’s students pass the road test on the first try 92% of the time, compared with 75% statewide.
7
Green Light has only two instructors, so new students often wait a month for their first lesson.
46. Note 3 most directly affects which of Porter’s Five Forces, and how?
Answer: D. Bargaining power of suppliers is suppliers’ ability to raise prices or reduce quality. With only one insurer offering the coverage, Green Light has nowhere else to go, so supplier power is strong, as the 30% increase shows. Buyer power is about customers’ leverage, rivalry is about competition among the schools, and higher insurance costs make it harder, not easier, for new schools to enter.
47. How will the new law in Note 5 most likely affect Green Light’s market?
Answer: A. Today, parent-taught practice is a substitute for paid lessons (Note 4). Once the law requires 6 hours with a licensed instructor, parents can’t fill those hours, so the threat of substitutes weakens. A requirement to buy lessons doesn’t give parents more leverage over prices or terms; if anything, it leaves them fewer alternatives. The law raises demand for lessons, which would attract new schools rather than discourage them. Parents can still teach practice hours, but they can no longer replace the required lessons.
48. Which note belongs in the Weaknesses quadrant of Green Light’s SWOT analysis?
Answer: A. Weaknesses are internal disadvantages the business controls. Green Light decides how many instructors it employs, so having too few instructors (Note 7) is a weakness, and one it could fix. The insurance increase raises its costs, but the premium is set by an outside insurer, which makes it a threat; rivals’ promotions and parent-taught driving are also outside conditions, so they are threats as well.
49. Which strategy uses one of Green Light’s strengths to capitalize on an opportunity?
Answer: B. The 92% first-try pass rate is a strength (internal), and the new law requiring lessons for drivers under 18 is an opportunity (external), so promoting the pass rate to families who will need the new lessons pairs a strength with an opportunity. Hiring instructors to serve the new demand uses an opportunity to fix a weakness (too few instructors), using the pass rate to justify higher prices against rivals’ promotions uses a strength against a threat, and hiring instructors to keep families from leaving for discounters fixes a weakness to reduce a threat.
50. Marisol rates the threat of new entrants in her market as low. Which note best supports this rating?
Answer: C. The threat of new entrants depends on how easily new competitors can enter. A year-long licensing process and $40,000 cars are high barriers to entry, which keep the threat low. The new law raises demand, which would make the market more attractive to new schools; parent-taught practice relates to substitutes; and rivals’ promotions describe rivalry among the existing schools.
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.
Halftone Print Co.
Jasmine Cole and her brother Marcus own Halftone Print Co., a screen-printing shop that makes custom T-shirts and hoodies for schools, sports teams, and local businesses. Jasmine, a trained graphic designer, creates every design, and Marcus, a former machinist, runs the presses and maintains the equipment. Six part-time press operators are paid an hourly wage. Neither owner has sales experience. Most orders come from word of mouth, and Jasmine spends about 15 hours a week answering quote requests and returning customers’ calls, which delays her design work. The owners plan to hire one full-time employee this year.
Orders grew 25% this year, and the shop has struggled to keep up. The owners track the key performance indicators (KPIs) in Table 1 and compare them with industry averages published by a national trade association for screen printers.
To add capacity, the owners are using the PACED model to compare two alternatives. Alternative 1: Buy an automatic press for $45,000. It prints about three times as fast as the shop’s manual presses, and the manufacturer says its built-in alignment system cuts misprints by about half. The press operators would need two weeks of training, and the shop would lose about one week of production during installation. Alternative 2: Add an evening shift. Halftone would hire two more part-time press operators to run its manual presses from 4 p.m. to 9 p.m. on weekdays, adding about $4,000 a month in wages. The shift could start within a week, with no up-front cost and no lost production. However, the manual presses would misprint at the same rate as they do now, and Marcus, the only person who repairs the presses, would have to supervise the evening crew after working the day shift.
The market is also changing. Heat-press machines that cost less than $500 now let almost anyone start a custom-shirt business from home, without renting a shop, and find customers through social media. The two wholesalers that supply Halftone’s blank shirts raised their prices 18% this year after cotton prices jumped. Meanwhile, Jasmine’s designs have won three regional awards, and the county will open two new high schools next fall, each of which will need uniforms and spirit wear for its teams and clubs.
Table 1. Halftone Print Co. KPIs
KPI
Last year
This year
Industry average
Orders completed
1,600
2,000
—
Orders reprinted because of errors
32
110
—
Order accuracy
98%
?
97%
On-time delivery rate
96%
91%
95%
Gross profit margin
41%
38%
40%
(A) (i) Identify one skill or competency that Halftone’s current team lacks. (ii) Explain why hiring an employee whose competencies complement the owners’ would help Halftone more than hiring someone with the same strengths as the owners. (iii) Recommend a way to compensate the new full-time employee, and explain how it would motivate that employee. [3 points]
(B) Order accuracy is the percentage of completed orders that have no errors. (i) Using Table 1, calculate Halftone’s order accuracy for this year. Show your work. (ii) Explain what comparing this result with the industry average signals to the owners. [2 points]
(C) Using specific evidence from the scenario, describe how Alternative 1 and Alternative 2 would each perform on one nonfinancial criterion. [2 points]
(D) Identify the force in Porter’s Five Forces that the low-cost heat-press machines most directly affect, and explain, using evidence from the scenario, whether that force is weak or strong for Halftone. [2 points]
(E) (i) Identify where the 18% increase in the price of blank shirts belongs in a SWOT analysis of Halftone, and explain why. (ii) Describe a strategy that uses one of Halftone’s strengths to capitalize on an opportunity in the scenario. [2 points]
(F) Recommend one of the two alternatives, and justify your recommendation using specific evidence from the scenario or Table 1. [1 point]
Show the scoring guide
A (3 points)
1 point for identifying a competency the team lacks that the scenario supports, such as sales, persuasive communication with customers, or handling quote requests and customer follow-up. Design, printing, and equipment maintenance do not earn the point, because the owners already have those skills.
1 point for explaining that a hire with complementary competencies fills the gap instead of duplicating skills the owners already have, with a link to the scenario. For example, a salesperson would win orders that neither owner is equipped to win and would free Jasmine’s 15 hours a week for design, while another designer or press operator would leave the sales gap open.
1 point for recommending a specific compensation method (hourly wage, annual salary, commission, piece rate pay, profit sharing, or a combination) and explaining how it would motivate the employee in this role. For example, a base salary plus a commission on new orders ties the employee’s pay to the sales he or she brings in. Naming a method without connecting it to the employee’s effort or decision to stay does not earn the point.
Sample full-credit answer: (i) The team lacks sales skills: neither owner has sales experience, and most orders come from word of mouth. (ii) The owners already cover design and printing, so another designer or press operator would duplicate what they do well. A salesperson would bring a competency the team doesn’t have, win new customers such as schools and teams, and take over the quote requests, freeing Jasmine’s 15 hours a week for design work. (iii) Halftone should pay the salesperson a base salary plus a commission on each new order he or she brings in. The salary provides steady income, and the commission motivates the employee to win more orders, because pay rises with the sales the employee generates.
B (2 points)
1 point for the correct calculation with work shown: (2,000 − 110) ÷ 2,000 × 100 = 1,890 ÷ 2,000 × 100 = 94.5%.
1 point for explaining that the result is 2.5 percentage points below the 97% industry average (and down from 98% last year), which signals a quality problem as orders grew, such as reprints that add costs or errors that could hurt customer satisfaction and repeat business, so the owners should look into the cause. An explanation that correctly uses an incorrect value from part (i) can earn this point.
Sample full-credit answer: (i) Orders with no errors = 2,000 − 110 = 1,890. Order accuracy = 1,890 ÷ 2,000 × 100 = 94.5%. (ii) Halftone’s order accuracy is 2.5 percentage points below the 97% industry average and down from 98% last year. This signals that quality has slipped as orders grew 25%. Every reprint costs Halftone extra shirts, ink, and labor, which may be part of why its gross profit margin fell, and repeated errors could cost the shop repeat customers, so the owners should find out what is causing the errors.
C (2 points)
1 point for naming a relevant nonfinancial criterion (for example, print quality and order accuracy, speed and on-time delivery, or the effect on the owners and employees) and describing how Alternative 1 performs on it, using specific evidence from the scenario, such as the alignment system that cuts misprints by about half, printing about three times as fast, or the two weeks of training and one week of lost production.
1 point for describing how Alternative 2 performs on the same criterion, using specific evidence from the scenario, such as the manual presses misprinting at the same rate as now, the shift starting within a week with no lost production, or Marcus having to supervise the evening crew after working the day shift. General statements that are not tied to the scenario (for example, “new workers make more mistakes”) do not earn the point.
Sample full-credit answer: Criterion: order accuracy. Alternative 1 should improve accuracy, because the automatic press’s built-in alignment system cuts misprints by about half. Alternative 2 would not improve accuracy, because the evening crew would run the same manual presses, which would misprint at the same rate as they do now, and Marcus would be supervising the crew at the end of a full day shift. On this criterion, Alternative 1 is stronger.
D (2 points)
1 point for identifying the threat of new entrants (“new entrants” is also accepted). Industry rivalry and the threat of substitutes do not earn the point: the machines change how easily new businesses can start selling custom shirts, which is the ease of entry, not the intensity of competition among the shops already in the market or a different product that meets the same need.
1 point for explaining, with evidence from the scenario, that the threat of new entrants is strong (high) because barriers to entry are low: the equipment costs less than $500, no shop is needed, and new sellers can find customers through social media, so new competitors can easily start up and compete for Halftone’s customers, which can push prices down. A response that says only that there will be “more competition,” without describing the low barriers to entry, does not earn the point.
Sample full-credit answer: The low-cost heat-press machines most directly affect the threat of new entrants. This force is strong for Halftone, because the barriers to entry are low: anyone can buy a machine for less than $500, work from home without renting a shop, and find customers on social media. New sellers can start up quickly and compete for the teams and schools that Halftone serves, which puts pressure on Halftone’s prices.
E (2 points)
1 point for identifying the price increase as a threat and explaining that it is external: the price is set by outside wholesalers and the cotton market, which Halftone doesn’t control. Calling it a weakness because it raises Halftone’s costs does not earn the point.
1 point for describing a strategy that pairs a strength from the scenario (such as Jasmine’s award-winning designs) with an opportunity from the scenario (the two new high schools that will need uniforms and spirit wear next fall), for example, featuring the award-winning designs in a pitch to become the new schools’ uniform and spirit-wear supplier. A strategy that pairs a weakness or a threat instead of a strength and an opportunity does not earn the point.
Sample full-credit answer: (i) The 18% increase is a threat. It raises Halftone’s costs, but the price of blank shirts is set by outside wholesalers and the cotton market, not by Halftone, and threats are external conditions the business doesn’t control. (ii) Halftone should use a strength, Jasmine’s award-winning designs, to capitalize on an opportunity, the two new high schools opening next fall. Jasmine could create sample logos and spirit-wear designs for each school, highlight the awards in a pitch to the schools’ athletic directors, and aim to become their uniform supplier before the schools open.
F (1 point)
1 point for recommending either alternative and justifying the choice with specific, accurate evidence from the scenario or Table 1 that shows why it fits Halftone’s situation. Either recommendation earns the point when it is justified this way. For example, for Alternative 1: the on-time delivery rate fell from 96% to 91%, below the 95% industry average, and a press that prints about three times as fast adds lasting capacity, while its alignment system cuts the misprints behind below-average order accuracy; or the evening shift’s wages of about $4,000 a month would total $48,000 in a year, more than the press’s one-time $45,000 cost. For Alternative 2: it adds press time within a week, with no up-front cost and no lost week of production, so Halftone can start catching up on late orders right away while its on-time delivery rate (91%) is below the 95% industry average, and it doesn’t require spending $45,000 at once in a year when blank-shirt prices rose 18%. A recommendation with no evidence, with only general claims (for example, “newer equipment is better”), or with inaccurate evidence (for example, claiming that Alternative 2 would reduce misprints) does not earn the point.
Sample full-credit answer: Halftone should choose Alternative 1. Its on-time delivery rate fell from 96% to 91% this year, below the 95% industry average, because the shop can’t keep up with orders. An automatic press that prints about three times as fast would add the capacity Halftone needs to deliver on time, and its alignment system would cut the misprints that are dragging order accuracy below the industry average. An evening shift would add hours on the same manual presses, so the misprints would continue, and its wages of about $4,000 a month would add up to $48,000 in a year, more than the $45,000 press.
