Class 12 Entrepreneurship: CBSE Sample Question Paper- Term II (2021-22)- 2 | Sample Papers for Class 12 Commerce PDF Download

Class - XII

General Instructions:

• The paper is divided into 3 Sections.
• Section-wise overall choice is given to the students.
• Section A (2 markers) has 6 questions. Attempt any 4 out of 6.
• Section B (3 markers) has 5 questions. Attempt any 4 out of 5.
• Section C (5 markers) has 4 questions. Attempt any 3 out of 4.

Q.1.  Priya started a beauty parlour business by the name Beauty Co. She is a professional expert who has a great knowledge of makeup and hair care. She spent ₹ 5,00,000 to open the parlour of which she invested ₹ 3,00,000 of her own money and borrowed a loan for ₹ 2,00,000. Interest rate per annum is 4%. Sales revenue per month is ₹ 35,000. Cost of goods sold is ₹ 10,000 per month. Fixed expenses per month are ₹ 15,000 (salary ₹ 7,000, rent and utility ₹ 8,000), depreciation ₹ 1,000/- and tax @ 8%. What will be the value of Return on Equity of Priya’s business?

Net Profit After Tax = Gross Margin – Fixed Expenses – Depreciation – Interest – Tax

Q.2. How can an entrepreneur, raise funds by selling the issue mainly to the institutional investors?

An entrepreneur can raise funds by selling the issue mainly to the institutional investors through private placement. Private placement means the direct sale by a company of its securities to a limited number of sophisticated investors. Entrepreneurs, herein, raise funds by selling the issues mainly to the institutional investors like Unit Trust of India, Life Insurance Corporation of India, General Insurance Corporation of India, Army Group Insurance, State Level Financial Corporations, etc. Entrepreneurs both from public limited and private limited sector, bank heavily upon raising funds through the issue of varied financial instruments under this segment as at times they do not wish to disclose information to the open market.

Q.3.  ‘Golden Sweets’ was a partnership firm, owned by Swati and Sushma. ‘Asam Sweets’ was another partnership firm owned by Vipan and Pranav. Swati and Sushma were sharing profits in 1 : 2 ratio and Vipan and Pranav were sharing profits in 2 : 3 ratio. Both the firms were situated in a famous market of Guwahati and were doing competitive business. Pranav the partner of ‘Asam Sweets’ observed that many of their customers were from far off areas and if branches of ‘Asam Sweets’ are opened in other parts of the city; the firm may earn huge profits. Similar was the situation of ‘Golden Sweets’. One day in a function at a common friend’s house, the partners of both the firms met. The partners of both the firms knew that the internal expansion of their respective firms will be costly. Hence, they decided about the merger of the two firms. For this purpose, they decided to meet again to finalise the conditions of the merger. Finally, on 1.1.2016, their respective firms were merged and a new firm ‘Assam Golden Sweets’ was formed with all the four partners Swati, Sushma, Vipan and Pranav. Their new profit sharing ratio was 1 : 2 : 2 : 3. During the year ended 31.12.2016, the new firm opened four new branches in different parts of the city and earned a profit of 30% on sales. Identify the type of merger adopted by the two firms and also give its meaning.

The type of merger adopted by the two firms is horizontal merger. It is a merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms which operate in the same space, often as competitors offering the same goods or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry. Example: A merger between Coca-Cola and the Pepsi beverage division, would be a horizontal merger in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. If the merging companies' business operations are very similar, there may be opportunities to join certain operations, such as manufacturing and reduce costs.

Q.4. Evaluate the pricing strategy used by the company where the manufacturer charges a price to cover the cost of producing a product plus a reasonable profit.

Cost-plus pricing: The most common technique is cost-plus pricing, where the manufacturer charges a price to cover the cost of producing a product plus a reasonable profit. The cost-plus method is simple, but it does not encourage the efficient use of resources. Cost-plus pricing is typically based on a manufacturing estimate. Estimates of the costs associated with manufacturing tasks are made for many reasons. For example, to justify planned capital expenditure, to determine likely production costs for new or modified products, to focus attention on areas of high cost.

Q.5. Explain in brief the two ways in which an organisation can expand externally.

The ways in which an organisation can expand externally are:

(i) Franchising: Franchising is "an arrangement whereby the manufacturer or sole distributor of a trademarked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties and conformance to standardized operating procedures". The person offering the franchise is known as the franchisor. The franchisee is the person who purchases the franchise and is given the opportunity to enter a new business with a better chance to success than if he or she were to start a new business from scratch. Foundation of this relationship is the Franchise Agreement.

(ii) Merger: A merger is a combination of two companies into one larger company. This action involves stock swap or cash payment to the target. In merger, the acquiring company takes over the assets and liabilities of the merged company. All the combining companies are dissolved

and only the new entity continues to operate. In general, when the combination involves firms that are of similar size, the term, consolidation, is applied. When the two firms differ significantly by size, the term merger is used. Merger commonly takes two forms. In the first form amalgamation, two entities combine together and form a new entity, extinguishing both the existing entities. In the second form absorption, one entity gets absorbed into another. The latter does not lose its entity.

(iii) Acquisition: A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both. An acquisition, also known as a takeover, is the buying of one company (the target) by another.

Q.6. What is sales strategy?

A sales strategy consists of a plan that positions a company’s brand or product to gain a competitive advantage. Successful strategies help the sales force focus on target market customers and communicate with them in relevant and meaningful ways. Sales representatives need to know how their products or services can solve customer's problems. A successful sales strategy conveys this so that the sales force spends time targeting the correct customers at the right time.

Section - B

Q.7.

(i) Identify the type of business whose operating cycle is represented above?

(i) The type of business whose operating cycle is represented is Trading Business.

(ii) Analyze the working capital requirement for the type of business identified in (i)

(ii) The cash conversion cycle (CCC or Operating Cycle) is the length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable. It is the time required for a business to turn purchases into cash receipts from customers. CCC represents the number of days a firm's cash remains tied up within the operations of the business. Different products  will have different operating cycles. If the conversion takes longer then the cycle will be longer. For trading, where there is no manufacturing (or conversion), the operating cycle will be shorter. Longer the operating cycle, working capital quantum is more; shorter the cycle, less working capital is needed.

Q.8.  Aditi started a beauty parlour business. She spends ₹ 30,00,000 to open the parlour of which she invested ₹ 14,00,000 of her own money and borrowed a loan for ₹ 16,00,000. Interest rate per annum is 14%. Sales revenue per month is ₹ 1,60,000. Cost of goods sold is ₹ 60,000 per month. Fixed expenses for that month are ₹ 60,000 (salary ₹ 40,000, rent and utility ₹ 20,000), depreciation ₹ 30,000 and tax @ 15%. Calculate ROI and ROE.

Calculation of ROI and ROE

Q.9. Explain in detail any two pricing strategies.

Following are the various pricing strategies:

(i) Variable pricing technique: Variable pricing is a marketing approach that permits different rates to be extended to different customers for the same goods or services. The approach is often employed in cultures where dickering over the price of goods is considered the norm, or potential buyers are allowed to participate in a bidding situation, such as in an auction. Even in countries where fixed pricing is the standard, variable pricing may come into play when the customer is committing to the purchase of large volumes of goods or services. When this is the case, the customer must usually comply with specific criteria in order to enjoy pricing that varies from the standard cost.
(ii) Skimming pricing method: Skimming price method is the method of pricing in which the product is introduced in the market with a very high price. Selling a product at a high price, sacrificing high sales to gain a high profit is therefore "skimming" the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product commonly used in electronic markets when a new range, such as smart phones, are firstly  dispatched into the market at a high price. This strategy is often used to target "early adopters" of a product or service. Early adopters generally don’t have a relatively lower price-sensitivity. This strategy is employed only for a limited duration to recover most of the investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can have some setbacks as it could leave the product at a high price against the competition.
(iii) Cost plus pricing method: In this method the cost of production of one unit of the product is calculated. This cost covers all the types of costs including explicit cost, variable cost, fixed cost, etc. To this is now added the pre-planned profit margin. This method of pricing is a very simple method. It can easily be used for determining the price. Any changes in the cost of production or the margin of profit change the price in the same direction. It automatically gets adjusted to the change. Profit margin is not to be calculated. It is already fixed. Thus, by multiplying the profit per unit with the volume of the product, the total profit can be determined. Any upward rise in cost is easily visible. This provides an idea to the entrepreneur to adjust his production for keeping the cost as low as possible. Comparatively less calculations are involved, which makes the implementation of this method simple. This method can easily be implemented because of its simplicity to understand and easy calculations.
(iv) Penetration pricing: Penetration pricing is a pricing strategy where the price of a product is initially set at a price lower than the eventual market price to attract new customers. The strategy works on the expectations that customers will switch to the new brand because of the lower price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than to make profit in the short term. The price will be raised later once this market share is gained. For example, toothpaste sold in a remote rural area.

Q.10. Elaborate on any three types of franchising.

Types of franchising:
(i) Product franchise business opportunity: Manufacturers use the product franchise to govern how a retailer distributes his products. The manufacturer grants a store owner the authority to distribute goods by the manufacturer and allows him to use the name and trademark owned by the manufacturer. The store owner must pay a fee or purchase a minimum inventory of stock in return for these rights. Some tyre stores are good examples of this type of franchise.
(ii) Manufacturing franchise opportunity: These types of franchises provide an organization with the right to manufacture a product and sell it to the public, using the franchisor's name and trademark. This type of franchise is found most often in the food and beverage industry. Most bottlers of soft drinks receive a franchise from a company and must use its ingredients to produce, bottle and distribute the soft drinks.
(iii) Business franchise opportunity ventures: These ventures typically require that a business owner purchases and distributes the products for one specific company. The company must provide customers or accounts to the business owner, and in return, the business owner pays a fee or other consideration as compensation. Examples include vending machine routes and distributorships.
(iv) Business format franchise opportunity: This is the most popular form of franchising. In this approach, a company provides a business owner with a proven method for operating a business using the name and trademark of the company. The company usually provides a significant amount of assistance to the business owner in starting and managing the company. The business owner pays a fee or royalty in return. Typically, a company also requires the owner to purchase supplies from the company.

Q.11. Identify and explain the type of marketing strategies used in the given situations:
(i) Vipul found a worm crawling out of newly opened tetra pack of juice manufactured by a reputed company, Juices Ltd. He went back to the shopkeeper from whom the pack was purchased who directed him to call up the customer care centre. When all his efforts fell free, he went to a consumer activist group to seek advice. The group decided to help Vipul and take measures to impose restrictions on the sales of the firm’s products of the particular batch and urge customers to refrain from buying the products of the company. Juices Ltd. lost its image in the market. The CEO gave the responsibility of bringing back the lost image of the company to the Manager.

(i) Public relations: Public relations helps to create a positive image about the company in the eyes of various interest holders like consumers, government, suppliers, etc. It helps in launching new products as they may be accepted easily because of good reputation of business. It helps the business to reinstate itself in wake of controversies or prejudices, etc. Public relations is the deliberate, planned and sustained effort to establish and maintain mutual understanding between an organisation and its public. Public relations is about building good relations with the stakeholders (public) of the business by obtaining favourable publicity, building a good corporate image and handling or heading off unfavourable rumours, stories and events. By building good relationships with the stakeholders, particularly customers, we can generate positive word of mouth and referrals from satisfied customers.

(ii) Ritu, Vimla and Swapna are three women entrepreneurs who are engaged in dealing with handicraft goods under the brand name ‘craftworks’ through a chain of retail outlets at five different places in Mumbai. They outsource all their products from tribal and rural women in the state of Maharashtra. Ritu is of the opinion that in order to increase the sale of their products, they should advertise about it on television. But, Swapna is arguing that advertisement expenses will add to cost of operation. Whereas Vimla is insisting that they should set up an online portal to market their products across the globe.

(ii) Advertising: Advertising is a paid form of communication designed to persuade potential customers to choose the product or service over that of a competitor. Successful advertising involves making the products or services positively known by that section of the public most likely to purchase them. It should be a planned, consistent activity that keeps the name of the business and the benefits of products or services uppermost in the mind of the consumer.

(iii) Sohan has decided to set up a small factory to manufacture hand wash and toilet soaps in a rural area in Haryana. In order to promote the product initially, he plans to distribute small sachets of the hand wash as free samples, besides deploying a team of salesmen to sell the product door to door in the different parts of the city. Moreover, he has decided to conduct a hygiene camp in rural areas wherein he will distribute a kit comprising of hand wash and soap and also plans to organize street plays to highlight the importance of hygiene and sanitation in our daily lives.

(iii) Personal selling: It means selling products personally. It involves oral presentation of message in the form of conversation with one or more prospective customers for the purpose of making sales. Companies appoint salesperson to contact prospective buyers and create awareness about the company’s product. Thus, a salesperson plays three different roles:
(a) Be persuasive
(b) A service provider
(c) Be informative

Q.12. What is venture capital? State any four features of venture capital.

Venture capital is a type of private equity capital provided as seed funding to early-stage, high potential, high risk, growth up companies/entrepreneurs who lack the necessary experience and funds to give shape to their ideas. Venture capital is an equity based investment in a growth  oriented small to medium business to enable the investors to accomplish objectives, in return for minority shareholding in the business or the irrevocable right to acquire. It is more accurate to view venture capital broadly as a professionally managed pool of equity capital. Venture capital is a way in which investors support entrepreneurial talent with finance and business skills to exploit market opportunities and obtain long-term capital gains.
Venture capital finance has the following features:
(i) Venture capital can be best characterized as a long-term investment discipline, usually occurring over a five-year period that helps in the creation of early-stage companies, the expansion and revitalization of existing businesses, and the financing of leveraged buyouts of existing divisions of major or privately owned enterprises.
(ii) It is basically equity finance in relatively new companies.
(iii) It is long-term investment in growth-oriented small or medium firms.
(iv) Venture capitalist not only provide capital but also business skills to investee firms.
(v) It involves high risk-return spectrum.
(vi) It is a subset of private equity.
(vii) The venture capital institutions have a continuous involvement in the business after making the investment.
(viii) Such institutions disinvest the holdings either to the promoters or in the market.

Q.13. Anjali who is doing graduation from Delhi University has got an idea to make a safety gadget for college going girls which will give alert message to the registered numbers as well as nearest police stations, if the wearer is in any kind of danger. To execute her idea, she requires finance. She convinced one of her teachers who had the knowledge of making such gadget to provide her finance for feasibility studies. Identify and explain the source of funding used by Anjali.

The source of funding used by Anjali is Angel investors.
Angel investor is an affluent individual who provides capital for a business start-ups and early stage companies using a high-risk, high return matrix usually in exchange for convertible debt or ownership equity. The job of an angel investor is invaluable. They fill the gap in start-up or early stage financing between "friends and family", by providing seed funding and formal venture capital.
Most angel investors are current or retired executives, business owners or high net worth individuals who have the knowledge, expertise, and funds that help start-ups match up to industry standards. As angel investors bear extremely high risk and are usually subject to dilution from future investment rounds, they expect a very high return on investment. Apart from investing funds, most angels provide proactive advice, guidance, industry connections and mentoring start-ups in its early days. Their objective is to create great companies by providing value creation, and simultaneously helping investors realize a high return on investments. They have a sharp inclination to keep abreast of current developments in a particular business arena, mentoring another generation of entrepreneurs by making use of their vast experience.

Q.14.  Read the following article from a Business Newspaper and answer the questions:
“Orchid Group of Builders were engaged in building and selling of flats, has decided to expand their business. To do so, they have decided to merge with Vipul Constructors, who were their biggest competitors. It is a merger occurring between companies in the same industry. They both have now decided that they would merge the companies with equal shares and form a new company by the name Vorchid Ltd.”
(i) Quoting the lines from the passage identify and explain the type of merger in this case.

(i) Horizontal merger: A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms which operate in the same space, often as competitors offering the same goods or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry. Example: A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. In the merging companies' business operations are very similar, there may be opportunities to join certain operations, such as manufacturing and reduce costs.
Lines: “It is a merger occurring between companies in the same industry. They both have now decided that they would merge the companies with equal shares and form a new company by the name Vorchid Ltd.”

(ii) Also explain any three reasons for mergers.

(ii) Some of the commonly identified reasons for mergers are:
(a) Synergy: Synergy is the most essential component of mergers. In mergers, synergy between the participating firms determines the increase in value of the combined entity. In other words, it refers to the difference between the value of the combined firm and the value of the sum of the participants. Synergy accrues in the form of revenue enhancement and cost savings.
(b) Acquiring new technology: To remain competitive, companies need to constantly upgrade their technology and business applications. To upgrade technology, a company need not  always acquire technology. By buying another company with unique technology, the buying company can maintain or develop a competitive edge.
(c) Improved profitability: Companies explore the possibilities of a merger when they anticipate that it will improve their profitability.
(d) Acquiring a competency: Companies also opt for mergers to acquire a competency or capability that they do not have and which the other firm does. For example, the ICICI ITC alliance made the retailer network and depositor base available to the merging entity. Similarly, IBM merged with Daksh for acquiring competencies that the latter possessed.
(e) Entry into new markets: Mergers are often looked upon as a tool for hassle-free entry into new markets. Under normal conditions, a company can enter a new market, but may have to face stiff competition from the existing companies and may have to battle out for a share in the existing market. However, if the merger route is adopted, one can enter the market with greater case and avoid too much competition. For example, the merger of Orange, Hutch, and Vodafone took place to achieve this objective.
(f) Access to funds: Often a company finds it difficult to access funds from the capital market. This weakness deprives the company of funds to pursue its growth objectives effectively.

In such cases, a company may decide to merge with another company that is viewed as fund-rich. For example, TDPL (Tamil Nadu Dadha Pharmaceuticals) merged with Sun Pharma since TDPL did not have funds to launch new products.
(g) Tax benefits: Mergers are also adopted to reduce tax liabilities. By merging with a lossmaking entity, a company with a high tax liability can set off the accumulated losses of the target against its profits gaining tax benefits. For example, Ashok Leyland Information Technology (ALIT) was acquired by Hinduja Finance, a group company, so that it could set off the accumulated losses in ALITs books against its profits.

Q.15. What is penetration pricing method and enlist its advantages and disadvantages?

Penetration pricing is a pricing strategy where the price of a product is initially set at a price lower than the eventual market price to attract new customers. The strategy works on the expectations that customers will switch to the new brand because of the lower price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than to make profit in the short term. The price will be raised later once this market share is gained.

For example, toothpaste sold in a remote rural area.

The advantages of penetration pricing to the firm are:
(i) It can result in fast diffusion and adoption. This can achieve high market rates quickly. This can take the competitors by surprise, not giving them time to react.
(ii) It can create goodwill among the early adopter’s segment. This can create more trade by word of mouth.
(iii) It creates cost control and cost reduction pressures from the start, leading to greater efficiency.
(iv) It discourages the entry of competitors. Low prices act as a barrier to entry.
(v) It can create high stock turnover throughout the distribution channel.
(vi) This can create critically important enthusiasm and support in the channel.

Disadvantages of penetrating price method:
(i) The main disadvantage with penetration pricing is that it establishes long–term price expectations for the product and image preconceptions for the brand and company. This makes it difficult to eventually raise prices. Some commentators claim that penetration pricing attracts only the switchers (bargain hunters), and that they will switch away as soon as the price rises.
(ii) Another potential disadvantage is that the low profit margins may not be sustainable long enough for the strategy to be effective. Profit margin is low in the price fixed by such method. This profit may not be sufficiently compared to the cost of production and promotion.
(iii) This method is applicable only to the products and services which have high price elasticity. Thus, it is not applicable to all the products.
(iv) Turnover of the enterprise increases tremendously. Such enterprises have to prepare themselves for a situation of more financial requirements.