IGNOU FREE SOLVED ASSIGNMENT: ECO - 01 BUSINESS ORGANISATION (2019 - 2020)

Dear Students,

As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course. Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule. Before attempting the assignments, you should carefully read the instructions given in the Programme Guide.

This assignment is valid for two admission cycles (July 2019 and January 2020). The validity is given below:

You have to submit the assignment of all the courses to The Coordinator of your Study Centre. For appearing in June Term-End Examination, you must submit assignment to the Coordinator of your study centre latest by 15th March. Similarly for appearing in December Term-End Examination, you must submit assignments to the Coordinator of your study centre latest by 15th September.

TUTOR MARKED ASSIGNMENT

Course Code: ECO - 01

Course Title: Business Organization

Assignment Code: ECO – 01/TMA/2019-20

Coverage: All Blocks

Maximum Marks: 100

Attempt all the questions.

1. (a) Distinguish between the following: (5+5)

1) Business and Profession

Ans: Business: Business is an economic activity, which is related with continuous and regular production and distribution of goods and services for satisfying human wants.

Profession: A profession is a specialised occupation, which involves rendering of personal services by using professional knowledge.

Comparison of Business and Profession

2) Public Limited Company and Public Enterprise

Ans: Difference between public limited company and public enterprises:

(b) Write short notes on the following: (5+5)

1. Pervasiveness of risks in business

Ans: Business Risk: Business risk means possibility of some occurrence, which might lead to profits less than expectation or some loss for the business. It arises due to many reasons such as:

a)      Natural Causes: Human beings have no control over the nature. Unforeseen events like heavy rains, famine, earthquake etc. affects business adversely.

b)      Human causes: These include dishonesty, carelessness and negligence of employee, riots, strikes etc.

c)       Economic Causes: Economic causes relate to fluctuations in demand and price or changes in the market conditions.

d)      Physical Causes: These include all technical or mechanical causes, which affect the working of the business.

In every business, there is a possibility of incurring loss because the above mentioned causes exist everywhere and these are outside the control of the business enterprise. No business can run without some element of risk in it. In fact business means assuming risk and it runs on the principle of “No risk, No gain”. The nature of business and the volume of operations determine the degree of risk. Fluctuations in demand or prices, wrong estimates of demand and supply, changes in government policies are some of the examples of uncertainly, which influence the business. That is why we can say that risk in business is pervasive.

2. Relationship between banker and customer

Ans: Relationship between Banker and Customer:

1. Contractual Relationship: The primary relationship between a banker and a customer arises from a contract between the two, so it is a contractual relationship. The contract takes place the moment an account is opened by a customer with a bank and this contract remains valid till the customer operates his account as per the terms and conditions agreed between them.

2. Debtor and Creditor Relationship: The relation of a banker and customer is primarily that of a debtor and creditor. When a customer opens an account with a bank and maintains a credit balance, the banker assumes the position of a debtor and the customer assumes the role of a creditor.

3. Bailee and Bailor Relationship: When a bank accepts deposits of money, he does not act as a bailee. This is so because a bailee accepts the bailment of goods on the condition that the things bailed will not be utilised by him and the identical goods will be returned. A banker provides for safe deposit vaults and accepts documents and valuables for safe custody. Here the bank is acting as a bailee and the relationship is that of bailee and bailor.

4. Trustee Beneficiary Relationship: Banks also act as trustees and executors of will of customers. A trustee is required to hold property and money and use the trust money in accordance with the trust deed and use it for the benefit of some other person known as beneficiary. A customer may deposit some money with the bank for a specific purpose with specific instructions to the bank regarding its use. In such cases, the banker is the trustee of the customer's money, and the banker cannot employ them for any other purpose other than the purpose specified by the customer.

2. “Company form of business organization emerged essentially because of the limitations and failure of the partnership form of organization”. Discuss.                                                 (20)

Ans: Sole Trade business: A sole proprietorship implies a one-man show and in case more partners are taken on to fastens growth, the structure of the firm has to be changed to a partnership firm or a company. Lenders are also unwilling to lend as the business is in the hands of one individual and so, the risk is high. In case of liabilities arising from the conduct of the business, the losses have to be covered by the personal assets of the proprietor. The liability of the proprietor to pay off all creditors is unlimited.

Partnership Firm: Two or more people can come together to form a partnership firm. It is required to draft a partnership deed, which is signed by all the partners indicating the formation of the partnership. The advantage of the partnership firm is that two or more people can come together to start a business and the regulatory and disclosure norms are relatively simple. The main disadvantage is that even in this form of business, the partners’ liability to pay off creditors is unlimited.

Company: A company may either be a private limited company or may be formed as a public limited company. The members of the company appoint directors who are responsible for the management of the company. The directors are collectively known as the Board of Directors. A private limited company can be formed with a minimum of two members and a public company may be formed with a minimum of seven members. A private limited company can have a maximum of 200 members excluding employee-members; whereas there is no maximum limit on the number of members of a public company.

The major advantage of a company set-up is that the liability of the members is restricted to the extent of the member’s investment in the company; his/her personal property is not put at risk. The company form of organization is most suitable for modern times because it provides a route whereby ownership (members) can be separated from management (directors). A company is considered superior to sole trade and partnership because of the following reasons:

(a)Availability of Large Resources: One-man business is the best in the world if the owner has enough resources and ability to manage. This statement shows that a single person is unable to undertake big business mainly because of limited resources and managerial ability. In partnership also the financial resources of partners are limited. Therefore, only a company can raise enough capital and hire expert knowledge required for the management of a big business.

(b)Limited Liability: We know that liability of members is unlimited both in sole proprietorship and partnership and limited in case of a company and cooperative societies. Since members hesitate to undertake big risk, they prefer to invest in a company.

(c)Stability: Stability is essential for the success of any business. The existence of a company and cooperative society does not depend on the health and wealth of its members. Sole proprietorship and partnership forms are dissolved but company form of an organisation continues irrespective of the death or insolvency of any of its members.

(d) Flexibility: An ideal form of business must have flexibility in operations. Decisions must be taken quickly and implemented promptly for its functioning. Any rigidity in its functioning will not be beneficial for the survival and growth of a business. A company enjoys better flexibility whenever more finances are required. It can raise more capital and include more members whenever needed. In a partnership, the number of members at any time cannot exceed 20. In sole proprietorship there is only one owner and availability of finances is also limited. But flexibility in operations is maximum in sole proprietorship. He does not require approval of other members as in partnership or compliance with the provisions of the Act as in a company. Hence, the change in the nature of business or its operations is easiest in the case of sole proprietorship.

(e)Extent of State Control: While it is not possible altogether to avoid compliance with governmental regulations the entrepreneur will always like to choose that form of business organisation which has minimum government interference. A company has to fulfill many legal formalities before it can commence its business. Even after the formation, it has to comply with various legal provisions. In sole proprietorship and partnership, the government control is comparatively less.

From the above discussion, we can say that Company form of business organization emerged essentially because of the limitations and failure of the partnership form of organization

Ans: Meaning of Capital Structure

Capital structure refers to the mix of sources from where long term funds required by a business may be raised i.e. what should be the proportion of equity share capital, preference share capital, internal sources, debentures and other sources of funds in total amount of capital which an undertaking may raise for establishing its business.

In the words of Robert H. Wessel “The term capital structure is frequently used to indicate the long-term sources of funds employed in a business enterprise”.

In the words of John J. Hampton “Capital structure is the combination of debt and equity securities that comprise a firm’s financing of its assets”.

In simple words, Capital structure of a company is the composition of long-term sources of funds, such as ordinary shares, preference shares, debentures, bonds, long-term funds.

Factors Determining the Capital Structure of a Company

The following factors are considered while deciding the capital structure of the firm.

4. (a) “Foreign trade is an engine of economic growth in a country” Comment on this statement keeping in view the Indian context.                 10

Ans: Notwithstanding greater complexities and risks, Foreign trade is important to both nations and business firms. It offers them several benefits. Growing realisation of these benefits over time has in fact been a contributory factor to the expansion of trade and investment amongst nations, resulting in the phenomenon of globalisation. Some of the benefits of Foreign trade to the nations and business firms are discussed below.

Benefits to Nations

(i) Earning of foreign exchange: Foreign trade helps a country to earn foreign exchange which it can later use for meeting its imports of capital goods, technology, petroleum products and fertilisers, pharmaceutical products and a host of other consumer products which otherwise might not be available domestically.

(ii) More efficient use of resources: Foreign trade operates on a simple principle-produce what your country can produce more efficiently, and trade the surplus production so generated with other countries to procure what they can produce more efficiently. When countries trade on this principle, they end up producing much more than what they can when each of them attempts to produce all the goods and services on its own. If such an enhanced pool of goods and services is distributed equitably amongst nations, it benefits all the trading nations.

(iii) Improving growth prospects and employment potentials: Producing solely for the purposes of domestic consumption severely restricts a country’s prospects for growth and employment. Many countries, especially the developing ones, could not execute their plans to produce on a larger scale, and thus create employment for people because their domestic market was not large enough to absorb all that extra production. Later on a few countries such as Singapore, South Korea and China which saw markets for their products in the foreign countries embarked upon the strategy ‘export and flourish’, and soon became the star performers on the world map. This helped them not only in improving their growth prospects, but also created opportunities for employment of people living in these countries.

(iv) Increased standard of living: In the absence of international trade of goods and services, it would not have been possible for the world community to consume goods and services produced in other countries that the people in these countries are able to consume and enjoy a higher standard of living.

Benefits to Firms

(i) Prospects for higher profits: Foreign trade can be more profitable than the domestic business. When the domestic prices are lower, business firms can earn more profits by selling their products in countries where prices are high.

(ii) Increased capacity utilisation: Many firms setup production capacities for their products which are in excess of demand in the domestic market. By planning overseas expansion and procuring orders from foreign customers, they can think of making use of their surplus production capacities and also improving the profitability of their operations. Production on a larger scale often leads to economies of scale, which in turn lowers production cost and improves per unit profit margin.

(iii) Prospects for growth: Business firms find it quite frustrating when demand for their products starts getting saturated in the domestic market. Such firms can considerably improve prospects of their growth by plunging into overseas markets. This is precisely what has prompted many of the multinationals from the developed countries to enter into markets of developing countries. While demand in their home countries has got almost saturated, they realised their products were in demand in the developing countries and demand was picking up quite fast.

(iv) Way out to intense competition in domestic market: When competition in the domestic market is very intense, internationalisation seems to be the only way to achieve significant growth. Highly competitive domestic market drives many companies to go international in search of markets for their products. Foreign trade thus acts as a catalyst of growth for firms facing tough market conditions on the domestic turf.

(v) Improved business vision: The growth of Foreign trade of many companies is essentially a part of their business policies or strategic management. The vision to become international comes from the urge to grow, the need to become more competitive, the need to diversify and to gain strategic advantages of internationalisation.

(b) Discuss various problems of India’s Foreign trade.                                   10

Ans:  Problems of Indian foreign trade: In internal trade generally buyers and sellers meet together and transactions take place as per their convenience. But in external trade the situation is completely different. It takes a long procedure to buy and sell the goods and services. The business people generally face a number of problems in the process of foreign trade. The various difficulties, which are faced by the buyers and sellers engaged in external trade are described below:

(a) Distance: External trade involves transport of goods over long distances, except for neighbouring countries. Distance between various countries makes it difficult to establish quick and close trade contact between the importers and exporters.

(b) Different currencies: Every country has its own currency. So importer has to make payment in the currency of exporter’s country.

(c) Greater risk: In external trade goods are exposed to greater degree of risk. Risk in transit of goods is more because of long distance. Goods are transported by ship, which may sink due to storm or collide with submerged rocks. The ships or goods may also be captured by the enemies. These risks may be covered through marine insurance, but that increases the cost of goods.

(d) Difficulties of transport and communication: Long distances incidental to external trade create difficulties of proper and quick means of transport and communication. Though modern means of communication have solved this problem, it is quite costly and can not be used for securing all sorts of information. Loading and unloading of goods often takes long time and also involves a large expense which increases the cost of goods.

(e) Legal Formalities: International business is subject to a large number of legal formalities and restrictions by way of customs, tariff, quotas and exchange regulations, which restrict the scope of external trade.

(f) Lack of personal touch: In external trade, the transactions are made with unknown persons through correspondence and other means of communication. There is no direct contact between the buyer and seller. So the risk of dispute and bad debts are always there.

(g) Language Barrier: Due to different languages in different countries, it becomes difficult for traders to understand the terms and conditions of the contract.

(h) Information Gap: It is difficult to obtain accurate information about foreign markets and about the financial position of foreign merchants.

(i) Study of foreign markets: Markets for different products have their own characteristics as regards demand, intensity of competition, buyers’ preferences, etc. Thus, an extensive study of foreign markets is required for success in external trade. This is not easily possible from an individual exporter’s or importer’s point of view.

(j) Cost: Both import and export of goods involve very costly operations due to high cost of transport, insurance, intermediaries and cost of formalities to be completed.

(k) Change in rules and regulations: Every country has framed its own rules and regulations for its external trade, to protect its economic and political interest. These rules change from time to time. So the traders find it difficult to acquaint themselves with the rules and regulations and procedures followed by different countries.

5. “Advertising is an economic waste.” Do you agree with this statement? Give reasons for your agreement.   (20)

Ans: Meaning, Importance of Advertising and Why it is considered as Social waste

Meaning of Advertising: It is the most commonly used tool of promotion. It is an impersonal form of communication, which is paid by the marketers (sponsors) to promote goods or services. Common mediums are newspaper, magazine, television and  radio. Advertisements play a very important role in offering innumerable benefits to the manufacturers, customers and to the society in general.

In the present day marketing, advertising has become increasingly important to business enterprises-both large and small. Even non-business enterprises have recognized the importance of advertising. The various advantages of advertising are discussed below:

Inspite of the above advantages, several objections have been raised against advertising and some people criticize advertising as a social waste. The main point of criticism is as follows: