Business Studies Multiple Choice Question – 1 July 2022

Corporation tax is paid by businesses on their earnings at a level set by the government.

An increase in corporation tax will initially result in a reduction in ….?

Select ONE answer:

1. price
2. variable costs
3. fixed costs
4. retained profit

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 4

1. Not correct – firms will be more likely to increase their prices to compensate for the increased tax rate.
2. Not correct – costs are likely to increase as a consequence of suppliers having to pay higher taxes.
3. Not correct – fixed costs are not affected by increases or decreases in corporation tax in the short term.
4. Correct – Retained Profit is the amount of profit kept in the business rather than paid out to the owners or shareholders and held as cash for reinvestment. Paying the increased rate of tax is a legal requirement. It will have to be paid by businesses resulting in less profit to be retained in the organisation.

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