Unit 1 Sample Answers

Essential Business Studies for Cambridge IGCSE® and O Level

Sample Answers to Practice questions

Unit 1 Understanding business activity

Section 1: Short-answer questions

1. A ‘need’ is essential for survival, such as water, enough food , shelter. A ‘want’ is something we
would like to have, but is not essential, such as a new mobile phone, new jeans.
One example of each plus brief explanation
[2]

2. KFC provides products, which are the cooked chicken and other food and drinks. However, they
also provide a service which is the cooking and selling of ‘fast food’ to customers.
Understanding of the difference between product (tangible item) and service (how product is
cooked and sold) [3]

3. Added value is the difference between the cost of the raw materials and the selling price to the
customer. Levi Strauss company takes the blue denim material and makes it into garments in a
range of styles and sizes. These items are decorated and branded with the company’s name and
label. Therefore the finished product may be sold for far more than the cost of the original
denim material.
Understanding of added value; 3 examples applied to Levi Strauss company [6]

4. Apply to Starbucks company or similar. Added value = $4 – ($0.10 + $0.02 + $0.07) = $3.81. The
company adds value by grinding the coffee beans and making and serving the cup of coffee to
take away in a comfortable, convenient retail environment, often in city shopping centres.
Calculation of added value[3] and application to coffee shop[3] [6]

5. Specialisation is when an individual or business carries out a function or makes a product that
they have particular skills in. This can also be applied to ‘division of labour’ in a business, where
functional departments concentrate on one aspect of the business. A school based example
might be the Business department specialising in the teaching of Business and Economics.
Definition plus your own example
[3]

6. If the government of a country spends $10 million on road improvements, then the opportunity
cost of this will be other ways in which this government money could have been spent, for
example, a new school, new hospital or other facilities which benefit the country.
Understanding of opportunity cost applied to likely spending by a government [4]
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7. A public enterprise is one which is owned and run by the government. Therefore this type of
enterprise receives its income from taxation paid by the population and businesses of the
country. This money is therefore ‘public money’ and the government has a responsibility to its
population to spend the money to benefit the public in the best way possible. The government
budget is also limited, so opportunity cost of spending decisions must be carefully considered.
Understanding of source and use of finance to public enterprise, two reasons plus some
development. [4]

8. Local examples may include, hospitals, school, police forces.

Two examples needed
[2]

9. Local or national example, together with characteristics, for instance determination, risk taking,
refusal to give up, creative abilities.

Knowledge of one entrepreneur and key characteristics [4]

10. A business plan includes details about the owners of a business, aims and objectives, products
and financial projections. It may be used to monitor progress and obtain funding, but must be
continually updated.

Understanding of why it important to plan and monitor progress against aims and objectives in a
business plan. [4]

11. Local examples of primary sector businesses (agriculture, fishing, extractive), secondary
(manufacturing, construction) and tertiary (sales, service, finance).
One example of each [3]

12. Local examples, such as a farm which grows (primary) and sells (tertiary) produce in a farm shop,
or a factory which makes (secondary) and sells (tertiary) products in its own factory shop. There
may also be organisations that operate in all three sectors, such as a business that catches fish
(primary), processes and cans them (secondary) and sells/exports the finished product (tertiary).
Two examples plus correct sectors identified
[4]

13. Typically, business size may be measured by output – number of items produced or sold, sales
revenue, number of employees, amount of capital employed, market share. (Not amount of
profit.)
Appropriate measures applied to examples from question 11 [4]

14. A state-owned health service may be measured by the number of patients treated, or number of
staff employed, because these may be quantified. The size of the budget is also acceptable. A
car production company may be judged by number produced, number sold, market share; not
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number of staff as this is likely to be a capital intensive operation.

Appropriate measure plus explanation [4]

15. Many entrepreneurs who run family businesses do not want to expand, as they are happy with
the income and lifestyle the small business allows them to have. An entrepreneur may not want
the additional pressure of opening new locations and employing many new people.

Two appropriate reasons explained [4]

16. Advantages to a sole trader of entering into a partnership may include sharing the workload and
financial commitment of business ownership as well as bringing different skills. For instance,
one partner may be very creative, the other having accounting skills (example good here) .
Disadvantages may include having to share profit, so less income for the original sole trader, and
the risk that one partner may make a mistake, causing losses to the business and having to be
paid for by both. NB most partnerships have unlimited liability in the same way as a sole trader
so this would not be a valid disadvantage of the change.
Two advantages and one disadvantage explained, can include example [6]

17. Governments in most countries worldwide are committed to limiting carbon emissions from
sources such as energy use and looking for ways to preserve scarce resources, such as oil. An
innovative product in this case may be one that utilises natural energy, such as solar, wind
(example good here, such as solar lighting, wind farms, other energy sources such as bio-fuel).
All of these developments need significant and costly research, which would attract government
grants as long term success will help to meet government objectives.
Appropriate explanation and examples
[4]

18. Three stakeholders in a farming business may be the owner, employees and customers. The
owner’s objectives may be to make as much profit as possible, the employees would like good
working conditions and higher wages, whereas customers want good quality farm products.

Appropriate explanation and examples [6]

Section 2: Longer-answer questions

The young enterprise company

1. Contact2U add value by re-packaging the accessories and adding their own brand name and
logo. They also offer an installation service and publicise their environmental aims. All of these
aspects enable the company to sell the accessories for a higher price than they buy them for
from China, hence adding value.
Two examples in context plus development [4]
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2. The Contact2U company and its members are being enterprising by meeting a local need in
terms of products and services such as installation. They are taking a risk by investing their own
money in the enterprise.
Two examples in context plus development [4]

3. Contact2U publicise their charitable aims and give 75% of their profits to local marine
preservation organisations, which protect marine species from pollution. This gives a ‘feel good’
factor to customers who care for conservation and would rather buy accessories from them and
help protect the environment, rather than buy the same items from competitors.
Understanding plus explanation in context [4]

4. The company adds value by giving consumers access to the products by importing and adding
their own brand identity, as well as additional services such as installation, which will be
welcomed by inexperienced phone users. They also promote ‘green’ charitable organisations.
Three examples explained in context [6]

5. Reasons to agree with the statement will include ‘carbon footprint’ effect of importing products
by air, that have been produced in China, where there are few pollution controls, in order to get
cheap price, whereas comparable products may be available from nearer locations. Reasons to
disagree with the statement will include the company’s commitment to donating to
environmental charity. On balance, this company probably have more positive effects on the
environment than other competitors who sell the same goods, but do not support
environmental charities.
Consideration of both sides of the issue plus a conclusion [6]

The new malaria clinic

1. Two not-for-profit organisations are the Ugandan government, who oversee the work of the
clinic and the charity, who raise money and provide volunteers. .Both of these are not-for-
profit, as the government get money from taxation (and aid) and spend it to benefit the
population and the charity collects donations to spend on a cause.
Two organisations plus development [4]

2. The clinic has the social objective of helping patients recover and stopping the spread of
malaria. This will help the people become more productive and lose less work days due to
illness. It also helps the training and education standards of local employees including
nurses.
Understanding of social enterprise plus application in context. [4]

3. The opportunity cost to the government of funding the clinic will be other projects that
could have been financed, eg schools, roads. The opportunity cost to the charity will be
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other countries malaria treatment centres or similar projects which could have been
supported.
Application of opportunity cost in context [4]

4. Malaria clinics do help to provide sustainable development to a large extent, because they
assist the population to combat the disease and become more productive, which in turn
leads to growth which benefits all sections of the population and improve standards of
living. However, the county’s resources also need to be used in a sustainable way so that
they do not run out, for instance replanting forests and investment in education is also
important to provide skills.
Understanding of the contribution clinics may make, but also the importance of other factors
plus conclusion. [6]

5. An essential need may be defined as something which is necessary for survival, and as such
these clinics are essential to those who are treated, who would otherwise die. In this
instance there may be a case for government funding, but the government of Uganda, a
developing country, has very limited resources and also relies heavily on international aid
from the developed world. Therefore fully funding these clinics would carry a very high
opportunity cost and disadvantage perhaps the education of children. Also, western world
charities raise money for these causes, so meet their objectives by their involvement. In
conclusion, the government should support and encourage the clinics, but are not,
realistically in the position to fund them fully.
Understanding of both sides of the argument plus conclusion. [6]

The seed money enterprise

1. Objectives of the enterprise are to make and sell baskets, providing an income for the
entrepreneurs and other women in the village. Wider objectives are to alleviate poverty
and improve the standard of living in the village
Two objectives explained in context [4]

2. The Camfed charity (Campaign for Female Education) focus on helping young women in
Zambia to stay in education and become self supporting by way of starting their own
small enterprises. The ‘seed money’ grants enable girls to buy the items they need to
start the businesses, in the hope that this money will ‘grow’ as the enterprises start to
sell goods and provide an income for the entrepreneurs.
Understanding plus development [4]

3. Added value in the example is equal to $2 per basket (selling price- cost of materials).
Value is added by the making and dying of the baskets and also delivery to the market,
where customers will be found.
Understanding of added value and application in context [4]
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4. The possible reasons for success may include the satisfying of a local need, the skills of
the basket makers in producing a high quality product and the entrepreneurial skills of
the girls in acting as ‘middle men’ between the weavers and customers, plus very
competitive prices.
Understanding of three reasons in this context plus explanation [6]

5. Arguments in favour of the view will be that these small enterprises, if available widely,
will lift women out of poverty and improve the standard of living in rural areas.
Arguments against the making of a major contribution will be that this is a small
initiative, which can only make a difference to a small proportion of the population.
Investment by governments and other agencies in infrastructure, education and
healthcare are likely to be bigger factors in the progress towards sustainable
development. Therefore seed-money enterprises are not the most important factor.
Understanding of both sides of the issue plus development and conclusion. [6]