IGCSE and O Level Business Studies Coursebook Answers

Cambridge IGCSE and O Level Business Studies
1 Business activity
Answers to Coursebook activities
Activity 1.1 (page 10)
Student’s own answer.

1 Total required needs for population:
Water: 500 × 100 litres = 50 000 litres
Food: 500 × 25 kilos = 12 500 kilos
Clothing: 500 × 20 units = 10 000 units
Housing: 500 × 1 = 500 houses
Enough water, but not enough food, clothing or housing, to satisfy the needs of the population.
2 Those with a higher income than the rest will want to satisfy their basic needs and will be able to afford
to pay the prices charged by suppliers. As food, clothing and housing are scarce, this is likely to cause
prices to rise. Those able to afford to pay higher prices may decide to buy more than they need to ensure
that they always have supply of their basic needs. This will reduce the supply of basic needs for the rest
of the population, so fewer families will be able to satisfy their needs.

1 Land – natural resources, such as wheat for flour used in cakes.
Labour – the number of people available to work in Fatima’s business.
Capital – machinery, equipment and finance needed to make cakes.
Enterprise – Fatima being prepared to take risk in setting up her business.
2 The wage she earns from working in the bakery.
3 ‘Needs’ are things that people need to survive. ‘Wants’ are things that people would like, but are not
essential for living. Fatima produces cakes for special occasions. Although cakes are food, they are
luxury items so are ‘want’ rather than ‘need’.
Case study (page 13)

a Specialised machinery
b The production process is divided into five stages and each employee only completes one of those
stages. For example, some employees will only cut out panels from sheets of leather.
c Employees become skilled in just one task so they are able to produce more. Also, because employees
are skilled at what they do there will be fewer mistakes so the quality of footballs produced will be
better.
d One benefit to Global Sports is that employees will produce more footballs. This reduces the cost of
producing each football. Global Sports will earn more profit for every football made, or it will be able to
lower its prices below competitors and sell more footballs. The benefit for consumers is that they will be
able to buy high-quality footballs at a lower price.

a 600 000 + (30% × 600 000) = 780 000
b Consumer goods are sold to the public for their use; they can be divided into durable and non-durable.
Printer cartridges are non-durable consumer goods as once ink has been used to print it cannot be
© Cambridge University Press 2018 Chapter 1 Answers to Coursebook activities 1

used again. Capital goods are sold to other businesses for them to use in the production process, e.g.
computer-controlled equipment to manufacture printer cartridges used by RTP.
c Division of labour is where each member of RTP’s workforce will specialise in one area of the
production process. They will become very skilled at doing the same task and this could increase RTP’s
labour productivity. However, the employees may become bored if they are only doing simple repetitive
tasks and this might cause problems for RTP. (Although not expected at this stage in the course, more-
able students may identify some of these problems, e.g. lower productivity, poor quality, increased
absenteeism and an increase in labour turnover.)
Student’s answer must include suitable justification.


•• By taking raw materials, e.g. ingredients and food items, and converting these into meals for diners.
The owners may also decorate and furnish the restaurant so that it is a nicer place for diners to eat.
•• Taking leather and converting this into shoes for people to wear.
•• By converting materials such as wood, cement, or bricks into houses that people can live in.
•• By taking flowers and combining these into bouquets or other displays for customers to buy.

a Enterprise, e.g. Mitike Paulos and her younger sister; Land, e.g. workshop; Capital, e.g. equipment;
Labour, e.g. ten employees.
b It is the process of producing goods and services to satisfy consumer demand. Mitike’s business
produces leather bags and belts that are sold to customers.
c The business employs workers who are paid a wage. They can use money from wages to buy basic needs,
e.g. water, food, clothing and housing.
d Mitike’s business takes raw material – leather – and converts this into bags and belts that it sells to
customers at a higher price than the business pays for the leather.
e Add special features to products that will make them different or better than similar products offered
by competitors; create a brand image for products through advertising or persuading a local celebrity to
buy products – celebrity endorsement.
Test yourself (page 18)

1 A ‘need’ is something that is essential to living, e.g. food, water, clothing, shelter. A ‘want’ is something
that people would like but is not essential for living, e.g. mobile phone, holiday.
2 It is impossible to produce enough goods and services to meet consumers’ needs and wants.
3 Unlimited wants cannot be satisfied because there are limited factors of production. This creates scarcity.
4 Specialised machinery may help a business to increase productivity, lower costs of production and
produce a wider range of products.
Exam-style practice questions (page 19)

1 a Jonah has identified that consumers want to buy wooden toys; Jonah buys raw material and other
resources needed to produce wooden toys; Jonah converts raw materials into finished products which
satisfy consumer wants. [2]
b The cost of the next best alternative given up. [2]
c Land, labour, capital and enterprise. 1 mark for each correct factor identified. [Total: 4]

d Answers might refer to branding, special features, personalised service and convenience, as shown
below (1 per relevant point identified up to a maximum of 2). Jonah could add special features or
design new wooden toys (1). This will make his products better (1). Customers will be prepared to
pay more (1). Jonah could create a brand for his toys (1) through advertising (1). Customers will be
more aware of Jonah’s toys and buy his toys rather than competitors’ toys (1). Jonah could provide
a specialised service (1). He might paint toys in the colours asked for by the customer (1). This will
make Jonah’s toys unique (1). [Total: 6]
e Identification of benefits only (maximum 2). Answers might include: reduces costs of production;
more efficient; reduces waste; improves quality; lowers price. Possible answers might include: Jack
will be able to build houses more quickly (1) and the work completed will be better quality (1). This
will help him to sell more houses (1). Or, employees will be more efficient (1). This reduces the costs
of building each house (1). Jack can lower prices and this will increase sales (1). [Total: 6]
2 a Land, labour, capital, enterprise. [2]
b Something that is essential to life, e.g. water and food. [2]
c When people and businesses concentrate on what they are best at doing (1). Company X is better
at producing pottery products than other types of products (1). There is division of labour in the
company (1). Production is divided into nine different processes and each employee only performs
the tasks in one of these processes (1). [Total: 4]
d Taking clay and shaping this into plates and bowls (1) is likely to be labour intensive (1) and require
a high level of skill (1). Taking the clay plates and bowls and putting them into an oven (1) is not a
skilled process (1) and is capital intensive (1). [Total: 6]
e The company takes raw materials and converts these into plates and bowls (1), which it sells to
consumers at a price that is higher than the cost of the raw materials used in the production process
(1). The manager can add value by: improving the branding of Company X’s products (1), e.g.
through increased advertising or promotion of the company’s products (1); improving service to
customers (1); offering personalised service to hotels and restaurants that the company sells products
to, e.g. by visiting them in person and making sure that they receive the products that meet their
specific needs (1). [Total: 6. Note: to be awarded maximum marks the suggestions must be related to
the products Company X produces and their main markets of hotels and restaurants.]

2 Classification of businesses



a i Extraction of natural resources, e.g. mining diamonds.
ii Converting natural resources into products for sale, e.g. making jewellery using diamonds.
iii Supplying service to consumers and other businesses, e.g. Browns sells jewellery to consumers
through its retail stores.
b Chain of production from primary to secondary to tertiary sector businesses. Petra Diamonds supplies
Mark Solomon with natural resources that his business converts into jewellery that is then sold by
Browns in its stores.
c Both businesses being able to guarantee supply and quality of products to their stores. They will earn
higher profit margins on their jewellery because they are able to cut out middlemen.

1 Bermuda
2 Zimbabwe
3 No, because both Rwanda and Zimbabwe have tertiary sector activity that is greater than the other two
sectors in their country, but these are both developing economies.
4 The primary sector business activity of developing countries is much larger than it is in developed
countries.

1 Any suitable answers, e.g. primary: farming; secondary: car manufacturing; tertiary: tourism.
2 Primary sector – extraction of natural resources from the land, e.g. mining, fishing. Tertiary sector –
provision of services to consumers and other businesses, e.g. banking, hairdressing.
3 Processing and manufacturing of natural resources into goods for consumers and other businesses, e.g.
food processing, petrol refining.
4 The activities of each sector are often connected – this is known as the chain of production. For
example, the supply of a natural resource such as oil by a primary sector business to a secondary sector
business that converts this into a good, for example petrol, which is then made available for sale to
consumers through petrol filling stations.
5 Developing economies usually have very high levels of primary sector business activity compared to the
very low levels of primary sector business activity of developed economies.


1 Sole trader, partnership, private limited company, public limited company.
2 Student’s own answer.
3 The private sector has profit as an objective. Provision of services, often free at the point of delivery, is
the main objective of public sector organisations. Private sector businesses are owned and controlled by
private individuals. Public sector businesses are owned and controlled by the state.
4 An economy that has both private sector and public sector organisations.
5 Private sector: consumers decide through the choices they make. Public sector: the government decides.

1 a Partnership (Paul and John); limited company (Pisces Products (PP)). [2]
b Organisations in an economy that are financed, owned and controlled by the state. [2]
c What to produce is influenced by consumer choices/consumer demand (1); private sector businesses
will only produce these goods and services if they can earn a profit (1); how to produce is decided by
the private sector businesses (1); they will try to produce a product at the lowest possible cost so that
they make a profit (1). [Total: 4]
d Primary sector is the extraction of natural resources (1); secondary sector is the manufacture of
goods from natural resources (1); Paul and John extract fish from the sea (1); PP processes fish and
puts them into cans for sale to consumers (1); the primary sector provides the resources for the
secondary sector (1); Paul and John provide the fish used in PP’s canning process (1). [Total: 6]
e Might provide Paul with an opportunity for selling more fish to his friend’s company if he invests
(1). Depends on whether investment will give Paul any say in business decisions (1). Is the company
successful/profitable (1)? Will Paul get a good share of the profits to ensure that his investment was
worthwhile (1)? Would he be better off investing money in expanding his own business (1)? Statement
as to whether Paul should invest or not based on the points made (1). [Total: 6]
2 a 40 million × 15% = 6 million [2]
b Business activity that involves extraction of natural resources from land, e.g. fishing, farming,
mining. [2]
c Private sector owned and controlled by private individuals (1); public sector owned and controlled
by the state (1). Private sector has profit as its main objective (1); public sector provides goods and
services, often free at the point of delivery, to the population (1). [Total: 4]
d The primary sector of Country X is much larger than the primary sector of Country Y (1). The
tertiary sector of Country Y is much larger than the tertiary sector of Country X (1). Figures suggest
that Country X is a developing economy and Country Y is a developed economy (1). Country X’s
public sector is much bigger than its private sector (1). The private sector of Country Y is a bigger part
of its economy than the private sector in Country X (1). In Country X the government makes more
decisions about what to produce, how to produce and for whom than the government in Country Y
(1). [Total: 6]
e Country X is probably a developing economy as its primary sector is much bigger than its other
two sectors (1); its public sector is three times the size of its private sector (1). The private sector
in Country Y is larger than its public sector (1). People in developed economies usually earn
more money from work than in developing economies (1). A good private sector will earn high
tax revenues for the government to spend on better public sector services (1). Statement agreeing/
disagreeing based on the points made (1). [Total: 6]

3 Enterprise, business growth and size

a Primary, secondary.
b She had a business idea and took risk by investing her own money in the business.
c She was able to identify who her potential customers were. She could estimate how many customers she
might have for her business.
d She did have some elements of a business plan. She knew what her idea for a business was and carried
out market research to identify if there was a market and what size it might be. A complete business
plan would have set clear objectives, identified competitors and the potential for market growth and
produced financial forecasts. This would have helped Naisiadet to identify the resources required by
her new business such as finance, number and skills of employees needed and how best to market her
business. Financial forecasts would have provided targets for her business and a measure to compare
how well her business was performing. Even though she did not have a business plan, her business
seems to have been successful; she employs ten workers, which means that her business has grown.


1 Innovative/has ideas, risk-taker, not afraid of failure, results driven, etc.
2 Describes business opportunity, market, financial forecasts, etc.

1 Because there are different methods for measuring the size of a business and, depending on which
measure is used, each company in the table could be said to be the largest.
2 Might be hi-tech industry that does not require a large number of employees, e.g. computer software
design.
3 Could argue that Company C is biggest because it has the highest revenue and number of employees
and the second highest capital employed. No right answer – depends on reasons given.

1 Revenue, capital employed, market share, value of output or number of employees. Note: NOT profit.
2 Different measures may give different results, e.g. a capital intensive business might be small if the
number of employees is used to measure its size, but large if capital employed is used.

a By adding more aircraft to its fleet, by looking to expand into new markets.
b Take over or merge with another airline.
c It has invested in the latest model of passenger aircraft, which will improve the quality of services it
provides. The company is looking to enter new markets across a wide geographical area.


1 Form of integration Business activity Business activity
Forward vertical Oil refining Petrol filling station
Conglomerate Carpet retailer Restaurant
Horizontal Large car manufacturer Small car manufacturer
Backward vertical Supermarket Fruit canning
Conglomerate Fast food outlet Supermarket
Forward vertical Overseas holidays Travel agency
2 Has ready-made customers for its output.
3 Spreads risk. If the market for one product decreases then the business has products in other markets
that continue to do well.
4 Has a retail outlet that will market and sell its holidays.
5 Small manufacturer might benefit from some of the economies of scale that are beneficial to large
manufacturer. Might give large manufacturer access to a profitable niche market.

1 To increase profits that belong to the owner, to protect the business from takeover – more difficult to
take over a large business than a small one.
2 Internal growth is achieved through a business expanding output by entering new markets, developing
new products or investing in new technology. External growth is achieved through merger or takeover
of other businesses.
3 Market size, owner’s preference, industry is dominated by a large producer or lack of capital to expand.

Article A: Prices it was charging were not high enough to cover costs. Unable to increase prices due to
competition.
Article B: Lost passengers because of safety concerns and eventually revenue was less than costs so it was
making losses and no longer able to pay its debts.
Article C: Too much competition in a fairly small market so not possible for the company to compete
profitably with other airlines.
Article D: Not earning enough revenue to cover all of its costs. Cash shortage eventually resulted in the
airline being unable to pay its debts.

1 People are losing their jobs so do not have money to buy luxury designer wedding dresses. Competitors
are producing cheaper dresses, which consumers are able to afford even with the lower income levels.
2 Misaki’s revenue has decreased below total costs. Operating costs are fixed so even though she is selling
fewer dresses she still has to pay the same amount of rent and other overheads.
3 If economic recession continues and more people lose their jobs then this could further reduce Misaki’s
revenue and increase her losses. Eventually the losses that Misaki makes will mean that she does not
have enough cash to pay all of her costs and business debts and the business will fail/close down.
Misaki might decide to make cheaper non-designer dresses and this could help to increase revenue; she
might move to smaller premises to reduce costs. Any increase in revenue or decrease in costs could help
Misaki’s business to survive until economic conditions improve.


1 Liquidity problems, poor planning, poor management, competitor action, change in economic
conditions, etc.
2 Liquidity problems, poor marketing, lack of clear objectives, poor management, etc.

1 a Primary, tertiary. [2]
b Someone who has an idea for a business and is prepared to risk their own capital. [2]
c Self-motivated; confident; innovative; inititative; risk-taker; results driven; multi-skilled. Any four
relevant characteristics for 1 mark each. [Total: 4]
d A business plan contains information about a business, its market, objectives and financial forecasts
(maximum 3 for identifying features). Market research will help identify the size of the market and
growth opportunities (1). Objectives will give the business a sense of direction (1). Financial forecasts
will help her to secure finance from lenders and investors (1). [Total: 6]
e Is the market large enough (1)? Are people interested in buying the product (1)? She has not carried
out any market research (1). Will consumers pay a price for her product which is greater than the total
cost (1)? Will competitors enter the market with similar products (1)? Will she have enough capital to
start supplying her product (1)? Factors considered most important with justification linked to points
made (1). [Total: 6]
2 a Value of output, capital employed. [2]
b Businesses that provide services to consumers or other businesses. [2]
c Method of business growth (1) that provides a business with its own outlet for the sale of its produce
(1). Easier to bring products to market (1). Should increase profits that can be reinvested in the
business to fund future growth plans (1). [Total: 4]
d Lack of capital to finance growth plans (1). Banks/other lenders are often not keen to lend to small
businesses (1) because of the high risk of failure and inability to repay the amount borrowed (1). The
market already has many competitors in the retail sector for farm produce (1). The market is not
big enough to support another retailer (1). Consumers are loyal to the shops they currently use (1).
[Total: 6]
e There is a risk that if they borrow money to finance expansion they will not earn enough revenue
from increased sales (1) to be able to pay the interest on the loan (1). Business could fail (1). If they
have a good business plan (1) then there is a good chance of their growth plans being successful (1).
Statement for or against supported by points raised (1). [Total: 6]

4 Types of business organisation

Advantages and disadvantages of partnerships – shown below – to be put into context given in activity.
Advantages of partnership Disadvantages of partnership
•• Usually greater access to finance than •• Partners usually have unlimited liability for the debts
sole traders as there is more than one of the business. May have to use personal wealth to
person investing capital in the business. pay these if the partnership is unable to do so.
•• Decision-making is shared and can often •• Partners must share profits.
lead to better decisions. •• If a partner leaves then the business ceases to exist
•• Management and day-to-day running of and will need to be re-formed if other partners want to
the business are shared, which reduces continue trading.
the workload for individual owners. •• Business decisions are binding on all partners, even if
•• Easy to set up. Partners may sign a they don’t agree to them.
legal agreement known as a Deed of •• Often are fairly small businesses and, like sole
Partnership. traders, find it difficult to raise additional finance to
expand.

1 Both will have limited liability for any debts of the new company. They only risk losing the amount they
invest in the business and cannot be forced to sell personal belongings or use personal savings to finance
business debts.
2 Advantages: Chata and Juma will have the additional finance they need to finance expansion plans
without borrowing. This is a much cheaper source of finance as they do not have to pay interest or
repay the amount invested by Chata’s father and Juma’s sister. Converting the business will provide both
Chata and Juma with limited liability for business debts. As a partnership they have unlimited liability
for the debts of the business. They could be forced to use personal savings or sell personal belongings
to finance business debts. If the business becomes a private limited company then their liability will be
limited to the amount they invest in the business. Chata’s father or Juma’s sister might bring skills or
experience to the business that neither Chata nor Juma has. This could help the business to expand and
become more successful.
Disadvantages: A legal process is required when setting up a private limited company – cost involved.
End of year financial statements must be produced and submitted to the correct authorities. Chata and
Juma will have to share the profits of the business with other shareholders. They may no longer have
control over business decisions – new shareholders will be able to vote on major business decisions.

Student’s own answers.

a Two or more businesses agree to work together on a project and set up a separate business for this
purpose.
b Risk for each business is reduced and costs are cut. Each business brings different expertise to a joint
venture. Market and product knowledge is shared.

c Yes, because Chery is a well-known car manufacturer in China so knows and understands the market.
Consumers know the Chery brand so will be more likely to buy products of joint venture, which
reduces JLR’s risk of failure. JLR’s costs of entering new market will be much lower than if it were to try
to enter market on its own. Chery has experience of manufacturing and marketing smaller cars than
JLR. No, because if Chery’s reputation were to be damaged because of something it did in China, e.g.
produced faulty cars, then this could also damage JLR’s reputation. Chery might learn from JLR how
to produce better, more luxurious cars, and in the future decide to produce its own luxury car in direct
competition with JLR in China and the rest of the world.

1 One owner, makes all business decisions, keeps profit.
2 Owner(s) of the business are liable for business debts. Have to use personal savings or sell personal
belongings to settle the debts of the business.
3 Source of finance: each partner invests capital in the business. More skills and experience: each partner
brings their own skills and experience to the business – should improve effectiveness and efficiency.
4 Unincorporated businesses unlimited liability; incorporated businesses limited liability.
5 Ownership: private sector businesses owned by private individuals; public sector organisations owned
by state. Finance: private sector businesses financed by investment from private individuals and
external sources, e.g. borrowing; public sector organisations financed by taxes. Control: private sector
businesses controlled by private individuals; public sector organisations controlled by government or
government bodies.
6 Legal process in setting up a private limited company. Profits must be shared among all owners
(shareholders).
7 Articles of Association, Memorandum of Association.
8 Private limited companies cannot sell their shares to the general public; public limited companies can.
9 Less chance of business failure because the product and brand are well established. Franchisor often
provides advice and training to the franchisee as part of the franchise agreement. Franchisor finances
promotion of the brand through national advertising; checks quality of suppliers, so the franchisee is
guaranteed quality supplies.
10 Reduces risk for each business and cuts costs. Each business brings different expertise to a joint venture.
Market and product knowledge can be shared.

1 a Owned by private individuals. Financed by private individuals or through borrowing. Controlled by
private individuals. Main objective to earn profit for owners. [2]
b Organisations that are financed and owned by the state and controlled by government. [2]
c Advantages: additional capital; share workload; more ideas; better range of skills. (1 mark per
advantage)
Disadvantages: unlimited liability; lack of business continuity; disagreements; share profits. (1 mark
per disadvantage) [Total: 4]
d Spreads risk (1): if the property renovation element of the business is not doing well they will still
earn revenue from property maintenance (1). Increased revenue/profit (1): entering a new segment
of the market increases the opportunity to increase sales (1). Economies of scale (1): as the business
grows they could benefit from bulk-buying discounts, etc. (1) [Total: 6]
e Explanation of the advantages of a private limited company, e.g. limited liability, access to more
capital from investors, continuity of business if one of the owners leaves/dies (2). Explanation of
the disadvantages, e.g. sharing profits with other owners, possible loss of control, legal formalities
in setting up a private limited company (2). Decision based on evaluation of the advantages/
disadvantages of a private limited company for An and Bo (2). [Total: 6]
2 a Limited liability and business continuity even if the owner leaves/dies. [2]
b Part of the economy that has businesses financed, owned and controlled by private individuals with
the main objective of earning profits. [2]
c Limited liability (1): owners/shareholders risk losing no more than their investment in the company
even if the business fails and has unpaid debts (1). Access to capital (1): a public limited company will
find it easier to raise capital through sale of shares to the general public (1). [Total: 4]
d Lack of sales in Country X: (1) might not be enough demand for road construction in Country X,
(1) Mactar might face too much competition in Country X from other construction companies.
(1) Benefits of entering new market: (1) Country Y’s government wants a new motorway to be
constructed, (1) increase Mactar’s revenue and profits. (1) [Total: 6]
e Yes, because: Mactar has no experience of Country Y (1). Joint venture will make it easier to enter the
new market (1), KC Diggers knows the market in Country Y (1), already established business with
a brand image in the country (1). Mactar can benefit from KC Diggers’s experience and expertise
(1). KC Diggers owns machinery Mactar will need for construction of the motorway – reduces costs
(1). Government of Country Y might look more favourably on a joint venture because KC Diggers is
based in Country Y (1).
No, because: Mactar will have to share revenue and profits with KC Diggers (1). Does KC Diggers
have a good reputation in Country Y (1)? How might the reputation of KC Diggers affect Mactar’s
reputation in Country Y (1)? (Maximum 5 for reasons) Statement for or against joint venture based
on points discussed (1). [Total: 6]

5 Business objectives and stakeholder

objectives

1 Greater risk of failure in early years because PPAS was new to the market so did not have a customer
base. Takes time to attract customers and persuade them to use services.
2 Quality service, profit, market share, growth.
3 Important for PPAS to survive and become established in the market in early years even if not making
profit. However, all businesses must eventually earn profit so that they can reward owners and provide
finance for replacing/buying new non-current assets.
4 Owners’ preferences, i.e. want to remain small so can provide personalised service to customers and
keep full control of business; business has a small market, which would not support a larger business.

a Had idea for business, prepared to risk own money.
b Like private sector business, profit is the objective, but profit is used to finance social projects (not
for owners) or is reinvested in the business to finance growth so that more people can be employed.
Canyou Group uses profits to benefit its employees, their families and the wider community. Social
enterprises have social objectives such as Canyou’s objective of providing employment for people with
disabilities.

1 A specific target to be achieved by a business.
2 Important part of planning process, provides business with a sense of direction. Can be used to
measure performance and motivate managers.
3 Profit: Business aims to produce and sell a level of output where there is the greatest difference between
revenue and total costs. Market share: As a business grows it may achieve a larger share of the market.
Increased market helps develop a strong brand image, which makes it easier to sell the product
to consumers. Corporate social responsibility (CSR): Where a business takes an interest in social,
ethical and environmental issues and the impact that its decisions/activities may have on employees,
customers, the community and the environment. Businesses that ignore their social responsibility
run the risk of bad publicity and possible legal action, which can affect reputation, sales, revenue and
profits.
4 They have social objectives, i.e. to benefit society. They have a profit objective, but the profits are
reinvested to benefit society at large.

1 Customers, shareholders, employees, suppliers, community.
2 Managers, lenders, government.

3 Shareholders: profit – profit of a limited company belongs to its shareholders. The larger the profits
earned by a company, the higher the dividends are likely to be and the market value of shares will
increase. Employees: growth – as a business grows this often provides promotion opportunities for
employees and greater job security. Suppliers: growth – if a business grows, output increases. The higher
the output, the greater the need for the business.
Activity 5.4 (pages 65–66)

Statement A:
1 and 2 Shareholders – lower dividends today but higher dividends in future if the new technology
increases profits. Employees – work might be easier but more boring with the new technology. Some
employees will lose their jobs because tasks they perform now will be completed by the new technology.
3 Managers/shareholders – managers want to use profit to finance investment in new technology but this
will reduce dividend payments to shareholders.
Statement B:
1 and 2 Customers – greater choice of products/more convenient. If the in-store bakery results in closure
of local bakeries then reduced competition may result in the supermarket charging higher prices for
bakery products. Lenders – receive interest on money they loan, which increases their revenue. Risk
that supermarket may not earn enough profit in future to repay the loan.
3 Lenders/managers – lenders want to receive interest due on the loan but this may reduce the retained
profits available for financing the purchase of non-current assets.
Statement C:
1 and 2 Local community – new factory provides job opportunities for local people. Factory may cause
problems for the community, e.g. noise, traffic, air pollution. Owners – new factory will use the latest
technology so will be very efficient, which increases the competitiveness of the business. This may
increase revenue and profits and the return to owners.
3 Government/local community – government wants to encourage the location of the factory as this will
reduce unemployment in the area but the local community may be affected by pollution.
Statement D:
1 and 2 Employees – some employees will lose jobs. If the business is able to be more competitive after
producing goods in another country then this improves job security for employees who remain.
Customers – lower prices, but quality might not be as good.
3 Employees/customers – employees want to keep jobs but customers want lower prices.

1 Any individual or group that has an interest in the activities of a business.
2 Owners/shareholders, managers, employees, customers, suppliers, lenders, the local community,
government.
3 Employees – job security and higher wages. Shareholders – dividends and increased market value of
shares. Customers – lower prices, increased choice, quality products.

Provision of affordable services – providing services to the public at lower prices than they would be if
they were being provided by the private sector. Provision of accessible services – services available to
everyone regardless of location or income.


1 a Partnership, limited company. [2]
b Individual or group who has interest in activities of a business. [2]
c Set targets (1), which can be used to measure business performance (1). Motivate managers (1) as
objectives are targets that have to be achieved (1). [Total: 4]
d Keeps all profits (1). Aisha will not have to share profits (1) as she is the sole owner (1). Control (1). Aisha
has complete control over business decisions (1). She can do what she thinks is best for the business (1).
[Total: 6]
e Advantages: more capital available (1), increases skills and expertise (1), share decision-making
(1). Disadvantages: share profits (1), still has unlimited liability (1), no continuity of business if one
partner leaves (1) (maximum of 2 marks for advantages and 2 marks for disadvantages). Student
agrees/disagrees and supports their decision (1) within the context of Aisha’s business (1). [Total: 6]
2 a Business owned by shareholders (1) who have limited liability (1), shares cannot be sold to the general
public (1), often small/medium size owned by family and friends (1). [2]
b Business activity that converts resources supplied by primary sector business into goods for other
businesses or consumers. [2]
c 1 mark per stakeholder such as owners, employees, customers, suppliers, the local community,
government, etc.
Note: do not accept managers and employees or owners and shareholders as separate stakeholders.
[Total: 4]
d Profits (1). Private sector businesses have profit as objective (1); public sector organisations are not
profit driven, more concerned with providing services that are affordable to everyone regardless of
income (1). Survival (1). Private sector businesses often have survival as their objective, especially in
early years (1); public sector organisations do not need to have this objective as they will continue to
exist even if they operate at a loss (1). [Total: 6]
e If shareholders do not receive dividends they are happy with then they could vote at the Annual
General Meeting to remove the Board of Directors (1) or to increase dividends above the level
recommended by the Board (1). If existing shareholders are unhappy with the level of dividend then
they might not invest further in the business (1). Employees have helped Company Z to earn profits
so they should receive some share of this through higher wages (1). Higher wages might motivate
employees – could increase future profits (1). Trade union might take industrial action if members
do not receive a pay rise (1). Student makes a decision that is supported through the points above.
[Total: 6]

6 Motivating employees
1 Many employees leaving the business – increase in labour turnover; absenteeism at an all-time high;
production levels – productivity – fallen; increase in customer complaints; poor quality.
2 Work became boring – less interesting than it used to be; bonus targets are too high; pay is lower than
that of similar businesses.
3 Answers should focus on the effect motivation has on labour turnover, productivity, quality.
4 Answers should discuss the importance of financial motivators v non-financial motivators. Answers
that identify a benefit or a drawback of the new pay system to ZHAF will demonstrate analysis.
An answer that has the student making a judgement about the likely success of the new pay system
supported by evidence from the case study or relevant theories would be evidence of evaluation.

Level of need How business helps individuals to satisfy their needs
Physical needs 1 Pay received is high enough to buy basic needs.
9 Employees are given free meals at work.
13 Employees receive payment during periods of illness.
Safety needs 3 Employees are given a contract of employment setting out their pay and
working conditions.
5 Employees are provided with protective clothing.
7 The business is very profitable.
15 Employees are trained how to use equipment correctly.
Social needs 4 Employees are organised into teams or groups.
12 Social activities are organised for employees.
Esteem needs 2 The manager praises employees.
8 Employees are given responsibility for completion of tasks.
11 Employees are given the opportunity for promotion.
14 Respect from other employees.
Self-actualisation 6 Work is challenging.
10 Employees are given the opportunity to develop new skills to increase
their potential.

1 Productivity is much lower than average for FF’s other factories; absenteeism is more than double the
average for FF’s other factories; labour turnover is more than double the average for the other factories.
2 40/500 × 100% = 8%
3 Answers should consider the data given in the table, which shows that the average weekly wage in
Factory A is higher than the average for FF’s other factories but productivity is lower, and labour
turnover and absenteeism are higher. This would suggest that money is not motivating employees and
the poor motivation is due to non-financial reasons such as the leadership style of the factory manager,
poor working conditions and what employees see as ‘silly rules’. Students could link these points to
relevant theories to support their answer.

4 Answers should outline Herzberg’s two-factor theory and explain the importance of hygiene factors and
motivators, how a knowledge of these might be used by senior managers to improve the motivation of
employees and why this could lead to improvement in productivity. Better answers will link the theory to
the present situation of the employees and how some of the hygiene factors are present, e.g. high wages,
but others are not, e.g. poor working conditions. Answers should recognise that an improvement in these
factors will not motivate employees but that they need to be present to satisfactory standard in order
to prevent job dissatisfaction. Focus should then be on how senior managers might use ‘motivators’ to
improve employee motivation and productivity. Influence of the leadership style of the factory manager
might also be considered. Senior managers might also consider why the productivity of employees in
their other factories is higher than Factory A, i.e. what is so different between the factories?

1 Physical, safety, social, esteem, self-actualisation.
2 Hygiene factors are those factors, such as pay and working conditions, that need to be present in order
to prevent job dissatisfaction, but they will not motivate employees. Motivators, e.g. responsibility and
recognition, are important influences on the motivation of employees.

1 A: 40 × $4.75 = $190; B: 2000 × $0.10 = $200; C: (40 × $4.50) + $15 = $195
2 There is no ‘right’ answer. Students need to choose a company and justify their choice, e.g. Company B
because the harder I work, the more pay I will receive; Company A because I am guaranteed $190 per
week even if I don’t work very hard!

1 Director: salary + performance-related bonus + fringe benefits; receptionist: hourly.
2 42 × $6 = $252
3 Financial rewards received by an employee in addition to money wage or salary. Include company car,
health insurance, company pension. Note: Relocation expenses are not a fringe benefit because they are
a ‘one-off’ payment used to attract better-quality applicants.
4 To attract the very best candidates. There are fewer people with the required skills and expertise to
carry out the duties of a director so fringe benefits help attract these to apply. No experience is needed
for the receptionist – many more people will be interested in applying so fringe benefits are not
required to attract applicants. Competitors will likely be offering similar benefits.
5 Any appropriate answer that the student can justify, e.g. free membership of health and fitness club.

1 Increased automation/new technology; work has become boring and less challenging; employees are no
longer using their skills.
2 Increased productivity – reduces average cost/cost per unit; reduced labour turnover – reduces
recruitment and training costs; reduced absenteeism – increases productivity; better-quality products
– increases sales/reduces waste/reduces customer returns or complaints/improves company image or
brand image.
3 Answers should explain job redesign, i.e. job rotation, job enlargement and job enrichment, and how
each of these might solve some of the problems identified, e.g. reduce boredom, make work more
challenging, provide employees with greater responsibility. Link to relevant theory/theories such as
Maslow or Herzberg. No mention of financial motivation but answer could consider the importance
of money as a motivator. Students need to make a judgement about the likely effect of job redesign on
solving the problems and support it with relevant theory or application.

There are many possible answers – the following are some suggestions.
1 Offer bonus for achieving a certain level of sales, or commission based on amount of sales.
2 What is causing the increase in faulty products? Is the work boring? Will job rotation help reduce boredom?
3 Bonus paid on efficient delivery of pizzas. Pay the driver using the piece-rate system based on number
of deliveries made.
4 Salary + performance-related pay based on sales, fringe benefits, e.g. company car.
5 Training so able to gain promotion to manager.
6 Bonus based on the number of cars they sell. Commission-based salary, i.e. the more they sell, the more
they earn.
7 Hourly wage. Safety equipment.
8 More responsibility.
9 Salary. Profit sharing. Laissez-faire leadership style.
10 Performance-related pay based on the examination results of their students.

1 Financial incentives involve paying money for work done, e.g. hourly wage, piece-rate, salary, bonuses,
or providing a benefit that saves employees from spending their own money, i.e. fringe benefits such
as company cars and health insurance. Non-financial methods include job redesign, giving employees
greater responsibility, recognition and opportunities for reaching their full potential.
2 Job rotation – employees move around different tasks to increase the variety of work they do
and reduce boredom. Job enrichment – giving employees other tasks that increase their level of
responsibility. This can motivate employees by helping to satisfy esteem needs (Maslow), or provide
a motivator (Herzberg).

1 Environment that employees are working in, e.g. noise levels, cleanliness, temperature, bathroom
facilities, restrooms, health and safety procedures.
2 In addition to a wage based on number of hours worked, employees receive payment based on how well
they perform their tasks. Might be based on achieving production targets, or quality targets.
3 Advantage: employees perform tasks quickly and to a high standard – improves productivity and
quality. Disadvantage: employees become bored with performing the same task, which demotivates
them – reduces productivity and quality, increases absenteeism and labour turnover.
4 New factory pays wages based on hours worked rather than using the piece-rate system. Employees
have greater certainty about how much they will earn each week – not based solely on how hard they
work/how many units they produce. Working conditions in the new factory are much better and
employees might feel healthier and have a safer environment in which to work. New factory probably
uses better technology and is more automated than MFC so the work is easier.
5 Answers should discuss advantages/disadvantages of the piece-rate system. Some employees might
prefer the system if they are hard-working and able to produce a high level of output. However,
employees do not know from one week to the next what their wage will be as it depends on how many
units they produce. Some employees might not be able to earn as much as they would like because their
output is affected by slower employees. Better answers will also consider advantages/disadvantages
to the employer. MFC only pays employees for the work they do; however, employees might pay less

attention to quality if they are trying to produce as many units as possible. Changing from piece-rate
to another system, e.g. hourly rate, might improve quality, could reduce productivity. Decrease in
productivity will increase average costs and this would need to be balanced against any reduction in
average costs as a result of improved quality/reduced wastage.
Exam-style practice questions (pages 87–88)

1 a Non-cash incentives (1) to recruit or retain employees (1). Could reward relevant examples, e.g.
company car, pension, employee discounts, etc. [Total: 2]
b $200/40 = $5 per hour [2]
c Piece-rate (1) based on output (1) – the more employees produce, the higher their wage. (2) [Total: 4]
d Bonus (1), Company A could set production targets (1) – employees will receive additional payment
for reaching target (1). Profit sharing (1), employees will receive payment at end of year based on
profit earned by Company A (1), the higher the profit, the more each employee will receive (1).
[Total: 6]
e Use of relevant motivation theories. For example, according to Taylor, money is most important
motivator (1). Other theorists such as Maslow and Herzberg disagree (1), employees motivated by
other needs such as security, social, esteem or self-actualisation (1), Herzberg’s two-factor theory
identified money as hygiene factor, i.e. needs to be of a satisfactory level but does not motivate
(1), other factors such as responsibility and recognition are more important as motivators (1).
[Maximum: 4] Answer disagrees with Company B management because although they use piece-rate
to motivate employees, they do not stay more than one year, which may suggest not motivated by
money (2). [Total: 6]
2 a Additional payment to employees on top of weekly wage (1) for reaching production target (1). [Total: 2]
b Factors that influence behaviour of employees (1) towards achieving set business goals (1). [Total: 2]
c Financial motivators (1). Managers will work harder (1). Fringe benefits help to recruit the best
managers (1). Improves the quality of ABC’s management (1) or helps to retain managers (1), which
reduces recruitment and training costs (1). (maximum of 4) [Total: 4]
d Maximum 2 marks for identifying non-financial methods of motivation, such as job rotation, job
enrichment, delegation, team working, training, opportunities for promotion. (2 marks each for
explaining how methods identified might be used to motivate employees.) For example, job rotation
(1) introduces variety into their work (1), the work becomes less boring / more interesting (1); ABC
might introduce job enrichment (1), as it gives employees more responsibility (1). It satisfies their
esteem needs (1). [Total: 6]
e Production workers are easier to replace so not necessary to provide them with the same fringe
benefits as the manager (1). More important to retain the manager or use fringe benefits to attract
the best manager to ABC (1). Too costly to give all employees a company car (1). Giving all employees
the same fringe benefits would increase ABC’s costs and reduce profits (1). However, if production
workers receive fringe benefits this will reduce labour turnover (1), reduce recruitment and training
costs (1). Production workers should receive a share of the profits (1) because they, not only the
managers, have worked hard to help ABC earn profits (1). (maximum of 6) [Total: 6]

7 Organisation and management

Any two of the directors.

4: The recruitment manager is directly responsible to the human resources director.

The supervisor of Factory B.


1 Shows formal relationships within an organisation.
2 Set objectives, motivate employees, make sure employees have resources needed to complete tasks.
Answers might also identify roles or functions of management.

1 Person responsible for a certain group of tasks or area of a business, e.g. the manager of each restaurant
is responsible for making sure that all tasks for that restaurant are completed and employees have the
resources needed to complete tasks.
2 a Number of levels in business. Four levels in Mohinder’s business.
b Number of subordinates who report directly to the supervisor/manager. Chef in restaurant C has a
span of control of six.
c Route through which authority is passed down in an organisation. In Mohinder’s business it is from
Mohinder to the restaurant managers to the chefs and finally to the other employees.
3 Shows their position in the organisation, who they report to and who they are responsible for.
4 Answers should discuss advantages/disadvantages of centralisation. Advantages: faster decision-
making; Mohinder can make decisions for the whole business; benefits of economies of scale; easier for
Mohinder to control business. Disadvantages: centralisation might demotivate restaurant managers
who are not able to make decisions; communication is slower; restaurant managers are unable to
respond quickly to local factors – opportunities missed. Answers should include a decision on whether
advantages outweigh disadvantages or vice versa.

1 Giving authority to subordinates to perform certain tasks.
2 Answers should explain ‘organising’ and ‘commanding’ as these are functions of managers at local
level. The other three functions of managers are probably specific to senior management, e.g. reference
to the planning function of a country director.
3 Advantages: local managers can respond to factors that are local to their offices; used to motivate
managers; used to prepare managers for promotion; gives the country director more time to

concentrate on more important decisions. Disadvantages: local managers might not have the skills
or experience needed to make ‘good’ decisions; communication problems; loss of control by senior
managers; decisions taken might not support the overall objectives of the business.

1 Planning, organising, commanding, coordinating, controlling.
2 Fear loss of control, lack trust in the abilities of subordinates, feel threatened by subordinates who
might do the job better, have an autocratic leadership style.

1 Laissez-faire
2 Autocratic
3 Democratic
4 More autocratic than democratic
5 Laissez-faire
6 Democratic
Students might disagree with the suggestions above. Purpose of the activity is to encourage students to
learn how to justify a particular choice.

a Secondary and tertiary sectors.
b Someone who has responsibility for a group of tasks or an area/department of a business.
c Because of the nature of the work and the fact that an installations manager is responsible for health
and safety issues, it could be argued that a more autocratic style is the most appropriate. However, a
democratic leadership style might also be used if there is a need to discuss with others the health and
safety issues and how best these might be implemented and communicated to all employees.

1 Styles are complete opposites. Autocratic leaders make all the decisions without discussion with
subordinates. They tell employees what to do and expect orders to be obeyed without question.
Communication is one-way. Might threaten or punish employees if they do not follow instructions.
Democratic leaders encourage participation in decision-making by subordinates. Communication is
two-way.
2 A crisis situation that requires an immediate decision, e.g. if a product is found to have a serious fault
that could endanger the life of users.

1 Organisation formed and financed by employees to protect their interests and negotiate with employers
on their behalf for improvements in pay and conditions of work.
2 Union will negotiate with employer to try to get pay increase for employees. Easier for trade union to
negotiate with employer than individual employees.
3 Strike would mean employees do not go to work and this would stop production of sugar and could
affect sales and profits of companies who are MSPA members.
4 Physical environment of the workplace and how well it meets the health and safety needs of employees,
e.g. temperature, noise, cleanliness, washroom facilities, rest areas, drinking water, canteen facilities.

5 Answers should consider how important dock workers and the work they do are to the economy of
Argentina. According to the article they are very important and, because of this, it is likely that any
strike action could have a damaging effect on the economy. Government will want to avoid this.
However, it will also depend on the cost of improving working conditions and whether employers can
afford this. Some idea of the strength of the union because of the type of employee it represents and
their importance to the economy, but balanced against the cost of meeting the union’s demands.

1 To represent the interests of members when dealing with employers to get improved pay and working
conditions.
2 Employee may not be able to pay the fee needed to join a union.

1 a Someone in charge of a group of tasks, or an area or department of business, e.g. marketing
manager. [2]
b The formal, internal framework of a business that shows how it is managed and organised. [2]
c Planning, controlling, coordinating, organising, commanding. (1 mark each) [Total: 4]
d Helps develop the skills of GL’s employees (1), which gives GL a more flexible workforce (1).
Employees will be able to cover for absent colleagues (1). GL’s managers can focus on more important
tasks (1), which improves the management of GL (1). Better and quicker decision-making (1).
[Total: 6]
e Autocratic leaders make all the decisions without consultation (1) and expect orders to be followed
without question (1). Some evidence in the text suggests that Gopal is an autocratic leader. Gopal
likes to know what all the directors and managers are doing (1) and has blocked the pay rise agreed
by the local manager (1). However, Gopal has delegated authority for marketing, finance and HRM
(1), which suggests that he does not want to make all decisions for every area of business, which
implies that Gopal is not autocratic (1). [Total: 6]
2 a Appointed or elected member of the Board of Directors of the company who has responsibility for
setting and implementing the company’s policy. Some directors have a management role too, e.g.
Bimla’s uncle is responsible for management of RF’s finance. [2]
b Planning, organising, controlling, coordinating, commanding. [2]
c When employees join together in a trade union they have greater power (1) to negotiate with their
employer for improved pay and conditions (1). Trade unions provide free legal advice to members
who are being unfairly treated or injured at work (1). Individual employees would probably not be
able to afford this legal help themselves (1). [Total: 4]
d Features might include chain of command, span of control, levels of hierarchy (up to 2 marks).
Further 2 marks for each feature explained. The award of 2 marks requires students to use the
organisation chart provided. For example, RF has a tall structure (1), there are five levels in the
hierarchy (1), this might slow down decision-making (1). The two supervisors have a span of control
of 12 (1), which is wider than the marketing manager who has only a narrow span of control (2), the
wider span of control might make it more difficult to communicate with and control the production
workers (1). [Total: 6]
e The Board of Directors are the most senior managers of RF (1) appointed or elected by shareholders
(1). They are responsible for setting strategy (1), making sure resources are available to achieve
objectives (1), providing the leadership for the success of RF (1). Justification of importance (1).
[Total: 6]

8 Recruitment, selection and training

of employees
Answer should consider advantages/disadvantages of internal and external recruitment for each post and
make a decision as to which one is ‘best’. No single correct answer, but likely that a machining supervisor
might be recruited internally whereas a factory manager might need external recruitment. Answers might
take the opposite view but must be justified to demonstrate evaluation skills.



1 Internal recruitment – person appointed to post already employed by the business in a different role.
External recruitment – employment of someone from outside the business.
2 Job title, main duties, responsibilities and accountability, etc.
3 Offers greater flexibility; increases skills and experience of workforce; might help to keep experienced
full-time employees who might otherwise leave; can attract skilled and experienced employees who are
only interested in working part-time; evidence suggests that part-time employees are more productive.


Report should consider advantages/disadvantages of internal and external recruitment and apply these
to Ravinder’s business. On the basis of this analysis, the report should make a decision and justify which
method Ravinder should use. No ‘right’ answer – will depend on the quality of analysis of the factors and
making a reasoned judgement as to which method is ‘best’ in this context.

1 Training provided to employees when they first join an organisation, which introduces them to the
workplace, colleagues, facilities, health and safety procedures, etc.
2 On-the-job training – employee learns by doing the job, often by working alongside an experienced
employee. Off‑the-job training – takes place away from the workplace in training centres, colleges, etc.

1 Increased automation/use of technology; fall in demand for the product produced by the workforce;
relocation to another part of the country or a different country.
2 Incompetence, poor conduct.


1 Name of employee, name of employer, hours of work, pay, holiday entitlement, job title, main duties, etc.
2 Race, colour, gender, religion, age, disability.

a Being dismissed from a job without good reason.
b Race, gender.
c Answer should discuss why employees need to be protected from employers who might act unfairly
and dismiss employees without good reason. Quality of argument is what is important, i.e. it should
consider advantages to employees and possible disadvantages to employers.

1 a List of qualifications, skills, experience and personal qualities looked for in the successful applicant. [2]
b Cannot discriminate on any of the following: gender, race, colour, religion, disability, age. [2]
c Must give all employees a contract of employment (1), removes possibility of misunderstanding
about pay, hours of work, holidays, duties, etc. (1); minimum wage laws (1), Glowtech cannot exploit
employees by paying very low wages (1). (Maximum: 4) [Total: 4]
d Employees feel part of the business more quickly (1). Settled employees are likely to be more
productive (1), increases labour productivity/reduces average costs (1). Employees are given health
and safety training (1), reduces risk of accidents (1), production time not lost due to injury to
employees (1) or Glowtech will not have to pay compensation to injured employees (1). (Maximum:
6) [Total: 6]
e Internal recruitment – appointing someone who already works for Glowtech to be the new
supervisor (1). Can be a source of motivation for existing employees (1). Person appointed will
already understand Glowtech procedures and will require less training than if the company were
to use external recruitment (1), this will be less costly for Glowtech (1). However, using external
recruitment might mean appointing a better-qualified person (1), they might bring new ideas that
improve the way Glowtech works (1). Appointing someone from outside will increase training
costs and might demotivate existing employees (1). Answer must choose one of the methods and
justify why it is best, e.g. it is not a very senior position and probably plenty of suitably experienced
employees are already employed by Glowtech who could do the job. (Maximum: 6) [Total: 6]
2 a Employee tells employer that they wish to leave employment perhaps because they have found
another job or are retiring. [2]
b Job that employee does is no longer needed. [2]
c Qualifications required (1), academic qualifications or professional qualifications that Bright Sparks is
looking for from applicants for the manager vacancy (1). Experience (1), what relevant work experience
applicants for the manager’s job need, e.g. must have five years’ experience in a marketing role (1). [Total: 4]
d Maximum 2 marks for identifying the features of a contract of employment, e.g. information about
duties, working hours, pay, holidays, etc. Answers might include that a contract of employment is a legal
agreement (1), which removes the risk of misunderstandings about pay, working hours, etc. (1), prevents
employees from being exploited (1). Contract of employment provides details of an employee’s duties (1),
employees cannot be forced to do work they have not been employed to do (1), protects employees from
unfair dismissal for refusing to do work that they have not been employed to do (1). [Total: 6]
e Costs include amount paid to training organisation (1) and output lost while employee is being
trained (1). Benefits – improved productivity (1), reduced average costs (1); better-quality products
(1), reduced waste / customer complaints (1), increased sales / profits / reputation / brand image
(1); employees feel valued, which increases motivation (1), reduced labour turnover (1), reduced
recruitment costs (1). (Maximum: 5) Disagree with marketing director because benefits identified
outweigh costs, or similar statement (1). [Total: 6]
9 Internal and external communication

1 Everyone knows what to do in the event of fire. If there is no notice then lives might be lost and the
business sued for compensation.
2 So there is no confusion as to what is needed. If the wrong goods are supplied this might delay
production with possible loss of sales.
3 Business should respond quickly to convince the customer that it takes their complaint seriously. If
it does not respond quickly then the customer might tell other consumers and this will damage the
reputation of the business. Customer might decide to take legal action if the complaint is not dealt with
quickly.
4 There needs to be a permanent record of warnings to be used in evidence if the employee is later
dismissed for lateness. Without evidence the employee might claim unfair dismissal.
5 So that the customer receives exactly what they want – no misunderstanding. If the wrong goods are
sent then the customer will return these and might cancel their order. Could tell relatives and friends
about poor service and this could damage the firm’s reputation and decrease sales and profits.
6 All employees should receive the same information at the same time to avoid any misunderstanding. If
the message is not communicated to all employees at the same time then some employees might think
they are not going to get a pay rise and might become demotivated/leave/threaten industrial action.
7 Businesses need accurate information about how much money they have in the bank. If they do not
have correct information then they might spend more money than they have in the bank. Overdraft
will increase business costs due to interest they will have to pay on the overdrawn balance.
8 Accurate names and addresses of customers are needed if the business wants to contact them – perhaps
to send them direct mail. If information is inaccurate then the business will waste money sending
direct mail and other correspondence that cannot be delivered or is sent to the wrong person.
9 Consumers might use the website to find out information about what the business sells. If it is out of
date or the website is difficult to use, then customers will look elsewhere and sales will be lost.
10 Advertising is probably the most important contact between the business and consumers. If not
effective then consumers will not know that the product is available, what it does or where consumers
can purchase it. Sales will be lower than they might have been if the message had been communicated
more effectively through advertisement.

See table in Activity 9.5 answers for ways to communicate using the spoken word (oral).

See table in Activity 9.5 answers for ways to communicate using the written word.

See table in Activity 9.5 answers for ways to communicate using technology (electronic).


1 Types of communication
Oral Written Electronic Visual
Conversation Email Email Bar chart
Meeting Fax Fax Graph
Interview Memorandum Video-conferencing Photograph
Telephone Text message Text message Diagram
Video-conferencing Noticeboard
Letter
Report
Note: some methods could appear in more than one column.
2 Answers might offer different responses to suggestions below – accept any sensible responses, which
will depend on the justification for the method selected.
a i Report – detail needed.
ii Bar charts, graphs – visual presentation easier to understand, detail not required.
b Letter – make sure all employees receive.
c Diagram/drawings and report – visual to show what it might look like and a report to provide
explanation and cost information.
d Memo or email – written record that can be used as a further reminder.
e Telephone – quick and easy, provides the applicant with the opportunity to ask questions.

Purpose of activity is to encourage students to ‘justify’ their choice, i.e. discussion is not just about
identifying the method but for students to explain why they think it is the best method. Suggestions below
are not the only methods that might be appropriate.
1 First warning might be verbal, but there should be a written record that this has been given in case
future action needs to be taken against the employee.
2 Follow-up might be a telephone call or letter depending on the seriousness of the complaint.
3 Advertisement on a noticeboard. Only need to bring this to the attention of existing employees. Cheap
and everyone has the opportunity to read the advertisement.
4 Advertisement in a newspaper/magazine – covers a wide area of the market and cheaper than a
television advertisement, which is more expensive, but has greater visual impact.
5 Telephone call or email. Need to contact the supplier quickly to speed up delivery.
6 Telephone call. Can speak directly to the customer and agree how and when payment will be made.
Reminder letter – this might be ignored.
7 Meeting with employees as a group or individually. More personal and can be used to explain the
reasons for redundancy and why they have been selected. Should be followed up with a letter as a
written record of the decision to avoid misunderstanding.
8 Meeting. Everyone gets the same message at the same time – avoids rumour and misunderstanding.
9 Report or email with data attached. Need to have written evidence to avoid any misunderstanding.
10 Minutes of meeting. Must be a permanent written record of any discussions and decisions taken to avoid
misunderstanding and to make sure that appropriate actions are taken and who is responsible for them.

1 Information that is passed between two or more people with feedback to confirm that it has been
received and understood.
2 Oral, written, electronic, visual.

a To avoid misunderstanding and prevent mistakes, to prevent rumours. Improves morale and
motivation, decision-making.
b Answer should consider how information is passed and whether there is opportunity for feedback.
Article suggests that communication is likely to be effective because there is a regular meeting for all
employees and an open session allowing employees to ask questions.

1 Receiver might not have a mobile phone with them, or might not check their messages regularly.
2 Factory might be noisy and a barrier to effective communication.
3 Letter might not be delivered or get lost in transit.
4 Employee might not pass the message on or might not pass on the whole message. Might not have
understood the message and pass on what they think it is.
5 Sender and receiver might not speak the same language. Might be technical problems with the phone
line that make it difficult to hear message.

1 Communication where there is a permanent record, e.g. letter, memorandum, email, etc.
2 Telephone, letter.
3 Have a meeting with Indira to give her a verbal warning – should be a written record of the meeting.
Send Indira a letter as a written warning about timekeeping.
4 Written communication to suppliers might not be received so might delay the supply of raw materials.
Without raw materials, Abdul might not be able to meet orders from customers and this could lose
him sales and reduce profits. Instructions to his employees might not be understood and they might
carry out tasks incorrectly. Customers might become unhappy with the quality of work and this might
damage the reputation of the business.
5 Customers receive goods on time and as ordered – improves the reputation of the business and
increases future sales and profits. Instructions are understood and correctly carried out – reduces waste
and improves quality. Raw materials are received on time. Any problems with employees are correctly
recorded and, if dismissal is necessary, then there is less chance of it being unfair and it prevents the
business from being sued.

1 Wrong communication channel is used, noise, lack of trust between sender and receiver.
2 Answers will depend on barriers identified in the previous question. More careful choice of channel,
move to somewhere quieter, more regular meetings between sender and receiver to improve
relationships and encourage greater trust.

1 a Information passed between two or more people with feedback provided by the receiver confirming
to the sender that the message has been received and understood. [2]
b Tables, charts, graphs, photographs, etc. [2]
c Noise, wrong medium used, language used too complex, communication channel too long, lack of
trust between managers and other employees, demotivated employees, etc. (1 mark per correct barrier
identified) [Total: 4]
d She could hold a meeting (1) with all part-time employees involved. This will give employees the
opportunity to ask questions (1), all employees will hear the same message at the same time (1).
She could write a letter (1) to them all. If she uses appropriate language then all employees will
receive the same message (1); this provides a permanent record of what decision has been made and
communicated (1). [Total: 6]
e Effective communication means that instructions from the manager to employees have been received
and understood (1); if messages are not received or understood then tasks will not be properly carried
out (1). This might mean that Golden Sands Hotel’s customers receive poor service (1), they will not
return and will tell other people about the poor service they received (1). This damages the hotel’s
reputation (1), it will lose future sales (1) and profits will fall (1). (Maximum: 5) Answer should decide
the importance of effective communication to the success of the hotel and justify this with reference to
points made (1). [Total: 6]
2 a Use of technology to send messages, e.g. email, texts, fax and video-conferencing. [2]
b Meeting, memo, telephone, email, etc. [2]
c Text refers to use of electronic communication methods, e.g. using a fax machine (1). Advantage of
this method is that factory managers receive an exact copy of the original document from head office
(1). Telephone (1), message is communicated quickly and immediate feedback can be obtained from
the factory managers to check that the message is understood (1). [Total: 4]
d Barriers to effective communication might include noise (1), wrong choice of media (1), mistrust
between sender and receiver (1), complex language (1). (Maximum 2 for identifying barriers to
effective communication) Noise – message not heard properly or important parts of the message not
heard (1), task not completed or incorrectly completed (1). Mistrust between sender and receiver –
receiver does not listen to the message properly, or does not pass the message on to other employees
(1), tasks not completed, causing late delivery of orders to customers (1), loss of sales/damage to
reputation (1). (Maximum 2 for each explanation) [Total: 6]
e Advantages and disadvantages of each method should be identified. Letter – all employees get the
same information (1), permanent record so employees can look at the message several times to check
understanding (1). However, employees in the two factories might not receive their letters at the same
time (1), could result in rumour (1) or employees in one factory thinking they are less important
than employees in the other factory (1). Meeting – all employees hear the same message at the same
time (1), opportunity to ask questions (1). However, meeting might have to be during working hours
and this will reduce output (1). Can all employees from both factories get to the meeting venue (1)?
Company A might have to hire a venue for the meeting for 600 employees and this increases costs
(1). Answers should decide which method is ‘best’ and justify this with reference to points made (1).
[Total: 6]

10 Marketing, competition and

the customer
a Taking raw materials and converting them into goods and services that can then be sold to customers.
b Customer loyalty is when customers repeat purchase the business’s products. It is important to
maintain sales and profits. Without a loyal customer base the business would not be able to survive.
When markets are very competitive, like the mobile (cell) phone market, it is important for businesses
to have loyal customers who will continue to buy their products rather than competitors’ products.
Also easier to introduce new products into the market if there is strong customer loyalty and sometimes
possible to charge slightly higher prices than those of competitors.
c Important for a firm to meet the needs and wants of customers better than competitors do as this
will increase sales and profits and customers will become loyal to that firm’s products. Carrying out
research to identify what it is customers want from their mobile phone is a very good way of identifying
customer wants and, once these have been identified, the firm can produce products to meet specific
wants. If one firm does this better than competitors then customers will buy its product rather than
those of competitors. Involving customers in the design stage is also a very good way for a mobile
phone company to make sure that it is providing exactly what customers want.

1 Identification and satisfaction of customer needs and wants at a profit.
2 Helps to maintain and improve sales and profits. Easier to launch new products into a market when the
firm has loyal customers who trust its products.


Answers should identify and develop the following factors: product quality, quality of service, fashion,
consumer income, competitor actions.

Student’s own answer, as depends on country chosen.

1 Changes in fashion, consumer income, price of the product and price of competitor products,
advertising and other promotional activities.
2 Government intervention in markets, e.g. legal controls to prevent one firm from dominating the market;
increased free trade – easier for companies in one country to sell goods in other countries; e-commerce –
many businesses can now sell their product over the internet to customers across the world.
3 To survive. If a business does not respond to increase in competition in its markets then it will lose
sales and eventually will not be selling enough goods to earn profit.


Because it is a specialised type of tourism. Consumers will pay a high price for this type of ‘holiday’. There
is less competition in this market than there is in the general tourism market.

Because it is a very large market with millions of potential consumers.

1 Niche market – a small market selling specialised goods or services to a few consumers who are
often prepared to pay a higher price to have a product that meets their specific needs. Mass market –
a market where there is a very large number of consumers who purchase similar products; more
competitive than a niche market.
2 Little scope for economies of scale; high profits might attract competition – eventually reduce prices
and profits; small fall in consumer income can often significantly reduce sales in niche markets.
3 Requires large-scale production so firms can often benefit from economies of scale; potential for high
levels of sales and profits; small decreases in consumer income have less effect on sales and profits of
firms in a mass market.

a Uses geographic segmentation to identify different needs of consumers in different countries. Then
produces different products for consumers in these countries, such as Nigeria and Russia, which helps
to increase sales and profits.
b Changes its product to meet the specific needs of customers in different countries, e.g. jollof rice in
Nigeria, ugali in Kenya. Changes advertising in different countries to reflect local customs and culture.
c Because it identifies the needs of customers in each country it is able to make sure that products offered
in restaurants are what consumers want. This will increase KFC’s sales and profits in each of these
countries and KFC’s overall profits will be higher. Also uses geographic segmentation to make sure that
advertising and restaurants reflect the culture of each country.
d Carrying out market research for each different country is more expensive. Producing different
products for each country and designing different advertisements and restaurants is more expensive.
Will lose some economies of scale.

There is no ‘correct’ answer for each of the contexts provided. The activity is aimed at encouraging
students to apply their knowledge of market segmentation in a variety of different contexts and to then
justify which method they think is best and why.

1 Better meet customer needs – increases sales and profits; might identify a niche market; target
promotional activity, which reduces possible waste of resources.
2 Geographic segmentation – dividing consumers in market by geographic area; demographic
segmentation – dividing consumers in market by factors such as age, gender, income, ethnic
background, social class; psychographic segmentation – dividing consumers in market by lifestyles,
personalities, attitudes.


1 a The group of customers a business sells its goods to.
b Higher prices, limited range of spectacles. [2]
c Price (1), consumers comparing the price of spectacles offered by Magda with those of her
competitors, choosing to buy competitors’ spectacles because cheaper (1). Fashion (1), many
consumers, especially the young, want to buy fashionable spectacles (1). [Total: 4]
d More competition (1) – Magda faces competition from suppliers of spectacles who sell their goods
over the internet (1). The more competitors, the lower the price (1). Magda sells fewer pairs of
spectacles because of the greater number of competitors.
Lower profit margin (1) – the greater competition from e-commerce suppliers of spectacles means
that Magda has lower sales and profits (1). In order to compete, Magda must reduce her prices and
this will reduce the profit per pair of spectacles (1).
e Magda could lower the prices of her spectacles to a level similar to that of competitors (1). Her
customers will buy from Magda rather than having to wait for spectacles to be delivered from
e-commerce suppliers (1). Customers will also buy from Magda because they will be able to see the
different spectacles and try them on to see which are best for them (1). Magda could increase her
range of spectacles (1) including spectacles that meet the fashion needs of some customers. This will
increase Magda’s inventory costs (1) but will increase sales as long as the price is also competitive (1).
[Total: 6]
2 a Small part of the total market (1) where consumers are looking for a specialised product (1) [Total: 2]
b Geographic, demographic or psychographic, or income, gender, lifestyle, location, etc. [2]
c Can achieve economies of scale (1), reduced average cost/cost per unit (1). Larger number of potential
customers (1), increased sales and profits (1). [Total: 4]
d Change in fashion (1), if GG does not produce fashion clothing wanted by consumers (1) then sales
and profits will fall (1). Change in the structure of the population (1), increase in the birth rate will
eventually increase demand for fashion clothing (1), this will increase GG’s sales and profits (1).
[Total: 6]
e GG earns profit from both segments so increases overall profit (1). If it only operated in a niche
market it might not earn enough profit to make it worthwhile (1). Niche markets usually have
high profit margins and less competition (1). Fall in sales and profits in the mass market might be
offset by sales and profits in the niche market (1). More expensive to operate in different segments
because advertising and other promotion are often different (1). Any problem with GG’s products in
the mass market might affect sales in the niche market and vice versa (1). (Maximum: 5) Answers
should include a statement for or against operating in both markets by weighing up points made (1).
[Total: 6]

11 Market research
a Primary research – collecting data first-hand and for the first time for a specific purpose. Secondary
data – using data that has already been collected, often for a different purpose.
b Advantage: quicker and cheaper than primary research. Disadvantage: uses data that may be out of date
or less accurate because it already exists and was collected for a different purpose.
c To gather qualitative data that provides Kellogg’s with information about what consumers think about
its products.
d Can test a product on a small section of the market and identify any problems with the product, which
it can change before launching on to the whole market; cost of any problems is limited to the test
market so this reduces Kellogg’s’ costs.

1 Because they will produce products that consumers want and this will increase their sales and profits.
Can be market-orientated by carrying out market research to find out what consumers want from ice-
cream products.
2 Qualitative market research collects information about buyer behaviour and consumer opinions about
products. Methods of qualitative research include focus groups and observation. Quantitative market
research collects numerical data, which can be presented in different formats such as tables, charts and
graphs. Data can be analysed using statistical techniques.
3 Data might have been collected using secondary research – could be out of date; secondary research
uses data that has been collected for another reason so it might not be accurate; the sample used in
primary research might be too small – could produce unreliable results.

1 Representative number selected from the population used in market research.
2 Personal interviews, postal survey, telephone survey, focus group.
3 Candle A.
4 37/50 × 100% = 74%
5 Carrying out market research to find out from consumers what they are looking for in a product.
Joseph asked 50 people what they thought of three new candle products he was thinking of adding to
his product range.
6 Pie chart – data is shown as segments of a circle; tables – responses shown as numerical values.
7 Research tells Joseph what consumers think about three candles he is thinking of introducing to
market. Candle A was not popular with the sample so Joseph should not waste money producing
Candle A as sales are likely to be low. Candle B was very popular with the sample so it looks as if
Joseph should add this product to his product range. However, market research is less helpful to Joseph
when making any decision about Candle C because yes and no responses are very similar. Also, the
sample that Joseph used was from his existing customers and these might not be representative of the
whole population so Joseph cannot be sure that their views about the candles reflect the views of all
consumers who buy candles.


1 Visual impact – easier to understand for people who do not understand numerical data.
2 Circle would be divided into too many segments – difficult to compare data.

1 a Process of collecting, recording and analysing data (1) about customers, competitors and market for
product (1). [Total: 2]
b Tables, bar charts, pie charts, graphs, pictograms. [2]
c Telephone survey (1), she could call people at home and use a questionnaire to collect the data she
needs (1). Focus group (1), she could get a group of mothers together to discuss her ideas for a nursery
(1). [Total: 4]
d Identifies what customers want (1), better able to meet customers’ needs (1), will help to increase sales
(1). Identifies how much customers are willing to pay (1), can work out how many customers she
needs to break even (1), and if the business is going to be profitable or not before she decides to go
ahead with her plans (1). [Total: 6]
e Answers should consider advantages/disadvantages of primary and secondary research. For example,
primary research is collected for the specific purpose of Bibi’s nursery plans (1) so is more accurate
than secondary data, which will have been collected for other purposes (1). However, primary
research is more costly (1) and takes longer to collect the data (1). Statement about which is best and
why, linked to the advantages and disadvantages discussed (2). [Total: 6]
2 a Group of consumers who discuss products to provide qualitative market research data. [2]
b Simple random, systematic random, stratified or quota sampling. [2]
c Cheaper (1), population is usually very large and would be too expensive to include everyone in the
survey (1). Quicker (1), would take too long to have every member of the population take part in
the survey (1). [Total: 4]
d Mistakes are less costly (1), only need to produce relatively small output for the test market (1), if
there is a problem then money has not been wasted mass producing the product (1). Can identify
changes needed (1), test market might reveal changes that should be made to improve the product (1)
before it is launched into the mass market (1). [Total: 6]
e Quantitative market research collects numerical data, which can be further analysed (1), easier to
interpret and compare quantitative data (1). Qualitative market research collects consumers’ opinions
and attitudes towards the product (1), can be time-consuming to collect (1), not possible to use
statistical analysis on results (1). Businesses often use a combination of methods (1). (Maximum: 5)
Statement as to which is best for Company Y. Might be qualitative because a focus group is able to
see, smell and even use the product and comment on these (1). [Total: 6]

12 Marketing mix: product and price

Vodafone – communications technology; Shell – energy and petrochemicals; HP – information
technologies, software and solutions; Kodak – imaging and photographic equipment, materials and
services; Nike – sports footwear, clothing and equipment; Hitachi – engineering and electronics; Fedex –
international courier services; Canon – imaging and optical products; Hyundai – motor vehicles,
engineering shipping containers and tourism; Tata – communications and information technology,
engineering, materials, services, energy, consumer products and chemicals.
Success of companies relates to their culture of new product development, strong brand development,
diversification and multinationalism.

Student’s own answer, depending on product chosen. Answers might consider: protection, keeping
product fresh, promotion, providing information about how to use the product, etc.

Student’s own answer, depending on products chosen.

1 To remain competitive, enter new markets, increase sales and profits, replace a product going into
decline, survival.
2 Might be used to promote a product, protect a product, keep a product fresh, or make it stand out from
competitors’ products.
3 Introduction, growth, maturity, decline.
4 To keep a product in its maturity stage for as long as possible; maturity stage is the most profitable stage
of a product’s life cycle – cash earned from the sale of mature products helps to finance research and
development of new products and marketing activities needed to support products in the introduction
and early growth stages.

Student’s own answers, depending on market chosen.
1 Answer might consider: profits attract firms to the market, each firm offering something slightly
different, government controls prevent one firm from dominating a market.
2 Answer might consider issues such as quality, brand image, consumers’ tastes, convenience, etc.

$0.40 + ($0.40 × 30%) = $0.52

There is no single correct answer. Answers should justify the decision based on factors such as level of
competition in the market or brand image of the company. The following are suggestions but answers
might consider other pricing methods.
1 Competitive pricing probably slightly higher than less well-known brands.
2 Skimming price based on uniqueness of product, or penetration to try to enter a very competitive car market.

3 Penetration pricing if the market is very competitive, but competitive pricing if it is a well-known pizza
provider.
4 Psychological pricing to convince consumers of luxury service but might need to use penetration
pricing if there are already luxury hotels in the same area.
5 Promotional pricing such as loss leader to attract customers back.

1 People need petrol so demand is relatively price inelastic, i.e. percentage reduction in demand for petrol
is less than percentage increase in price.
2 Visits to a theme park are a luxury for consumers so a small increase in price causes a bigger decrease
in demand for tickets.
3 Innocent Pfupa will spend less money on theme park tickets because they are luxury and he needs
money to be able to buy petrol for his car so he can get to work. Petrol is a necessity for Innocent so he
will continue to buy it even though the price has increased.

1 Important for the producer because the difference between the price and the cost of supplying the
product is profit. Important for consumers because it will determine if they are able to buy the product,
or how much or how often they will buy it – consumers have limited incomes and must decide how best
to spend these to satisfy their needs and wants.
2 Market skimming earns very high profits for business. High profits eventually attract competitors to
the market. Increase in competition causes prices to fall.
3 Some products are needed by consumers more than others, i.e. some products are necessities, others are
luxury. Price elasticity of demand for luxury products is higher than that for necessity goods.

1 a Difference between revenue and total costs, or reward to entrepreneur for risking their investment in
a business. [2]
b $80 + ($80 × 300%) = $320 [2]
c Price of dresses, price of competitors’ dresses, consumer income, taste/fashion, quality etc. (1 mark
per relevant point) [Total: 4]
d Skimming (1), if the dresses are ‘designer’ then consumers may be willing to pay a high price for
exclusive products (1). However, it depends on how many of each dress Debbie has made because too
many will not make them exclusive (1). Cost-plus (1), the same method she uses for adult designer
dresses (1). However, the price charged might be too high for the market (1). [Total: 6]
e Good idea because it is another niche market that has few competitors and high profit margins (1),
this will increase Debbie’s overall sales and profits (1). She might be able to sell dresses to existing
customers if they have children (1). Developing new products for new markets spreads risk (1).
However, will she have time to design and market them (1)? Will it reduce the number of adult
dresses she can design and make (1)? [Total: 6]
2 a Consumer demand is very sensitive to changes in a product’s price, or the percentage change in
demand for a product is greater than the percentage change in its price. [2]
b Introduction, growth, maturity, decline. [2]
c Benefit: direct sales (1), Carmel keeps all profit (1). Limitation: small market (1), Carmel’s sales are
limited to the number of customers who visit the market (1). [Total: 4]
d Advantage: website can be used to promote her products because consumers can see photographs of
products (1). Can sell to a much wider market (1), customers could order and pay for goods through

the website (1). Disadvantage: cost of designing the website (1), cost of keeping the website up to date
(1), risk of people ‘hacking’ into the site (1). [Total: 6]
e It is easy to work out the price of each item (1). Price might be higher than competitors’ (1) very
competitive market so she might lose sales as a result of this (1). Some items might be priced too high
and others too low if the same mark-up is used for all items (1). Is 50% enough to cover costs (1)?
Statement for or against 50% mark-up linked to points mentioned above (1). [Total: 6}

13 Marketing mix: place and promotion

1 a Compton because it is very small and more likely to serve a local market.
b Will not have to share profits with middlemen.
c Probably not, because to reach a larger market Compton will have to sell through middlemen such as
retailers and if his business grows very large then he might need to use wholesalers too.
2 a Good4U Foods plc because it is a large manufacturer so needs to sell its breakfast cereals to the mass
market. Needs to use wholesalers to distribute products to retailers over a wide geographical area.
b Advantage: able to reach a wider market, which increases sales and profit. Disadvantage: earns less
profit per unit sold to the wholesaler.
3 a Sunshine Holidays.
b Direct sales and agent/retail outlet.
c Some consumers prefer to deal directly with holiday companies, while others prefer to buy through
an agent/retail outlet. Sunshine Holidays can increase its sales and profits by selling to these two
different market segments. Direct sales can help Sunshine Holidays to cover a wide geographical
area, especially if it uses e-commerce.

1 Do not have to share profit with middlemen.
2 Using middlemen such as wholesalers and retailers increases the number of units sold because a wider
market is reached. Selling more of an item, even at a lower profit per unit, increases overall profits. This
is why supermarkets make much larger profits than local stores even though prices in supermarkets are
often much lower than in local stores.



a Can upgrade flights, use Skywards miles to purchase other goods and services, access airport facilities
such as the business lounge.
b Benefit: encourages consumers to purchase services from Emirates and its partners so increases sales
and profits. Limitation: miles exchanged for goods and services at a discount – reduces profit margin
on these goods.

Sponsorship is a form of below-the-line promotion. If the Jordanian football team does well then this
might increase sales of Pepsi in Jordan. Football often has wide television coverage so Pepsi’s name will be
mentioned and seen when matches are televised. Pepsi’s name and logo might be on players’ shirts.

1 An amount of money that has been set aside for financing marketing activities.
2 Local newspaper, local radio.

3 All promotional activities have a cost to the business. Different methods of promotion have different
costs, e.g. television advertising is much more expensive than advertising in newspapers. Knowing how
much is available to spend affects the method(s) used by the marketing department.
4 IF has new owners who have improved facilities. They need to let consumers know this to try to
encourage people to use the new fitness studio. Promotion is needed to create awareness and persuade
people to use the IF fitness studio because the owners need to increase revenue to recover their
investment in buying the business and purchasing the latest fitness equipment.
5 Money-off vouchers will reduce the price of using the fitness studio – they might encourage people to
try IF and hopefully return if they have enjoyed their discounted visit. However, some of the people
who use the money-off voucher might be willing to pay the full price so IF will lose revenue. T-shirts
will be an additional cost to IF. However, if people are given a T-shirt when they first use the studio
then IF will have earned revenue from this to help pay for the cost of T-shirts. People might wear the
T-shirt at places outside of the studio and this will be ‘free’ advertising for the business. Answer should
select one of the options and justify which method of promotion will be more effective. Answer should
recognise that there is a need to balance cost of method against potential benefit.

1 To increase awareness, remind consumers that the product is still available, persuade consumers to buy
the firm’s products rather than those of competitors, and to increase sales, revenue and profits.
2 Incentives are used to encourage short-term increases in sales or repeat purchases.
3 Compare sales before and after promotional activity; compare increase in revenue and profits with
amount spent on marketing activities; has it achieved objectives set, e.g. increased the market share by 5%?

a Use of the internet and other technologies by businesses to market and sell goods and services to
customers.
b Advantage: increased market. OLOOK can now sell its goods throughout the world. This increases
the potential number of customers, which could increase sales and profits. Disadvantage: increased
competition. Businesses in other countries are able to use e-commerce to compete with OLOOK in
Brazil and other countries. Likely to reduce prices in the market and if competitors are more successful
than OLOOK in attracting customers then OLOOK’s sales, revenue and profits will be reduced.

1 100/20 × $100bn = $500bn
2 Money is not wasted trying to sell to consumers who are not interested in the product. Targeting to
consumers who may be interested in the product has a better chance of increasing sales – more effective
use of the marketing budget.
3 Wider market – internet is worldwide so firms are able to sell products to a much larger market. Has
the potential to increase sales, revenue and profits. Reduces business costs because if businesses sell
online then they do not need to buy or rent retail outlets or employ staff to work in them.

1 Benefits include a larger market (worldwide) so there is the potential for more sales and higher profits.
E-commerce reduces business costs because everything can be done online so there is no need to have
the cost of running retail outlets. Costs include: setting up and maintaining the website; increased

competition; might be more difficult for new businesses to establish themselves online; some consumers
like to see, touch and try products before they buy them. Answers should decide whether benefits
outweigh costs, or vice versa, and justify the choice.

1 a Small segment of a total market. Consumers want specialised products. [2]
b $30 000 × 40% = $12 000 [2]
c Advertising, sales promotion, trade fair, personal selling, direct mail, etc. (1 mark per relevant
method) [Total: 4]
d Identifies market needs (1) – produce footwear that meets customer needs (1), increase sales and
profits (1). Identifies competitors (1) – collect information about competitors’ products (1), do what
competitors do best and improve on their products’ weaknesses (1). [Total: 6]
e New segment of market spreads risk, or opportunity to increase sales and profits, or niche market
so could be very profitable (1), current market very competitive so needs to expand product range to
ensure survival (1). However, is it able to produce safety footwear with current resource (1)? If not,
is it able to finance expansion (1)? Risk that entry into this market might not be successful and that
could threaten the survival of the business (1). Statement with justifying decisions to enter or not
based on points discussed, e.g. benefits outweigh costs (1). [Total: 6]
2 a Use of the internet and other technologies by businesses to market and sell goods and services to
customers. [2]
b Any appropriate methods such as cost-plus/mark-up method and competitive pricing. [2]
c Website (1), use website to show photographs and give other details of products to customers (1).
Social media networking site such as Facebook (1), advertise on other internet sites (1). [Total: 4]
d Wider market (1), wholesalers distribute RPC’s products to a wider market of retailers (1), increases
RPC’s sales (1). Promotion (1), wholesalers will often promote products to retailers to increase their
own sales (1), reduces RPC’s promotion costs (1). [Total: 6]
e Benefits of e-commerce and social media networking include access to a wider market (1), which is
important for RPC given the nature of its products, which are likely to appeal to consumers across
the world (1). Can help to enter new markets – increases sales and profits, or more convenient for
customers looking to buy this type of product or customers can order and pay for goods online. Or
cuts out middlemen, increases RPC’s profit margin (1). Drawbacks might include cost of maintaining
the website, or increased distribution costs as RPC must despatch goods to individual customers (1),
might need to employ more employees to handle e-commerce orders – increases costs (1). Statement
for or against RPC using e-commerce and social media networking based on points raised, e.g.
benefits outweigh costs (1). [Total: 6]

14 Marketing strategy
Situation A: Product and promotion
Situation B: Product and place
Situation C: Product and promotion
Situation D: Promotion
There is no ‘right’ answer. The above suggestions need to be developed by students who should justify their
choice. Activity aims to encourage students to justify their opinions to others.

1 To find out what customers want from this type of game and what ‘typical’ consumers think about
Matrix. Research helps to produce better products.
2 Market is very competitive so price is an important factor influencing consumer demand. Cyber
Software must be well-known in the market, which is why she has not used price penetration.
3 Children are the final users of Matrix – though not necessarily the buyers (parents). They need to attract
the attention of children to the product so that they can persuade parents to buy it for them. A poster in
shops is a visual form of communication – to attract the attention of children and their parents.
4 Budget is too small for expensive advertising media.
5 Cyber Software products are already known to middlemen such as wholesalers and retailers – will be
prepared to buy a new product.
6 Main objective of marketing strategy is to achieve sales of Matrix. Monitoring sales will be a good
indicator of how well the marketing strategy is working. If sales are poor she can analyse the reason
and alter the marketing strategy accordingly.

There is no single correct answer. Answers should consider how all elements of the marketing mix can be
used to increase sales in particular price reductions and promotional activities.

1 A plan to achieve marketing objectives with the given level of resources.
2 Without objectives it is not possible to focus on what has to be achieved or to measure the success or failure of
the marketing strategy. Objectives need to be specific, measurable, agreed, realistic and have time dimension.

1 Laws that control business activity.
2 Factors such as ingredients used in products, how products are described/advertised, product safety,
minimum quality standards.
3 Product safety – ingredients used and products produced must not be harmful to consumers who use
them. Advertising of products must not make claims about them that are untrue or deliberately mislead
consumers.

1 They offer protection from exploitation, dangerous products, misleading advertisements.

2 Student’s own answer, depending on country chosen. Answer likely to focus on product safety,
protection from misleading advertisements, other attempts by producers to exploit consumers.

a When two businesses decide to work together on a business opportunity.
b Gerdau will be able to enter the new foreign market much more easily than if it tried to do this by itself.
Kalyani – opportunity to benefit from the expertise of a much larger steelmaker. Sales and profits of
both companies should increase as a result of the joint venture.
c Reputation of each company might be damaged by activities of the other, e.g. if Gerdau were to cause
pollution in India then Kalyani’s reputation may also be damaged.

1 Wider market – increases potential sales and profits; sales in own country might be falling – new
market replaces lost sales in the domestic market.
2 Consumers in the foreign country may be loyal to existing products and reluctant to buy from foreign
business; government controls in the foreign country might make it difficult for foreign companies to
enter the market, e.g. import tariffs.

1 a A target – something that Sublime wants to achieve, i.e. 2 million units of sales in the first year. [2]
b Advertising, sales promotion. (Note: two different advertising media, 1 mark only.) [2]
c Competitive pricing (1), setting price similar to that of other products already on market (1).
Penetration pricing (1), setting the price below other similar products to encourage consumers to try
the product and build product loyalty (1). [Total: 4]
d Replace the products in decline (1), all products have a life cycle (1), without new products Sublime
will not survive (1). To maintain or increase market share/sales/profit (1), without new products,
market share/sales/profit will fall (1), could lose brand loyalty (1). [Total: 6]
e Product is important because if it does not meet consumer needs then it will not sell (1), no sales
means no revenue or profit (1). However, a good product might be priced too high (1), especially
important in highly competitive markets like the chocolate market, which Sublime is in (1). Answers
should recognise the importance of other elements of the marketing mix. Although product and
price are important, they would not sell a product if consumers do not know that the product exists –
promotion (1), or if consumers cannot find the product to buy it – place (1). [Total: 6]
2 a Incentives to encourage short-term increases in sales or repeat purchases. [2]
b Market research, marketing objectives, marketing budget, marketing mix, control and review. [2]
c Marketing budget is a fixed amount of money (1), determines what type of marketing activities are
possible (1). Without a budget, marketing activities might be wasted (1), a budget can be used to
measure the effectiveness of marketing activities, i.e. have the marketing objectives been achieved (1)?
[Total: 4]
d Money-off voucher (1), could reduce the amount customers have to pay to below that of competitors
(1), if they like the food they may return and be prepared to pay the slightly higher price (1). Buy-one-
get-one-free (1), customers pay for one meal but get a second free (1), encourages short-term increase
in sales but hopefully will help Sung Song to build customer loyalty (1). [Total: 6]
e Marketing strategy is a clear plan for Sung Song’s business, or sets clear objectives for the business to
achieve (1), identifies resources for marketing and promotion of business (1). Strategy will give Sung
Song clear direction and a measure of how well the business is doing (1). Strategy will use market
research information to help decide on the best marketing mix (1). Should help Sung Song to increase
sales, but actions of competitors (1) and other factors outside of Sung Song’s control might prevent
him from achieving increase in sales (1). [Total: 6]

15 Production of goods and services

Student’s own answer, based on Figure 15.1 in the Coursebook (page 203).

1 Skill level – training; motivation – financial and non-financial incentives; automation/technology –
obtain latest technology, how might this be financed? management decisions – training, recruit better
managers, give managers more time, e.g. delegate less-important tasks.
2 More finance available for training and purchase of technology; economies of scale, e.g. technical
economies and managerial economies.

1 Reduction in the cost of waste and possible reduction in employment costs.
2 Yes, if the introduction of JIT is not carefully planned, there is the risk of not having raw materials to
complete customers’ orders on time. Late delivery of orders risks damaging PPP’s reputation.
3 Computer technology – ensures immediate and effective communication with suppliers. Effective
communication between PPP and suppliers is important because it needs to be able to order raw
material supplies instantly and be sure that suppliers receive orders and know when materials must be
delivered.
4 Warehouse employees might lose their jobs because they will no longer be holding inventories.

1 Process of converting inputs into saleable outputs.
2 Goods are physical items that you can see and touch, e.g. furniture, mobile phones. Services cannot be
seen or touched, e.g. banking, legal advice.
3 Improve employee motivation, improve automation/technology, better quality management.
4 Reduce waste to lower costs per unit and increase competitiveness.

1 Spreads risk, increases sales, revenue and profitability.
2 Niche market, which often has high profit margins and less competition.
3 Large fashion retailer – flow production; small independent clothing retailers – batch production;
bespoke wedding dresses – job production.

1 Single unit of output versus mass production; highly skilled labour versus unskilled labour.
2 Size of the market/demand; product being produced; variety of goods required by consumers; costs of
production.

a 7106 – 4490 = 2616
b (6723 − 4127)/4127 × 100% = 62.9%

c Inventory of raw materials and components needed for production process or part-finished goods or
finished goods awaiting sale.
d Use of computers in controlling the manufacturing process, e.g. robotics.
e Advantage: designs can be changed quickly and easily – saves time and cost. Disadvantage: cost of
technology.
f Just-in-time inventory management reduces the costs of holding inventories – will reduce car
manufacturers’ costs and reduce waste. Need to invest in technology to ensure effective communication
with suppliers. Must have reliable suppliers who will guarantee delivery of raw materials and components
when needed to prevent delays to the production process. Should introduce JIT if benefits outweigh costs.

1 Use of computers to design products.
2 Advantages: quicker, more accurate, increases productivity; disadvantages: expensive, might go out of
date quickly and need replacing, maintenance costs.

1 a Products move continuously along a production line. [2]
b 8000/25 = 320 units per week [2]
c Advantage: economies of scale (1), materials can be purchased in large quantities attracting bulk-
buying discounts (1); automation/technology can be used to benefit from technical economies (1).
Disadvantages: machinery breakdown (1), if one part of the production line has a problem it causes
the whole production process to stop (1). [Total: 4]
d Poorly motivated employees (1), less interested in working hard/high absenteeism (1), receive a lower
wage than employees in Company A (1). Training (1), employees are not properly trained / less well
trained than employees in Company A (1), employees who are better trained have more skill and
work more productively (1), producing better-quality products with less waste (1). [Total: 6]
e New technology should improve productivity (1), which reduces costs per unit (1), increases profit
margins or enables Company B to reduce price and be more competitive (1). New technology might
replace some employees (1), which reduces costs (1). New technology is expensive (1), is Company
B able to finance the purchase (1)? Employees will need training, an additional cost (1). Employees
might be demotivated because of fear of job losses or if the work becomes boring (1). (Maximum of 5
marks) Statement for or against based on the points discussed (1). [Total:6]
2 a Inventory of raw materials, part-finished goods or finished goods. [2]
b Land, labour, capital. [2]
c Production completed one stage at a time (1), each batch of goods moves from one stage of the
production process to the next until completion (1). Specialised machinery (1). Each stage of the
process requires specialised machinery that is only used for that stage (1). [Total: 4]
d Reduces inventory costs (1), just-in-time inventory management would mean that Nice ‘n’ Spicy
would not hold raw materials inventories (1), which reduces warehouse costs (1). Fewer employees
needed (1), no inventories means that warehouse employees at Nice ‘n’ Spicy would be redundant (1),
which reduces the firm’s labour costs (1). [Total: 6]
e Arguments for: increases sales, revenue and profits (1); could lead to bigger orders after 12 months
(1); increases the geographical spread of Nice ‘n’ Spicy’s products, which improves brand image
(1). Arguments against: requires a large financial investment in a flow production line (1), can they
afford to finance investment (1)?; if the supermarket does not place future orders, the production line
becomes obsolete (1). Whether they accept or not might depend on how confident the owners are
that the supermarket will place further orders and on the attitude of the owners to risk. (Maximum
of 5 marks) Statement based on these factors and discussion of arguments for and against accepting
the order (1). [Total: 6]

16 Costs, scale of production and

break‑even analysis
Fixed Variable
Factory rent (✔)
Leather used in making some shoes ✔
Electricity used to power machinery ✔
Machinery maintenance ✔
Advertising ✔
Production workers’ wages ✔
Operations manager’s salary ✔
Delivery of finished goods to customers ✔
Safety equipment for production ✔
employees

1 Output Fixed Variable costs Total
(pairs of shoes) costs $3 per pair of shoes costs
$ $ $
0 2 000 0 2 000
1 000 2 000 3 000 5 000
2 000 2 000 6 000 8 000
3 000 2 000 9 000 11 000
4 000 2 000 12 000 14 000

1 Output Total Costs Average Costs
$ $
1 000 5 000 5
2 000 8 000 8
3 000 11 000 3.7
4 000 14 000 3.5
5 000 17 000 3.4
6 000 20 000 3.3
2 Fixed cost spread over increasingly larger levels of output so fixed cost per unit gets smaller as output
increases.


1 Fixed costs do not change with output, e.g. it costs as much to advertise one unit of output for sale as
it does 10 000 units. Variable costs change as output changes, e.g. if output doubles, average costs also
double. Example of variable costs is raw material.
2 Cost of producing one unit of output.
3 Total cost/output

1 Costs which do not change with output. If the plane is empty or full, the fixed costs remain at $14 000.
2 1925/25 = 77
3 a 116 × $10 = $1160
b $14 000 + $1160 = $15 160
c $15 160/116 = $130.69
4 Revenue per passenger is $160, which is less than the average cost of $191.82. Some flights might make
a loss but others are profitable. If EasyAir cancelled flights then it might still have to pay fixed costs of
$14 000.

Technical economies – able to buy more machinery and better machinery for the new factory that will
produce greater output in the same amount of time as the machinery in his current factory; Bulk-buying
(purchasing economies) – buy more raw materials from suppliers so might expect to receive discount for
buying in larger quantities; Managerial economies – as the business is expanding he might employ more
managers to improve decision-making.

1 Economies of scale reduce cost per unit. Help firms to increase profit margins or reduce prices to
become more competitive.
2 If a business grows too big it might have problems managing its workforce effectively, or
communication between managers and employees might become less effective. Diseconomies of scale
will increase unit costs.

a Bulk-buying (purchasing economies) – able to buy the products it sells in its supermarkets from
suppliers in much larger quantities. Might expect to receive a discount for buying larger quantities;
Managerial economies – can employ more managers and attract better-quality managers. Will improve
efficiency and effectiveness of the business; Financial economies – likely to find it easier to borrow
money from banks and other lenders to finance expansion plans. Often be able to borrow large sums at
lower rates of interest than small businesses who might only be borrowing small amounts of capital.
b Provide consumers with a wider choice of products in their supermarkets. If it achieves economies of
scale, it will pass some of the reduced costs to consumers in the form of lower prices.
c If Nakumatt becomes too large then it might become difficult to manage effectively. Decision-making might
be slower so it might not be able to respond quickly to changes in markets. Communication between head
office and individual supermarkets might be less effective – tasks might be completed incorrectly or not
completed at all.

Answers are given in Coursebook, following each stage of activity.


1 Total costs for output level of 600 pizzas = $1200
2 Revenue at a sales level of 600 pizzas = $1500
3 Molly’s profit at a sales level of 600 pizzas = $300
4 Molly’s profit if only sells 500 pizzas = $150

1 Straight line drawn from 0 to $1600
2 600
3 If Molly sells 800 pizzas per week, profit = $200

1 Revenue = Total costs. Output where a business does not make a profit or a loss.
2 To calculate the level of profit that will be earned for any given level of sales. To know how a change in
costs (or revenue) will affect break-even.
3 Benefit: can easily show the effect on break-even and profit of a change in revenue or costs. Limitation:
assumes all output is sold, i.e. there are no inventory costs.

1 Fixed costs, e.g. manager’s salary, do not change with the number of guests. Variable costs change as
the number of guests rises and falls, e.g. costs of providing food for breakfast for each guest, or laundry
costs for washing linen used by each guest.
2 210 × 50 = 10 500 rooms
3 10 500 × 60% = 6300 rooms
4 Owners can calculate: how many rooms they need to sell in order to cover all costs; how much profit
they will make for a given level of occupancy; the effect on break-even and profit of any changes to
revenue (room rates) and costs. However, break-even assumes that all rooms are sold for the same price,
which might not be the case, e.g. might reduce the price of rooms during less busy periods. Some costs
are neither fixed nor variable – cannot be shown on a break-even chart. Break-even might provide a
useful guide about the relationship between revenue and costs, but it does not give 100% reliable data.

1 a A = Revenue; B = Total costs. [2]
b (200/4000) × 100% = 5% [2]
c Fixed costs (1), costs that do not change with the production of Product X, e.g. factory rent (1).
Variable costs (1), costs that change in direct proportion with the production of Product X, e.g. raw
materials (1). [Total: 4]
d Benefit: identify break-even point / output (1), how many units of Product X must sell to cover all
its costs (1), can compare the break-even output with current or forecast sales to measure profit (1).
Limitation: assumes all output of product X is sold (1), inventory costs are ignored (1), if inventory
costs are ignored and there are these costs then break-even and profit calculations are misleading (1).
[Total: 6]
e Can be used in break-even charts (1), might help when setting price (1), can see which costs must
be paid even if they do not sell any output (1), can be used in making decisions about whether or
not to continue producing a product (1). (Maximum of 4 marks for usefulness of cost information.)
However, not all costs can be classified into fixed or variable (1), or even fixed costs will change above
certain output levels (1). Statement about usefulness based on points made (1). [Total: 6]
2 a Point where a business is not making either a profit or a loss. Revenue = Total costs. [2]
b 18 000 + (15% × 18 000) = 20 700 units
c Fixed costs do not change with output/sales (1), SE’s fixed costs might include the accountant’s salary
(1). Variable costs do change as output changes (1), SE’s variable costs will include the raw materials it
uses to manufacture solar panels (1). [Total: 4]
d Purchasing economies (1), increase in sales will have needed SE to buy more raw materials to increase
output of solar panels (1), might have been able to negotiate bulk-buying discounts from suppliers
of raw materials (1), this reduces unit costs (1). Technical economies (1), expansion of solar panel
production might have been achieved through use of more technology/automation (1), machines can
produce a greater output than labour (1), a more capital-intensive production process increases SE’s
productivity (1). [Total: 6]
e Need to discuss the benefits and limitations of break-even charts. SE management can calculate
how many solar panels they need to sell in order to cover all of their costs (1). They can calculate
how much profit they will make for a given level of output/sales (1). They can calculate the effect on
break‑even and profit of any changes to the selling price and costs (1). However, break-even assumes
that SE sells all of its output (1). Inventories and associated costs are ignored (1). Break-even assumes
that all costs can be classified into fixed and variable (1). However, some costs are neither fixed nor
variable and these cannot be shown on a break-even chart (1). (Maximum of 4 marks for identifying
and explaining benefits and limitations of break-even charts.) Supported statement as to whether the
student agrees or disagrees with the managing director’s view of break-even – might provide a useful
guide to the owners about the relationship between revenue and costs, but it does not give 100%
reliable data (2). [Total: 6]

17 Achieving quality production

a It does not know how many cars and which cars have the fault. Cannot risk not recalling a car that has
the fault because this could damage the company’s reputation and affect future sales.
b Quality is extremely important to Volkswagen. In a very competitive market Volkswagen uses factors
other than price to compete with other car manufacturers, i.e. quality. If it has a reputation for
producing high-quality cars then it will also be able to charge a higher price than its competitors.

1 Providing a good/service that meets the needs and wants of consumers.
2 Consumers expect a certain level of quality in the products they buy and often pay more for better
quality. If the quality of a product does not meet the required consumer standard then the customer
will complain, or return the product. If this happens too many times, the reputation of the firm is
damaged and consumers will no longer buy its products. In very competitive markets, consumers know
that if one firm cannot provide them with a quality product, others will.
3 Increases sales/profits, improves brand image, increases customer loyalty, reduces customer complaints
and returns, reduces waste, which reduces costs, lengthens product life cycles, means that wholesalers
and retailers will stock the product and the business can often charge a premium price.

a System of setting agreed quality standards for every stage of production.
b Employees – responsible for making the product and if well-trained and well-motivated likely to produce
quality products. Suppliers – quality of raw materials and components used in production affect the quality
of the finished product. If raw materials or components are poor quality then the finished product will also
be poor quality.
c Premium price – Toyota can charge a higher price for cars than competitors can for similar cars.
Customer loyalty – customers who buy a Toyota car are likely to buy another one when replacing their
car if happy with the quality; helps Toyota to maintain market share. Reduces costs – fewer customer
complaints or returns and less waste reduces costs and increases profits.
d Car market worldwide is very competitive. If Toyota is to maintain or increase its market share it must
satisfy the needs and wants of car buyers. If costs of quality are outweighed by benefits of producing
quality products, e.g. customer loyalty, reduced waste/customer complaints, premium pricing, etc. then
Toyota’s approach to quality and quality assurance is worthwhile.

1 Checking the quality of goods through inspection.
2 Quality of the raw materials, components, labour force and capital machinery used directly influences
the quality of the finished product. If any inputs are poor quality it will affect the quality of the finished
product.

1 a Minimum standard of production or service acceptable to consumers. [2]
b 2150 × 2% = 43 [2]

c Checking at the end of the production process (1), fault might have been made at the beginning of
the production process so resources were wasted completing a faulty product (1). Inspection boring
(1), task of inspection is repetitive and inspectors might become demotivated and take less care in
checking the quality of Component Y (1). [Total: 4]
d Introduce quality assurance (1), – raw materials and other resources used in the production process
must meet required standards (1), quality standards to be agreed for every stage of production and
employees responsible for meeting these (1). Introduce CAD and CAM (1) – use computers to design
and control manufacture of components such as Component Y (1), this improves design quality and
CAM reduces human error in the production process (1). [Total: 6]
e The percentage of Component Y found to be defective at the end of the production process increased
from 0.5% to 2% showing that production of these components is not as good in 2012 as it was in 2011
(1). Management should be concerned about this trend because it shows that quality has fallen (1). Or,
the number of Component Y returned from customers has fallen from 4 to 2, even though Zebtech
produced more of these in 2012 than in 2011 (1). Management should be pleased that the inspection
process has improved (1). However, Component Y is used in heart surgery and even one faulty
component getting through the inspection process is not good and could damage Zebtech’s reputation
(1). (Maximum 4 marks for use of data) Management should be concerned because hospitals will
look for a more reliable supplier of the component/ might not buy any other medical equipment from
Zebtech (1) if they are worried about quality. This will decrease Zebtech’s sales and profits (1). [Total: 6]
2 a Providing goods or services that meet the needs and wants of consumers.
b 46 000 × 1.5% = 690
c Improves reputation / brand image, increases sales/profits, can charge higher prices, reduces waste,
reduces customer complaints, easier to introduce new products to market. (1 mark per relevant
reason) [Total: 4]
d Quality of inputs (1), poor-quality raw materials / demotivated employees / problems with
machinery (1), if the quality of any inputs decreases it will affect the quality of PP’s products
(1). Inspection process is boring (1), quality inspectors become demotivated because the work is
repetitive (1), demotivated inspectors are less careful when checking products and allow faulty
products to be despatched to customers (1). [Total: 6]
e Present system not working as well as previously (1), could look at improving the present system (1).
Quality assurance ensures that inputs into the production process are of required quality (1),
minimum standard is set for each stage of production (1), employees are made responsible for the
quality of their work (1). (Maximum 4 marks) Cost of introducing quality assurance, e.g. setting
standards, training employees, improving machinery, etc. (1), is this outweighed by reduction in
faulty goods and customer complaints (1)? [Total: 6]

18 Location decisions


a Proven manufacturing base, skilled labour, reasonable costs of labour, good management availability,
excellent communication links, strategic positioning close to potential markets.
b Planning restrictions on location near to housing and pollution controls.
c Identified a gap in the local market for its products, which has increased sales and profits potential.

1 Cost of land, availability of land for future expansion, legal controls, availability of suitable/skilled
employees and local wage rates.
2 Cheaper labour – if wage rates are lower in another country it could reduce business costs and help
make the business more competitive. Close to markets – if the other country is closer to the market for
the firm’s products it will reduce transport costs.
3 Planning restrictions might prevent location in a particular area; pollution controls might make it too
expensive to locate in another country; controls to prevent discrimination in employment of workers;
minimum wage laws may increase costs of production.
4 Employees may lose their jobs – redundancy; might have to move themselves and their families to the
new location to remain in employment.
5 Consumers’ demand for the product, e.g. a hairdresser will locate in an area with good-sized local
population.
6 Costs of land, buildings, workforce, and transporting raw materials and finished goods are important
influences on price. Price influences demand/sales. Cost is a major influence on location as virtually
every aspect of the decision has cost. However, being close to the market is more important than cost
for some businesses, especially those that provide a personal service.
7 How: offering grants, low rent for land/factories, tax breaks for new businesses. Why: to provide
employment, earn foreign exchange, improve living standards, earn tax revenues.

1 a A business that is owned (1) and controlled/run by one owner (1). [Total: 2]
b Unlimited liability, limited access to finance for expansion, no-one to share problems/decision-
making with. [2]
c To have total control, to make all decsions, to take all profits, to be her own boss, so she can decide how
long/how often to work, to have a business that uses her skills. (1 mark for relevant point) [Total: 4]
d Size of potential market (1) and how close the salon will be to the market (1). Service such as
hairdressing needs to be close to customers because people are unlikely to travel long distances to
the hairdresser (1). How many competitors are close by (1), or what services do they provide and how
much do they charge (1)? The more competitors who are already established in the market, the more
difficult it will be for Aisha to enter the market (1). [Total: 6]
e Location needs to be close to the market (1), needs to be demand for Aisha’s services (1), number
of competitors will affect Aisha’s entry into the market (1), she might need to employ other stylists
so needs to be located in an area where there are people with these skills (1), or in an area where
employees are able to travel to easily (1). (Maximum 4 marks for location reasons) Although the
location is important, other factors will affect the success of the business – pricing, promotion,
quality of service offered by Aisha (1). Statement that justifies view based on analysis of the location
decision (1). [Total: 6]
2 a Appointed or elected members of the Board of Directors of a company – responsible for determining
and implementing the company’s policy. Some directors might also have a management role, e.g.
marketing director. [2]
b Can sell shares to the general public, has limited liability, must publish its financial accounts. [2]
c Pollution controls (1), laws preventing TE from causing noise or air pollution (1). Planning
restrictions (1), not able to locate the factory close to houses where people live (1). [Total: 4]
d Production employees (1), may lose jobs / get may redundant (1), if employees become unemployed
and cannot find jobs will have less money to spend and standard of living will fall (1). Suppliers (1),
no longer need to supply raw materials to TE (1), reduces sales and profits of suppliers (1). [Total: 6]
e Before relocating should consider: cost of land (1), labour cost (1), skills of local employees (1),
availability of local employees (1), any financial assistance provided by the government of Country
Y (1), competitors in Country Y (1). Will relocating damage TE’s reputation with consumers in
Country X (1)? Potential communication problems between head office and the new factory in
Country Y (1), redundancy costs (1), transport costs of finished goods from Country Y to customers
(1), availability of supplies of raw materials/components in Country Y. (Maximum 5 marks for factors
for and against location in Country Y) Statement for or against relocation with justification, e.g.
benefits outweigh costs (1). [Total: 6]

19 Business finance: needs and sources

Case study (pages 245–246)
a The capital needed when first setting up a business to purchase/rent premises and buy inventories.
b Ingredients used in drinks, wages.
c Money spent on buying non-current assets such as a refrigerated truck.
d To expand her business. This is not available from her profits so she is borrowing money from a bank or
other lender.

1 Premises, machinery/equipment, raw materials, other items used in making clothing, vehicle, office
equipment, shop fittings, etc.
2 Premises, machinery/equipment, raw materials, vehicle, shop fittings.
3, 4 and 5 Student’s own answer.

1 Start-up capital, expansion, temporary cash shortage.
2 Short-term finance is needed for less than one year. Long-term finance is needed for more than one year.

1 Land and buildings do not usually decrease in value. Buildings can be used over and over again for
different purposes. Machinery loses value over time – becomes less efficient with use and eventually
no longer works. Most machines can only be used for one purpose, and are often replaced with better
technology.
2 Computers go out of date very quickly because technology is constantly changing. A three-year-old
motor vehicle will have a useful life that is much longer than that of three-year-old computers.
3 Machinery might have a specific use and be of no use to other businesses. The machine might have
been replaced with better technology in the last three years and buyers of such machinery will want to
purchase the ‘best’ technology available if they are able to afford to do so.

a Not made a profit in the last two years so insufficient internal sources of finance. Long-term debt that
it needed to finance, i.e. had to pay interest on loans or repay some loans. If not making profit then
borrowing needed to be financed from other sources, e.g. selling assets.
b If assets not being used then probably a good way to raise finance to pay off some debts. Assets might
have been costing Cemex money to keep them, e.g. maintenance of empty buildings. However, if assets
might have been used by Cemex in future then not such a good idea because it will have to purchase
new assets in future, which will be more expensive than the assets sold. Cemex had large debts so it
might have been very difficult to raise finance through more borrowing – selling assets perhaps only
option. However, if assets sold included land/buildings then it might have been able to borrow from
banks/other lenders and used land/buildings as collateral. Advantage for Cemex – would still own asset
for future use. Disadvantage – Cemex would have to pay interest on new loans but not likely to be able
to do this as not making profits.


1 Purchase would use all the cash available and leave IE with zero cash balance to pay for day-to-day
expenses. Would need an overdraft for expenses, which would increase IE’s costs.
2 If delivery of raw materials from suppliers is late, or delivery is less than the quantity ordered or
damaged, then IE would not have raw materials needed for production. If unable to produce goods,
unable to supply customers on time – lose sales and reduce IE’s profits.
3 If IE reduces inventory and then there is an increase in demand for products, IE might not be able to
supply customers. This could lose not only this sale but also future sales.
4 IE is owed money from its trade receivables; $12 000 is from customers who have had goods for over
30 days but have not yet paid for these. Improving credit control and recovering these debts more
quickly would increase IE’s cash balances. However, this will not finance the whole $14 000 needed, so
could reduce inventories of raw materials and finished goods by a smaller amount than the directors
suggested. IE could consider just-in-time inventory management. However, this will take time to
organise so is probably a more long-term solution to improving working capital.

•• Lost discount will increase business costs. Might have to increase prices, which makes them less
competitive.
•• Refusing to deliver supplies might result in halting production. If the business cannot produce goods
then it will not have them to sell. It could lose sales and suffer lower profits.
•• Demanding payment when the order is placed will reduce cash that the business has to meet its other
day-to-day expenses. This reduction in working capital could result in the business needing to use an
overdraft – which increases costs.

a Had idea for business. Always looking for other business opportunities. Presumably she finances other
business ideas from the profits of her original business, which means she is prepared to risk her own
money in business ventures.
b New businesses at much greater risk of failing and not being able to repay money borrowed. Banks
consider them to be too great a risk and are reluctant to lend money to them, especially when the
entrepreneur is not investing their own money or has no assets to use as security against bank loans.
c Yes, because she is earning profit that supports her family and has enough left over to finance other
business ideas.

1 Internal finance is raised from within the business, e.g. profit, working capital and the sale or sale and
leaseback of non-current assets. External finance is obtained from sources outside of the business, e.g.
share issue, borrowing from banks and other lenders.
2 Earned by the business through activities; has no cost to the business as a source of finance.
3 Size of business, business’s legal form, amount required, existing borrowing, how long finance is needed for.
4 Find it easier to borrow money because seen as less risky than small businesses. Larger businesses often
have assets they can use as security to obtain loans. Banks often charge a lower rate of interest on loans
to larger businesses than on loans to smaller businesses.

1 a External source of finance. Interest is payable on the amount borrowed and the capital amount must
be repaid at the end of the loan term. [2]
b Interest charge/cost and loan has to be repaid. [2]
c Recent profits of business (1), bank will need to be certain that the business is making enough
profit to be able to pay the interest on any loan and repay the loan at the end of the loan period (1).
Or forecast profit/how much profit George expects to earn from expansion plans (1). Helps bank
to measure risk of loan/will George’s plans increase profits enough to repay amount borrowed (1)?
[Total: 4]
d Leasing (1), premises and machinery could be paid for on a monthly or quarterly basis (1), the cost of
the lease is paid monthly or quarterly and George should be able to do this from internal sources (1).
Government grants (1), governments often help small businesses such as George’s by providing low
interest or interest-free grants (1), OR grants that do not have to be repaid (1). (Do not reward marks
for both). This source of finance is much cheaper than borrowing from banks (1). [Total: 6]
e Advantages: Winston brings capital to business (1), has skills needed to help in George’s expansion
plans (1), can help with the running of the business – which reduces George’s workload (1).
Disadvantages: George must share profits with Winston (1), George no longer has total control over
business decisions (1). Statement as to whether or not George should enter into partnership with
Winston based on advantages and disadvantages (1). [Total: 6]
2 a Limited liability, cannot sell shares to the public. [2]
b Spending on purchase of non-current assets, e.g. machinery, vehicles. [2]
c Retained profits (1), current year’s profit earned by BSE could be kept in the business and used to
finance the new machine (1); Sale of unwanted assets (1), BSE might have land or buildings it doesn’t
use or need, which could be sold to raise money for the purchase of the machine (1). [Total: 4]
d Existing borrowing (1), if BSE already has loans then it needs to think about whether or not it can
afford interest charges for further loans (1), banks might want collateral as security against further
borrowing (1). Does BSE want to own the machine (1)? If so then a bank loan might be the best
option, if not then it could consider leasing the machine (1), both sources have interest payments but
a bank loan has to be repaid at the end of the loan period, whereas a lease spreads the cost over the
lease term (1). [Total: 6]
e Leasing: cost is spread over the period of the lease so no large repayment at the end (1), BSE will not
own the machine (1), leasing company may be responsible for maintenance/repairs, which reduces
BSE’s costs (1). Debenture: interest charges and the amount must be repaid at the end of the loan period
(1), BSE will own the machine (1). Statement as to which is the best method and why based on points
discussed (1). [Total: 6]

20 Cash-flow forecasting and

working capital
1 February
2 Payments are greater than receipts, or outflows are greater than inflows.

1 May: 2; June: 7.
2 Positive cash balance in January and February becomes negative in March and April before returning
to positive in May and June. Temporary cash shortage in March and April may need overdraft facility
if it happens.
3 Knowing that there is a temporary cash shortage in both March and April, the finance manager could
look at ways of increasing cash inflows or decreasing cash outflows to improve the position. If not
possible then make sure the bank agrees to finance the shortage with an overdraft.

1 Month 1 Month 2 Month 3 Month 4
$000 $000 $000 $000
Cash inflow
Receipts 36 43 38 49
Total inflow 36 43 38 49
Cash outflows
Payments 33 46 45 37
Total outflow 33 46 45 37
Net cash flow 3 (3) (7) 12
Opening balance 11 14 11 4
Closing balance 14 11 4 16
2 Monthly closing balances are all now positive – better than having a negative cash balance for month 3.
3 Yes, because it improved closing balances and removed the need for an overdraft. No, because they do
not own the vehicle and in the long run it will cost more to have the vehicle. The one month negative
cash balance when buying the vehicle would have meant using an overdraft, but only for one month.
Would have been better off buying the vehicle rather than leasing it as they would own the vehicle and
cost would have been less.

1 Needed to finance day-to-day expenses. Without cash, a business cannot pay its debts and will not be
able to survive.
2 To avoid negative cash balances that would require use of an overdraft or other form of borrowing,
both of which increase a business’s costs.
3 Using an overdraft or a short-term bank loan.


a Flow of cash into and out of a business over time.
b Metrorail could not pay Sinqobile the money it was due on time. This will have reduced Sinqobile’s cash
inflows and made it more difficult to meet its cash outgoings.
c Sinqobile is a small company and will have lower cash inflows than a large business such as Metrorail.
If Sinqobile has a shortage of cash, banks might not be prepared to grant an overdraft facility or other
short-term borrowing, which could threaten the survival of Sinqobile.
d Make sure that Metrorail and other businesses it supplies services to pay on time. Could try to reduce
costs or delay payments to own trade payables.

1 Capital needed to finance day-to-day running expenses and pay short-term debts of the business.
2 Working capital = current assets − current liabilities
3 Measures the ability of a business to pay short-term debts. Business that does not have enough working
capital may have to borrow the finance required. Will have to pay interest on the amount borrowed –
increases the business’s costs. If the business is unable to borrow the finance required, it may fail.

a She took risks and had a business idea.
b To purchase raw materials for buggies and pay the wages of two employees.
c Measures Shonaquip’s ability to pay short-term debts. If Shonaquip does not have enough working
capital then she may have to borrow the finance required. Would have to pay interest on any amount
borrowed – increases the business’s costs. If the business is unable to finance short-term debts, it
may fail.
d Depends on the time it takes from buying raw materials, making these into buggies for sale, finding
buyers for these and then receiving payment from customers.

1 a Capital needed to finance day-to-day running expenses and pay short-term debts of the business (1).
Current assets − current liabilities (1) [Total: 2]
b A: 1060 − 640 = 420 (1); B: (−180) + 390 = 210 (1) [Total: 2]
c Closing balances in January and February are negative (1), do not have enough cash to pay business
expenses and debts (1), might need to use overdraft facility (1), overdraft is an expensive source of
finance, which increases Cards4U’s costs (1). [Total: 4]
d Increase cash inflows (1), manage trade receivables more effectively (1), offer discount to credit sales
customers to pay for goods sooner (1), increase cash sales (1). Reduce cash outflows (1), buy fewer
inventories (1), negotiate longer credit terms with suppliers (1). [Total: 6]
e No, because without cash Cards4U will not be able to pay its debts and will have no cash to pay for
supplies (1), without supplies nothing to sell, if cannot pay rent then will have to close down (1),
might waste cash buying goods does not need (1), credit customers take longer to pay if not properly
managed (1), if have a cash shortage have to use an overdraft or other short-term finance, which
increases costs (1). Statement agreeing or disagreeing supported by points discussed (1). [Total: 6]
2 a To pay day-today expenses, to avoid the need for an overdraft which increases the business’s costs. [2]
b Difference between cash inflows and cash outflows for a particular time period. [2]

c Jan Feb Mar Apr

$000 $000 $000 $000
Cash inflows
Credit sales 230 250 200 180
Total cash inflows 230 250 200 180
Cash outflows
Payments 160 350 230 160
Net cash flow 70 (100) (30) 20
Opening balance 20 90 (10) (40)
Closing balance 90 (10) (40) (20) [Total: 4]
d Cash inflows may improve (1), recovering money owed from trade receivables on time (1), more cash
coming in to the business to finance cash outflows (1). Cash outflows kept to a minimum (1), avoid
paying trade payables early (1), ensure cash outflows not greater than cash inflows – improves cash
balances (1). [Total: 6]
e ABC has cash shortages from February to March (1), needs to increase cash inflows in these months or
reduce cash outflows (1). Offer discounts to trade receivables to encourage early payment (1), improve
credit control to make sure trade receivables pay on time (1), reduce inventories (1). Delay purchases if
possible (1), ask trade payables for longer credit period (1). [Total: 6]

21 Income statements
Cost of sales: flour, yeast, water, salt.
Expenses: electricity, rent, advertising, machinery repairs.

1 1600 + 1580 + 1550 + 1530 + 1520 + 1500 = 9280
2 Gross profit: 9280 − (160 + 158 + 155 + 153 + 152 + 150) = 8352
Profit: 8352 − 600 = 7752
3 Costs of sales are variable costs. The more Chata sells the more he must make. Expenses are fixed costs,
do not change with output/sales.
4 Another bakery opened up in direct competition. Competitors reduced prices – some of Chata’s
customers have bought from competitors.

1 On the basis of revenue and profit, Company C. However, Company B’s profit is a larger percentage of
revenue than that of Company A or C.
2 a Company A − paid bigger dividend, OR Company C − made highest profit and this might increase
share value.
b Probably Company B − paying good dividend and its profit as a percentage of revenue is much
higher, suggesting that it is better managed.

a Someone who has an idea for a business and is prepared to risk their own capital in the business venture.
b Sold bicycles that have earned revenue greater than costs of sales and other expenses of running his
business.
c To reward Jimmy for taking a risk and setting up business, to reward other people who also risked their
investment in Jimmy’s business, to have profits that could be retained in the business to finance future
growth.
d Money invested in the business by Jimmy and his investors is not included as revenue in the income
statement so it does not affect profit but increases cash balance.

1 Difference between revenue and costs of sales.
2 To attract investors, measure business success, decide whether to continue producing/selling a product
and to finance the purchase of non-current assets.
3 Cash includes all money received by a business from all sources, e.g. owners, investors and sales, as well
as all payments made by a business, e.g. day-to-day expenses, purchase of non-current assets such as
machinery. Profit is the difference between revenue earned from sales – even if cash has not yet been
received – and all revenue expenses – even if some of these have not yet been paid.


Need to link income statement information with comments from stakeholders and explain the reasons for
the comments – see table below.
Change from last year Cause of change
Revenue increased by 4% Lower prices increased sale of toys.
Suppliers Increase in sales means Muza produced more so needed more raw
materials from suppliers.
Customers Lower prices.
Competitors Have lost customers to Muza because of their lower prices so
competitors need to respond if they are to attract customers away
from Muza.
Cost of sales increased by 1% More raw materials were purchased.
Finance manager Need to spend more on raw materials, which increases inventories
and trade payable.
Profit increased by 5% Better control of expenses.
Government Higher profits = higher tax revenue.
Trade union Employees help to increase profits so should be rewarded.
If profit continues to increase then dividends might increase and
market value of shares too.
Lenders Interest is easier to pay when a business is making profits.
Dividends fell by 3% To increase retained profits.
Shareholders Lower dividends received.
Retained profits increased To finance expansion plans.
Potential investor If expansion increases profits then dividends will be high and market
share will also rise.
Employees Expansion increases employment prospects and future profitability.
Senior managers Retained profit is an internal source of finance with no cost to the
business.

a Difference between revenue and total costs; reward to entrepreneurs for taking risk when investing/
starting a business.
b Lower revenue from sales, higher operating costs.
c Reward investors, attract new investors, source of finance for expansion.

1 Gross profit is revenue − costs of sales; profit is revenue − all costs.
2 Reward to investors in a limited company.

1 a Amount earned by business from sales of products. [2]
b Advertising, transport. [2]
c Source of finance (1), retained profit can be used to purchase non-current assets or finance expansion
(1). Attract investors (1), high profits usually means high dividends and increased share value (1).
[Total: 4]

d Employees (1), high profits so possibly higher wages (1), better job security (1). Shareholders (1), high
retained profit so lower dividends (1), retained profit could be used to finance expansion of Company
A and increase future profits/dividends (1). [Total: 6]
e Company A is most profitable (1) so market share likely to increase (1). Company B has lower
retained profit as a percentage of profit so must have paid high dividends (1). Company A has high
retained profits (1). Is this due to finance expansion? Future profitability of Company A could
increase and lead to higher dividends and growth in the market value of its shares (1). Decision as to
which company based on points above (1). [Total: 6]
2 a Managers, employees. [2]
b 5% × $8 500 000 = $425 000 [2]
c Source of finance (1), to purchase non-current assets (1), finance expansion (1), no cost to VM (1).
[Total: 4]
d Recession (1), consumers have less money to spend (1), lower sales on luxury items (1). Competitors (1),
lowered prices / improved quality / increased promotion (1), some of VM’s customers bought from
competitors (1). [Total: 6]
e No, as the fall in profits and lower dividend (1) likely to reduce the market value of its shares (1).
Alternative uses of shareholders’ money invested in VM (1)? Profit as a percentage of the market was
only 2.5% (1), suggests VM is not good at controlling costs (1). Statement for or against shareholder
satisfaction based on points discussed (1). [Total: 6]

22 Statement of financial position

1 Net assets = capital employed.
2 Working capital.

Statement of financial Non-current Current asset Current Non-current Owner’s
position item asset liability liability equity
Inventories ✔
Bank loan ✔
Share capital ✔
Machinery ✔
Overdraft ✔
Trade receivables ✔
Retained profit ✔
Premises ✔
Trade payables ✔
Debenture ✔

1 Something a business owns that will be used for more than one year, e.g. premises.
2 Something a business owes that it expects to pay within the next 12 months.
3 Inventories, trade receivables.
4 Trade payables, overdraft.
5 This is their working capital – important to have more cash coming in from current assets than going
out through current liabilities.

1 Trade receivables = 30
2 Trade payables = 16
3 Borrowed money from a bank or other lender.
4 Working capital.
5 Non-current assets = 100
6 Value on the statement of financial position is what the asset is worth to the business, not what it might
be able to sell the asset for. Land/buildings shown at original cost of these assets to the business –
usually increase in value over time so market value might be much higher than the statement of
financial position value.
7 What the company owes to the owners of JB Plastics.
8 Source of finance to buy new non-current assets/finance expansion plans.
9 Corporation tax.
10 Shareholders.

1 Capital employed shows owners’ equity and non-current liabilities.
2 Current assets and current liabilities changed because some inventories were sold and new inventories
were bought. Cash from some trade receivables was paid to the business and other credit customers
were added. Business paid some suppliers and received credit for more recent purchases so trade
payables are different. Cash is constantly flowing into and out of the business so the cash and bank
balances are different.
3 If the business makes a loss then the retained profit on the most recent statement of financial position is
less than the previous year.

a Monies owed by the business that it expects to pay within the next 12 months, e.g. trade payables.
b (3090 − 2966)/2966 × 100% = 4.2%
c Non-current assets increased. MHC must have bought more of these assets. Non-current liabilities
decreased. MHC must have repaid some of its borrowing. Retained profit increased. MHC must have
made profit in 2012.
d Important source of internal finance used to buy non-current assets. ‘Best’ source of finance because
no cost.

1 a Owners’ liability for business debts is limited to the amount invested in the company (1). Cannot be
forced to use personal wealth to finance the debts of the company (1). [Total: 2]
b Money invested in the business by the owners of a limited company. [2]
c Non-current assets are resources owned by the business (1) which will be used for a period longer
than one year (1). SSF needs a factory to make its products in (1), needs machinery to make the
products (1), needs vehicles to transport the products to customers (1), needs computers to control
inventory and finance, etc.(1) [Total: 4]
d Banks (1), if SSF asks for a loan the banks will want to know the value of its non-current liabilities (1),
if existing borrowing is high then the banks might think SSF is too risky. However, would also look
at non-current assets as land/buildings might be used as collateral against any further borrowing (1).
Shareholders (1), as owners of the company want to know how much the business is worth (1), can
also see if the business is well managed (1), e.g. does it have good working capital (1)? [Total: 6]
e Net current assets is SSF’s working capital (1), value of working capital decreased (1) by 35% (1),
means that more cash left the business than came into the business (1). If the trend continues, SSF
might have a cash shortage (1), might not be able to pay debts, might have to use an overdraft (1), this
can be expensive (1). Net current assets are positive so not currently a problem (1). [Total: 6]
2 a Land, buildings, machinery and vehicles. [2]
b Monies owed by the business to lenders. Do not expect to repay this amount within next year. [2]
c Inventories (1), raw materials, part-finished goods, finished goods (1). Trade receivables (1), money
owed to the business by customers who have been sold goods on credit (1). [Total: 4]
d Non-current liabilities increased (1) by 0.1 (1), BJ must have borrowed money long term (1), net
current assets decreased (1) from 0.2 to (0.2) (1) OR BJ might have cash-flow problems (1). [Total: 6]
e Internal stakeholders might use the information to identify problems (1), probably have a better
understanding of the financial information (1), internal stakeholders know how statements of
financial position figures have changed and therefore have a better idea of how the business is
currently performing (1). External stakeholders might not understand the statements of financial
position (1), information becomes out of date as soon as the statement of financial position is
produced, external stakeholders will not know how the figures have changed (1). Statement agreeing
or disagreeing supported by relevant points (1). [Total: 6]
23 Analysis of accounts

•• Will business have profits to reinvest? Senior managers – will they be able to replace non-current assets or
carry out expansion plans from internal sources of finance, or will they have to borrow funds?
•• Will business continue to exist? Employees – job security.
•• Will future profits rise or fall? Shareholders – rise or fall of profits means increase or decrease in dividends.
•• Will it be able to pay its debts? Suppliers – will they get paid for goods supplied on credit?
•• Will it be able to repay long-term borrowing? Lenders – will they get back money loaned to the business?

1 Risen each year by 1% on the previous year. Business is performing better each year.
2 Company A – increased, Company B – fallen. A has performed better than B .
3 A has not controlled overhead costs as well in 2012 as previously.
4 A’s gross profit margin has risen. B’s gross profit margin has fallen. However, B’s gross profit margin is
still higher than A’s. A’s profit margin has remained unchanged, B’s profit margin has fallen from 10%
to 9%. Figures suggest that B has not controlled overhead costs as well as A. Over the period, B has
performed better than A because even though gross profit and profit margins have fallen, they are still
higher than those of A.

1 Profitability ratio 2012 2013
Gross profit margin 45% 48%
Profit margin 15% 14%
Capital employed 52.5% 58.3%
2 Gross profit margin has improved but not the profit margin. Suggests that TT has not controlled
overhead costs as well in 2013 as in 2012. However, TT is more efficient in use of capital because capital
employed has increased.
3 a Pleased profit has increased because this would increase dividend and market value of shares.
b Increase in profit might mean an increase in wages.
c Revenue increased. If this is because TT has sold more goods then suppliers will be pleased because
they will be supplying more goods to TT.
d Increase in profits means increased tax revenue.
4 Bank will want to know if TT is making enough profit to be able to pay the interest on the loan and
also to repay the loan when due. Although profit margins have fallen, return on capital employed
has increased. Suggests that TT is using capital efficiently and is likely to use any new capital just as
efficiently. Bank will want to see how TT thinks plans will affect future profits before lending money,
but TT is not too much risk so the bank will probably lend the money. Might want non-current assets
as security against borrowing.


1 2012 2013
Current ratio 1.5:1 1.7:1
Acid test ratio 1:1 0.7:1
2 Liquidity position improved if the current ratio is used as a measure. However, when inventories
are deducted from current assets to show the most liquid assets, liquidity position worsened
between 2012 and 2013 because the acid test ratio is now 0.7:1, i.e. for every $0.7 coming into TT
it spends $1.
3 Reduce inventories; recover money owed from trade receivables more quickly, e.g. offer early payment
discounts to credit customers.

1 GP margin 2011: (114 217 / 1 162 340) × 100% = 9.8%
GP margin 2012: (117 998 / 1 328 300) × 100% = 8.9%
Profit margin 2011: (56 002 / 1 162 340) × 100% = 4.8%
Profit margin 2012: (41 458 / 1 328 300) × 100% = 3.1%
2 ROCE 2011 = (56 002 / 533 670) × 100% = 10.5%
ROCE 2012 = (41 458 / 590 000) × 100% = 7.0%
3 All three ratios indicate that the company performed less well in 2012 than 2011.
4 Current ratio 2011: 805 394 / 784 856 = 1.03:1
Current ratio 2012: 1 087 365 / 1 066 017 = 1.02:1
5 Liquidity position in 2011 is not very good because the ratio should ideally be between 1.5:1 and 2:1.
However, in 2012 liquidity position is worse as the current ratio has fallen to 1.02:1. Results suggest that
the company may have cash‑flow problems.

1 Gross profit / revenue × 100%
2 Profit / revenue × 100%
3 Profit / capital employed × 100%
4 Current assets / current liabilities
5 Current assets − inventories / current liabilities
6 Liquidity is cash. Without cash a business will not be able to pay its debts and will not be able to
survive. In the long run a business must be able to earn profit to survive. They are both important
but in the short run cash is more important than profit, and in the long run profit is probably more
important.
7 Only useful if comparing results over time or between companies. Different companies prepare their
accounts using different methods so direct comparison might be misleading.


1 and 2
Stakeholder Stakeholder Objective Interested in: Reason
2 Employees 1 Higher wages Profit Employees help to earn profits so should
receive a share. A business making high
profits will be able to afford to pay higher
wages to its employees.
2 Job security Retained profit Retained profit used to modernise and

expand a business will help it to remain
competitive/be more competitive and ensure
the long-term survival of the business.
3 Lenders 1 Interest payments Profit Interest on loans paid out of profit, so the
more profit the business earns, the easier it
is to pay interest on borrowing.
2 Repayment of loan Profit and To repay a loan the business will have to
liquidity earn profit over the life of the loan and use
some of this profit to build up cash balances
that can then be used to repay the loan
when due.
4 Suppliers 1 Paid on time for Working capital Does the business have enough cash
goods supplied on coming into the business to meet its debts?
credit
2 Increase orders for Revenue/ If revenue is increasing because the business

supplies retained profit is selling more, then suppliers might expect
to receive more orders for raw materials and
components. Also a business that is using
retained profit to expand is likely to increase
its demand for supplies.
5 Government 1 Tax revenues Profit The higher the profit, the higher the tax
revenues for government.
2 Employment Profit/retained Profitable businesses and businesses using

profit profits to expand provide employment.
This reduces unemployment and reduces
government spending on any benefits to the
unemployed.
6 Consumer 1 Lower prices Retained As businesses expand, they often benefit
profits from economies of scale. These economies
reduce average costs and might enable the
business to reduce its prices.
2 Continued Profits Consumers want to be able to buy the

production products they like and trust. If a business
is profitable then it is likely to continue
producing products and also any spare parts
that might be needed to repair products.


1 Shareholders – not pleased with performance as the company not performing as well; may affect level
of dividends they receive and the market value of shares might fall.
Employees – decrease in performance might mean no/low pay rise. If the downward trend continues,
some employees might be made redundant.
Government – lower profits reduces tax revenues.
Lenders – might be concerned about the company’s ability to pay interest on borrowing and its ability
to repay the loan when due.
Managers – senior managers will want to know why the company is performing less well. Ratios might
indicate that middle managers are not doing their job properly and this could affect salaries, bonuses,
promotion prospects and even their job security.
2 Unlikely to see the company as a good investment prospect because profitability ratios indicate that the
business is doing less well than in previous years. If this continues then dividend payments and share
values are likely to fall.

Senior managers might use ratios to measure the performance of middle managers; employees might use
ratio analysis to assess job security.

1 a The job an employee does is no longer needed by the business. [2]
b 10 000 / 50 000 × 100% = 20% [2]
c Price (1), if Josep is charging a lower price than competitors he might sell a greater quantity (1).
Consumer income (1), the more income consumers have to spend, the more goods Josep will be able
to sell (1). [Total: 4]
d Government (1), interested in Josep’s profit (1), Josep will pay tax on profits and, as these have
increased, the government will earn higher tax revenues (1). Suppliers (1), increase in sales means
increase in output (1), Josep will need more raw materials from suppliers, which increases their sales
and profits (1). [Total: 6]
e Sales and profit both increased (1), however, profit margin only increased slightly from 28% to 28.5%
(1), so suggests Josep has not controlled overheads well in Year 2 (1). ROCE increased from 20% to
24% (1), shows Josep used capital more efficiently (1). Statement for or against whether Josep should
be pleased based on evidence such as that outlined above (1). [Total: 6]
2 a Profit / revenue × 100% [2]
b Primary, tertiary. [2]
c Benefit: ROCE (1), shows how efficient the company has been in use of its capital to earn profit (1).
Limitation: difficult to compare one business with another (1) because businesses might use different
methods to produce financial data in their accounts (1). [Total: 4]
d Difference between gross profit margin and profit margin is overheads (1). Service industries do not
need raw materials (1) so have very high gross profit margins (1) but they do have high overheads (1),
e.g. employment and buildings (1), which reduces the profit margin (1). [Total: 6]
e All businesses will not have the same costs (1), all businesses will not charge the same price (1), some are
large businesses and some are much smaller (1), some businesses operate in mass markets and others in
niche markets (1), some businesses will be more efficient than others (1), some businesses might be new,
others well established (1). [Total: 6]

24 Economic issues
1 Recession, economic growth, unemployment, inflation, GDP, investment, interest rates.
2 Keeping interest rates low at 0.5%, forming a committee of economic and financial experts to make
further recommendations about how to improve economic growth.
3 To encourage economic growth.
4 Fall in demand for its products, which reduces sales and profits.

a 9.5%
b 13%
c 36.8%
d Fall in consumer demand, reduced investment by existing and new businesses because of a fall in
business confidence, fall in economic activity.
e Fall in business confidence leading to a lack of investment that resulted in a rise in unemployment and
lower consumer demand. Exports will have fallen and this has worsened the balance of payments. The
country’s GDP fell as a result of the combination of these factors.

1 $4000 per month
2 He will have $250 less per month to spend. This will reduce his spending, especially on luxury goods
and services.

1 Country A = $168 000 Country B = $156 000 Country C = $192 000
2 Country B
3 Student’s own answer, depending on country-specific data.

Student’s own answer, depending on country-specific data.
Case Study (page 308)

a Fallen from around 12% to around 6% – almost halved.
b GDP more than doubled in this period.
c Lower interest rates have encouraged businesses to invest. Consumers have had a larger disposable
income and they have increased their demand for goods and services. Businesses have expanded output
and unemployment will have fallen.
d to f Student’s own answers.


1 2009: 8396; 2010: 5417; 2011; 5146; 2012: 5146
2 Yes, because the interest rate is the lowest it has been for five years so he will pay less for the amount
he wants to borrow. However, he needs to know if interest rates are likely to remain at 9.5% for the
foreseeable future. If they are likely to rise then he will have to pay a higher interest amount per month
and might not be able to afford to do this out of his earned income.

1 Positive balance of payments, low inflation, low unemployment and economic growth.
2 Increase/decrease taxes, interest rates and government spending.
3 Growth – rise in GDP and falling unemployment; boom – business profits at the highest and a high
level of demand for goods and services causing prices to rise; recession – less investment by new and
existing businesses and a fall in consumer demand and business profits; slump – very low business
confidence and high levels of unemployment.
4 Direct taxes include: income tax, corporation tax. Indirect taxes include: value added tax, import
tariffs/customs duty, sales tax and excise duty.
5 Reduces consumers’ disposable income. Consumers have less money to spend. Will spend less on
luxury goods and will save less. Might use previous savings to maintain their standard of living.
6 Decrease in interest rates increases consumers’ disposable income, which increases spending. This will
increase sales for most businesses, especially those that provide luxury goods and services.
7 An increase in interest rates will increase the cost of borrowing. Businesses may decide to delay any
expansion plans or delay the purchase of expensive capital goods such as machinery, which they need to
finance through borrowing. Consumers’ disposable income will fall and this is likely to decrease demand for
luxury goods such as cars. Businesses that produce luxury goods might reduce their prices or offer incentives
such as 0% finance, or low rates of finance, to encourage consumers to buy these expensive goods.

1 a When a whole economy shrinks in size. [2]
b Decrease in business confidence, consumer demand falls, unemployment rises, lower output, lower
economic growth. [2]
c If they are limited companies they will have to pay corporation tax (1), this is a tax they must pay on
profits earned (1). Value added tax or sales tax (1), this tax is likely to increase the price of the goods
sold (1). Import tariff or customs duties (1), retailers will have to pay these taxes on goods that are
imported into Country A (1). (2 marks per tax identified and explained) [Total: 4]
d Lower sales/consumer demand (1), manufacturers will reduce output, may reduce size of the
workforce/ make employees redundant (1). Fall in business confidence (1), reduce investment in new
technology (1), may become less competitive and sales and profits will fall (1). [Total: 6]
e Reduce interest rates (1), this decreases the cost of borrowing, which encourages investment by
businesses in new technology/growth plans (1), consumers might now borrow money to spend
on more expensive goods and services such as houses and cars. Increase government spending/
government borrowing (1), spend money on building hospitals, schools, motorways, etc. or
employing more doctors, nurses, teachers, etc. – increases the amount of money in the economy (1).
Recommendation depends on current level of interest rates (1), if they are low then reducing them
might not have the desired effect (1) OR how easy will it be for government to borrow money (1)? if
current government borrowing is very high then might not be able to borrow the money needed to
increase spending (1). [Total: 6]

2 a Difference between the value of exports and the value of imports of a country over a one-year period. [2]
b Low unemployment, economic growth, positive balance of payments, low inflation. [2]
c Increasing GDP (1), the country is producing more goods and services (1). Its balance of payments is
healthy (1), it is exporting more than it is importing (1). [Total: 4]
d Decrease in corporation tax: will increase profits after tax (1), higher dividends for investors (1) or
higher retained profit (1). Decrease in interest rates: will reduce the cost of borrowing (1), businesses
will be able to borrow finance more cheaply to finance expansion (1), this is likely to increase the
future profitability of businesses (1). [Total: 6]
e Import tariffs are a tax on goods from other countries (1). Higher import tariffs will increase the
price of goods from other countries (1). Imported raw materials will be more expensive (1), foreign
competitor goods will be more expensive (1), higher imported raw material prices will not help local
businesses who use them because their costs of production will be increased (1). However, it might
help local businesses who use local materials produce similar goods to those that are imported
because they will once more be competitively priced (1). [Total: 6]

25 Environmental and ethical issues

1 Students should be encouraged to evaluate whether the advantages of the location of the factory, i.e. the
positive externalities, outweigh the disadvantages, i.e. the negative externalities. There is no ‘right’ answer.
Arguments in support of the location might focus on issues such as improved products for consumers,
employment opportunities in an area of high unemployment, the sharing of ideas with other businesses
and the benefits to the local community of improvements in the local infrastructure. The location of
Loreli’s factory and the improvements it could bring in infrastructure and product expertise might
encourage similar businesses or support industries to also locate in the same area.
Arguments against might focus on the general environmental impact of the location of the factory and
how this might have a negative effect on the local population. Issues such as pollution and destruction
of ‘green spaces’ and how these might affect the local population’s quality of life/living standards and
the loss of possible income to the local area from any possible reduction in tourist numbers.
2 Might approve because: provides employment, which reduces government spending on payments to
the unemployed; improves the standard of living for the local community through employment and
improved infrastructure; contributes towards growth of the economy. Might not approve because:
might be politically unpopular – how soon is the next election for government? (this may not be
relevant to all countries); action of pressure groups; might want to protect the environment – could
have as one of its objectives to reduce pollution in the country.

1 Government, local community, pressure groups, suppliers/construction companies, airlines, airport
customers.
2 Construction traffic, increased traffic congestion once the airport is opened, noise pollution and air
pollution once the airport is operational.
3 Economic benefits: employment opportunities for both the construction and the operation of the new
airport – increases consumers’ disposable income. Consumers will spend some of this ‘extra’ income
on goods and services produced in Country X – increases the output of domestic businesses. Increase
in tourism – increases exports; earns foreign currency for Country X – tourists will spend money in
local businesses, e.g. hotels, restaurants and tourist attractions.
4 More aircraft increases noise and air pollution; land used for the new airport cannot be used for more
environmentally friendly uses; trees, plants and animal habitats will be destroyed forever; could affect
the health of local residents.
5 Student’s own answer, depending on answers to previous questions.

1 Noise, air and land pollution; possibility of chemical leaks; effect on local water supplies and the habitat
these provide for birds and other animals.
2 Benefits: provides employment, which increases consumers’ disposable income and improves living
standards. Limitations: air, noise and traffic pollution; health issues arising from the toxic chemicals
used in tyre manufacturing; will water and energy supplies to local households be reduced as a result of
the factory usage?
3 Passing and enforcing laws to prevent/control the level of pollution. Planning laws to restrict the size
of the factory or its hours of operation to protect local residents from 24-hour noise, traffic or air

pollution. Could require ABC Tyres to offset its damage to the environment with schemes aimed at
helping the environment, e.g. planting trees.

2 Not only unethical, it is illegal.

a Ignored warnings about unsafe conditions of buildings, low pay, limited employees’ rights, dangerous
working conditions and child labour.
b Should not buy goods from suppliers who provide worse conditions than would be expected if they
were being manufactured in the buyer’s own country. However, this does not mean that low labour
costs are unethical as long as employees are being paid the ‘going rate’ for Bangladesh. Western buyers
are, after all, looking to source supplies at the lowest cost. But if Western retailers are then selling these
goods using very high profit margins, is it ethical that they should do so when wage rates are so low?
c Western buyers have a responsibility to ensure that the goods they source are being produced ethically.
They could send representatives from their company to visit Bangladesh and inspect the factories. The
power is with the Western buyers and they could force suppliers in Bangladesh to behave ethically
otherwise they will not buy their products.
d Children should be receiving an education and not being forced to work simply because they are
cheaper than adults. Children are more likely to suffer injuries in the workplace as they are not as
physically well developed as adults and are less aware of potential dangers in the workplace.
e Pass laws stating the minimum age for employees; ensure that all children receive an education; fine
or close down businesses that break the law; provide financial assistance to families so that they do not
have to rely on the wages of their children.

1 Causes different types of pollution, uses up natural resources, soil erosion, destruction of animal
habitats, production of waste, emission of greenhouse gases, uses up non-renewable energy resources.
2 The effect of business activities on unrelated parties.
3 To analyse the social costs and social benefits of a project. Benefits should outweigh cost.
4 A business activity that has a positive overall impact on the environment and its stakeholders, ensuring
future survival.
5 It is in the long-term interests and survival of a business to act ethically.
6 A group of people who join together for a common cause, often to change the behaviour of business.
7 Pollution targets and waste disposal regulations; government might fine, close down or even imprison
business owners who ignore these targets and regulations; taxes or levies on commercial energy use; to
encourage businesses to be more energy efficient.

1 a A business activity that has a positive overall impact on the environment and its stakeholders. (2)
b The effect of business activity on unrelated parties. (2)
c Positive: provides employment (1), Juan Cruz will pay wages to local people to work in his shrimp
farming business (1). Negative: damage to marine biodiversity (1), the business is taking too many
shrimp from the sea and soon none will be left (1). [Total: 4]
d Uses energy sources (1), might use sources of energy that cannot be renewed such as coal and gas (1),
use of these energy sources also creates greenhouse gases that are bad for the environment (1). Uses

natural resources (1), might take too many shrimp from the sea/overfishing (1), could lead to scarcity
of shrimp, which will increase prices (1). [Total: 6]
e Impose a tax on energy use (1), increase the price of energy to the business, which increases costs of
production (1), Juan Cruz will look at ways to reduce energy consumption/use more energy-efficient
production methods/use alternative, more environmentally-friendly energy sources (1). Set standards
for businesses to meet when using renewable resources, e.g. shrimp (1), set a quota for the amount of
resource a business can use in a given time period (1), reduces risk of resource becoming scarce (1).
[Total: 6]
2 a A group of people who join together for a common cause (1) to influence business activity/
government policies (1). [Total: 2]
b Exploiting employees by paying very low wages, employing child labour, unsafe/unhealthy working
conditions. [2]
c Improves reputation/brand image (1) increases sales/profits/investment (1). Motivates employees (1),
easier to retain and recruit employees (1). [Total: 4]
d Encourage consumers to boycott/stop buying Khan’s products (1), reduces sales and profits (1),
could cause closure of Khan’s business. Could persuade government to ban import of supplies from
countries acting unethically (1), Khan will not have enough supplies of raw materials (1), will not be
able to produce a full output so will lose sales (1), or have to look for other suppliers who might be
more expensive (1). [Total: 6]
e If he does not change supplier then consumers may boycott his goods (1), this will decrease sales and
profits (1), could result in closure of the business (1). If he does change then costs will rise (1), might
have to increase the price of garments (1), less competitive so consumers will buy elsewhere and
Khan’s market share/profits will fall (1). [Total: 6]

26 Business and the international

economy
1 Carlos may be able to buy better-quality raw materials at a lower price from other countries who are
members of the free trade agreement.
2 It improves economic and technical cooperation between member countries and the free trade
agreement will reduce trade barriers such as tariffs and quotas between member countries.
3 The free trade agreement encourages trade between member countries. This will increase competition
from businesses in other countries for Carlos and other businesses in his country.

a It operates in more markets – helped to increase sales and profits. Growth has led to economies of
scale – reduced Starbucks’ unit costs and increased profit margins.
b Increased marketing and distribution costs; competition from local businesses; government legal controls,
e.g. minimum wage laws; consumers loyal to local competitors; language and cultural differences.
c China has a very large population; the economy of China is growing fast so consumers have higher
disposable incomes.
d Increases competition so they might lose customers and market share and this will reduce revenue and
profits. Local competitors might have to reduce their prices to compete with Starbucks. This reduces
profit margins. Might have to increase marketing activities to keep customer loyalty. This increases
costs. Some local shops might not be able to compete with Starbucks and will close down.

1 Country Y 2011 = 24%; 2012 = 40%
Country Z 2011 = 16%; 2012 = 28%
2 Although there has been a reduction in competition from clothing imports from Country X, there has
been an increase in clothing imports from Countries Y and Z. The total value of clothing imports has
not changed between 2011 and 2012 so the policy has not been successful in reducing competition from
imports. Reduced competition from imports should increase sales for local clothing manufacturers.
However, the quality of locally produced goods might not be as good as that of suppliers from
Countries X, Y and Z. Also their prices might be higher. Consumers in Country B will not be happy if
they have to pay higher prices for clothing that is of poor quality. Also, the governments of Countries
X, Y and Z might place quotas or tariffs on goods exported to them from Country B. This would reduce
sales and profits for other businesses in Country B and could reduce the country’s economic growth
and employment.

1 Consumers benefit from a wider variety of products at lower prices. Increases cooperation between
countries and promotes peace and understanding of different cultures. Reduction in prices contributes
to greater exports and incoming foreign currency. Attracting more businesses to invest in their country
can help governments achieve their economic objectives such as lower unemployment and increased
economic growth.

2 Quotas limit the amount of goods that can be imported or exported. Tariffs are a tax on imports and
exports that has the effect of increasing their prices.
3 Reduces trade barriers between member countries, which encourages trade and investment. Trade
agreements often improve economic and technical cooperation between member countries.

1 Are there any regulations or controls on foreign investments? Does the government provide any
financial incentives such as tax incentives? How stable is the country’s currency?
2 Infrastructure affects operational efficiency. Businesses need reliable power supplies to make sure
that production is not disrupted; good transport facilities for the delivery of raw materials and the
distribution of finished goods to customers; effective communication systems so that the business can
communicate easily and quickly with other businesses, suppliers and customers.
3 Social, political and operational factors such as skills and productivity of the labour force, political
stability of the country, availability of raw materials and cost of land and buildings.
4 MNCs exploit countries’ natural resources, cause environmental damage; domestic businesses are
unable to compete and may be forced to close down; could change local culture.

Stakeholder Positive impact Negative impact
Shareholders Potential to increase dividends and value of There are likely to be
shares if the multinational increases overall high costs of becoming a
profits. multinational and if the
venture fails it will reduce
profits and reduce dividends
and the market value of
shares.
Managers Managers might be given the opportunity to Some of the work currently
work in other countries. done in the home country
Managers might have greater promotion might be transferred to
opportunities. another country and could
threaten job security.
Customers They will be able to receive goods more quickly Some production might be
if produced in their own country/region. moved to other countries and
Increases customer choice in the country/ this might affect quality and
region where the multinational locates. availability.
Suppliers Suppliers in the country where the Multinationals have stronger

multinational locates should sell more goods bargaining power and might
and increase their revenue and profits. force suppliers to reduce their
prices, which will reduce their
profit margins.
Government Government where the multinational locates The multinational might use
will benefit from increased tax revenue. all of the country’s natural
resources and then leave.
Local community Increased job opportunities, which increases Risk of pollution caused by
the standard of living. the multinational.


a Availability of a large, hard-working and educated workforce. Close to markets where finished goods
are sold, which reduces transport costs.
b Reduces costs of production. Close to the North American market that GM sells to. Reduces unemployment.
c GM will need to employ many employees in its new factory. Increases government tax revenue.
Employees will pay tax on their wages and GM will pay tax on its profits. Improves Mexico’s balance of
payments. GM will export the cars produced in Mexico to North America. GM cars no longer need to
be imported into Mexico as they are now produced there.
d There are potential drawbacks of MNCs locating in Mexico such as: possible environmental damage to the
area where the factories are located; air, noise and traffic pollution; employees might be exploited by the
MNCs, e.g. paid low wages; they might repatriate profits; the profits earned will not benefit the Mexican
economy; they might exploit Mexico’s natural resources and, once these are exhausted, leave the country.

1 Easier access to raw materials, lower cost of labour, economies of scale, access to bigger markets, lower
production costs, spread of risk, premium pricing for global brands.
2 Increases choice and quality of goods and services, improves country’s reputation, increases
employment opportunities, generates income in the form of tax, improves infrastructure, knowledge-
sharing, improves balance of payments.
3 Undue influence on the government, increased competition, environmental damage, exploitation of labour
and natural resources, repatriation of profits, negative social impact, less sense of social responsibility.

1 GBP = 49 250; euro = 41 500
2 GBP

a It has production and R&D bases in countries throughout the world. It has suppliers of raw materials in
different countries and it sells its cars throughout the world.
b Because it buys raw materials and components from different countries and its cars are sold in many
different countries too.
c South African factories can supply components and assemble cars at lower cost than in other countries.
Also they are well placed geographically for exporting cars to other countries. If the ZAR appreciates
against other currencies then local sales of cars produced in South Africa might fall because imported
cars will become cheaper as a result of the appreciation of the ZAR.
d Exports from South Africa will be more expensive so car sales to other countries are likely to fall.
e A depreciation of the ZAR against other currencies will make exports cheaper so car sales from South
Africa to other countries will probably rise.

1 The value of a currency falls against other currencies.
2 By increasing or decreasing import and export prices.
3 If a country’s currency appreciates then its exports will be more expensive and imports into the country
will be cheaper.
4 If a country’s currency depreciates then its exports will be cheaper and imports into the country will be
more expensive.


1 a The process by which countries are connected to each other (1) through the trade of goods and
services (1). [Total: 2]
b A business organisation that has operations in more than one country (1), a business that sells in
different countries (1). [Total: 2]
c Increases the price of exports (1), will reduce sales of its products in foreign markets (1). Reduces the
price of imports (1), will reduce Medico’s costs of production (1). [Total: 4]
d Impose tariffs (1), increase the prices of imported goods (1), protects local businesses from cheaper
competitor products from overseas (1). Set quotas (1), set a limit on the amount of a good that can be
imported (1), consumers will still have to buy locally produced goods (1). [Total: 6]
e Could bring both benefits and problems for the economy of Brazil (1); any relevant benefit,
e.g. increases consumer choice and quality of products, increases employment opportunities, or
drawback, e.g. increases competition, exploitation of labour (Maximum of 2). Explain one benefit,
e.g. the MNC will employ local people and this may increase their skills or increase their income,
which improves living standards, and one problem, e.g. the MNC will increase competition for local
producers. The larger MNC will be able to charge lower prices because it enjoys economies of scale
and this will reduce revenue and profits of local firms (Maximum of 2). The benefits outweigh the
problem, or the problems outweigh the benefit (1 mark). [Total: 6]
2 a The foreign country (1) where a multinational sets up its operations (1). [Total: 2]
b Can sell shares to the public (1). Owners have limited liability (1). [Total: 2]
c Availability of resources (1) – is there a good and reliable supply of raw materials at a reasonable price (1)?
Labour supply (1) – are there available employees with the right skills or who are capable of being
trained (1)? [Total: 4]
d Depreciation is a fall in the value of the currency (1), reduces the price of exports (1). Halim Leather
will sell more goods in foreign markets (1), profits will rise (1), easier to enter new foreign markets (1),
foreign governments might impose a tariff or quotas to reduce the increase in competition for local
businesses of cheaper imports (1). [Total: 6]
e Level of competition in foreign market (1), will consumers want to buy its products (1)? It must gain
market share in the foreign market (1). Costs of entering the foreign market might be too costly (1),
might be less risky to expand in its home market (1), if revenue from sales in the foreign market is
greater than costs then profit will increase so it will be successful (1). [Total: 6]

Cambridge IGCSE and O Level Business Studies Section 1 Understanding business activity
Exam-style case study answers

The answers have been written by the authors and aim to provide a summary of appropriate content for answering each question.
However, the suggestions provided are not intended to be a definitive guide to all acceptable answers; each response should be
assessed on its own merits.
Marking guidance for case study questions has been provided for this case study below, however this same guidance can be
followed when marking any case study questions from the coursebook or the Cambridge Elevate enhanced edition. Please note,
the way marks are awarded may differ in examination to the guidance provided in this resource.
Case study: Tabansi’s Drinks and Smoothies (pages 68–69)

It is important that students apply their understanding of business concepts to the specific business scenario given in the case
study. For instance, they could make appropriate use of the following features: soft drinks business/market, retained profit,
expanded product range, wider market, market trader, more ambitious, purchase production unit, savings/borrowing for start-up
capital, small business adviser, business plan. There may be further examples of application which have not been included here,
but for which students could be credited.
Question 1a Explain two characteristics that have made Tabansi a successful entrepreneur.
Possible answers could Characteristics

include • have an idea for a new business
• prepared to invest their own savings
• accept the risks of failure
• want to make all the decisions about the management of the business
Sample explanation
Entrepreneurs have an idea for a business. Tabansi sold soft drinks to tourists. He has expanded
the range of products sold. The business has been a success because it has expanded.
Marking guidance • Total available marks: [8]

• One mark should be given for each relevant characteristic: [max 2 marks]
• Up to three further marks can be given for each explanation, of which one of these marks
must be applied to the specific business context of this question. This means clear use of the
case study material must have been shown supporting the point being made: [max 6 marks]
Question 1b The small business adviser told Tabansi that ‘he should set clear objectives for his business’.
Explain the importance of each of the following objectives to Tabansi’s business. Which objective
do you think is the most important? Justify your answer.
Possible answers could Profit • reward Tabansi for his investment in the business – he receives
include a financial return for the risk he has taken
• can be used to invest in expansion of the business – which
might help the business enter new markets, compete better with
larger businesses
• needed to help convince the bank to provide a loan – to finance
growth plans
© Cambridge University Press 2018 Exam-style case study answers – Section 1

Growth • more profits for Tabansi – which he could use to plough back
into his business or improve his own lifestyle
• less risk – can better compete with larger businesses
• long-term objective – survival and profitability are going to be
more important in the short-run
Survival • in the short term many small/new businesses fail – because they
do not have economies of scale or enough financial resources to
compete with larger businesses
• needs to survive in order to achieve profit and growth – if the
business does not survive then no other objectives are possible
Conclusion • profit is needed for the long-term survival of Tabansi’s business

– without profit growth and survival of the business will be
difficult
• growth will help increase Tabansi’s profits in the long-term and
provide a source of finance to help with growth plans – a larger
business may be more competitive, and this helps the business
to survive in competitive markets, or difficult economic times
• if the business does not survive, then Tabansi will not earn profit
and he risks losing the money he invested in the business
Marking guidance Level Criteria Marks

High • Detailed discussion of two or more objectives is evident in the [9-12]
response
• Recommendations and/or conclusions have been well-justified
clearly explaining the reasons behind decisions made and why
the alternative points are not as important
• Clear and appropriate use of case study material to support
points made is evident throughout the response to demonstrate a
good understanding of appropriate business concepts.
Middle • At least one objective has been discussed in detail [5-8]

• Some justification and reasoning has been provided for the
choices made
• Some use of case study material to support points made is
evident in the answer to show understanding of appropriate
business concepts.
Low • Some points have been made, but little or no explanation offered [1-4]
• Judgement may have been attempted but there is limited or no
explanation of the choices made
• An appropriate reference to material in the case study may have
been made.
Non-creditable • No response provided or, response given is not creditable. [0]

answer

Question 2a Explain two benefits to Tabansi of being a sole trader.

Possible answers could Benefits
include • easy to set up / low start-up capital
• owner has complete control / makes all decisions
• uses owner’s skills and interests
• decides when to work and working hours
• keeps all of the profits
Sample explanation
Tabansi is the only owner. He has complete control over business decisions. Tabansi made all
decisions about expanding his product range to retain profits to expand the business.

• One mark should be given for each relevant benefit: [max 2 marks]
Question 2b Explain how the following three factors might influence Tabansi’s decision to change his
business to a private limited company. Which factor do you think is the most important? Justify
your answer.
Possible answers could Limited liability • as a sole trader, Tabansi has unlimited liability for
include the business’s debts – he could be forced to use his
personal money and sell his personal belongings to pay
debts of the business
• with limited liability, he only risks losing the amount he
invests in his business – this reduces his personal risk
Additional source of finance • he could raise capital by selling shares to family, friends
and other private investors – this is easier to obtain and
cheaper than borrowing
• this is a cheaper source of finance for business
expansion than borrowing from banks or other lenders –
no interest is payable on money raised through a share
issue and it does not have to be repaid by the business
to the shareholders
More owners • more owners will dilute or even remove the total control
Tabansi has over the business – all the owners will want
to be involved in business decisions
• profits will have to be shared between all the owners –
Tabansi might receive less profit from the business than
he does currently

Conclusion • limited liability – offers Tabansi protection from losing

everything he owns if the business fails and has unpaid
debts – there is less risk for Tabansi
• additional source of finance – this might be easier for the
business to obtain than borrowing – also, it is cheaper
and does not have to be repaid, unlike borrowed capital
• more owners – Tabansi loses some or possibly all control
of his business – he will have to include other owners in
the decision-making process for the business and he will
have to share profits with them – however, the business
might be able to grow and earn much higher profits than
at present, so even though profits are shared, Tabansi
might receive more than he does at the moment

High • Detailed discussion of two or more factors evident in the response [9-12]
points made is evident throughout the response to demonstrate a
good understanding of appropriate business concepts.
Middle • At least one factor has been discussed in detail [5-8]

choices made
business concepts.
been made.

answer

Question 3a New businesses such as Tabansi’s are at greater risk of failure. Explain two reasons why new
businesses fail.
Possible answers could Reasons

include • poor management
• poor cash-flow management
• wrong location
• lack of finance
• competition, etc
Sample explanation
New businesses often fail because of poor management. Cash flow is not effectively managed.
There is no planning. Poor cash flow means that a business is unable to pay its debts.

• One mark should be given for each relevant reason: [max 2 marks]
Question 3b The small business adviser has recommended to Tabansi that he produces a business plan.
Consider the importance of the following elements of a business plan for Tabansi. Which element
of the business plan do you think is the most important? Justify your answer.
Possible answers could The business opportunity • what product will the business sell? – Tabansi needs to
include have a clear idea about his product mix
• why does Tabansi think customers will buy the drinks? –
demand for drinks influences the sales of the business
and hence the revenue and profit earned
• what market research has he done for the business? –
this provides data that Tabansi can use to prove there
is a demand for his drinks, the quantity he might sell,
how much consumers are willing to pay and information
about competitors’ products
The market • what is the size of the market for Tabansi’s products? –
this will help Tabansi calculate the potential sales for his
drinks and whether the market is big enough for him
to enter
• is the market likely to grow? – will he be able to achieve
future increases in sales and profits
• who are the main competitors? – what are their
products? what do consumers think of them? how are
they priced? Is there a market leader?
Financial forecasts • what is the forecast of sales and profits for the first
year? – will profits give Tabansi a good return for the risk
he is taking in investing in his business?
• what is the cash-flow forecast? – is Tabansi likely
to need an overdraft to meet any short-term cash
shortages?

Conclusion • the business opportunity – without a good idea for the

business, which is supported by good market research
inforamtion, then there is no point in Tabansi risking his
own money starting the business
• the market – if the market is small with many competitors,
then Tabansi will find it difficult to enter. However, if it is a
growing market then Tabansi could also see his business
grow which increase long-term revenue and profits
• financial forecasts – these are important because
Tabansi needs to know if this is the best way of investing
his capital – will the return be high enough to reward
his risk, or could he do better by investing his money
elsewhere?

High • Detailed discussion of two or more elements is evident in the
[9-12]
response
points made is evident throughout the response to demonstrate
a good understanding of appropriate business concepts.
Middle • At least one element has been discussed in detail [5-8]

choices made
business concepts.
been made.

answer

Question 4a Explain two ways Tabansi might increase his business’s added value.
Possible answers could Ways

include • improving product quality
• offering quality service offered
• distinctive packaging or branding
Sample explanation
Tabansi might improve quality, e.g. cooler bags, freshly squeezed juices, which could increase
sales and profits.

• One mark should be given for each relevant way: [max 2 marks]
Question 4b Consider why each of the following stakeholders will be interested in Tabansi’s business.
Which stakeholder group do you think will be most interested in the success of Tabansi’s
business? Justify your answer.
Possible answers could Lenders • will the business be able to pay interest on loans? – this is how lenders earn
include their profit so will want to be sure they will get paid by Tabansi’s business
• will the business be able to repay loans? – The lender risks losing the money
loaned if it cannot be repaid
Suppliers • will they get paid for goods they supply to Tabansi? – goods are supplied on
credit to Tabansi – the supplier needs the cash from Tabansi to meet their own
cash outflows – if they don’t get paid then they will make a loss on these sales
• is the business likely to grow? – if so then they will need more supplies and
this will help to increases the revenue and profits of suppliers
Government • how much tax will they receive from Tabansi’s profits? – the Government
needs tax revenue to be able to finance their spending plans
• will Tabansi provide employment opportunities for locals? – this benefits the
local community by paying wages to those Tabansi employs – they will spend
some of this buying goods and services of other businesses and so provide
more employment opportunities
Conclusion • lenders – they want to be certain that they will receive interest payments and
return of the amount loaned to Tabansi – the more successful the business, the
lower the risk of not receiving these
• suppliers – they want to be sure that they will receive money owed and a
successful business will also provide opportunities for suppliers to grow too
• government – the more successful Tabansi’s business, the more tax paid
to government and the more people employed – provides government with
revenue to finance spending, so they don’t have to borrow or it reduces
borrowing – also, it will reduce the amount spent supporting the unemployed


High • Detailed discussion of two or more stakeholder groups is [9-12]
evident in the response
points made is evident throughout the response to demonstrate
a good understanding of appropriate business concepts.
Middle • At least one stakeholder group has been discussed in detail [5-8]
choices made
business concepts.
been made.

answer

Exam-style case study 1a answers

assessed on its own merits. Marking guidance for case study questions has been provided for this case study below, however,
this same guidance can be followed when marking any case study questions from the coursebook or the Cambridge Elevate
enhanced edition. Please note, the way marks are awarded may differ in examination to the guidance provided in this resource.
Case study 1a: DIY Home Supplies

Question 1a Identify one advantage and one disadvantage to Joshua of changing the legal structure of his
business to a private limited company.
Possible answers Advantages

could include: • raise capital by selling shares
• limited liability
• continuity
• easier to get bank loan
• separate legal identity
Disadvantages
• shareholders expect dividends
• accounts not totally private
• more complex legal process than unlimited business
Sample explanation
Limited liability for his building suppliers business means that, if the business owes suppliers money
for the purchase of building materials, and the business goes bankrupt, then Joshua and his father (as
shareholders) cannot have their personal possessions taken away to pay the debt. They would only lose
the money they invested into the business.

• One mark should be given for a relevant advantage: [max 1 mark]
• One mark for a relevant disadvantage: [max 1 mark]
• Up to three further marks can be given for each explanation, provided that one is applied to the
specific business scenario in this question: [max 6 marks]
Question 1b The small business development adviser encouraged Joshua to set clear objectives for his business.
Consider each objective in Appendix 2. Which do you think is most important for the success of DIY
Home Supplies? Justify your answer.
Possible answers Objective 1: Offer quality • create brand loyalty – could lead to increased sales as customers keep
could include: products and services to returning
customers at competitive • remain competitive – less risk of losing market share to rivals
prices at all times
Objective 2: Reinvest • able to finance growth without the need to borrow money externally –
a percentage of profits keeps costs of finance lower
each year to improve • no risk of losing control of business
and expand the business • able to control rate of growth
© Cambridge University Press 2018 Exam-style case study answers – 1a

Objective 3: Only sell • better reputation – lower costs of promotion

products that meet • increased sales if able to find customers who have same principles
expected social, ethical • less risk of legal / pressure group action which could have negative
and environmental impact on costs/image
standards • able to charge higher price – may increase profit margin
Conclusion • objective 1: helps remain competitive – without this may not be able
to achieve other objectives or expand his business – so possibly most
important
• objective 2: important source of finance – so able to buy more houses
to renovate – but may slow down expansion as little retained profit as
only formed seven years ago – may need to borrow to expand as quickly
as planned
• objective 3: customers may not share same views – may not be prepared
to pay extra – lower sales as customers go to cheaper competitors – may
not be able to find suitable suppliers or materials to pursue which could
lower sales – so could be seen as longer term aim – depends on personal
values as to how important the issue is

High • Detailed discussion of two or more objectives is evident in the response [9–12]
• Recommendations and / or conclusions have been well-justified clearly
explaining the reasons behind decisions made and why the alternative
points are not as important
• Clear and appropriate use of case study material to support points made
is evident throughout the response to demonstrate a good understanding
of appropriate business concepts.
Middle • At least one objective has been discussed in detail. [5–8]

• Some justification and reasoning has been provided for the choices made.
• Some use of case study material to support points made is evident in the
answer to show understanding of appropriate business concepts.
Low • Some points have been made, but there is little or no explanation offered. [1–4]
• An appropriate reference to material in the case study may have been
made

answer

Question 2a Explain two reasons why the government provides grants to start-up businesses.

include: • to increase employment
• to increase economic growth
• small businesses may grow into large businesses
Sample explanation
To raise employment levels as small businesses will employ many workers in their shops and
factories and so reduce unemployment. Without government help, businesses such as Joshua’s
building supplies shop may not open and, therefore, these workers would not have a job. This
may reduce benefit payments or increase income tax for the government.

• One mark should be given for each valid reason: [max 2 marks]
• One mark for a relevant disadvantage: [max 1 mark]
• Up to three further marks can be given for each explanation, provided that one is applied to
the specific business scenario within this question: [max 6 marks]
Question 2b Explain why the following three characteristics are important to Joshua when being a successful
entrepreneur. Which characteristic do you think is most important? Justify your answer.
Possible answers Taking risks • set up the business in 2010 – with $5000 in savings – and borrowed money – could
could include: have lost it all
• looking to expand rather than second shop – entered a new market – no experience
– so could make loss and damage reputation of other business
• no direct experience of either business – as electrician – so shows he is willing to
take advantage of new opportunities
Creative • needs new ideas to make his supplies business different to others such as
equipment stocked or how to operate
• saw opportunity to renovate house for students – did something different – he will
have to think about how he decorates the house
Hard working • business established in 2010 – made many mistakes but learned quickly – to own
an efficient and profitable business – had to work hard to manage the business
effectively so that it is successful
• planning shown for new business – work long hours to ensure business is given
finance needed
Conclusion • creative – limited evidence of this – so less likely to be important
• hard working – has a successful business – father provided some of the finance but
he worked hard in first two years to ensure success – without this risk would not
have paid off
• taking risks – taken chances with both ideas – without this, would not have had
opportunity to be successful – but taking risk is only part of the process – need to
work hard to ensure decisions taken are worth the risk


High • Detailed discussion of two or more characteristics is evident in the [9–12]
response
• Clear and appropriate use of case study material to support points made is
evident throughout the response to demonstrate a good understanding of
appropriate business concepts.
Middle • At least one characteristic has been discussed in detail. [5–8]

answer to show understanding of appropriate business concepts.
Low • Some points have been identified but there is little or no explanation [1–4]
offered.
• Judgement may have been attempted but there is limited or no explanation
of the choices made
• An appropriate reference to material in the case study may have been made

answer
Question 3a Explain two possible problems linked to Joshua’s proposed growth of his business.
Possible answers Possible problems

could include: • financial
• competition
• government / legal controls
• more difficult to control
Sample explanation
More difficult to control as Joshua already has the DIY supplies business to run as well as starting this
new venture, especially as the two businesses are very different and he made a number of mistakes in
his first two years of business. This could lead to poor decisions being taken which threaten his potential
success.

• One mark should be given for each valid problem: [max 2 marks]
• Up to three further marks can be given for each explanation, provided that one is applied to the
specific business scenario within this question: [max 6 marks]

Question 3b Consider how the following three stakeholders will be affected if Joshua goes ahead with his new
business idea. Which stakeholder do you think will be most affected by this decision? Justify your answer.
Possible answers Bank • providing finance – gain interest payments on $25 000 – which increases revenue
could include: • high risk as no experience in this sector – could affect bank’s profits – can use house
as security to limit amount of risk
Customers • additional accommodation – more choice or better quality (as newly renovated) –
more choice could mean lower prices so more affordable – important as on low
income
• Joshua has no experience in sector so house may not be suitable or there may be
problems contacting him
Shareholders • lower profits possible – as added costs of finance and investment in new venture –
no experience so less certain of success
• has limited liability – limits risk faced to amount invested
Conclusion • bank – probably most affect as faces risk of non-payment – property might not be
easy to sell
• customers – increases competition – more choice – but lack knowledge of market so
choice may not match needs – but always other landlords available
• shareholder – risks limited as benefit from limited liability as private limited
company – so losses limited and will benefit if makes profit

High • Detailed discussion of two or more stakeholders is evident in the response [9–12]
• Clear and appropriate use of case study material to support points made is
evident throughout the response to demonstrate a good understanding of
appropriate business concepts.
Middle • At least one stakeholder has been discussed in detail. [5–8]

answer to show some understanding of appropriate business concepts.
Low • Some stakeholders have been identified but there is little or no explanation [1–4]
offered.
• An appropriate reference to material in the case study may have been
made

answer

Question 4a DIY Supplies is in the private sector. Explain two differences between Joshua’s business and
its competitors in the public sector.
Possible answers could Differences

include: • profit motive
• Joshua’s business not owned by government
• separate legal identity
• limited liability
Sample explanation
Joshua’s business has profit as an objective, whereas public sector businesses have different
objectives, such as providing a service. This means that the price Joshua charges for renting a
room will be based on how much profit he wants to make to achieve this objective rather than
setting prices based on what students can afford to pay.

• One mark should be given for each valid difference: [max 2 marks]
• Up to three further marks can be given for each explanation, provided that one is applied to
the specific business scenario within this question: [max 6 marks]
Question 4b Consider the advantages and disadvantages to Joshua of choosing to start a new business
rather than expand his existing business. Do you think Joshua made the correct decision? Justify
your answer.
Possible answers could Existing • has experience – operated since 2010 – knows mistakes so able to
include: business avoid them
• demand – is there scope for a second shop? – he bought the shop, why was
it sold?
• finance – cheaper than other option by $20 000
• spread business reputation
New business • competition – there are other landlords who students rent from – students
may be loyal so how will he attract customers?
• potential market – there is a large population of students – so could be first of
many houses – help increase profit further
• finance – will need to borrow $20 000–50 000 more than new shop – can he
afford it?
• taking risks – seems to like a challenge as was electrician before
• has prepared a business plan
• has practical skills – as electrician – so may not be too difficult to renovate
house or know people who can help him – which would lower costs
Conclusion • existing business – has experience – and reputation to build on – cheaper so
may be seen as safer option – but may want a new challenge
• new business – may like taking risks, already lived the dream with current
business – may want a new challenge – higher risk as no experience – large
potential market – has competition so may represent greater risk – so could
depend on how much risk he is prepared to take


High • Detailed discussion of both options is evident in the response [9–12]
• Recommendations and / or conclusions have been well-justified
clearly explaining the reasons behind decisions made and why the
alternative points are not as important
• Clear and appropriate use of case study material to support points
made is evident throughout the response to demonstrate a good
understanding of appropriate business concepts.
Middle • One option has been discussed in detail [5–8]

• Some justification and reasoning has been provided for the choices
made.
• Some use of case study material to support points made is evident
in the answer to show some understanding of appropriate business
concepts.
Low • A number of issues have been identified but there is little or no [1–4]
explanation offered.
been made

answer

Exam-style case study 1b answers

However, the suggestions provided are not intended to be a definitive guide to all acceptable answers; each response should
be assessed on its own merits. Marking guidance for case study questions has been provided in the answers document for
case study 1a. This can be used as a basis for marking this case study. Please note, the way marks are awarded may differ in
examination to the guidance provided in this resource.
Case study 1b: Banke’s bakery

Question 1a Explain two ways to measure the size of Banke’s business.
Possible answers could Relevant points

include: • number of employees
• capital employed
• level of sales turnover
• market share of the business
Sample explanation
The number of employees is one way to measure size. Banke does the baking so is likely to
employ few employees, if any. Large businesses often employ a large number of workers,
although this is not always the case when capital-intensive methods of production are used.
Question 1b Consider the following three reasons why Banke might want her business to remain small.
Which reason is likely to be most important? Justify your answer.
Possible answers could Lack of demand • bakery may not have a large number of potential customers
include: in the local area – without a large demand there is no point in
trying to expand to sell large numbers of bread or pizza, so the
business will remain small
Offer personal service • Banke bakes the bread and pizza – customers might like
supporting small local business and meeting Banke – if she
expands, she may not have time to meet and talk to customers
• customers can easily ask for different, individual orders to
be made which limits Banke’s ability to increase the scale of
production
Ability to control • runs her own business successfully – does not want someone
telling her what to do
• does most of the jobs – so able to see clearly what needs to be
done
Conclusion • lack of demand – must be able to sell what she makes –
otherwise will make a loss – unless able to increase demand, this
is likely to be most important factor
• personal service – only one shop – can train employees to offer
good service as well, but it would not be Banke
• control – did not like idea of partnership so control is clearly
important to her – Billy did offer to become a partner
© Cambridge University Press 2018 Exam-style case study answers – 1b

Question 2a Explain two disadvantages to Banke of her being a sole trader.

include: • no one to share workload with
• only have own ideas and skills
• unlimited liability
• few sources of finance available for expansion
• carry all the business risk
Sample explanation
Banke has no one to share workload with so, as well as making the bread and pizzas, she has
to run the shop which could increase the amount of stress and burden Banke has to deal with
(especially at a time when her main customer to whom she sells 60% of her products is closing
down) which could increase the chances of her making mistakes.
Question 2b Consider the advantages and disadvantages of the following two forms of business
organisation Banke could choose if she went into business with Billy. Which form do you think
Banke should choose? Justify your answer.
Possible answers could Partnership • increased capital – Billy will put money in
include: • additional partners to work in the business – help with decisions –
holidays/responsibility shared
• additional specialisms/skills of partners – Billy has 20 years’ experience
as manager – so could help expand business or know about potential
customers to help replace lost revenue when supermarket closes down
• unlimited liability – so same risk as remaining a sole trader
• disagreements may cause problems/arguments – which can lead to
slower decision making or wrong decisions being made – missing out
on opportunities – but Billy is a friend for 10 years so may not be an
issue
• profit will have to be shared – so make less than would if remain as sole
trader
Private limited • limited liability – limit losses to amount invested – reduces risk –
company important if she decides to buy franchise as it is a different business
• increased capital – can sell shares to friends and family
• legal requirements – more paperwork to set up
• less privacy with accounts – some disclosure legally required
• only sell shares to family and friends – restrict amount of capital that
can be raised
Recommendation • private limited – main advantage is limited liability – limit any loss to
amount invested – so personal assets safe – would also allow other
friends and family to invest – but would have less privacy as some
accounts disclosed – could always employ Billy as manager – so if
lower risk is important – private limited is safer option
• partnership – can share risk and will benefit from Billy’s skills and
knowledge of supermarket – but retain unlimited liability – and as pizza
is new business this increases risk

Question 3a Explain two examples of tertiary sector businesses that a business might use.

include: • banking
• transport
• advertising agency
• market research agency
• wholesaler
• website designer
• accountant
• legal services
• business advisor
Sample explanation
Banke needs to use an advertising agency to help promote her bread to the customers as she is
busy making the bread and pizzas.
Question 3b Explain why the following three recommendations are important to Banke when deciding
whether to expand her business. Which recommendation do you think is the most important?
Justify your answer.
Possible answers could Market research • greater awareness of consumer needs – can adapt its pizza or bread to
include: match what customers want – increasing sales
• help forecast likely future trends – can improve focus of new products
• know strength of competitors – can change marketing strategy, such as
prices to compete improving chances of success
• reduces risks so franchise launched with more confidence – know what
features customers want
• produce the correct amount of product to avoid wastage of bread ingredients
Clear objectives • measure of success – if achieve a certain amount of new business to

replace 60% lost, they know they are on track
• helps decision making/planning/budgeting for the new franchise
• gives sense of purpose and direction – able to take decisions/allocate
resources effectively to ensure annual target is hit
Business plan • guide business/acts as a checklist/monitoring – to help decision making/

see what action they need to take – in order to help ensure expansion is
successful
• support loan applications/attract investors – so don’t have to use own
savings as shows ability to repay
Conclusion • depends on what Banke wants to know – all help with planning but focus
on different elements
• market research – information about the market – important as lost major
customer – has to decide whether to accept franchise
• objectives – important as before she decides whether to go into partnership
or buy franchise needs to know what she wants to achieve
• business plan – overview of aims – help planning and support requests for
loans – but needs to know what she wants to do first

Question 4a Describe two stakeholders that might be affected by the closure of Lowcost Supermarket.

include: • suppliers
• employees
• government
• lenders
• local community
Sample explanation
Suppliers, such as Banke, rely on the supermarket for 60% of its business so will lose
a significant amount of revenue from its closure. If suppliers are unable to find alternative
customers for its bread or other products, the businesses also face the risk of having to
close down.
Question 4b State the advantages and advantages of the three options listed in Appendix 2. Which option
do you think Banke should choose? Justify your answer.
Possible answers could Option 1 • be own boss – able to make all decisions – was concerned about idea
include: of partnership
• lower risk – has experience in this market
• current business is successful
• level of demand – can she find new customers to replace the ones lost
by the supermarket closure?
Option 2 • partnership – able to share risk and costs but would have to share
ownership which she is worried about – may make decisions she is not
happy about
• private limited – lowers risk but set up is more time consuming and
requires more paperwork and disclosure of information
Option 3 • Billy has 20 years of management experience but not in this business
• would Billy want to be an employee? – he offered to be a partner
• would increase her workload and risk of being a sole trader – and if
business not successful would be at greater risk of losing personal
possessions if unable to pay business debts
• has some knowledge of pizza market
• new competitor is likely as someone will take franchise which could
lower her sales of bread and other food items, especially as one of her
main customers is closing down
Recommendation • Banke does not like idea of partnership – still has unlimited liability –
but has private limited company option – but would mean more
information and legal requirements to set up
• current business – about to lose main customer – so can she find
alternative customers to replace the 60%?
• franchise – help and support offered – has some knowledge of pizza
business – could help spread risk if she can afford the cost of buying
the franchise – may depend if Billy willing to work for her

Cambridge IGCSE and O Level Business Studies Section 2 People in business

Marking guidance for case study questions has been provided for Section 1 in the answers documents. However, this same
guidance can be followed when marking the case study below and the other case study questions from the coursebook or the
Cambridge Elevate enhanced edition. Please note, the way marks are awarded may differ in examination to the guidance provided
in this resource.
Case study: Precision Tooling (pages 136–137)

study. For instance, they could make appropriate use of the following features: component manufacturer, one factory, division
of labour, hourly-rate method, bonus, production target, motivation, decrease in output, change of pay system, trade union,
recruitment of employees. There may be further examples of application which have not been included here, but for which
students could be credited.
Question 1a Explain two documents that the human resources manager might use in the recruitment
process.
Possible answers could Job description

include • outlines the main duties of the post – for example, supervise ten production employees; plan
and carry out marketing activities to agreed budgets and timescales
• identifies who the job holder is responsible for supervising/managing – supervising ten
employees
• identifies who the job holder reports to – accountable to the factory manager
Person specification
• identifies the type of qualifications, skills, experience and personal qualities the business is
looking for in applicants
• should attract only those applicants with the right skills, experience and personal qualities
• can help in the selection process
Sample explanation
The person specification lists the skills, experience and personal qualities that the business is
looking for. It will help Precision Tooling attract applicants with the right skills and experience for
the factory manager’s job. Only people with the required skills will apply. This will save time and
money in the recruitment process.
Question 1b The human resource manager is wondering whether she should use internal or external
recruitment methods for replacing the factory manager and the Section A supervisor. State the
advantages and disadvantages of each method of recruitment. Which method do you think the
human resource manager should choose? Justify your answer.

Possible answers could Internal recruitment Advantages

include • the person already knows the business and how it
operates – so it may reduce training requirements
• might provide motivation for employees – prospects
for promotion
Disadvantages
• job requires skills and expertise that might not be
available from internal recruitment – don’t get the
best person for the job
• could lead to conflict – employees who apply for the
job but are not successful
External recruitment Advantages

• external recruitment will bring in new ideas – more
effective and efficient; improves quality
Disadvantages
• advertising costs will be more expensive – reduces
profits
• takes longer to fill vacancies – could reduce output in
the short-run
• training required – new employees will have to be
trained and this increases costs and could reduce
production in the short-run
Conclusion • internal recruitment – quicker and less costly, but

the business will not necessarily recruit the ‘best’
employees – perhaps more appropriate for recruiting
the supervisor than the factory manager
• external recruitment – will take longer to recruit and
is more costly e.g. advertising and training of new
employees – might be more appropriate for the
factory manager e.g. brings new expertise/ideas to
the business
Question 2a Explain two benefits for the production workers of Precision Tooling of trade union
membership.

include • negotiation with employers to improve pay and conditions – collective bargaining
• conflict resolution
• legal support and advice
• membership benefits, e.g. pensions
Sample explanation
A trade union will negotiate with employers on behalf of its members. This will protect Precision
Tooling employees from exploitation and make sure they are not worse off with a change of pay
system. It is more effective for a trade union to represent all employees than for employees to do
this individually.

Question 2b The operations director wants the new factory manager to ‘understand the functions of
management’. Explain the importance of each of the functions of management below for the
future success of Precision Tooling. Which function of management do you think is the most
important? Justify your answer.
Possible answers could Planning • looking at where the business is now and where it
include wants to be in the future – needs to have a clear idea
about the future direction of the company
• setting clear objectives and deciding on the actions
needed for these to be achieved – without clear
(SMART) objectives, the business will not know the
resources required and employees will not know what
they should be working towards
Organising • preparing and organising the resources needed to

achieve the planned goals and objectives at the
lowest possible cost to the business – if resources
are not available when needed, then this will delay
the achievement of objectives and could result in loss
of revenue and/or increased costs and hence lower
profits
Coordinating • making sure that all of the different parts of the

business are working together towards achieving
the business’s goals and corporate objectives – if
different functions are working towards different
goals and objectives, then there will be a waste of
resources and targets will not be met
Conclusion • planning – without careful planning, including setting

clear objectives, the business will not be successful
and marketing opportunities could be missed
• organising – without the resources, objectives will not
be achieved at the lowest possible cost – profit will
be lower than it might have been had resources been
available as and when required
• coordinating – marketing, operations, finance and
HRM must all work together to achieve company
goals and objectives – it is no good for one function
to work differently from the others as this is likely
to result in a waste of resources and targets not
achieved in the shortest possible time and at the
lowest cost

Question 3a Other than improving productivity, explain two benefits to Precision Tooling of having a well-
motivated workforce.

include • improved quality/reduced waste
• lower absenteeism
• lower labour turnover
• less conflict in the workplace/easier to manage
Sample explanation
A more motivated workforce may reduce labour turnover. Precision Tooling will not have to recruit
employees as often and will not lose skilled employees. A lower labour turnover will reduce
Precision Tooling’s costs.
Question 3b The operations director has suggested replacing the hourly-rate system with a piece-
rate system to improve the motivation of the production workers. State the advantages and
disadvantages of each system for Precision Tooling. Which system do you think they should use?
Possible answers could Hourly-rate system Advantages

include • Precision Tooling knows exactly how much its wage cost
will be – number of hours worked per worker × hourly
rate – this helps with budgeting wage costs
• only pay workers for the time worked
Disadvantages
• not dependent upon employee output – employees
receive a fixed amount per hour regardless of how many
they produce/how hard they work
• difficult to calculate unit cost of output which might be
needed for pricing decisions
Piece-rate system Advantages

• employees will work harder in order to increase their
wage – increases motivation
Disadvantages
• quality of output might be poor as employees work too
quickly to increase their pay – increases costs of waste
and could affect company reputation if poor quality
products are sold to customers

Conclusion • hourly-rate – easier to budget and only pay workers for

time worked – however, it does not motivate employees
to increase productivity, so does not necessarily improve
labour productivity and reduce average costs – however,
quality of output might be better
• piece-rate – could motivate employees to work harder
and produce greater output – this increases labour
productivity and reduces average costs which increases
profit margins or helps the business to lower prices and
be more competitive – however, quality issues might
arise, increasing the costs of waste and customer
returns/complaints
Question 4a Explain two features of Precision Tooling’s organisational structure.

Possible answers could Features
include • chain of command – shows responsibility, accountability, formal communication channel,
delegation of authority
• span of control – number of subordinates, effectiveness of control
Sample explanation
Span of control shows how many subordinates a manager/supervisor is in charge of. A factory
manager has a narrow span of control. Supervisors have a span of control of ten employees each.
Spans of control are not too wide, so supervision should be effective.
Question 4b Explain the advantages and disadvantages of each of the following methods of communication
that might be used by Precision Tooling when communicating with employees.
Which method do you think would be most effective? Justify your answer.
Possible answers could Noticeboard Advantage

include • can be made available for all employees if placed on all noticeboards
in the company – everyone has access to the same message
Disadvantage
• no permanent record of the message – once removed from the
noticeboard employees do not have anything to refer back to
• not everyone reads noticeboard messages – communication may not
be effective
• notices might get covered up by other notices
Email Advantage
• quick and easy – all employees are sent the same message at the
same time
• provides a permanent copy of the message which can be referred
to later
Disadvantage
• some employees might not have email, or check it often – Precision
Tooling will not know who has received the message and who has not
• could end up as junk mail – not seen by some employees

Letter Advantage
• all employees will get the same message at the same time and it is a
permanent record of the message – less chance of miscommunication
Disadvantage
• takes time to prepare and send letters – delays communication of the
message
• cost - expense of printing and postage
Conclusion • method chosen will depend on message to be communicated e.g.

noticeboard might be a good place to communicate information about
a job vacancy, but not about possible redundancies
• email and letters provide employees with a permanent record of the
message
• email is probably best for receiving confirmation that the message has
been received and understood i.e. easier for employees to reply to
email than the other two methods – effective communication


Case study 2a: Snax Plc

Question 1a Explain two benefits to Snax Plc of contracts of employment.

include: • it is a legal requirement
• avoids misunderstanding if there is a dispute
• employers and employees know the terms and conditions of the employment
Sample explanation
It is a legal requirement, so Snax Plc has to provide all the 350 production workers with a contract
setting out details, such as the hours and when they are to be paid; this should stop the chance
of disputes arising which could lead to a stoppage in the production of crisps. If the employer
does not provide a contract, it could lead to fines/legal action which would increase costs.
Question 1b As well as contracts of employment, there are other legal controls on the recruitment and
employment of workers. How might each of these laws affect Snax Plc? Justify your answer.
Possible answers could Minimum wage laws • workers have right to be paid for work they do – pay at minimum
include: wage – so unless large increase limited impact
• would increase business costs – may not be able to afford to pay
all 350 workers – so make some workers redundant/replace with
machinery
Health and safety laws • laws to protect employees – ensure protective clothing provided
• if employers do not provide safety equipment and the worker is
injured during crisp production they can sue for compensation –
company can also get fined for not complying with the law
• increases business costs – as will need to train workers to use
machines safely as well as purchase equipment
• could reduce number of accidents – increasing productivity/output
Anti-discrimination laws • have to have equal opportunities policies in place – takes time and
money to set up
• could have to give job back and pay compensation if unfairly
dismissed
• if workers feel unfairly treated they may leave – many are leaving –
could help reduce recruitment costs
• widen pool of ideas/skills – leading to more varied ideas and views
Conclusion • minimum wages – as current level of pay meets law – limited impact
• health and safety – increases costs – impact on profitability and
prices – so likely to have most effect as cannot avoid
• anti-discrimination policies can benefit business as more ideas –
help compete – policies do not necessarily increase costs

Question 2a Explain one advantage and one disadvantage of off-the-job training.
Possible answers could Advantages

include: • other workers not affected
• workers have access to skilled trainers
• workers do not learn bad habits
• workers focus 100% on training
Disadvantages
• expensive
• not necessarily tailored to individual company
• workers are training rather than working
Sample explanation
Other workers not affected so the remaining from the 350 employees are able to focus on
production, which could help increase/maintain output. If not, Snax Plc would not be able to
keep up with demand, leading to a reduction in sales for its crisps and other snacks.
Question 2b Explain three reasons why training of workers is important for Snax Plc. Justify your answer.
Possible answers could Decrease amount of • less supervisors – lower costs of pay
include: supervision • help motivate some of the 350 employees – as do not feel being
watched as much
Decrease chances of • fewer errors – less rework required as fewer wasted resources –
mistakes lower costs
• higher output of crisps – able to meet demand
• better quality – could improve reputation of its snacks – increase
demand/sales
Increase opportunity for • increase motivation – so fewer employees leave – which is

internal promotion current problem
• increase pool of internal candidates – easier to find employees
with knowledge of business so lessens requirement to recruit
external candidates
Conclusion • supervision – help lower costs – but this is not main issue – high
turnover and waste issues
• mistakes – concern over high level of waste – but workers highly
trained so impact may be limited in cooking division
• opportunity for promotion – high labour turnover – and have to
recruit external candidates – could save time – reducing need for
induction training
Question 3a Other than increasing hourly wage rates, identify two financial incentives that Snax Plc could
consider paying to its employees in the Preparation division.

include: • bonuses
• performance related pay
• share ownership scheme

Sample explanation
Share ownership may encourage the employees to think about how to make the business more
productive, such as reducing the level of waste as they will directly benefit from any increase in
profit or improvements in quality. Furthermore, it does not add to costs of running the business,
as payment comes out of profits.
Question 3b Explain the following non-financial incentives. Which one would be the best for the Factory
Manager to use in order to reduce labour turnover in the Preparation division? Justify your
answer.
Possible answers could Job rotation • workers switch jobs – more interesting/not as boring as doing
include: the same thing – improve motivation
• cost of training workers to do different jobs
Quality circles • workers have first-hand knowledge of issues – solutions likely to

be more effective – can save time and money
• takes longer as time in group meetings (350 employees) could
be used working – lower output
• can help motivate employees as given responsibility – which
could help reduce problem of workers leaving
Team working • employees have ownership of work – increases motivation

• relies on workers being able or willing to cooperate – as not
everyone may be team workers
• unequal participation – could lower overall productivity so fewer
crisps/snacks produced
Recommendation • employees may not want extra responsibility of team working so

lower output not increase motivation
• how easy is it to switch jobs without additional training costs – if
work is not interesting will not help improve motivation
• employees must feel that solutions offered are listened to
otherwise could demotivate rather than motivate
• depends on reasons why employees leaving – is it work, pay or
responsibility? – may need to see results of questionnaire
Question 4a Explain the purpose of two documents that the human resources department might send to
someone interested in applying for a vacancy at Snax Plc.

include: • job description
• person specification
• application form
Sample explanation
Job description outlines the tasks and responsibilities that will need to be carried out as part of
the specific job. Applicants will know what the job involves and if they are suitable to apply. This
reduces the chance of wasting Snax Plc’s time by applying for an inappropriate role. This allows
the human resources manager to draw up a job specification with suitable skills required, so he
can focus on resolving the labour turnover issue.

Question 4b State the advantages and disadvantages of the following methods of recruitment. Which
would be the most appropriate for Snax Plc to use to fill a vacancy for a supervisor in any of the
three factory divisions? Justify your answer.
Possible answers could Internal recruitment • saves time and money – cheaper than external recruitment
include: • can be motivating – as others see chance for promotion – so
fewer employees leave, helping solve another problem
• person is already known – so no need for induction training,
saving time
• may need training – increases costs
External recruitment • new ideas about how to make crisps or reduce amount of
wastage
• already skilled/trained to correct level reduces costs of training
• person does not know the organisation and how it works
• person not known
Recommendation • employees may want chance for promotion so could lower

labour turnover – have knowledge but do not feel valued but
better candidates may be the ones who have left Snax Plc
• new employees may take time to adapt and be able to bring in
new ideas to help improve productivity and quality but existing
employees might have ideas from quality circle but not had
opportunity to implement


Case study 2b: MJM Foods

Question 1a Explain two features of MJM Food’s organisational structure.

include: • span of control
• levels of hierarchy
• chain of command
Sample explanation
The span of control is the number of subordinates working directly under a manager. The Factory
Manager is in charge of the whole factory and has a span of control of two people. The Deputy
Factory Manager has a wider span of control of six supervisors. The supervisors have a wider
span of control of 10 workers.
Question 1b Consider the following three functions of the Factory Manager. Which management function is
likely to be the most important? Justify your answer.
Possible answers could Planning • look ahead and set aims/targets – so know what to do to achieve aims
include: • plan for necessary resources/level of output to ensure supplies arrive
on time from local farms
• make decisions about which products/suppliers to use for its food
Organising • delegate tasks

• arrange work schedules for people who work both part- and full-time –
so maintain/maximise efficiency
• ensure everyone works effectively – so no duplicated tasks
• arrange for deliveries to central warehouse – so customers receive
goods on time for supermarket shelves
Controlling • measure/evaluate work of employees

• identify problems – such as late supplies
• order ingredients to ensure that planned production of processed
foods can be made – otherwise factories may not be able meet orders/
lose sales
Conclusion • all functions important in different ways

• planning – know goals and make decisions to achieve objectives but
much of planning done by head office
• organising – ensure all resources are in place to achieve objectives –
factory manager likely to responsible for overseeing this stage
• controlling – checking/ensuring planned activities have happened but
only important once plans and actions taken place

Question 2a The manager of F2 uses an autocratic leadership style. Explain two other leadership styles
MJM Food’s managers could use.

include: • democratic
• laissez-faire
Sample explanation
Democratic management style would make employees feel more involved in decision-making in
each factory and, therefore, increase worker motivation and productivity. Production workers who
make the frozen food could be asked for their views on how the food is manufactured, to find out
better ways to produce it.
Question 2b Explain why the following three factors are important when choosing a method of
communication. Which factor do you think is the most important? Justify your answer.
Possible answers could Speed • how quickly does the message need to reach receiver? – if urgent, quick
include: methods such as telephone or text are necessary – allows appropriate actions
to be taken soon which is important for frozen food and ingredients – could
save money
• speed involves more cost as technical equipment needed
Need for • do you need a reply? – if not, how will you know whether message received
feedback understood or acted upon in the factory?
• not all messages need a response
Cost • technology costs money – which business or farms might not be able to afford
• systems must be compatible between the different offices and departments
within factory
Conclusion • much depends on the message being sent – is it urgent or is feedback

required? – speed and feedback are likely to be the important factors
• speed of message – will increase cost – but can mean quicker actions taken –
but with four factories speed can be very important as may need to coordinate
actions
• cost – quicker methods will cost more – but large organisation should be able
to afford it – and cost of delays may be more expensive as food could be
damaged or wasted if slow
• need for feedback – need to ensure messages are received (speed does not
matter if they have not understood the message)
Question 3a Explain two benefits to MJM Foods of producing a person specification when recruiting the
new manager for F2.

include: • allows MJM to specify qualities, qualifications & experience needed
• allows MJM to recruit best person for the job

Sample explanation
A person specification lists the personal qualifications, experience and skills required for the job.
This means the directors can list all the personal qualities he thinks are important for the new
manager to have, such as good listening skills to talk to production workers (especially if using
quality circles). If applicants have these skills and qualifications, MJM Foods can match these
employees to the job description and recruit the best person for the job.
Question 3b State the advantages of part- and full-time employees. Recommend whether the other
factories should increase the number of part-time workers. Justify your answer.
Possible answers could Part-time • more flexible hours – able to reduce hours at times of low
include: demand for its frozen food – reduces wage costs
• easier to extend hours at busy times – so able to meet demand
• when not working no need to pay – lower wage costs
• may leave for full-time job elsewhere – increasing time spent
recruiting/training replacements
• one of higher rate of percentage rejects at 5% and more
accidents
• lower cost of training
Full-time • consistency of work – could boost reputation/quality of its food

products
• more committed to the business – reducing labour turnover
• more likely to be trained/skilled than part-time workers – so
cause fewer mistakes or accidents
• fewer workers needed – so lower training costs
Recommendation • part-time more flexible but higher level of mistakes and

accidents (but this may be due to lower amount of training rather
than part-time status)
• full-time employees receive more training, so make fewer errors,
so the case for more part-time employees is not clearly made
Question 4a Explain two ways, other than retirement, in which a worker’s employment with MJM Foods
might end.

include: • dismissal
• redundancy
Sample explanation
Redundany when the job no longer exists because of a change, such as automation in the
factory. The worker is released as there is no work for them to do. The employee has not made
any fault or mistake when making the food.

Question 4b Explain how the following three types of training could help improve the overall efficiency of
MJM Foods. Which type of training is likely to have the most effect on efficiency? Justify your
answer.
Possible answers could Induction • new workers will know what they have to do when they start work which will
include: mean the production workers will be effective straight away
• helps familiarise workers/provide information about the business – so
understand how food is produced
• aware of health and safety/legal issues in the factory – lower risk of
accidents
• know who to ask if there is a problem – preventing wastage of expensive
ingredients
• opportunity to communicate culture – so all workers get same message
about efficiency
On-the-job • some production takes place but trainer is less productive

• can reinforce errors OR bad practices reducing sales OR damage reputation
• fewer new ideas OR skills will be taught
• control what is taught so workers only learn skills needed
• employees can carry on working – improving productivity
• cheaper (than off-the-job) – lower training costs
• addresses the specific needs of the business
• trainer may have bad habits – so repeating costly mistakes – lower
productivity in long run – increase cost
Off-the-job • not necessarily tailored to individual business – so not cost effective

• have to pay more OR high cost for specialists – which increases costs
• skills might not be available in the business – so benefit from new techniques
• allows for mistakes – building employee confidence in job – reducing waste
• workers have access to skilled trainers – so know how to use the machinery
correctly – fewer accidents
Conclusion • off-the-job is more expensive, increasing costs, but will allow workers to
focus 100% on training so could lead to fewer accidents
• on-the-job allows some output so lessens impact on productivity – efficiency
is important
• induction will introduce workers to business but may not provide the
specialist training needed
• choice could depend on whether skilled workers are willing or able to offer
on-the-job training

Cambridge IGCSE and O Level Business Studies Section 3 Marketing

in this resource.
Exam-style case study: Teen Fashions (pages 200–201)

study. For instance, they could make appropriate use of the following features: clothing manufacturer, fashion clothing, young
females, brand image, e-commerce, competitors, market share, operational factors, website, shareholder return, expansion,
market research, trade mission, population data, recession, disposable income and channel of distribution. There may be further
examples of application which have not been included here, but for which students could be credited.
Question 1a Explain two benefits to Teen Fashions of having a ‘strong brand image’.

include • increases sales
• more control over pricing
• easier to introduce new products
Sample explanation
A strong brand image may help to introduce new products, which is important for fashion
products entering the market for older women, and would increase Teen Fashions’ profits.
Question 1b Consider how the following three factors influence the demand for Teen Fashions products.
Which factor do you think is the most important? Justify your answer.
Possible answers could Price of Teen Fashion products • the higher the price, the lower TF’s sales will be
include – opposite is also true – price is the most important
factor influencing the demand for most products
• the price of fashion products is relatively price elastic
– a small change in price will cause a bigger change in
sales/quantity demanded
• consumers will compare the price of their products with
competitor fashion products – if TF’s products are more
expensive, then consumers will not buy from TF
Consumer income • the higher consumer income, the more likely they will
buy fashion clothing from TF – fashion clothing is more
of a luxury good than a necessity
Quality of Teen Fashion products • consumers will look for value for money – if TF’s products
are similar to competitors, then they will consider other
factors, such as the quality of the clothing

Conclusion • price – most important factor as the level of sales will be

higher the lower the price, especially when compared to
competitor products
• consumer income – will only buy luxury items, such as
fashion clothing, if they have money left after buying
necessity goods and services, such as food and rent
• quality – fashion items have short life cycle, so quality
might not be so important – however, if the price is
similar for other fashion clothing, then quality might
become a more important factor
Question 2a Explain one advantage and one disadvantage to Teen Fashions of its current channel of
distribution shown in Appendix 1.

include • distribution to wider market
• wholesalers break down bulk
• middlemen may promote products
Disadvantages
• lower profit margins for Teen Fashions
• Teen Fashions has less control over product marketing
Sample explanation
An advantage of the current channel of distribution is that it helps Teen Fashions to sell to a wide
geographical market / a competitive market / a national market, increases sales and profits.
Question 2b The marketing director and the operations director disagree about the benefits to Teen
Fashions of e-commerce. Consider their views and recommend whether or not Teen Fashions
should develop e-commerce activities. Justify your answer.
Possible answers could Marketing director’s view Supports introduction of e-commerce.

include • wider access to market – potential to increase sales
and profits
• need to keep up with the competitors who are using
e-commerce – many young people use the internet to
buy goods
• more convenient for consumers who can buy from home
instead of visiting shops – consumers with busy lives
might only buy fashion clothing using e-commerce

Operations director’s view Against introduction of e-commerce.

• need to invest in design and maintenance of a website
– this increases TF’s costs and the level of investment
might not be worth it
• need to set up a department to handle e-commerce
orders – which increases costs
• higher inventory costs – need to make sure that they
always have enough items in stock to meet demand,
otherwise TF could get a reputation for not being able to
supply goods when requested by consumers
Conclusion • marketing director’s view – potential to increase sales

and profits by increasing potential market – competitors
are likely to be using e-commerce, so TF must too in
order to maintain and increase market share
• operation director’s view – increases costs – money
could be spent on other, more profitable investments
• opposing views might be considered as short term costs
(operations director’s view) versus long-term benefits
(marketing director’s view)
Question 3a Explain two benefits to Teen Fashions of the marketing manager carrying out market research
for Option 1.

include • can identify the needs of consumers
• can identify gaps in the market
• reduces risk when developing and launching products
• can help with decisions about other elements of the marketing mix, e.g. pricing, identifying
competitor strengths and weaknesses
Sample explanation
Market research will help identify the needs and wants of consumers. This is important for fashion
clothing, as trends change often and quickly and there is a need to remain competitive (the
market is highly competitive). Market research can increase sales and profits, and strengthen
brand image.

Question 3b The Board of Directors has agreed that Teen Fashions needs to expand the business. Consider
Option 1 and Option 2. Which option do you think it should choose? Justify your answer.
Possible answers could Option 1 For

include • TF’s brand already familiar to this market – makes the
introduction of new products easier
• expansion into another segment of the market –
potential for increased sales, revenue and profits
• less risk as brand is known to the potential market –
Teen Fashions has some idea of the wants of the market
Against
• cost of market research – how will this be financed?
• cost of developing new products – will the costs be
recovered from sales?
• high inventory costs – will need to have more items held
to meet demand
• how younger consumers might see expansion of
products to an older consumer – could damage brand
image and reduce sales to younger consumers
Option 2 For
• no need to change products as aimed at same age
group – less risk
• large potential market – could lead to increased revenue
and profits
• spreads risk – if the market in Country X falls, TF might
still have good demand in Country Y
• consumers in Country Y have high disposable income
to spend on fashion clothing – consumer income is an
important factor influencing the demand for more luxury
items, such as fashion clothing
Against
• TF’s brand is not known in Country Y – consumers in
Country Y might not buy foreign-made clothing
• high promotion costs – needed to create brand
awareness
• there might be language and cultural issues – will
products meet the needs of consumers in Country Y?
• there might be competition in Country Y – which is
already well-established and this could make it difficult
for TF to enter this market

Conclusion • Option 1 – less risky option – TF brand already known

in the market – however, could damage image in current
segment and sales might fall – will any sales in new
segment compensate for potential loss of sales in the
current segment?
• Option 2 – potential to increase market size and spread
risk – could increase revenue and profits – however, high
entry costs e.g. product design and promotion costs
– however, TF unknown in the market and not easy to
predict how consumers in Country Y will react to their
entry into the market
Question 4a Explain two methods of promotion Teen Fashions might use if it chooses Option 1 to expand
the business.
Possible answers could Methods

include • advertising
• celebrity endorsement
• event sponsorship
• money-off vouchers
Sample explanation
Teen Fashions might advertise in magazines read by 25–40-year-old females to create awareness,
help Teen Fashions to enter the market more easily.
Question 4b Explain how each of the following three factors might influence the success of Teen Fashions
entering Country Y. Which of these factors do you think is likely to be the most important? Justify
your answer.
Possible answers could Social differences • demographic factors such as age and gender profile
include of Country Y are important – what is the size of the
potential market?
• is there a demand for fashion clothing in Country Y?
Differences in language • how might different language affect TF’s entry into this
market e.g. the effect on product name, promotional
activities?
Differences in legal controls to • are consumer laws in Country Y different and stricter
protect consumers than in country X? – how will this impact on costs of
production of goods for Country Y?
Conclusion • social differences – fashion clothing is mainly aimed at

younger consumers – what is the size of the market in
Country Y? – do younger consumers have high incomes?
• different language – less of a problem as it is relatively
easy and not too costly to translate promotional
materials into other languages
• difference in legal controls – this could be the most
important factor, because TF must obey the laws in
Country Y if they want to sell their goods there – if this
increases production costs, then TF might have to
charge a price above that of local producers


Case study 3a: Savoury Foods (SF)

Question 1a Explain two advantages to SF of using a wholesaler.
Possible Relevant points

answers could • buy in small quantities
include: • wider variety of goods available
• advice given
• delivery available
• credit
Sample explanation
SF can buy the food ingredients in small quantities from the wholesaler and, therefore, will not need to pay
additional costs for a large storage facility for fresh vegetables which could go bad and damage the quality
of the finished product.
Question 1b Explain why the following three roles of packaging might be important to SF’s new products. Which role
do you think is most important? Justify your answer.
Possible Protect • frozen food could be easily damaged/perish – so ensure it is safe to eat
answers could • could face legal action if food not edible – damage reputation of this well known brand –
include: could lower market share
Promote • promote as attractive wrappings – encourage people to buy its products in what is a
competitive market – increase sales
• reinforce brand image – low cost product will have simple packaging and plain colours
Inform • could include nutritional information or cooking instructions on labels

• legal requirement – could face legal action if misleading – increase cost or damage reputation
Conclusion • protection is vital to ensure food is safe to eat and to avoid legal action
• important to promote as this ensures sales of new product, but there are other ways to
promote as well as packaging
• providing information is a legal requirement, but lack of information will have less impact
than failure to protect the food
Question 2a Explain one advantage and one disadvantage of primary market research.
Possible Advantages
answers could • greater awareness of consumer needs
include: • help forecast future trends
• know strength of competitors
• produce the correct amount of product

Disadvantages
• time to collect
• cost to collect
Sample explanation
Greater awareness of consumer needs, so they know what to do to adapt the frozen food to match what
customers want. They will be better able to meet customer needs, especially when launching a new product
which increases the likelihood of sales.
Question 2b Explain how each item of secondary market research listed below might affect SF’s marketing decisions.
Which factor do you think is likely to have the most effect on sales? Justify your answer.
Possible Where competitors • know distribution channels used by competitors

answers could sell its products • help decide on an appropriate promotion strategies to use in supermarkets
include: depending on where competitors are
• help decide on whether to sell in same supermarkets or not
Competitor’s prices • know what prices they should charge – to maximise revenue or improve chances
of sales – which have reduced over last 10 years by 140 000 for example if
competitors charge high price, could use price penetration to gain share
Income • know what prices they should charge charge for the meals
• know what type of products to supply to different supermarket
• help decide of style of packaging to promote brand image – as have a well
known brand
• product is high quality so will want to sell in areas where incomes are higher and
people can afford to pay higher prices
Conclusion • where competitors sell will influence pricing and promotion – it is a competitive
market – competitors are selling similar products so may not want to be in direct
competition
• competitors prices – have to decide on pricing – it is a competitive market but it
is a new product
• less income will have less money to spend so may be unable to pay high prices
or try new products (unless heavily discounted, which could damage image as is
a better quality product)
Question 3a Explain one advantage and one disadvantage of using a focus group.
Possible Advantages
answers could • highly detailed answers
include: • the researcher can interact and ask follow-up questions
• results can be easier to understand than lots of data
• can get information from non-verbal responses, such as facial expressions or body language
Disadvantages
• small sample size
• other group members can influence others responses
• expensive to set up
• take time to arrange

Sample explanation
The researcher can interact with the people in the focus group allowing them to ask follow-up questions
to find out more detailed information about their views on the new frozen foods. This can help SF make
necessary adjustments to the recipe or packaging before launching it into the market.
Question 3b State the advantages and disadvantages of the following three pricing strategies suggested by the
directors for the new product. Which one do you think SF should use? Justify your answer.
Possible Competitive pricing • able to maintain sales – as price does not deter customers – but will not
answers could necessarily attract customers to its new ready meals
include: • research costs and time to find competitors’ prices in this competitive market
• limited control over prices – so have to rely on other elements of marketing to
attract customers
Penetration pricing • low prices can help attract customers

• way to quickly increase market share
• price may not cover cost which could mean lower profit than $132 000
• customers may buy from competitors when increase price of its ready meals
Price skimming • helps establish an image of high quality – food is better quality
• able to recover development costs quickly – so profit can be made
• high price may put off potential customers – leading to lower sales
Recommendation • operate in competitive market so competitive pricing is sensible but have

limited control over prices and may not reflect the better quality of the new
ready meals so could lose potential revenue – better in long term once
established
• new product so penetration pricing can help attract customers to try and, as it
is better quality, they may keep buying when the price goes up
• product is better quality so price skimming would reinforce image but could
lead to fewer customers especially in competitive market
Question 4a Explain two stages of a product’s life cycle.

answers could • development
include: • introduction
• growth
• maturity
• decline
Sample explanation
Introduction is when the new frozen food is launched onto the market and sales grow slowly as many
customers will not be aware of its existence.

Question 4b Explain how the following three options could help SF increase its sales. Which option do you
think is likely to be the most effective? Justify your answer.
Possible answers could Option 1: Price reduction • demand should increase if lower price as demand is price
include: elastic, but the amount of the change may not lead to an overall
increase in revenue
• competitive market so lower pricing may encourage customers
to try product
• customers might think lower price means lower quality
Option 2: Sales promotions • if aimed at children – should be seen by target market but
parents are likely to buy food
• can target customers with offer which could lead to repeat
purchases to increase chance of winning
Option 3: Extension • changes to package can improve appeal – as its food is seen as
strategies more up to date
• existing customers may not recognise product – so lose more
customers than they gain as cannot find it
• cost of redesign can be high
• relies on children being there when goods are being purchased
which may not be case as parents may shop in supermarkets at
times when children not there
Recommendation • price reduction can encourage people to try – and if they like
then they keep buying its meals but competitors may match offer
– as it’s a competitive market and lower prices lower the profit
margin which can lower profit even further
• sales promotions encourage people to buy but only if they want
to win the prize being offered – will not work if do not like the
product
• updating the image can attract or remind customers, giving
sales a boost, but market share is only small percentage of total
market of $2.4m so may not be cost effective


Case study 3b: Quality Vacations (QV)

Question 1a Explain two advantages to QV of segmenting the market.
Possible answers Relevant points

could include: • makes advertising/promotion more effective
• a more focused marketing mix
• product meets customer needs of specific niche
• price suitable for target market
• suitable channel of distribution chosen
• meets specific customer needs
• more effective use of marketing budget
• more likely to have higher sales to that target market
• lower competition in a specific market
Sample explanation
The marketing mix is likely to be more effective because QV has identified a new market for guided
walking holidays. The advertising can be in a form that reaches these target customers, making the
promotion more effective. The cost of promotion is likely to be more cost effective in turning advertising
expenditure into sales.
Question 1b Explain why the following three elements are important to the success of QV’s new product. Which
element is likely to have the most effect on sales? Justify your answer.
Possible answers Product • this is the main reason why customers are buying – so must meet customer
could include: needs or they will look at other holidays
Price • price can persuade customers to choose its products rather than other holiday
companies
• price can help reinforce image – as it’s a niche market – may be able to charge
higher price to reflect type of holiday
Promotion • helps attract attention – leading to higher sales

• inform customers on its website about what they can expect on the walking
holidays – so better able to make decisions
Conclusion • price – influences ability to pay – as use cost plus 50% could mean it is too
expensive so fewer customers – and it is important as operate in a competitive
market – but as none of its rivals offer this type of holiday may be less important
• product – this is important as if holiday is not what customers want it could lower
demand and then price and promotion may be less effective
• promotion can help attract customers who may be interested in guided walking
holidays – but if it is not what customers are looking for then could have limited
impact

Question 2a Explain one advantage and one disadvantage to QV of using secondary market research.

include: • low cost
• quick/readily available
disadvantages
• information may not be appropriate
• out of date
Sample explanation
Information may be out of date so QV does not find out what customers currently think about
holidays. This could lead to the wrong decisions being taken, such as entering the new niche
market leading to money being wasted and fewer sales being made.
Question 2b Explain how the following three factors are likely to affect the accuracy of QV’s market
research. Which reason do you think is likely to have the most effect? Justify your answer.
Possible answers could Number of • affects the sample size – more people asked, lower margin for error
include: people asked • can have more confidence in results which is important for this new niche
market
Where research • need to obtain opinions from people in target market – asking people in
was carried out another country about walking may not reflect views of people in Country X
• location can influence results – if questions are asked where there are lots
of children, the results will not reflect the target market
Who was asked • need to obtain opinions from people in target market – if the wrong people
are asked, QV may not obtain information required – wrong decisions made
such as whether to use television to advertise
• need to have a range of views
Conclusion • number of people can help ensure confidence in results but if wrong people
are asked, results can be misleading
• target market is based in Country X so important to have views of these
people but also need to ensure there is a range of views
• as it is a niche market need to know views of potential customers – not
everyone will be interested in guided walking
Question 3a Explain two limitations to QV of operating in a niche market.

include: • small market
• lack of economies of scale
• likely to attract competition if successful
• vulnerable to market changes – all ‘eggs in one basket’
Sample explanation
Small market means there is limited potential for growth, which will limit the amount of customers
willing to buy walking holidays from QV. So, even if they are successful, there is likely to be a
maximum amount of revenue they can gain from this small sector of the market.

Question 3b Explain how each of the following three factors may influence QV’s future sales and profits.
Which factor do you think is the most important? Justify your answer.
Possible answers could Unemployment • high unemployment rate of 8% will lead to fewer potential
include: customers – as not able to afford holidays
• niche market for walking holidays so may depend on where or
who affected by unemployment
Average wages • people may have jobs but if standard of living low – and average
wage expected to fall by $300 – could lower demand
• does sell a range of holidays so may see higher demand for
different sectors
Exchange rate • as holidays are in another country – appreciation is good for

tourists as own currency worth more whereas depreciation in
Country X would increase costs and affect demand
• fluctuations could make pricing difficult as need to pay variable
amounts for accommodation and food
Conclusion • unemployment could lower demand but may have limited impact
on niche market aimed at higher income earners
• wages affect ability to pay – even if have job – may be low paid
so cannot afford demand
• exchange rates will affect cost and prices charged, but if
customers do not have money to pay, this factor may have less
impact
Question 4a Explain one advantage and one disadvantage to QV of using a website to sell its products.

include: • improved communication
• increased potential number of customers/sales
• increased target market
• lower marketing costs
Disadvantages
• cost of maintaining website
• lack of personal service
• can be difficult to stand out from competitors
Sample explanation
Improved communication means employee have access to emails/phones to keep in contact

with customers, and are able to respond to customer requests quickly. This can help improve
customer loyalty so they return to buy holidays from QV rather than its competitors.

Question 4b Explain how the following three factors might influence the choice of distribution channel.
Which factor is likely to be the most important? Justify your answer.
Possible answers could Cost • transport costs are not an issue as it is a service not a physical
include: product
• costs of advertising can be reduced is use its website rather
than television for new type of holiday
Nature of the product • perishable or fragile goods need to be moved quickly and
carefully – holidays are a service so do not need to be stored
• technical or specialist products may need to offer personalised
service
The market • customers located overseas may require an agent – difficult to

access which increases costs
• operates in a range of niche and mass markets for its various
holidays
• using shops could help provide advice
Conclusion • sells holidays so costs of transport and storage not relevant –

costs of advertising can be lowered if used a website
• nature of product means direct channel or retailer can be used
as there is no physical item to be moved – will influence choice
but it may not be as significant
• as operates in a range of markets, this factor does need to be
considered as has a wide range of customers, some of whom
may require a specialist service

Cambridge IGCSE and O Level Business Studies Section 4 Operations management

in this resource.
Case study: Sunshine Foods (pages 242–243)

study. For instance, they could make appropriate use of the following features: manufacturer, breakfast cereals, batch production,
flow production, economies of scale, new product, break-even, operational efficiency, quality, customer complaints. There may be
further examples of application which have not been included here, but for which students could be credited.
Question 1a Explain two reasons why quality is important to Sunshine Foods.

include • reduces the cost of waste
• improves brand image/more competitive
• increases sales
• reduces customer complaints/returns
Sample explanation
Quality is important because it reduces costs, reduces customer complaints, improves brand
image, increases sales.
Question 1b State the advantages and disadvantages of quality control and quality assurance. Which
method do you think would be most effective for Sunshine Foods to ensure that they produce
quality products? Justify your answer.
Possible answers could Quality control Advantages

include • output is inspected to reduce risk of sending defective
items to consumers – helps SF’s image and reputation
Disadvantages
• need to employ quality inspectors which increases costs
• not all output can be inspected because this would be
too time consuming and costly – some defective items
might be sold, and this could damage SF’s reputation
• work is repetitive and boring – demotivates employees
and defective items might be missed
• production employees don’t see quality as their job –
over-reliance on quality inspectors to check quality
• inspection often takes place at the end of the production
process – if mistakes are made early on in the process,
then resources are wasted completing these products

Quality assurance Advantages

• raw materials, components and other resources must be
of the required standard before being used in production
– no risk of making products with defective resources
• quality standards agreed for every stage of the
production process – all employees are responsible for
the quality of their output
• products designed to reduce quality issues – using
technology such as Computer Aided Design (CAD)
Disadvantages
• requires staff training in quality assurance procedures –
increases costs
• high cost of the technology if CAD used
Conclusion • quality control – all responsibility for quality rests with

quality control inspectors and not production employees
– costly and, because not all items can be inspected,
there is greater risk of defective products making their
way to the final consumer – waste is higher because
inspection often takes place at the end of the production
process – no check to make sure that raw materials,
components and other resources are of the required
standard
• quality assurance – less waste as raw materials,
components and other resources are quality checked
before use – greater use of technology which removes
human error from the quality process – focus is on
all employees taking responsibility for quality which
reduces costs and can provide a source of motivation
for employees
Question 2a Explain one advantage and one disadvantage to employees at Sunshine Foods of the
directors’ decision to finance the investment for the introduction of flow production methods.

include • work is easier
• develop new skills in the operation of the equipment
• if profitability increases as a result of introducing flow production this could increase wages or
improve job security
Disadvantages
• some employees may be made redundant/lose their jobs
• work becomes less skilled which may be boring
Sample explanation
Flow production requires fewer employees with less skill, work becomes boring, employees do
not need to use the skills they have been trained for, some employees might be made redundant.

Question 2b The operations manager wants to introduce changes to improve productivity at

Sunshine Foods. Explain how each of the following might help the operations manager achieve
this objective. Which one is likely to be the most effective? Justify your answer.
Possible answers could Training • better-skilled employees – use machinery more efficiently,
include have better skills, so can produce more in the same time
• improves motivation (perhaps link to theories) – better
motivated employees are more productive
• fewer mistakes – less defective products/waste – more
output of saleable quality
Improving employee motivation • could use financial and non-financial incentives – bonus
based on production targets, or give employees greater
responsibility within the production process
• motivated workers will work harder and take more pride
in their work – increases output per worker and reduces
waste/improves quality
Investing in new technology • removes human error from production – machines do

not make mistakes because they don’t get tired
• faster and more reliable – machines, once set up,
produce identical products every time
• greater output than employees – do not need to rest
machines so they can work longer hours
Conclusion • training – short-term cost of training, but long-term benefits

of better skilled employees – benefits outweigh costs
– however, workers might leave if their skill level is not
matched by wage level – similar business pay higher wage
• employee motivation – costs involved e.g. bonus
payments – not all employees are motivated by the
same incentives – how long will the incentive motivate
workers for?
• new technology – might be the best method because
‘human’ aspect is taken out – but still need to train
employees to use machinery – high capital cost and
technology needs updating
Question 3a Explain two examples of economies of scale which Sunshine Foods might have benefited from
as a result of growth over the past five years.
Possible answers could Economies of scale

include • marketing economies
• bulk-buying economies
• managerial economies
• technical economies
• financial economies
Sample explanation
As Sunshine Foods has grown, it might have benefited from managerial economies, could
improve operational efficiency, improve quality, this could reduce SF’s costs per unit or
increase sales.

Question 3b State the advantages and disadvantages of break-even charts to Sunshine Foods when
launching a new product such as Choco-pops. Do you think break-even charts are useful to
Sunshine Foods when launching new products? Justify your answer.
Possible answers could Advantages • simple to construct – all data is linear

include • can be used to see effect of changing revenue or costs
– can forecast profit at different levels of output for
different revenue and cost changes
• can easily see and calculate the margin of safety at
different levels of sales
Disadvantages • difficulty of separating costs into fixed and variable – so

not possible to draw a linear total cost line
• costs do not behave in a linear way – economies of
scale not considered
• assumes all output is sold – in reality most businesses
have inventories of finished goods
Conclusion • do the advantages outweigh the disadvantages?

• provides management with some data about how many
they need to sell in order to cover costs – some data,
even with limitations is better than no data
• management can easily see what the effect would be on
break even and profit of different prices
Question 4a Explain two reasons why Sunshine Foods should manage the level of raw material inventories.
include • costs of holding inventory – warehousing, damage, theft, obsolescence, ties up cash
• costs of not holding inventory – disrupts production, late customer delivery, damage to
reputation, possible loss of orders
Sample explanation
There are costs of holding and not holding inventory, raw materials used might go out of date,
quality is important, effective inventory management reduces business costs.
Question 4b Explain the advantages and disadvantages of just-in-time inventory management. Do you think
Sunshine Foods should introduce just-in-time inventory management? Justify your answer.
Possible answers could Advantages • no inventories of raw materials and components held –
include removes costs of holding these inventories
• no inventories of finished goods held – removes costs of
holding these inventories
• could identify the costs of holding inventory e.g.
warehouseing, insurance, theft, obsolescence,
opportunity costs of cash tied up in inventories

Disadvantages • costs of not holding inventories e.g. disruption to

production if inventories not available
• unable to meet orders for goods at short notice
Conclusion • do the benefits of not holding inventory outweigh the

costs of holding inventory?
• do they have good communication with suppliers –
essential for just-in-time inventory management to work.
• are employees and machinery flexible enough to switch
jobs at short notice?


Case study 4a: Meltec Electronics (ME)

Question 1a Explain two reasons why ME might want to locate its new factory in Country P.

include: • reduced labour costs
• access to raw materials
• government incentives
• closer to market
Sample explanation
Reduced labour costs, especially as Country P is a low cost economy, would help reduce costs
and improve competitiveness, leading to a potential increase in sales and profit.
Question 1b State the advantages and disadvantages of the two sites being considered for the new factory
in Country P. Which site do you think ME should choose? Justify your answer.
Possible answers could Site A • price of land high – will increase fixed costs
include: • land is available – allows ME to set up factory sooner – to start producing the
electronics to recover costs of factory
• close to local town – allows access to employees
• no grants available – will increase costs
Site B • price of land lower than Site A – will lower fixed costs
• land is not available – which could impact on output
• 20 km from town – could create transport problems for employees but lessen
impact of environmental effects on local community and infrastructure may need
be developed
• grants available – will decrease costs
Conclusion • Site A is more expensive, but land is available which could speed up production;
and close access to town makes it easier to attract employees, but could face
problems due to external costs of new factory
• Site B is cheaper but no suitable land available so may be problems with
starting factory; but grants are available, so government does want to
encourage businesses to this location and may be willing to help with
infrastructure and planning permission
Question 2a Explain one advantage and one disadvantage to ME’s employees of flow production.

include: • increased skills/offer training
• make job easier/quicker
• jobs may be more secure as business more competitive

Disadvantages
• boring/lack motivation
• jobs lost
• worried about future job security
• difficult to adapt
• reduce skills needed for job
Sample explanation
Work can be boring (employees lack motivation) so might not work as efficiently, which could
have a negative impact on the forecast output for the new factory.
Question 2b State the advantages and disadvantages of the following three ways to improve labour
productivity. Which way is likely to have most impact? Justify your answer.
Possible answers could Spend more on • improve skills – less likely to make mistakes and work quicker so more
include: training output from fewer resources
• improve motivation – so try to ensure quality production
• Increase cost – could impact on profit
Employ more • cost of wages – increase costs

supervisors • can only identify errors – but if workers do not know how to improve
errors remain
• could demotivate employees as do not feel trusted to make electronics
Introduce a bonus • incentive to increase output so achieve the 500 000 target within
scheme based on three years
production targets • risk to quality as paid by results so customers not willing to buy its
electronics
Conclusion • increased cost of training in short run, but in the long run it could help
improve quality, so fewer mistakes, fewer resources and increased
output
• bonus scheme could encourage more output but may encourage
workers to rush, which lowers quality
• supervisors are expensive and may not be able to identify all mistakes;
having more supervisors does not solve basic errors in technique
Question 3a State and explain four sources of waste in the business.

include: • scrap materials during production
• wasted energy
• damaged raw materials
• obsolete stock in storage
Sample explanation
Scrap materials during production as quality of components may not meet the required standard.

Question 3b State the advantages and disadvantages of the following two methods of lean production ME
could use to reduce the level of waste. Which method do you think is likely to be more important?
Possible answers could Cell production • improved communication, avoiding confusion arising from
include: misunderstood or non-received messages in the factory
• workers become multi-skilled – more able to adapt to meet future
needs of business which is looking to expand
• improved employee motivation – more variety and arising from
variety of work, sense of team work and more responsibility so
quality is achieved
• improved quality as each cell has ‘ownership’ for its product/area
• not all workers may want to participate – and pressure to keep
producing more output/better quality
• workers may need training – increase costs
• may not allow business to use its machinery as intensively
compared to flow production
• may not suit all products
Kaizen • all workers involved – sense of team effort encouraged – leading to

lower labour turnover
• increase motivation – as feel opinions and ideas matter
• employees have hands-on knowledge – leading to better solutions –
saving time/cost or resources
• help break down barriers between different departments in the
factory
• rewards all ideas – which can all lead to major savings
• everyone needs training in approach – costs time and money
• relies on changing culture in organisation – may meet resistance –
so can demotivate some employees
Conclusion • cell production would produce less than flow, so level of output is a
factor that may work against this method
• kaizen would need to involve everyone to continually suggest
improvements, so could depend on who is recruited for new site
Question 4a Explain two reasons why quality is important to ME.

include: • good reputation
• increased sales
• more competitive
• can charge a higher selling price
• creates customer satisfaction
• creates brand loyalty

Sample explanation
To gain a good reputation so that customers are confident that the electronics will last and work
as expected. This means customers will keep coming back and buying its products and so keep
sales and profits high.
Question 4b ME needs to choose a method of production for the new factory. Consider the advantages and
disadvantages of the following two production methods. Which method do you think ME should
use? Justify your answer.
Possible answers could Flow production • larger output/mass production

include: • economies of scale or lower unit costs
• continuous process
• standardised products/consistent quality
• use unskilled workers – lower wage costs
• demotivating for employees as work is repetitive – lower efficiency
• significant storage requirements – higher rent/fixed costs when already
have high costs at site A
• high set up/machinery costs which means a large capital outlay at time
when looking to build a new factory
• if one machine breaks down whole production line stops – might not be
able to meet orders – could damage reputation
• inflexible/standard size – not easy to alter production to meet new requests
Batch production • flexible OR easy to switch production to help meet changes in demand
• variety of products – leading to possibly more sales
• some variety in workers’ jobs – less boring than flow
• less effect on production if machinery breaks down – as many materials
are important
• spread risk as not focusing on only one type of product
• time lost to reset machines between batches – lower productivity/lost
output
• fault with one product can affect entire batch – increase waste
• inventory may be sitting around between stages
• added cost of moving OR storing semi-finished goods
Conclusion • will there be variety in electronics made? if so, batch better as more
flexible
• flow production produces higher output so easier to meet forecast and
cheaper in long run but high set-up costs
• do they need to invest in flow production as average cost will be lower?
• low cost country – do workers have the skills to oversee machinery? if
not, flow makes greater use of unskilled workers but low cost can afford
to train workers


Case study 4b: Freedom Footwear (FF)

Question 1a Explain two economies of scale FF might benefit from.

include: • financial
• marketing
• purchasing/bulk buying
• managerial
• risk bearing
Sample explanation
Purchasing economies as FF can buy its stock of leather or other raw materials in larger quantities
now, and gain bulk buying savings from his supplier.
Question 1b Consider the advantages and disadvantages of the following three ways to ensure the quality of
FF’s products. Which way do you think is likely to have the most effect? Justify your answer.
Possible answers could Quality control • prevents faulty products leaving factory – maintain reputation
include: • only occurs at end of process so can be expensive to correct errors in its
electronic production
Increase training • increase training costs

• could avoid/reduce number of errors – improving quality and reduce cost
of rework especially when materials have to be imported
• can improve employee motivation – lower number of employees leaving
Only buy best quality • increase inventory cost – so cost of sales rises reducing profit margin
materials • good quality materials could be damaged during production –
• can aid quality image – which is important as looks to maximise its
capacity of 500 000 items
Conclusion • quality control protects reputation but only check at end so errors can
still occur throughout process
• training can stop employees making mistakes which can cover cost of
training in long run so likely best solution
• quality materials only important as long as production process does not
waste or damage materials
Question 2a Explain one advantage and one disadvantage to FF of using batch production.

include: • flexible way of working
• variety in workers’ jobs
• less effect if machinery breaks down

Disadvantages
• can be expensive
• increased movement of goods
• warehouse space needed
Sample explanation
It is a more flexible way of working and production can easily be changed from one product to
another to meet demand. So, if there is an increase in the number of orders for a particular size of
shoes, then FF can quickly meet this demand.
Question 2b State the advantages and disadvantages of each of the following three ways for FF to save
costs. Which way do you think is most likely to have the most effect? Justify your answer.
Possible answers could Reduce styles and • save inventory costs – lower cost of sales
include: colours • could order larger quantities of other materials and benefit from possible
economies of scale
• lower storage costs
• lower demand as customers have less choice and may not only want black
– could damage reputation of its shoes
Reduce number of • reduce wage cost – as highly skilled to likely to receive higher pay - lower
workers total costs
• work would have to done by remaining workers - demotivate remaining
workers – who leave or lower productivity as overworked – so not able to
meet 95 000 pairs needed to break even
• cost of redundancy in short term
Introduce lean • damage, waste and loss of stocks/equipment are lowered – lower costs
production allowing them to lower prices
methods • improved quality through the introduction of kaizen and quality circles
• its skilled employees are more involved – more motivated leading to higher
efficiency
• cost of introducing system – changing processes and training will increase
costs rather than help lower them in short term
• little margin for error – delays in delivery of leather or other materials can
mean lose order
• inventory orders generally lower – reduce opportunity for economy of scale
Recommendation • reducing range can lower inventory costs but can damage reputation as
less customer choice which could see sales fall which negates benefit of
lower cost
• reduce workers will lower labour costs but can demotivate other workers
who may not be able to cope with increased workload
• depends on lean production method used – aim to eliminate waste – so
small savings can be made – which over time could become significant –
involves employees which can help increase motivation

Question 3a Explain two disadvantages to FF’s workers of introducing the latest technology into the
production process.

include: • jobs lost
• sometimes job more boring
• worried about future security of jobs
• difficult to adjust to new machinery
• resistant to change
• reduce skills
• maybe lower wage rate
Sample explanation
Jobs can be lost so workers become demotivated as they fear they could be ones to be made
redundant which will lower their incomes and standard of living.
Question 3b Explain how the following three uses of new technology could help FF improve its business.
Which use do you think is likely to have the most effect? Justify your answer.
Possible answers could CAD • help design prototypes/new products – for different shoe style – which
include: could help increase target market/sales
CAM • computers monitor production process and control machines –

quicker production and reduce need for someone to do quality control
checks
• less labour required – lower labour costs as fewer highly skilled
workers needed
Start a website • improved communication with retailers so able to respond to requests

for more shoes quickly
• increased sales potential – as allows customers to easily view its
different shoe options before order
• lower marketing costs as can advertise latest styles/colours quickly
without having to reprint brochures which is important as will not
increase further its promotion budget
Recommendation • website can help improve sales – which have fallen for past three
years – providing information and way to communicate about
products available/wanted but product quality must match
• CAD can help improve production – new designs can attract sales
which business needs
• CAM can help ensure quality and speed of production but if product
designs are wrong, customers may not want to purchase the shoes
Question 4a Explain two ways FF’s management could use the break-even data shown in Appendix 1.

include: • to estimate how many sales need to be made to cover all the costs
• to see what will happen to the break-even point if costs or prices change
• to calculate the margin of safety for the different products

Sample explanation
To estimate how many sales need to be made to cover all the costs so that the business will not
lose money on its output and will make a profit on its shoes. If they did not know what the break-
even level of output was then FF might be losing money and may not be aware of this until the
end of the year when the income statement was produced.
Question 4b FF is thinking of changing to a cheaper supplier. Explain why the following three factors are
important when making this decision. Which factor do you think is most important? Justify your
answer.
Possible answers could Speed of delivery • without access to materials for its shoes, production will stop – will
include: not be able to meet orders – leading to customer dissatisfaction and
even lower sales
• retailers might decide to stop stocking its products
Range • having a variety of materials and colours is important to produce the

three different styles planned
• different styles can help attract new customers or target new
markets – to increase sales or spread risk
Quality • make high quality shoes so quality materials are needed to maintain
standards
• poor quality materials would damage its reputation, leading to a
further decline in its sales
Conclusion • speed is important as, without materials, there can be no production,

but as it is batch production some processes can still continue
• range – as looking to reduce number of styles and colour this is
likely to be less important – as only need black which is likely to be
standard colour most suppliers have
• quality is part of its image – so this is important – especially if they are
switching to a cheaper supplier – a significant difference between this
and quality of old supplier could damage its reputation

Cambridge IGCSE and O Level Business Studies Section 5 Financial information and decisions

in this resource.
Case study: The Paradise Group (pages 296–297)

study. For instance, they could make appropriate use of the following features: public limited company, hotels, profit growth, hotel
performance, statement of financial position, cash-flow forecast, profit, hotel purchase, share capital, financing options, financial
data, any statement of financial position items. There may be further examples of application which have not been included here,
but for which students could be credited.
Question 1a Explain how any two external stakeholders of the Paradise Group might use the financial data
provided in the text and Appendix 2.
Possible answers could Stakeholders

include • lenders
• suppliers
• customers
• government
Uses
How profit might be of use when considering:
• receipt of interest on borrowing/repayment of borrowing
• tax receipts
• supply of raw materials
• pricing
• new products
Sample explanation
Lenders will want to know the profit of the company, cash flow, so that interest will be paid.
Question 1b Do you think The Hideaway hotel is as successful as other businesses in the Paradise Group
chain? Justify your answer using at least two profitability ratios.
Possible answers could Ratio 1 • gross profit margin is 50 % – this is the same as for the
include rest of the group
Ratio 2 • profit margin is 10%, which is lower than for the rest of
the group – 25%

Conclusion • if measured by profitability ratios, it is as successful as

the other hotels in the group as measured by the gross
profit margin, but the profit margin is significantly lower,
suggesting that they are not as successful at controlling
overhead costs
• making a judgement as to success based on just one
year’s figures could be misleading – a more accurate
judgement could be made if figures for previous years
were available
Question 2a Using examples, explain the difference between non-current assets and current assets that
might be held by the Paradise Group.
Possible answers could Current assets

include • inventories
• trade receivables
• cash/bank balances
Non-current assets
• land
• premises
• machinery
• motor vehicles
Give marks for appropriate definitions of the two terms, e.g. current assets are resources owned
by a business that they expect to convert into cash before the date of the next statement of
financial position.
Sample explanation
Non-current assets are resources owned by a business that they expect to use for longer than
one year. For example, hotels, furniture.
Question 2b Consider the advantages and disadvantages of the following methods that could be used to
finance the purchase of City Budget Hotels. Recommend to the Board of Directors which source
it should use. Justify your answer.
Possible answers could Share issue Advantages

include • no interest payments so cheaper than a long-term loan
• money raised is a permanent source of capital
Disadvantages
• dilutes control of the company
• profits shared among more owners
• cost of the share issue
Long-term bank loan Advantage

• does not affect ownership of the company
Disadvantages
• must pay interest on the loan – increases costs
• the loan must be repaid
• reduces the profit available for other uses,
e.g. investment in growth or dividend payments

Recommendation • share issue – dilutes control, but cheaper than borrowing

– reduces gearing i.e. lowers financial risk – might not
be able to raise all of the finance needed and will take
longer than arranging a bank loan
• long-term bank loan – more expensive but does not
dilute control – increases gearing i.e. increases financial
risk – quicker to raise finance this way compared to
share issue
Question 3a Explain two ways the company’s accountant, Eve Wan, might use the cash-flow forecast she
has prepared to better manage the Paradise Group’s cash position.

include • to monitor closing balances
• change timing of inflows
• change timing of outflows
• arrange finance to cover short-term cash shortages
Sample explanation
Eve Wan might use the cash-flow forecast to identify any months when the business might have a
cash shortage; she might try to increase cash inflows or delay payments to reduce cash outflows;
this will remove the need for an expensive overdraft.
Question 3b ‘Profit is what our business is all about and this has been increasing year on year for the past
five years, so there is nothing to worry about’. Explain why each of the following is important to
the Paradise Group. Which do you think is the most important? Justify your answer.
Possible answers could Cash • cash is needed to pay for day-to-day expenses e.g.
include trade payables and wages
• without cash the business would have to use overdraft
facilities, which are very expensive
Profit • profit is needed to reward shareholders

• profit can be ploughed back i.e. reinvested in PG – it is
the cheapest source of finance for PG
• profitable businesses find it easier to attract new
shareholders to invest or to persuade lenders to provide
finance for expansion
Conclusion • cash is more important in the short-run, but in the

long-run PG will have to make profit if it is to survive
and grow

Question 4a Explain two ways the Paradise Group could increase its profits.

include • reduce selling prices
• spend money on a promotional campaign – as long as the increase in revenue is greater than
the increase in promotional spending, profits should increase
• reduce costs – find cheaper suppliers, reduce the number of employees
Sample explanation
PG could reduce selling prices. It is in a competitive market so price elasticity of demand is likely to
be relatively elastic. Reducing price will increases revenue and if costs remain the same, then profits
should rise.
Question 4b Explain how the following two financial documents might be useful to Paradise Group’s
directors when choosing a source of finance. Which statement do you think is the most useful to
Paradise Group’s directors? Justify your answer.
Possible answers could Income statement • provides information about retained earnings – the
include amount PG has not given to shareholders and can be
used to reinvest in the business
• the dividends to shareholders proposed could be
reduced – this would increases retained earnings
Statement of financial position • they can calculate the gearing ratio – shows the level of
financial risk – the higher the gearing ratio, the less likely
that borrowing would be considered a good source of
finance
• current assets give an indication of the amount of cash
tied up in inventories and owed by trade receivables –
reducing these would increase cash balances and this
cash could be put to more profitable use
Conclusion • statement of financial position is possibly the most

useful, but it is only a ‘snapshot’ in time and there is
no guarantee that the figures are the same now as they
were when the statement was created
• the income statement might be used to consider how
best to apportion future profit i.e. give lower dividends to
shareholders to increase future retained earnings


Case study 5a: The Fitness Studio (TFS)

Question 1a Explain two reasons why someone might want to become a shareholder of TFS.

could include: • share of profits/dividends
• capital gain from increased share price
• wants to become a director
• benefit from limited liability
• a growing company
Sample explanation
To obtain share of profits as they are risking their own money by investing it in the business. The business
is successful and now has three gyms; this could lead to more dividends in the future. The share price may
increase in the future, which will lead to possible profits from selling their shares for a higher price than paid
originally.
Question 1b State the advantages and disadvantages of the following three sources of finance TFS could use for the
new equipment. Which source should TFS choose? Justify your answer.
Possible answers Leasing • no large initial payment of $700 000

could include: • lease company may cover cost of repair – lower costs
• can update fitness equipment when technology improves
• never own asset so cannot be added to the $400 000 of non-current assets
• overall cost may be higher due to regular payments
Share issue • access to greater amounts of capital

• no interest OR finance costs to pay – so fixed costs do not increase
• permanent source of capital – no need to repay
• avoid increasing debt which is currently $200 000
• possible loss of control OR risk of takeover for the five friends
• shareholders might expect dividends
• cost OR time to arrange
Retained profit • no interest to pay which could be expensive on a $700 000 loan
• no need to repay
• might raise limited amount as only been operative for five years
• takes time to raise funds
• funds not available of other uses such as the redecoration

Recommendation • leasing may be suitable as cash-flow issues – and easy to update to latest
equipment when needed which may help attract new customers to Gym 1 – but on-
going cost which has implications for cash flow – but as Gym 1 having problems it
might lower risk
• share issue – can raise full amount from sister – but will have to give up share of
ownership which everyone might not agree to
• retained profit – have $180 000 – so can afford it – but opportunity cost as funds
once used not available for other purposes – also need to pay for refurbishment
Question 2a Explain two current assets and two current liabilities TFS might include.

could include: • trade receivables
• inventory
• cash
• trade payables
• bank overdraft
Sample explanation
Cash received from membership payments received from the gym users.
Question 2b Explain how each of the following three financial documents might be useful to help an investor decide
whether to become a shareholder. Which document do you think is most important? Justify your answer.
Possible answers Balance • records amount of assets and liabilities – the fitness gyms have including the level of debt
could include: sheet and assets available to sell if necessary
• able to calculate liquidity ratios – stability of the business (ability to repay current liabilities)
• shows value of the existing business
Cash-flow • predicts cash inflows and outflows such as membership fees and redecoration of the gyms
forecast • able to see if any cash-flow problems and help identify ways to avoid liquidity problem – is
there sufficient working capital?
Income • to assess profitability/availability of retained profit/ability to repay loans as looking to

statement spend $700 000 on new sports equipment
• shows whether the business has made a profit or a loss over the year – compared with
competitors and with previous year’s accounts to assess if the gym business is improving/
worse
• able to see whether profits are made which could help indicate if dividend paid
Conclusion • SFP tells investor a lot about key elements of a business – its assets and liabilities – will
want to know there are sufficient assets
• cash-flow is important to short term survival of any business – if cannot solve cash-flow
problems business will fail – based on estimates so could change
• income statement shows how much profit made in previous year and does not necessarily
mean will be successful in future

Question 3a Explain two reasons, other than financing growth, why profit is important to TFS.

could include: • represent a reward for risk taking
• measure of performance
• ensure long term survival of business
• shareholders want dividends (satisficing)
• attracts future investors/shareholders
Sample explanation
Attracts future investors/shareholders, such as Jackson’s sister, as potential investors will see this as
a successful company. This would increase the amount of capital the business has to use to help fund
expansion.
Question 3b Consider the data in Appendix 2 for the three gyms. Which gym do you think has performed the best?
Include calculations of profitability ratios in your response and justify your answer.
Possible answers Gym 1 • gross profit margin (40 ÷ 60) × 100 = 66%
could include: • profit margin (10 ÷ 60) × 100 = 16.67%
• gross profit margin is second highest but less able to control its expenses based on
revenue generated
Gym 2 • gross profit margin (55 ÷ 80) × 100 = 68.75%

• profit margin (25 ÷ 80) × 100 = 31.25%
• revenue is equal to Gym 3
Gym 3 • gross profit margin (50 ÷ 80) × 100 = 62.5%

• profit margin (20 ÷ 80) × 100 = 20%
• revenue is equal to Gym 2
Conclusion • Gym 2 is the best performing gym – as both gross profit margin and profit margin are
the highest, this is due to better control of its cost of sales which allows it to have a
better margin
Question 4a Explain four factors TFS should consider when deciding how to finance the costs of redecoration.

could include: • amount
• time scale
• security
• cost of source
• impact on ownership
Sample explanation
Amount, as source must be able to raise the $30 000 needed.

Question 4b Explain how the following three stakeholders of TFS might use ratio analysis to help them make
decisions. Which stakeholder do you think is likely to find the information most useful? Justify your answer.
Possible answers Suppliers • how secure is their money? – profitability ratio
could include: • want to know if business is able to pay for inventory on time as owed – liquidity ratio
• owed $50 000 so keen to see size of other debts of business and what security exists –
assess risk of default
Bank • ability to repay capital/interest when borrowing money for new equipment – so use
liquidity ratios/acid test ratio
• able to pay interest on the $200 000 in non-current liabilities on time – liquidity ratio
Shareholders • will want to see if TFS has made high profit as want to be paid a dividend on their
$50 000 investment
• assess the profitability of the business and use it to assess the use of their funds –
profitability ratio
Conclusion • suppliers may base on trust – and can always shorten credit period if concerned
• bank likely to lend large amount to business especially if it is to finance new equipment
so important to be able to assess risk of investment
• shareholders benefit from limited liability which limits amount of risk – so more
interested in potential return


Case study 5b: Phacto Engineering (PE)

Question 1a Explain two disadvantages to PE of using an overdraft.

answers could • repayable on demand
include: • repayable within a year
• security may be required
• interest payable
Sample explanation
Interest is payable, which increases the expenses and cash outflows. This is an issue at a time when
having cash-flow problems. Interest must be paid, otherwise the lender has the right to cancel the overdraft
immediately and the business could struggle to pay its other creditors as well.
Question 1b Explain how the following three profitability ratios can be used to assess PE’s profitability. Which ratio do
you think is most useful? Justify your answer.
Possible Gross profit margin • 2016 (100 ÷ 300) × 100 = 33.3%

answers could • 2017 (150 ÷ 420) × 100 = 35.7%
include: • improved indicating the margin has increased
Profit margin • 2016 13.3%

• 2017 (50 ÷ 420) × 100 = 11.9%
• ratio has decreased which shows less able to control its expenses
Return on capital • 2016 20%

employed (ROCE) • 2017 (50 ÷ 220) × 100 = 22.72%
• ratio improved so business used its resources better to generate profit
Conclusion • ratios look at different elements of profitability

• ROCE shows amount of profit for each dollar invested – shows how efficiently capital
is used – this is very important to managers as provides an overview of business
operations so profitability can be said to have improved
Question 2a Explain the purpose of two financial statements produced by PE’s accountant, Suraiya. Calculate the profit
margin and return on capital employed (ROCE) for 2017. Compare your two ratio results with those of 2016 in
Appendix 1.

answers could • Profit margin = (50 ÷ 420) × 100 = 11.9%
include: • ROCE = (50 ÷ 220) × 100 = 22.72%

Sample explanation
Profit margin – ratio has decreased, which shows less able to control its expenses. ROCE improved, so
business used its resources better to generate profit.
Question 2b Explain how the following three stakeholders might use PE’s accounts. Which stakeholder do you think is
likely to find the accounts most useful? Justify your answer.
Possible Government • want to know level of profits which has increased by $10 000 – pay more tax
answers could • how secure are the 50 full-time jobs in community or expansion? – implications for
include: government policies
Lenders • ability to repay capital/interest when borrowing $50 000 for new equipment – so use
liquidity ratios/acid test ratio
• able to pay interest on time as often needed to use its overdraft – liquidity ratio and cash
flow
Suppliers • how secure is their money – as trade receivables is high – profitability ratio
• want to know if business is able to pay for inventory on time as takes more than 30 days
for some of PE’s customers to pay and cash balance ($10 000) last month – so do they
have sufficient cash to pay them – liquidity ratio and cash flow
• owed money so keen to see size of other debts of business and what security
exists – assess risk of default
Conclusion • government will be able to obtain helpful information about objectives and how business is
doing, but key information such as taxation can also be obtained through other methods
• suppliers will be interested in ability to pay – so cash flow and reputation could be useful
rather than ratios
• lenders, like suppliers, are likely to find information helpful as likely to lend larger sums of
money for projects so on this basis could find information more helpful as risk greater
Question 3a Explain two sources of finance PE could use for the new machinery.

answers could • retained profit
include: • leasing
• bank loan
Sample explanation
Leasing. Then the brothers do not have to borrow money at a time when cash flow is negative. This means
they can use their money for other uses, such as exporting. The sales from this could be used to generate
revenue which can then cover the cost of leasing.
Question 3b State the advantages and disadvantages of the following three methods that PE could use to improve its
cash-flow position. Which method should PE choose? Justify your answer.
Possible Buy lower level of • reduce cash outflow below ($10 000)
answers could inventory • could be n problem as may not be able to meet orders so may not be feasible to export
include: products to Country Y
Ask suppliers for • delays cash outflow – allows time for customers to pay as some take more than 30 days
more time to pay • damage relations with suppliers – less willing to supply parts in future

Increase prices • increase revenue and improve financial position as increases cash inflow
• risk of being less competitive with other component producers – could lose customers
to competitors
Conclusion • identified inventory as issue – so area to address but need to ensure have sufficient so
not delay production which would impact on cash inflow
• suppliers may not be willing to offer more time so may depend on credit history – will
delay cash outflow but may not solve underlying problem
• increasing prices will increase cash inflow but offering customer 30 days to pay may
not see benefit immediately and higher prices could discourage sales, lowering inflow
which will not improve cash flow
Question 4a Explain two reasons why managing cash flow is important to PE.

answers could • cash flow needed to pay day-to-day expenses
include: • business could fail due to lack of cash
• reduces need for finance
• able to predict/plan for cash-flow problems
• helps a business get a loan
Sample explanation
Business could fail due to lack of cash so it is important to be able to anticipate potential cash-flow issues,
such as the problems caused by trade receivables. This will allow the brothers time to find an appropriate
solution to ensure their otherwise profitable business does not fail.
Question 4b Explain how the following two changes might affect PE’s choice of finance for the new equipment. Which
change do you think is likely to have the most effect? Justify your answer.
Possible Large order from Country Y • order can support ability to pay – which can improve chance of loan being
answers could for its products given (or at a lower interest rate) as seen as lower risk
include: • large order could remove need to borrow from bank
• payment for order could be delayed so could influence source – as delay
could put pressure on cash flow and interest payments may be difficult to
manage
Interest rates increase by • increase cost of borrowing – higher repayments if use loans to purchase the
5% in Country X additional machinery – negative impact on expenses and cash flow
• loans become more expensive and internal sources such as retained profit
may have to be considered
• higher interest could increase the value of any cash reserves but as balance
is negative throughout the six months – this is unlikely to be significant
factor
Conclusion • order can help support application or may be sufficient to change the type
of finance used
• interest rates will only affect external sources such as loans, which is a
fixed cost, and as they need $50 000 its impact is likely to be significant

Cambridge IGCSE and O Level Business Studies Section 6 External influences on business activity

in this resource.
Case study: Halo Enterprises (pages 340–342)

study. For instance, they could make appropriate use of the following features: retail company, manufacturer of beauty products,
eco-certified products, organic products, no testing on animals, eco-friendly packaging, recession, international growth strategy,
exporting, host countries, economic indicators, political indicators. There may be further examples of application which have not
been included here, but for which students could be credited.
Question 1a Explain two benefits that the host country, Country Z, will have because of Halo Enterprises
setting up operations there as a multinational.

include • provides employment opportunities
• improves balance of payments
• increases choice of goods and services
• invites knowledge-sharing
• increases tax revenues
• improves country’s reputation
Sample explanation
The host country might benefit from increased employment opportunities. Country Z has 7%
unemployment – this will help to continue the country’s economic growth and will reduce
government spending on benefits for the unemployed.
Question 1b Explain the advantages and disadvantages of the following two countries for Halo Enterprises
when choosing a new location. Which country do you think Halo Enterprises should choose?
Possible answers could Country Y Advantages

include • politically stable
• good power and rail infrastructure
• economy is in the growth stage of the economic cycle
• member of a free trade area
Disadvantages
• lower growth rate
• higher inflation and interest rates than Country Z
• more trade barriers than Country Z

Country Z Advantages
• good transport infrastructure
• economy is at the boom stage of the economic cycle
• lower unemployment than Country Y
• low inflation and interest rates
• hardly any tariffs or quotas
• investment encouraged
Disadvantages
• much smaller population – smaller potential market
• land-locked – might be more difficult to transport goods
to Country Z
• exchange rate is less favourable than Country Y with
respect to country X’s currency
Conclusion • Country Z appears to have more advantages

than disadvantages – the lower inflation rate and
unemployment rate in Country Z and the economy being
in boom, might suggest that consumers have more
real disposable income – this could help HE achieve
better sales – however, political instability of Country Z
might be a problem for the future i.e. uncertainty that
good economic indicators will continue – when will the
economic boom end?
Question 2a Pressure groups are currently posing a threat to multinationals in Country Z. When considering
which country to set up operations in, explain why Halo Enterprises should consider pressure
groups as both an opportunity and a threat.
Possible answers could Opportunities

include • support HE’s environment concerns
• may change government policy
Threats
• effect on local businesses
• boycott of HE’s goods
• damage to HE’s reputation

Question 2b The exchange rate of Country X’s currency with respect to Country Y’s currency has been
fluctuating in the past year. Explain how each of the following might affect Halo Enterprises if
it decides to export to Country Y. Which of these do you think is the most beneficial for Halo
Enterprises? Justify your answer.
Possible answers could Appreciation of Country X’s • will make Country X’s goods more expensive in
include currency Country Y – higher prices reduce demand/sales
Depreciation of Country X’s • will make Country X’s goods less expensive in
currency Country Y – lower prices increase demand/sales
Conclusion • the depreciation of Country X’s currency is better for

HE exports to Country Y – however, the currency will
also be depreciating against other currencies and this
increases import costs – if HE imports its raw materials,
then the prices of these will rise – the increase in costs
of production might mean that HE has to increase its
prices, which could negate any benefit of currency
depreciation
Question 3a Based on the information in Appendix 2, compare two economic features of Country Y and
Country Z and explain their impact on business activity.
Possible answers could Economic features

include • GDP growth rate
• inflation
• interest rates
• exchange rates
• unemployment rate
• barriers to entry
• legal controls/regulatory framework
Sample explanation
The unemployment rate is higher in Country Y than it is in Country Z. Country Y’s employment
rate is almost double that of Country Z’s. Consumers in Country Y will have lower disposable
incomes and this will reduce the sales potential in Country Y for HE’s products.

Question 3b Before Halo Enterprises can set up operations in either of the countries, it needs to put
forward a proposal to the government showing the social costs and benefits of its operations.
The government of Country Z is aware of the increasing threat of pressure groups and wants to
do a very detailed cost–benefit analysis of Halo Enterprises’ proposal before giving it approval.
Explain how Halo Enterprises activities might cause positive and negative externalities. Do you
think the government of Country Z should approve Halo Enterprises’ proposal? Justify your
answer.
Possible answers could Positive externalities • provides employment opportunities

include • improves balance of payments
• increases choice of goods and services
• invites knowledge-sharing
• increases tax revenues
• improves the country’s reputation
Negative externalities • increased competition repatriation of profits

environmental damage exploitation of employees
• negative social impact
• undue influence on government
• less sense of social responsibility
• exploitation of natural resources
Conclusion • the cost benefit analysis should consider whether the

benefits of HE’s proposal outweighs the costs – do
the economic positives outweigh the social and
environmental negatives?
Question 4a What are tariffs and quotas? Explain how they may impact the business activity of Halo
Enterprises if it decides to export to or set up operations in Country Y.
Possible answers could Explains tariffs and quotas, e.g. tax on imports and exports, limits placed on the number of goods
include that can be exported and imported.
Effects
• increases price
• makes HE goods less competitive
• unable to sell enough to earn profit
• cannot satisfy demand in foreign country
Sample explanation
Tariffs are a tax on imports. HE’s goods will be more expensive in Country Y. Country Y imposes
tariffs but Country Z does not. HE will probably sell more in Country Y than in Country Z.

Question 4b Explain how the following three issues could affect Halo Enterprises. Which do you think is the
most important issue? Justify your answer.
Possible answers could Being ethical • consumers are more aware of ethical issues and many
include may not buy from businesses that behave unethically –
ethical behaviour can increase sales and profits.
• employees can be motivated working for a business that
behaves ethically towards them and in their production
process – it will be easier to recruit and retain employees
• improves the image and reputation of the business,
which helps to attract new investors to help finance
expansion plans
Being environmentally friendly • improves the business’s reputation and helps to gain/
keep customers, employees and investors
• government might fine or close down any business that
causes damage to the environment
• pressure groups might take action to oppose any
business that is seen as not being environmentally
friendly – this might affect production, damage
reputation, reduce sales and profits
Being sustainable • sustainable development requires a business to weigh

up the environmental, social and economic impacts of
its activities – a business is sustainable if it contributes
towards the economic growth of a country and makes
profits while obeying the law, behaving ethically and
being environmentally friendly
• importance of being sustainable could be any of the
advantages a business may gain from being ethical and
environmentally friendly
Conclusion • ethical – helps with brand image, sales, attracting

investment and employee recruitment and retention.
Possible long-term benefits – does HE have an objective
to behave ethically towards its markets and consumers?
• environmentally friendly – how active and powerful
are pressure groups – what are the consequences
of government action against HE if they behave in a
way that harms the environment? – does HE have a
corporate social responsibility (CSR) objective?
• sustainable – is likely to develop as a result of behaving
in an ethical and environmentally friendly way, so it
could be argued that this is the most important issue
for HE


Case study 6a: Toystar Ltd

Question 1a Explain two advantages to Toystar Ltd of becoming a multinational company.

answers could • to increase market share
include: • to secure cheaper premises and labour
• to avoid tax or trade barriers
• government grants
Sample explanation
To increase market share. TS is a successful business and may find there is limited potential growth in its home
market and, therefore, needs a new market for its products. They may start by exporting toys to other countries
but eventually they may want to set up production there.
Question 1b The management of the company is evaluating whether Country B is the right country in which to set up its
operations first. Consider two benefits and two threats to Toystar Ltd of setting up operations in Country B.
Do you think the benefit ts outweigh the threats? Justify your answer.
Benefit 1:
Benefit 2:
Threat 1:
Threat 2:
Conclusion:
Possible Advantages to • access to new market/increase sales/market share for its toys
answers could Toystar Ltd • reduce production costs, such as cheaper labour, transport, materials
include: • spread risk as this would be a new market so not reliant on one market for sales
• easier access to raw materials such as plastic and paper
• avoid barriers to trade as a free trade agreement has been signed recently
• help remain competitive
• reduce transport costs
• economies of scale
• reduce tax liability/take advantage of favourable tax laws
• access government grants
Disadvantages • subject to more legal controls – increase costs as must ensure meet rules and regulations
to Toystar Ltd in many different countries which could make it harder to ensure use fair practices
• communication problems as business looks to become a multinational company
• lack of coordination as will have operations in a number of countries
• environmental concerns such as the use of plastic and paper in packaging could damage
its reputation

Conclusion • business more likely to benefit from lower costs which can help it remain competitive and
wider market which helps spread risks
• business will have to deal with different sets of laws to ensure It does not face legal action
which takes planning
• larger organisation can face diseconomies of scale, can be managed but it is more difficult
as geographical spread increases
Question 2a Explain two methods of legal control that the government of Country B can use to control the amount of
foreign investment that happens in its country.
Method 1:
Explanation:
Method 2:
Explanation:

answers could • access to new markets
include: • labour may be cheaper in other markets
• increased competition
• increased marketing and distribution costs
Sample explanation
Increased competition as other toy manufacturers will find it easy to access Country A. If these products are
cheaper, it may be difficult for Toystar Ltd to compete leading to potentially lower sales and profit.
Question 2b State the advantages and disadvantages to the following stakeholders of multinational companies setting
up operations in Country B? Which stakeholder do you think will benefit the most? Justify your answer.
Possible Society • create jobs – increase incomes and standard of living – boosting the growing economy
answers could even more
include: • tax – increase government funds to provide services
• increased choice and lower prices as access to wider range of toy products
• improve reputation of country – attract other businesses
• use up scarce resources in a country that already has to import energy
• pollution such as the use of plastic and paper in packaging
• may exploit local labour as fewer legal controls
• may expect government support and threaten to pull out of country if not offered
favourable terms
• loss of cultural identify as standard products sold everywhere
Local • bring in expertise – so skills of local workforce improves – helps other local businesses to
business develop knowledge and skills
• could lose employees to new business increasing the problem of labour shortages so may
need to offer higher wages to retain employees increasing costs
• infrastructure improvements benefit local businesses as well as the toy producer
• improved image of country could lead to extra investment
• increased competition – as better product which able to sell at lower prices – could mean
lower sales

Conclusion • create jobs – but quality of jobs as may be low skilled

• offer choice and lower prices so consumers may benefit but in long term the closure of
independent businesses may reduce choice
• local businesses may benefit from expertise and improvements to infrastructure but many
small businesses may struggle to compete against larger competitors who are better
placed to lower their prices so, while some businesses benefit, others may have to close
Question 3a The threat from environmental pressure groups is growing significantly in Country A. Explain two methods
pressure groups could use to support their cause.

answers could • lobbying government
include: • organise a boycott so customers do not buy toys from Toystar Ltd
• write letters to newspapers
• hold public meetings
• arrange a meeting with business
• protest/demonstration
• petitions
• direct action
Sample explanation
Organise a boycott so customers do not buy toys from Toystar Ltd, which would lower its sales and revenue.
The business will have to be seen to listen to the pressure group if it wishes to maintain a favourable
reputation so customers will be prepared to continue to buy its products.
Question 3b The management of Toystar Ltd faces conflict between profit and ethics when making business decisions.
Management has chosen to adopt a more ethical approach and respond to environmental pressures.
Consider how businesses respond to environmental pressures and why it is important for them to do so
How businesses respond:
Why businesses respond:
Possible Reduction in minimum • lower labour costs – of it 300 employees – lowers production costs – improve
answers could wage profit margin and profitability of business
include:
Reduce time for new • less paperwork – saves time when looking to open new factory so able to start
businesses to obtain production/gain possible sales sooner
planning permission • need to find suitable location and overcome issues with pressure groups
Restriction on amount of • may need to redesign packaging of toys – increases costs

packaging • less packaging can improve image as seen an environmental friendly
• reduction in packaging could lower costs – improve margin
Conclusion • lower costs if minimum wage reduced but business may pay above minimum
wage as ethical so may have limited or no effect
• remove legislation so easier to set up factory but this is a one off impact when
start production
• packaging will be important for all its products – will cost money to redesign
packaging for each toy and it is an ongoing issue (especially if rules keep
changing) so likely to have most impact

Question 4a Explain two possible environmental impacts of Toystar Ltd’s activities.

could include: • air pollution
• visual eye sore
• people give up homes/loss of green fields or nature
• congestion/extra traffic
Sample explanation
Loss of green space. A large amount of land will be needed for the site and roads will need to be built
to access the factory to take materials and products in and out. This will reduce the amount of land for
community projects, lowering the quality of life for the local community.
Question 4b Explain two possible business practices (economic, environmental or social) of Toystar Ltd that
would indicate its commitment to sustainable development and corporate social responsibility. Why it is
important for companies to follow sustainable business practices? Justify your answer.
Business practice 1:
Explanation:
Business practice 2:
Explanation:
Importance of sustainable business practices:
Possible answers Reduce waste • less resources needed – as less need to import natural or other resources
could include: • reduce pollution – such as plastic and paper so less litter produced so no eye
sore or pollution of rivers – helps protect wildlife
• reduce cost – so more money to support other projects
Use renewable • protect scarce resources such as coal in country which already has to import
energy power
• reliable energy source for its factory to ensure production not impacted by
power shortages
Develop • can reduce or change materials used in its toys limiting amount of resources
environmentally used
friendly products • old toys will not add as much to litter if they can be recycled
• can improve reputation – leading to increase sales
Conclusion • reduce waste will reduce amount of pollution – and could lower amount of
materials needed which can conserve natural resources
• renewable energy is sustainable as does not use natural resources for power –
which could increase level of greenhouse gases – important as a factory
• changing how products are made can help reduce waste and energy as makes
better use of resources throughout process - it can also help improve image and
increase sales which can help offset the additional costs of development


Case study 6b: Style Fashions (SF)

Question 1a Explain two ways in which legal controls can affect SF.

could include: • need to provide safe working conditions
• limit working hours
• minimum wages
• pollution restrictions/permits
• location of business
• restrictions on what OR how much can be produced
Sample explanation
Need to provide safe working conditions, such as guards on the cloth-making machines, which increases
the production costs for the business. This could lower profit and make it harder for the business to
compete.
Question 1b Explain how the following three economic objectives could help Country T. Which economic objective
do you think is most important? Justify your answer.
Possible answers Lower the level of • more people in jobs – earning income – improves standard of living – able to
could include: unemployment afford to spend more on holidays and tourism
• more tax to government – able to provide services to people to help recover from
recession
Lower the level of • lower inflation should help improve real incomes so people have more money to
inflation spend on new clothes
• less pressure from employees for wage increases which increase business costs
• external factors such as fluctuating exchange rates also affect inflation – difficult
to influence as government looking to encourage trade
Increase the GDP • increase in total level of output of goods and services in economy
• business owners, especially textile business owners, may look to expand as
people have money to spend
• employ more workers as new bushinesses are encouraged to start up – standard
of living increases
Conclusion • lower unemployment increases standard of living – but depends on jobs created
– low paid unskilled will have limited impact
• lower inflation – means average level of prices fall but if people have jobs and
increase in GDP can reduce negative impact
• increase GDP most important as could have potential impact on whole economy
– expansion will create jobs which achieves one of the other objectives

Question 2a Explain one effect of a decrease in tax rates on the consumers and businesses in Country T.

could include: • consumers have more money to spend
• increase in sales
• business have more money to invest
Sample explanation
A decrease in tax rates leads to customers having higher disposable income. Customers will increase the
demand for clothes as they have more money to spend on luxuries. This will mean SF has an increase in
sales which will further increase its profits.
Question 2b Explain how each of the following three factors will affect the success of SF. Which factor is likely to
have the most effect on the success of SF? Justify your answer.
Possible answers Increase in • more people in jobs – earning income – improves standard of living – able to buy
could include: employment clothes from local businesses – most sales exported but this could change with
increase in demand as locals have more jobs
• could push up labour costs as harder to find suitable workers to make clothes
More business • increase competition – lower sales

start-ups • depends on type of business as tourism also important sector – some new businesses
could help provide services for SF
Lower legal • business tries to be ethical so may not change actions

controls • lower costs – increase profit so easier to compete
• could encourage more businesses to start up – increasing competition
Conclusion • increasing employment can increase demand – but also increase labour costs which
may not be able to pass onto customers through higher prices – but most exported –
but as incomes increase could see demand rise in own country so may have most
impact
• increased competition which could affect sales but impact depends on type of
businesses as could provide services
• lower legal controls help all business but as export need to be aware of laws in other
countries
Question 3a Explain two possible ethical issues that SF should consider.

could include: • pay fair wages
• provide better working conditions for workers
• pay fair price to suppliers OR pay suppliers on time
• source environmentally friendly materials
• do not sell excess stock cheaply OR fix prices
• charge a fair price to customers
• pay taxes in country in which sales are made
• do not employ child labour

Sample explanation
Pay fair wages. This means that workers will be paid a wage they can live on; this will give the company a
better reputation with its consumers. Sales may even increase because of its ethical reputation.
Question 3b State the advantages and disadvantages to Country T of allowing multinational companies to set up
operations there. Do you think multinational companies should be allowed? Justify your answer.
Possible answers Advantages of • create jobs – as two million people work in textiles increase incomes and
could include: multinationals for standard of living – boost economy which is growing
Country T • tax – increase government funds to provide services
• increased choice and lower prices of clothing as access to wider range of
products
• bring in expertise – so skills of local workforce improves – helps other local
businesses to develop knowledge and skills
• infrastructure improvements benefit local businesses
• improved image of country could lead to extra investment which helps achieve
its objective of attracting more new businesses
Disadvantages of • use up scarce resources and pollution

multinationals for • may exploit local labour as fewer legal controls so more use of child labour
Country T • may expect government support and threaten to pull out of country if not offered
favourable terms or taxes lower than 22%
• increased competition – as better product which can be sold at lower prices –
could mean lower sales
• loss of cultural identify as standard products sold everywhere
• environmental impact from pollution as materials are imported
Conclusion • create jobs – but quality of jobs may be low skilled especially in clothing industry
• offer choice and lower prices so consumers may benefit but, in long term, the
closure of independent businesses may reduce choice
• local businesses may benefit from expertise and improvements to infrastructure
but many small businesses may struggle to complete against larger competitors
who are better placed to lower their prices so, while some benefit, others may
have to close
Question 4a Explain one advantage and one disadvantage to SF of importing.
Possible answers Advantages

could include: • price of inventory could be cheaper
• higher quality
• wider range
Disadvantages
• depreciation of exchange rate of home country
• higher cost of transport
• speed of delivery
• different quality standards

Sample explanation
The price of imported stock can be cheaper. This means SF can sell its clothes at a cheaper price. SF will
be more competitive than manufacturer and this will increase both sales and profit.
Question 4b Explain how the following three changes are likely to affect SF. Which change do you think is likely to
have the most effect on SF? Justify your answer.
Possible answers Increase in Country T’s • exports more expensive – harder to sell its products abroad
could include: exchange rate • imports cheaper – clothing materials can be bought for lower costs – could
lower prices or increase profit
Lower tariff on imports • lower costs – so able to import materials for the first time so may be able to
charge lower prices – increase demand
• more imports – more competition – lower sales
Increase in interest • increase costs as rates increase by 0.5% – could delay or stop investment
rates in Country T • less disposable income – lower sales – clothes may be necessity although
may switch to lower quality – lower demand
Conclusion • exchange rates likely to have most effect as business imports materials which
helps and exports most of its products – so may depend on whether able to
increase sales in Country T
• tariffs help its import but could see more cheaper finished products enter
country – but as sell most overseas – less impact
• interest rate rise will increase costs but only a small rise so may not change
decisions

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Cambridge IGCSE and O Level Business Studies

Activity 1.2 (page 10)

Activity 1.3 (page 12)

Case study (page 13)

Case study (page 15)

© Cambridge University Press 2018 Chapter 1 Answers to Coursebook activities 1

Activity 1.4 (page 17)

Activity 1.5 (page 17)

Case study (page 18)

Test yourself (page 18)

Exam-style practice questions (page 19)

© Cambridge University Press 2018 Chapter 1 Answers to Coursebook activities 2

© Cambridge University Press 2018 Chapter 1 Answers to Coursebook activities 3

Activity 2.2 (page 21)

Activity 2.3 (page 22)

Case study (page 23)

Activity 2.4 (page 24)

Test yourself (page 25)

© Cambridge University Press 2018 Chapter 2 Answers to Coursebook activities 1

Test yourself (page 26)

Exam-style practice questions (page 27)

© Cambridge University Press 2018 Chapter 2 Answers to Coursebook activities 2

3 Enterprise, business growth and size

Activity 3.1 (page 31)

Test yourself (page 31)

Activity 3.2 (page 35)

Test yourself (page 35)

Case study (page 37)

© Cambridge University Press 2018 Chapter 3 Answers to Coursebook activities 1

Activity 3.3 (page 38)

Test yourself (page 40)

Case study (page 41)

Activity 3.4 (page 43)

© Cambridge University Press 2018 Chapter 3 Answers to Coursebook activities 2

Test yourself (page 43)

Exam-style practice questions (page 44)

© Cambridge University Press 2018 Chapter 3 Answers to Coursebook activities 3

4 Types of business organisation

Activity 4.2 (page 50)

Activity 4.3 (page 51)

Case study (page 51)

© Cambridge University Press 2018 Chapter 4 Answers to Coursebook activities 1

Test yourself (page 55)

Exam-style practice questions (page 56)

© Cambridge University Press 2018 Chapter 4 Answers to Coursebook activities 3

5 Business objectives and stakeholder

Activity 5.2 (page 60)

Case study (page 61)

Test yourself (page 62)

Activity 5.3 (page 64)

© Cambridge University Press 2018 Chapter 5 Answers to Coursebook activities 1

Activity 5.4 (pages 65–66)

Test yourself (page 66)

Test yourself (page 66)

© Cambridge University Press 2018 Chapter 5 Answers to Coursebook activities 2

Exam-style practice questions (page 67)

© Cambridge University Press 2018 Chapter 5 Answers to Coursebook activities 3

Activity 6.2 (pages 75–76)

Activity 6.3 (page 79)

© Cambridge University Press 2018 Chapter 6 Answers to Coursebook activities 1

Test yourself (page 79)

Activity 6.4 (page 81)

Activity 6.5 (pages 82–83)

Activity 6.6 (page 83)