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© Karen Borrington and Peter Stimpson 2015
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Contents
Introduction

Section 1 Understanding business activity

1 Business activity
2 Classification of businesses
3 Enterprise, business growth and size
4 Types of business organisation
5 Business and stakeholder objectives
Understanding business activity: case study

Section 2 People in business

6 Motivating workers
7 Organisation and management
8 Recruitment, selection and training
9 Internal and external communication
People in business: case study

Section 3 Marketing
10 Marketing, competition and the customer
11 Market research
12 The marketing mix: product
13 The marketing mix: price
 14 The marketing mix: promotion and technology in marketing
15 The marketing mix: place
16 Marketing strategy
Marketing: case study

Section 4 Operations management

17 Production of goods and services
18 Costs, scale of production and break-even analysis
19 Achieving quality production
20 Location decisions
Operations management: case study

Section 5 Financial information and financial

decisions
21 Business finance: needs and sources
22 Cash flow and working capital
23 Income statements
24 Balance sheets
25 Analysis of accounts
Financial information and financial decisions: case study

Section 6 External influences on business activity

26 Government economic objectives and policies
27 Environmental and ethical issues
28 Business and the international economy
External influences on business activity: case study
Answers
Introduction
Welcome to the Cambridge IGCSE® Business Studies Study and
Revision Guide. This book has been written to help you revise
everything you need to know for your Business Studies
examinations, alongside the Cambridge IGCSE Business Studies
Fourth Edition textbook. Following the Business Studies syllabus, it
covers all the key content as well as sample questions and answers,
case studies and practice questions to help you learn how to answer
questions and to check your understanding.
How to use this book
Key objectives
The key points covered in the chapter
Examiner tips
Advice to help you give the perfect answer
Common Mistakes that students often make, and how to
errors avoid them

Definitions of the key terms you need to know

Sample questions
Exam-style questions for you to think about

Sample student answers to see how the question might be

answered
Examiner’s comments
Feedback from an examiner showing what was good, and what
could be improved in the student answers

Exam-style questions
Paper 1 style examination questions for you to try to see what you
have learned

Case studies
End of section case studies to practice the skills needed for the
Paper 2 exam

Answers
Outline answers to the Practice exam questions and the Case Study
questions
Exam tips
Make sure you apply your answers to the business outlined at the
start of each question in Paper 1 and the data response context in
Paper 2. If your answer could be suitable for any business then you
probably have not applied and you will not gain all of the available
marks. Try underlining the key words about the business outlined: Is
it a sole trader or partnership for example? What does it sell or what
service does it provide? What are the problems it is facing or what
decisions does it have to make? How many employees does it
have? Are they skilled? There will be information provided about the
business and you should use it to help answer the questions.
Make sure you explain – or analyse – your answer for questions
(c), (d), and (e) on Paper 1 and all questions on Paper 2. Short
statements may not gain you all of the available marks.
The (e) questions on Paper 1 and the (b) questions on Paper 2
require a judgement to be made. On question e) on Paper 1 you will
need to evaluate and show judgment. With question b) tasks on
Paper 2, make sure that you weigh up each option before deciding
which is the best. Just stating which option you think is the best one
will not gain you the evaluation marks – you must give a reason for
this choice. With the b) questions on Paper 2 you should also explain
why you rejected the other options if you are to gain all the available
marks.
Karen Borrington and Peter Stimpson
1 Business activity

Key objectives
The objectives of this chapter are to revise:
• what the economic problem means
• the difference between wants and needs
• the scarcity of resources and why this leads to opportunity cost
• economic activity and the importance of specialisation
• the nature and purpose of business activity
• how businesses can increase added value.
Key definitions
Term Definition
A need A good or service essential for living.
A want A good or service that people would like to have, but
which is not essential for living.
Economic Unlimited wants but limited resources – this creates
problem scarcity.
Scarcity Lack of sufficient products to satisfy total wants of
population.
Opportunity The next best item given up by choosing another.
cost
Factors of Resources needed to produce goods and services –
production land, labour, capital and enterprise.
Business An organisation that combines factors of production
to make goods and services to satisfy people’s wants
and needs.
Specialisation People and businesses concentrate on what they are
best at.
Division of Production is split into separate tasks and each
labour worker specialises in one task.
Added value The difference between a product’s selling price and
the cost of bought in materials.
Business activity
Common errors
Error Why it is wrong
‘More money will solve The economic problem is caused by
the economic problem.’ scarce resources rather than lack of
money.
‘Division of labour means Division of labour leads to specialisation
that each worker of labour – workers concentrate on one
performs many different task.
tasks.’
‘Added value is the same Added value is not the same as profit –
as profit.’ other costs have to be subtracted from
added value to obtain the profit figure.
Sample questions and answers
The ARC business produces and sells cosmetics. These are sold in
supermarkets. It uses modern capital equipment allowing division of
labour so workers can specialise. Several workers have left ARC
recently. The Bella perfume, ARC’s best-selling product, sells for $7 a
bottle. Each bottle contains materials that ARC buys in for $2. ARC’s
managers want to increase added value. The Marketing Manager
thinks a price increase is the best way to do this.
1 Identify and explain one advantage and one disadvantage to ARC
of division of labour.
[6]
Student’s answer
Division of labour means that workers and machines specialise in
particular tasks [K] – such as filling perfume bottles. [Ap] This
specialisation improves efficiency as workers can now produce more
in the same time. [An]
Workers can become bored if they just do one task all the time. [K]
This could be the reason why several workers have left ARC
recently. [Ap] Boredom at work can lead to low motivation and this is
one reason why workers can leave a job, increasing recruitment
costs for ARC. [An]
Examiner’s comments
Good start. Student defines division of labour and also applies an
advantage to ARC and explains (analyses) it. The disadvantage is
also applied to ARC and well explained. Good answer. Full marks.
2 Do you agree with the Marketing Manager that the best way to
increase added value for the Bella perfume is to increase price?
Explain your answer.
[6]
Student’s answer
Added value is the difference between the selling price and the cost
of bought in materials. [K] In the case of the Bella perfume it is $5
per bottle. [Ap] A price increase to, say, $9 would raise the added
value to $7 a bottle. If sales and other costs stayed the same, ARC’s
profit would increase. [An] However, the consumers might buy less
Bella than before – especially as supermarkets will sell a large
number of competing perfumes. If sales fall, profits could decrease
too.
A better idea might be to reduce costs of bought in materials. ARC
could use a plastic bottle and not a glass one. Lower material costs
will also increase added value but consumers might think the quality
has fallen and buy less Bella than before. [An] However, I think that
this is better than raising prices as ARC will have many competitors.
[Ev] If ARC raises prices then demand will fall but it might not fall if
the business reduces costs making this the better option. [Ev]
Examiner’s comments
Another good start – there is a clear definition and worked examples
that are applied to ARC. Analysis of the possible effect of raising
price and analysis of the possible effect of using cheaper materials
are both included.
This answer shows very good understanding of added value and
some worked examples. Both ways of increasing added value are
explained and a clear final judgement is made. Full marks.
(NB: There are more marks indicated in this answer to show different
ways of achieving application and analysis.)

Examiner’s tips
• Start each answer with a definition or explanation of a key term if
possible.
• If the case study contains figures, try to use these at least once in
your answer.

Exam-style questions
BB is a bakery business that produces bread and cakes. It
specialises in high quality cakes for weddings and birthdays. There
is little division of labour used. A typical wedding cake is sold for $50
using bought in ingredients costing $15. Bashir, BB’s owner, wants
to increase added value and thinks the best way to do this is to buy
in cheaper ingredients for the bread and cakes his business
produces.
a) What is meant by ‘division of labour’?
[2]
b) Calculate the added value of each wedding cake.
[2]
c) Identify and explain two factors of production that BB needs.
[4]
d) Identify and explain one benefit and one drawback to BB of
specialising in high quality cakes.
[6]
e) Bashir thinks that the best way for BB to increase added value is
to buy in cheaper ingredients. Do you agree with him? Justify
your answer.
[6]
2 Classification of businesses

Key objectives
The objectives of this chapter are to revise:
• the differences between the three sectors of business activity
• the reasons why these sectors vary in importance: between
countries and over time
• the differences between the private sector and public sector in
mixed economies
• arguments for and against privatisation.
Key definitions
Term Definition
Primary sector Businesses that extract and use natural
resources to produce raw materials.
Secondary sector Businesses that manufacture goods using the
raw materials provided by the primary sector.
Tertiary sector Businesses that provide services to consumers
and other firms.
Deindustrialisation Decline in the importance of secondary,
manufacturing industry.
Mixed economy This has both private sector businesses and
public sector businesses.
Private sector Businesses owned by people, not the
government/state.
Public sector Businesses owned by the government/state.
Privatisation The sale of public sector businesses to the
private sector.
Classification of businesses summary
Businesses can operate in the primary, secondary and tertiary
sectors.
Common errors
Error Why it is wrong
‘Businesses can only Some businesses operate in all three
operate in one business sectors, e.g. an oil company that
sector.’ extracts oil, refines it and retails petrol to
consumers.
‘Organisations in the Public limited companies (see Chapter
public sector of an 4) are in the private sector of the
economy include public economy.
limited companies.’
Sample questions and answers
Country X used to be a major producer of agricultural products and
timber. In recent years the government of country X has encouraged
the construction of large industrial estates and these have reduced
land available for farming. Consumer incomes are rising rapidly and
demand for holidays, restaurant meals and financial services is
increasing. Country Y is a low income country but it has large
reserves of coal and huge fish stocks.
1 Identify and explain two possible reasons for different levels of
activity in the business sectors in country X and country Y.
[6]
Student’s answer
The primary sector produces food and raw materials, the secondary
sector manufactures goods and the tertiary sector provides services.
[K]
If a country has a lot of fertile land but not many factories it is likely
to have a big primary sector and a small secondary sector. [An]
If a country is rich with high incomes consumers will spend a lot on
services [K] such as holidays and shopping. [An]
Examiner’s comments
Defining the three sectors of business activity is a useful starting
point.
One factor explaining differences in different countries’ sectors of
business activity is identified and explained/analysed – but not
applied to countries X or Y.
Same skills are shown in the third paragraph – but also, no
application!
Marks: K2; ApO; An2 = 4 in total
2 Do you think that the tertiary sector of business activity will
continue to become more important in country X? Justify your
answer.
[6]

Examiner’s tip
Use the information provided and apply it to your answers!
Student’s answer
Tertiary sector business activity becomes more important in most
rich countries as consumers have more money to spend. [K] Once
consumers have satisfied many of their wants such as food, drink,
clothing and some luxury products, much of their income is spent on
services. [An] These include hairdressing, retail shopping, holidays
and financial services. This is the case with country X as ‘consumer
incomes are rising rapidly’. [Ap] In addition, country X might be
producing fewer primary products because all the timber might be
cut and less land is available for food production. [An]
Examiner’s comments
This answer shows an understanding of why the tertiary sector often
grows in importance in most developing and high income countries –
this shows skills of both knowledge and analysis.
There is also some application to country X – using the information
provided. However, there is no mention made of secondary sector
business activity – this could be increasing in country X too if it is still
building many factories. This means the student cannot make an
effective judgement and also the answer shows no evaluation in
answering the question.
Marks: K1 [max]; Ap1 [max]; An2; Ev0 = 4 in total

Exam-style questions
Jo owns a small shop selling take-away meals in country P which
has a mixed economy. The shop is called ‘Best Foods’. She buys in
food supplies such as pies and soups from Foodsure, a food-
processing business. Most of the meat and vegetables used by
Foodsure are supplied by local farmers. They transport their
produce to Foodsure and other food-processing businesses on the
rail system, which is owned and controlled by the state in country P.
Foodsure was recently sold by the government as part of its
privatisation programme.
a) What is meant by ‘mixed economy’?
[2]
b) What is meant by ‘privatisation’?
[2]
c) Identify and explain, for any two businesses in the case above,
which sector of business activity they operate in.
[4]
d) Identify and explain two possible reasons why the secondary
sector is declining in importance in country P.
[6]
e) Do you think that shops such as Best Foods should be in the
private sector or public sector of the economy? Justify your
answer.
[6]
3 Enterprise, business growth
and size

Key objectives
The objectives of this chapter are to revise:
• what an entrepreneur is and what characteristics they have
• needs of a new business
• importance of business plans
• how business size is measured
• different ways in which businesses can grow and possible
problems resulting from growth
• reasons why some businesses remain small and why some
businesses fail.
Key definitions
Term Definition
Entrepreneur Someone who organises, operates and takes the risk
for a new business venture.
Business The objectives and details of the operations, finance
plan and owners of a new business.
Capital The total value of capital used in a business (see
employed page 90 also).
Internal The business expands its existing operations, e.g. a
growth retailer opening more shops.
External The business expands by merging with or taking over
growth another business.
Takeover A business buys out the owners of another business.
Merger The owners of businesses agree to join their firms
together to form one business.
Horizontal The business integrates with another in the same
integration industry at the same stage of production – such as
two fashion shops.
Vertical The business integrates with another in the same
integration industry but at a different stage of production –
towards suppliers is backward vertical integration and
towards the market/customer is forward vertical
integration.
Conglomerate The business integrates with another but in a different
integration industry (also known as diversification) – such as an
insurance company merging with a food-processing
business.
Enterprise and entrepreneurs
Size of business and business growth
Common errors
Error Why it is wrong
‘Business Business plans can help to reduce risk and uncertainty
plans for new businesses – but nothing can ‘guarantee
guarantee success’.
the success
of a new
business.’
‘Profits are a Profit levels depend on many factors such as
good way of efficiency and effectiveness – but not necessarily the
comparing size of a business. Even though two businesses are
the size of the same size (e.g. measured by output or numbers
businesses.’ employed) profits could be very different.
‘There is Horizontal integration is always between businesses
both at the same stage of production.
backward Vertical integration can be backwards (towards the
and forward supplier) or forward (towards the market).
horizontal
integration.’
Sample questions and answers
Yasmin started her own small bakery business last year. She had
previously worked for a large bakery. Yasmin works six days a week.
She has developed several new recipes for tasty bread and cakes.
These are very popular with her customers. Her bank manager
loaned her a large amount of money last year after reading her
business plan. An old established bakery near to Yasmin’s is currently
for sale.

Examiner’s tips
• For questions which require evaluation it is important to consider
‘both sides’ of an argument and explain clearly why you are
making your conclusion.
• Read questions carefully and check that your answer is
appropriate.

1 Identify and explain two ways in which Yasmin has contributed to

the success of her business.
[6]
Student’s answer
Yasmin is creative and this is an important characteristic for
entrepreneurs. [K] She has thought up some new recipes which are
popular with customers. [Ap] If customers buy more bread and
cakes from Yasmin her sales and profit will increase. [An]
Yasmin might not have much competition. Low competition will
mean that customers will have to buy bread and cakes from her
shop. This will make her business more successful.
Examiner’s comments
This is a good point. The answer identifies one of Yasmin’s
characteristics and explains why this has led to the success of her
bakery.
The second point is not answering the question because it is not a
way in which Yasmin has contributed to the success of her business.
Marks: K1; Ap1; An1 = 3 in total
2 Do you think Yasmin should take over the bakery business that is
for sale? Justify your answer.
[6]
Student’s answer
If Yasmin took over this bakery business it would be horizontal
integration [K] as both businesses bake bread and make cakes. [Ap]
The takeover would give her a bigger market share and she might
be able to buy in materials more cheaply because of bulk buying.
This would help to increase the profits of her business. [An]
However, Yasmin’s business is only one year old and she might not
have the capital needed to buy the other business. [An] She already
has a bank loan. It might be better to repay this than take out
another loan to buy the other bakery. [Ev]
I would not advise Yasmin to expand her business at this time. But it
depends on her own objectives which I do not know. [Ev]
Examiner’s comments
This answer is very good. The student has correctly identified and
defined horizontal integration. There is an argument in favour of the
takeover and an argument against. Both are applied and explained.
The recommendation is clear and Yasmin’s objectives are recognised
as being important to this decision.
Full marks.

Exam-style questions
The table below shows data for three shoe manufacturers in 2015.

Business C has not grown in the last five years. The owner of
Business A wants to expand the business externally. The owner of
one of his major leather suppliers is retiring and wants to sell the
business. Business D, another shoe manufacturer that opened just
six months ago, failed recently.
a) Which is the largest business:
i in terms of sales?
[1]
ii in terms of capital employed?
[1]
b) What is meant by ‘entrepreneur’?
[2]
c) Identify and explain two possible reasons why Business D
recently failed.
[4]
d) Identify and explain two possible reasons why Business C has
not grown in recent years.
[6]
e) Do you think Business A should take over the leather supplier?
Justify your answer.
[6]
4 Types of business
organisation

Key objectives
The objectives of this chapter are to revise:
• differences between sole traders and partnerships
• difference between unincorporated businesses and limited
companies
• difference between private and public limited companies
• franchises and joint ventures
• business organisations in the public sector
• recommending suitable forms of business organisation to
business owners.
Key definitions
Term Definition
Sole trader The business is owned by one person.
Partnership The business is jointly owned by two or more
people.
Limited liability The liability of owners/shareholders is limited to the
amount invested. Personal possessions are not at
risk.
Incorporated A business with separate legal identity from its
business owners, e.g. a limited company.
Unincorporated A business without separate legal identity from its
business owners, e.g. a sole trader or partnership.
Private limited A business owned by shareholders but it cannot sell
company shares to the public.
Public limited A business owned by shareholders but it can sell
company shares to the public and its shares are tradable on
the Stock Exchange.
Shareholders The owners of a limited company.
Dividends Payments made to shareholders from the profits
(after tax) of a company.
Franchise A business that uses, under licence, the brand
name, logo and trading methods of an existing
business. The franchisor sells the licence; the
franchisee buys the licence.
Joint venture Two or more businesses start a new project
together sharing capital, risks and profits.
Public A business, in the public sector, that is owned and
corporation controlled by the state (government).
Types of business organisation
summary
Common errors
Error Why it is wrong
‘A sole trader A sole trader can be quite a large business,
business only employing many people – but it is only owned by
employs one one person.
person.’
‘Partnerships Only limited companies can sell shares.
can sell shares
to raise
capital.’
‘Private limited Yes, they do, and shareholders are a major source
companies do of capital for them – but these companies cannot
not have sell shares to the public or trade their shares on the
shareholders.’ Stock Exchange.
‘Public limited Most public limited companies appoint professional
companies are directors to manage and control the business – and
controlled by there is therefore a division between ownership
shareholders.’ (shareholders) and control (directors).
‘Public Public corporations are owned by the state
corporations (government) and do not have ‘shareholders’.
aim to make Although they might aim to make a profit they might
profits for have other objectives too, e.g. public service.
shareholders.’
Sample questions and answers
Ony’s car cleaning business is growing fast. He took on Sami as a
business partner last year. Sami took over responsibility for accounts.
They now employ ten workers. Ony wants more time to deal with
customers directly – as he did when the business first started. The
partners plan to buy an automatic car washer but it is very expensive.
They are thinking of buying a franchise licence from a national chain
of car wash centres – Autogleam.
1 Identify and explain two advantages to Ony of having a business
partner.
[4]
Student’s answer
Ony was able to give some of his work to Sami [K]– such as keeping
accounts. This gave Ony more time to spend with customers which
he wants to do. [Ap]
Sami would have put capital into the business. [K] This could have
been used to purchase the new car washing machine. [Ap]
Examiner’s comments
Two good points – clearly related to taking on a new partner and
applied to Ony’s business. They are both briefly explained.
Full marks.
2 Identify and explain two disadvantages to Ony of buying a
franchise.
[6]
Student’s answer
A franchise licence might be very expensive [K] and the business
might not be able to afford it meaning it cannot invest in expanding
the business. [An]
Franchisors often take a share of the franchisees’ annual sales. [K]
This means that there is less revenue left for the business to make a
profit. [An]
Examiner’s comments
Again, two good points made about the limitations of buying a
franchise. But can you see that they are not applied to Ony and
Sami’s business? The student could have suggested that they might
not now be able to afford the new automatic car washer. The student
could have suggested that less profit will mean that Sami and Ony
will be able to take less income from the business.
Marks: K2; Ap0; An2 = 4 in total
3 Do you think Ony and Sami should now convert the business into a
private limited company? Justify your answer.
[6]
Student’s answer
The business is growing. It is still a partnership. [Ap] This means
that Ony and Sami do not have limited liability. [K] They could lose
all of their personal assets if the business fails completely. The risk
is greater if they buy the new car washer as this will mean using
more of their savings in the business. [An] They could not sell
shares as a partnership but they could if it was a private limited
company – and their personal assets would be protected. [An]

Examiner’s tip
Always consider both sides of an issue with an ‘evaluation’ question.
Examiner’s comments
This answer has some strengths but also one major weakness. The
student identifies possible benefits of a private limited company – and
uses some of the evidence to apply these points to Ony and Sami’s
business.
However, it is not a balanced answer. There is no attempt to consider
any of the potential disadvantages of a private limited company
conversion. There is no final recommendation and so it does not earn
any evaluation marks.
Marks: K1 (max); Ap1 (max); An2; Ev0 = 4 in total

Exam-style questions
Suki set up a sole trader business called Care for Kids (CfK) 20
years ago. It was a nursery school for young children. She had left
her job as a teacher in a large school and she wanted to open her
business quickly. Suki is an independent person. The business has
grown rapidly. It is now a private limited company which owns 45
nursery schools. Suki is still a major shareholder and controls most
decisions. She wants to open a school in another country with a
local nursery school business called CCC.
a) What is meant by ‘partnership’?
[2]
b) Identify two features of a private limited company.
[2]
c) Identify and explain two advantages to Suki of initially setting up
her business as a sole trader.
[4]
d) Identify and explain two advantages to CfK of forming a joint
venture with CCC.
[6]
e) Do you think the owners of CfK should convert the business into a
public limited company? Justify your answer.
[6]
5 Business and stakeholder
objectives

Key objectives
The objectives of this chapter are to revise:
• why a business needs objectives and the different objectives that
can be set
• the objectives of public sector organisations
• what stakeholder groups are and the objectives they have
• the potential for conflict between objectives.
Key definitions
Term Definition
Business The aims or targets that a business works towards.
objectives
Profit Total income (revenue) of a business less total costs.
Market The proportion (%) of total market sales held by one
share brand or business
Social An organisation with profit, environmental and social
enterprise objectives.
Stakeholder Any person or group with a direct interest in the
performance and activities of a business.
Business objectives summary
Stakeholder objectives summary
Any business has a number of stakeholders. Conflicts between
stakeholder groups and their objectives might exist.
Common errors
Error Why it is wrong
Confusing the Shareholders (owners of limited companies) are
terms just one of the stakeholder groups – but there are
‘stakeholder’ several others too.
and
‘shareholder’
‘All business Not necessarily – for example, survival might be
organisations more important for a new business and many
aim to make as businesses, such as social enterprises, will have
much profit as other objectives apart from profit.
possible.’
‘Consumers’ Managers want to keep customers satisfied – that
objectives way they will return to buy again! Managers want
always conflict the business to be profitable – but consumers might
with those of benefit if profits are used to develop new and better
managers.’ products.
Sample questions and answers
Luis and Jez are partners in a business that operates a parcel
delivery service. There is increasing competition in this industry. The
partners aimed to build up customer numbers and just ‘survive’ during
the first two years of business. Now in its third year of operation, the
partners have decided to set new objectives of ‘growth’ and ‘profit’.
They plan to buy three new motor vehicles to offer more delivery
routes to customers. The government encourages small businesses
to expand but also allows the state owned parcel delivery business to
operate a public service without making a profit.

Examiner’s tip
When asked to explain two factors/reasons make sure that these
really are different from each other.

1 Identify and explain two reasons why Luis and Jez changed the
objectives of the business as it expanded.
[6]
Student’s answer
Reason one: profit is a source of finance. [K] When the business
was set up survival was important. Now that the partners have
completed two years in business they have set other objectives.
Profit will help the partners finance the three new vehicles [Ap] as
they will not have to borrow if the profits are high enough. [An]
Reason two: growth will mean that the business increases sales
each year. [K] Growth will be able to achieve more success against
‘increasing competition’. [Ap] This growth might help the business
increase market share. [An]
Examiner’s comments
This is a good answer. The student makes really good use of the
evidence provided. Both of the ‘new’ objectives are referred to and
understood. The impact of setting each of these two objectives is
explained – profit as a source of finance and growth leading
(possibly) to increased market share.
Full marks!
2 Do you think that these new objectives will make sure the partners’
business is successful? Justify your answer.
[6]
Student’s answer
The partners’ objectives will help them make decisions as they know
what they are aiming for. [K] Also, all of the workers will be able to
work towards the same targets and this will make the business more
united. For these reasons the business is more likely to be
successful. [An]
However, if other businesses started offering delivery services then
Luis and Jez’s business is less likely to be successful. [Ap] They
might have to reduce prices too much. [An] The business cannot be
sure of success as there is ‘increasing competition’ [Ev] and the
government owns a public sector competitor too which might offer a
similar service but at lower prices as it may not be aiming to
maximise profit. [Ev]
Examiner’s comments
This answer briefly explains the benefits of setting objectives. These
benefits will help the business achieve success. However, the student
recognises that success cannot be ‘guaranteed’ for Luis and Jez’s
business. In particular, increasing competition will make life more
difficult for the partners and the public sector delivery service does
not have to make a profit.
Full marks!

Exam-style questions
‘If we start exploring for oil in this national park all stakeholders will
benefit and there will be no conflict between them,’ said Myriam, the
Chief Executive of SureOil. This public limited company is one of the
most profitable oil businesses in the country. Its workers are well
paid, and the government receives much tax revenue from SureOil.
Some customers think that they pay too much for petrol from
SureOil garages.
a) What is meant by ‘public limited company’?
[2]
b) Identify two of SureOil’s stakeholder groups, other than
shareholders.
[2]
c) Identify and explain two objectives that the directors of SureOil
could set for this company, other than making profits.
[4]
d) Identify and explain two benefits to SureOil of being profitable.
[6]
e) Do you agree with Myriam that ‘all stakeholders will benefit and
there will be no conflict between them’ if SureOil starts exploring
for oil in the national park? Justify your answer.
[6]
Understanding business
activity: case study

Walt’s Wood Products (WWP)

WWP is based in country Z. The business is a private limited
company. Walt owns over 50% of the shares with the rest of the
shares owned by several family members who are not involved with
the day-to-day running of the business. Walt used to be an employee
of another wood products business, making windows and doors.
When Walt inherited some money from his grandfather he decided to
start his own business with the help of others in his family. He was
skilled in making wooden products and had his own ideas of designs
for garden furniture.
WWP produces garden furniture made from wood. The furniture is
sold to a large retail company that has shops in all the main towns
and cities in country Z. WWP buys its wood from local forests that
produce sustainable wood. Imported wood is available at a cheaper
price but Walt prefers to use locally produced wood. The factory uses
skilled workers to make good quality garden furniture and they are
paid using piece-rate, that is, their wages depend on how many
items of furniture they make.
Walt is thinking of expanding WWP by either opening his own
shops to sell their furniture or buying a 40% share in a major retail
company that sells his garden furniture.

Appendix 1 – The factory production process for

making wooden furniture
1 a Identify and explain four possible reasons why Walt wanted to
start his own business rather than work for someone else.
[8]
Student’s answer
1 Walt wants to be his own boss. He wanted to make all his own
decisions.
2 Walt wanted to keep all the profit. If the business made a profit
then Walt could keep it instead of just being paid a wage if he
worked for someone else.
3 Walt wanted to be independent and choose how to spend his time
and money. Walt had worked for ten years for another company
and he wanted to control his own working hours instead of being
told what to do by someone else.
4 Walt had worked with wood products in his previous job and he
had his own ideas about making wooden furniture which setting
up his own business would allow him to pursue.
Examiner’s comments
Four clear points giving reasons for setting up his own business are
written but only the last two reasons are applied to this context. Hence
6 marks are awarded. Full marks would have been awarded if the first
two points had been applied to this context.
b Explain one objective for each of the following stakeholder
groups in WWP. Do you think there will be conflicts between
these stakeholder groups? Justify your answer.
[12]
• WWP employees
• WWP customers
• The government of country Z.
Student’s answer
WWP employees are interested in the business because they want
to keep their jobs and perhaps get a wage increase. If the business
is successful and increases the sales of wooden garden furniture
then the business may also benefit from increased profit. This
increased profit may be paid out as a bonus or an increase in wages
to the employees.
WWP customers will want good value products that are well made
products, which are relatively low in price. Customers will not want to
pay low prices for cheap furniture that breaks easily or rots quickly in
the garden. They will want to pay a reasonable price for the quality of
furniture they receive.
The government of country Z will be interested in WWP because it
provides employment and employees pay tax on their earnings to the
government. WWP will also pay tax on profits earned. Therefore the
government will want the business to be successful so it carries on
benefiting the country.
Examiner’s comments
A detailed answer that explains each of the stakeholder groups in
context.
Student’s answer
There may be conflict between these stakeholder groups because
the employees will want higher wages and therefore they will want to
have higher prices charged for the furniture. However, customers will
want good quality furniture at low prices. The government will want
satisfied customers who are not being exploited and a business that
does not go bankrupt but it will also want high taxes to be paid from
employees and the business. So it may have conflicts with WWP if it
exploits customers by charging higher prices than might be expected
or does not tell customers the truth about products to encourage
them to buy them. The government will also want the business to be
successful and pay high wages to employees and the business to
make high profit. So there may be conflict between these
stakeholders but if the employees make good quality furniture which
is sold at fair prices for the quality and WWP is successful in meeting
customer needs then there may not be any conflict between each of
these stakeholder groups.
Examiner’s comments
The conclusion discusses possible conflicts between the different
groups and then ends with a final conclusion. The conclusion is in
context as well. Full marks!

Exam-style questions
2 a Identify and explain two ways Walt can increase the added
value of WWP products.
[8]
b Consider the following two options for Walt to expand WWP.
Recommend which option he should take. Justify your answer.
[12]
• Opening his own shops to sell their furniture.
• Buying a 40% share in a major retail company that sells WWP
garden furniture.
6 Motivating workers

Key objectives
The objectives of this chapter are to revise:
• reasons why people work and the importance of motivated
workers
• different motivation theories
• financial and non-financial rewards
• which motivation methods are most appropriate for different
situations
• different methods of increasing job satisfaction for different types
of work.
Key definitions
Term Definition
Motivation Workers want to work hard and effectively for their
employer.
Wage Payment for work, usually paid weekly.
Time rate Wage based on number of hours worked.
Piece rate Wage based on number of units of output produced.
Salary Payment for work, usually paid monthly.
Commission Payment based on number of units sold.
Profit Payment to employees based on a share of the profits
sharing of the business.
Bonus Additional payment to workers, above the basic
wage/salary, as a reward for good work.
Performance- Pay is related to the performance of an employee, e.g.
related pay meeting pre-set objectives.
Share Giving employees shares in a company to encourage
ownership a sense of belonging and ownership.
scheme
Appraisal Assessing the effectiveness of employees (important
for performance-related pay).
Fringe Non-financial rewards.
benefits
Job Enjoyment employees can derive from work if they
satisfaction feel they have done a good/rewarding job.
Job rotation Workers are asked to switch different tasks with other
workers (but at the same level of responsibility).
Job Tasks of a similar level of difficulty/responsibility are
enlargement added to a worker’s job description.
Job Adding tasks that are more challenging, more skilful
enrichment and more responsible.
Motivating workers
Rewards and job satisfaction
summary
Common errors
Error Why it is wrong
‘More money Pay is important to allow workers to satisfy
always important needs but beyond a certain level of pay
motivates it could be that other factors – such as job
workers.’ satisfaction – motivate workers more than money.
‘Herzberg’s According to Herzberg hygiene factors (pay,
hygiene factors working conditions, supervision) can remove
motivate dissatisfaction at work but they do not directly
employees to motivate employees. Only the ‘motivators’ can do
work harder.’ this.
‘Job rotation is a Asking workers to do different jobs without giving
form of job them more independence or more authority is not
enrichment.’ job enrichment. This requires workers to be given
more challenging and responsible work.
Sample questions and answers
ABC is a limited company which operates a drink bottling factory.
Production workers are paid an hourly wage rate. Work is repetitive
and workers are told not to work in teams but to concentrate on just
doing their own jobs. Senior managers are paid a salary and have a
share buying scheme. ABC spends a great deal each year on
recruiting new workers. Output of filled bottles has fallen recently. A
new manager, Suzi, was heard saying: ‘Paying workers more is not
the best way to improve motivation.’
1 Identify and explain two problems resulting from poor employee
motivation within ABC.
[4]
Student’s answer
Problem one: Workers will not want to do their work effectively if
they are not motivated. They will not bother to work hard. [K]
Problem two: Workers will want to leave a business that does not
motivate them so turnover will be high. [K]
Examiner’s comments
This answer identifies two problems of poor worker motivation BUT
fails to use the evidence – so no marks for application. The student
could have referred to the cost of recruiting new workers at ABC
because workers are leaving and the falling output levels at ABC.
Marks: K2; Ap0 = 2 in total
2 Identify and explain two financial methods that could be used to
improve motivation of ABC’s employees.
[6]
Student’s answer
ABC could offer a bonus to workers if output exceeds a certain level.
[K] This would provide workers with an incentive to increase output,
which is falling at ABC. [Ap] The sketch shows how the bonus could
work .[An]

Production workers could be offered a share buying scheme like the

senior managers of ABC are. [AP]
Examiner’s comments
The first method is well explained and applied to ABC. The second
method is applied to ABC but is not explained/analysed.
The student could have stated that a share buying scheme
encourages workers to be involved in the business and to work hard
as they own part of it and will benefit from dividends. Marks: K2; Ap2;
An1 = 5 in total
3 Do you agree with Suzi that ‘paying workers more’ is not the best
way to improve employee motivation of ABC’s employees? Justify
your answer.
[6]
Student’s answer
Suzi wants to motivate ABC’s workers. One way, suggested by
Taylor, is to link workers’ pay to output. This is called piece rate. [K]
He thought that all workers are motivated by more money. The
chance of being paid more for producing more might motivate ABC’s
workers. [An]
Herzberg did not think that more money motivates – it only removes
dissatisfaction. He thought that job enrichment is a good way of
motivating workers, e.g. by giving them more challenging and
responsible jobs which will increase job satisfaction [An] as the
existing work is repetitive and boring. [Ap]
If ABC’s workers are very badly paid, they should get a rise. If they
are well paid then job enrichment would be the best way to motivate
them. [Ev] The company is worried about falling output so this might
be the best method of motivation as it will make their job more
interesting. [Ev]

Examiner’s tips
• You are encouraged to use sketches or diagrams to support your
answers if they are relevant.
• Always look at both sides of the question when answering the final
6 mark question on Paper 1.
Examiner’s comments
The first paragraph gives an explanation of why more money might
motivate ABC’s workers. This answer started well – but the final 6
mark question always requires another opposite argument too.
The second paragraph contains an opposing view – the student is
considering both sides of the question. The second point has been
applied.
The final judgement/justification is based on the arguments in the
answer so good evaluation is shown and is applied to the business.
Marks: 1K; 1Ap; 2An; 2Ev = 6 in total

Exam-style questions
Patel is a retail business that sells clothes. It employs fifteen shop
workers and five office workers. One manager is in charge of all the
workers. She insists that all workers are trained in one area of the
business and should concentrate on this task. All workers are paid a
wage based on time rate. Patel’s shop has to recruit two new
workers each month to replace those who leave. The business
owner, Dev, has been told by a friend to concentrate on improving
pay and working conditions of his workers.
a) What is meant by ‘time rate’?
[2]
b) Identify two ways, other than time, which can affect employees’
pay.
[2]
c) Identify and explain two non-financial rewards that could be used
to improve motivation of Patel’s employees.
[4]
d) Identify and explain two reasons why motivated workers are
important to Dev’s business.
[6]
e) Do you think that Dev should focus on the ‘motivators’ or
‘hygiene’ factors when trying to improve employee motivation at
Patel’s shop? Justify your answer.
[6]
7 Organisation and
management

Key objectives
The objectives of this chapter are to revise:
• organisation charts
• key terms related to organisational structure
• the roles, responsibilities and inter-relationships between people in
organisations
• the role of management
• different leadership styles
• why employees join trade unions.
Key definitions
Term Definition
Organisational The levels of management and divisions of
structure responsibility in an organisation.
Chain of The route taken by instructions passed down from
command senior management.
Level of A level of management where people have the same
hierarchy level of responsibility.
Span of The number of employees working directly under a
control manager.
Line Have direct responsibility over people below them in
managers the hierarchy of an organisation.
Staff Specialists who provide support, information and
managers assistance to line managers.
Delegation Giving subordinates (employees/junior managers)
the authority to perform particular tasks.
Autocratic Where the manager is in charge of the business,
leadership takes all decisions and expects orders to be
followed.
Democratic All employees are involved in the decision making
leadership process.
Laissez-faire Makes broad objectives known to employees who
leadership are then left to make own decisions and organise
their own work.
Trade union A group of workers who join together to protect their
interests.
Organisational structure
Management, leadership and trade
unions
Common errors
Error Why it is wrong
‘Delegation means Delegation gives the authority or power to
that workers have junior managers or workers to do a job – the
final responsibility for senior manager still has the final
decisions.’ responsibility.
‘The democratic It depends on the nature of the business and
leadership style is the situation it is in. There is no single
best for all leadership style that is best for all businesses
businesses.’ and all situations.
‘Wider spans of A wider span of control means that more
control mean that workers report to each manager – so fewer
more managers are managers might be needed.
needed.’
Sample questions and answers
FurnCo is a large retail furniture shop. It has several departments
including kitchen furniture, lounge furniture and bedroom furniture as
well as marketing and finance. FurnCo’s organisation chart is:

Finn is the Managing Director. He believes that ‘making all decisions

and telling workers to carry them out’ is the best style of leadership
for FurnCo. ‘It worked well when we had the serious fire last year –
everyone knew what to do because I told them!’
In recent months he has received more complaints from customers
that furniture styles are not changing to meet current customers’
tastes.
1 Identify and explain two features of FurnCo’s organisation chart.
[6]
Student’s answer
The chain of command is long in FurnCo [K] – there are six levels of
hierarchy. [Ap] This might make communication slow as a message
has to pass through many levels. [An]
The span of control is narrow. [K] Each employee will not have much
delegated authority as they are tightly controlled by managers. [An]
Examiner’s comments
This answer identifies two appropriate features of an organisation
chart – chain of command and span of control. The effect of a long
chain of command and a narrow span of control are both briefly
analysed. However, the point about the span of control is not applied
– the student should have given examples of the span of control
being two within FurnCo’s structure.
Marks: K2; Ap1; An2 = 5 in total
2 Do you agree with Finn that ‘making all decisions and telling
workers to carry them out’ is the best style of leadership for
FurnCo? Justify your answer.
[6]
Student’s answer
Finn seems to be using an autocratic leadership style. [K] This can
have some benefits when there is a disaster such as a fire. [Ap]
Orders can be given quickly and all workers will know what to do in
an emergency. There is no time for them to ask questions or be
involved in decision making. [An]
Another leadership style that Finn could use would be laissez-faire
where all workers are encouraged to take part in decision making
with the managers. This can be motivating.
Telling workers to carry out decisions is not the best form of
leadership.
Examiner’s comments
This answer starts well but fails to argue why either democratic or
laissez faire leadership might be ‘the best style’. The answer does not
gain the second mark for analysis because of this – and there is no
evaluation or judgement that is supported by arguments. The final
sentences could have been evaluation if there had been an
argument to support it, e.g. the democratic style might be best
when Finn wants to gain workers’ views – for example, which styles
of furniture customers might prefer to purchase.
Marks: K1; Ap1; An1 = 3 in total

Exam-style questions
TinCo operates tin mines in several countries. It has a clear
organisational structure with several levels of hierarchy. Jin is the
Chief Executive. He does not delegate much authority to his junior
managers. There have been many accidents in TinCo’s mines this
year. Jin has given instructions to mine managers that safety must
be improved. Mine workers did not receive a pay rise this year. New
machinery was recently purchased for use in some TinCo mines.
These machines, once delivered, were too big for some of the mine
tunnels. Workers knew this would be a problem but they were not
asked for their opinions before the machines were ordered.
a) What is meant by ‘level of hierarchy’?
[2]
b) State two benefits to TinCo of having a clear organisational
structure.
[2]
c) Identify and explain two reasons why TinCo’s workers might want
to join a trade union.
[4]
d) Identify and explain two management roles that Jin has in TinCo.
[6]
e) Would you recommend Jin to adopt a democratic leadership
style? Justify your answer.
[6]
8 Recruitment, selection and
training

Key objectives
The objectives of this chapter are to revise:
• the role of the Human Resources department
• stages of recruitment and selection including job description, job
specification and advertising of vacancies
• benefits and limitations of full- and part-time employees
• the importance of training and different training methods
• reducing the size of the workforce – reasons for and choosing who
to make redundant
• why governments pass laws to protect employees.
Key definitions
Term Definition
Recruitment Identifying need for new employee(s) and encouraging
people to apply for a vacancy.
Job Responsibilities and duties to be carried out by the job
description holder.
Job (person) The requirements, qualifications, experience and
specification characteristics of people needed to fill a job vacancy.
Internal The vacancy is filled by someone who is an existing
recruitment employee of the organisation.
External The vacancy is filled by someone who is not an
recruitment existing employee of the organisation.
Part-time Jobs with less hours than a full working week, e.g. 20
employment hours per week instead of 40.
Full-time Jobs with a full working week (length varies between
employment businesses). Full-time employees will usually work 35
hours or more a week.
On-the-job Training at the place of work – watching and being
training instructed by experienced workers.
Off-the-job Training away from place of work, e.g. at college, being
training instructed by specialist trainers.
Induction Training for new employees explaining the business
training structure, activities and procedures.
Redundancy Employees are no longer required – the job no longer
exists.
Workforce Establishing the size and skills of the workforce
planning needed by a business for the future.
Dismissal An employee’s employment contract is terminated and
they must leave the business.
HR; employee recruitment and
selection
Contract of employment and other
legal controls
Training
Downsizing workforce
Common errors
Error Why it is wrong
‘Job descriptions Job descriptions outline the duties and
state the responsibilities of a job; job specifications give
qualifications details of the qualifications of the person likely to
needed for each fill the vacancy.
job.’
‘On-the-job Although a specialist trainer at a college is not
training does not being paid for, on-the-job training is not ‘free’. The
cost anything experienced employee undertaking the training
because other may not be able to work as fast as normal as
employees train he/she is explaining the job and the tasks it
the new recruit.’ requires to the new employee.
‘On-the-job An accountant (and many other skilled employees)
training is will need college training to gain recognised
suitable for qualifications – and this is off-the-job training.
skilled
employees,
such as
accountants.’
Sample questions and answers
Top Hotels (TH) operates three hotels. There are 25 employees in
each hotel. Most of them have part-time contracts – only one chef in
each hotel and the hotel managers have full-time contracts. Several
employees leave every year and recruiting and selecting new
employees takes a lot of the Human Resource manager’s time. Most
new employees have no experience of hotel work. ‘Our costs are low
because we have mainly part-time employees,’ TH’s Managing
Director told hotel managers last week.
1 Identify and explain two legal controls on employment that might
affect TH.
[4]
Student’s answer
Minimum wages [K]
Health and safety [K]
Examiner’s comments
Two marks for knowledge – but the answer lacks any attempt to
relate to TH. Because the question is worth 4 marks, it must make
some reference to the business in the data given. This is called
application. The student could have written: ‘Even part-time
employees will need to be paid the minimum hourly wage. Health and
safety will be important, especially in the kitchens with some
dangerous equipment.’
Marks: K2; Ap0 = 2 in total
2 Identify and explain any two stages of recruiting new TH
employees.
[6]

Examiner’s tip
Usually all questions worth 4 marks or more in IGCSE Business
Studies include marks for making relevant references to the case
study.
Student’s answer
Preparing a job description is important. [K] In the case of TH the
chef’s job description would include ‘to prepare high quality meals’.
[Ap] This would help identify the right people qualities for the job –
such as chef’s qualifications. [An]
Advertising the vacancy is another stage. [K] This could be done on
the noticeboard of a local senior school. This would be cheap [An]
and effective in attracting students interested in part-time work at the
hotel. [Ap]
Examiner’s comments
I hope you can see that this answer is applied to TH. The two stages
are correct and there is some, brief, development of them so this
means the student is analysing these points.
Marks: K2; Ap2; An2 = 6 in total
3 Would you recommend TH to offer more employees full-time
employment contracts?
[6]
Student’s answer
Full-time contracts can be motivating to employees [K] as they offer
more security than part-time jobs. [An] This would help to reduce the
number of employees who leave TH each year, cutting back on
recruitment costs and time spent on this. [Ap]
Full-time contracts can be expensive though, as employees will be
paid even if there is no work for them. [An] A hotel will be busier
during the tourist season and it would be useful to have more part-
time employees being available then.
Examiner’s comments
There are two good points here – one in favour of full-time contracts
and the other one against. The second sentence gains an application
point [only 1 application mark in final 6 mark questions on Paper 1].
There is no judgement or evaluation though. The student does not
give a supported recommendation – as was asked in the question.
The student could have suggested that ‘even though costs might be
higher with full-time employees they should offer better customer
services, which is important in hotels’.
Marks: K1(max); Ap1; An2; Ev0 = 4 in total

Exam-style questions
ASP produces high quality racing bicycles. These are made using
job production. Production techniques have not been changed for
several years. Each bicycle is made by a team of three full-time
multi-skilled employees and a team leader. There are nine teams.
Production employees are well motivated. ASP also has a Human
Resources manager, a Marketing manager and an Accounts
manager. Employees are trained to a high standard. Due to
retirement, a vacancy for a new team leader now exists.
a) What is meant by ‘well motivated’?
[2]
b) What is meant by ‘full-time’?
[2]
c) Identify and explain two responsibilities of the HR manager at
ASP.
[4]
d) Identify and explain two benefits to ASP from training its
employees.
[6]
e) Would you recommend ASP to recruit externally for the new team
leader? Justify your answer.
[6]
9 Internal and external
communication

Key objectives
The objectives of this chapter are to revise:
• why internal and external communication is important
• how to select the best methods of communication
• the most common causes of communication failure
• how businesses can overcome these barriers.
Key definitions
Term Definition
Communication Sending a message from sender to receiver who
understands it.
Message Information or instructions sent from sender to
receiver.
Internal Between members of the same organisation.
communication
External Between the organisation and another
communication organisation.
Sender/transmitter The person sending the message.
Receiver The person who receives the message.
Feedback Reply from receiver to sender to confirm
message received/understood.
Method of How the message is communicated, e.g.
communication meeting, letter, email.
One-way Message is sent without receiver required or
communication expected to give feedback.
Two-way Gives feedback to a received message – there
communication may be discussion about it.
Formal Messages sent through established channels.
communication
Informal Messages sent casually, not through established
communication channels.
Communication Factors that stop effective communication.
barriers
Communication methods
Barriers to communication
Common errors
Error Why it is wrong
‘All internal Many messages will pass ‘down the hierarchy’ but
communication two-way communication methods will mean that
in a business feedback will pass back up the organisation. Some
passes down communication will also be horizontal – between
the departmental managers, for example.
organisation.’
‘One-way It might be true that one-way communication is
communication more effective for emergency situations where clear
is more instructions must be given quickly. However, as
effective than there is no feedback, how can the sender be sure
two-way that messages have been received and
communication understood? Two-way communication also
as it is encourages employee involvement and this can be
quicker.’ a motivating experience, e.g. when discussing with
managers a problem that has arisen on the
production line.
‘Barriers to ‘Always’ is not necessarily correct but it might be
communication true that if a message is not received or understood
can always be using one method – e.g. a letter – then using
solved by another method might help to remove the barrier –
using more e.g. a follow-up phone call. In other cases of
than one ‘barriers’, it is important to identify the precise cause
method of of communication breakdown to adopt the
communicating appropriate solution.
a message.’
Sample questions and answers
Top Food (TF) operates 15 restaurants. There are 20 employees in
each restaurant, most of them part-time. The owner of TF sends out
instructions and targets each week by letter to each restaurant
manager. Employees are told to read the noticeboard in each
restaurant daily to pick up important messages. A monthly printed
newsletter containing details about the business is given to each
manager and employee. TF’s owner often complains in the newsletter
that his targets are not met and instructions ignored. He is planning to
use only IT-based methods of communication in future.

Examiner’s tip
Make sure that, when you are asked for two
reasons/factors/benefits/ disadvantages, etc., that the two points
mentioned really are different – and not the same point expressed in
a different way!

1 Identify and explain two barriers to communication within TF.

[6]
Student’s answer
One barrier is that the wrong method is used. Noticeboards are a
bad way to communicate as the notices might not be read. [K]
Workers in the restaurants are probably too busy [Ap] to read daily
notices so important messages will be ignored. [An]
The second barrier is that with the weekly newsletter there is no
chance of feedback [K] to say that there are messages in it which
have been read or understood. [An] It might not even be read by
part-time workers. [Ap]
Examiner’s comments
This is a good answer as two separate points are explained. Some
evidence from the case study is used to support each explanation.
Marks: K2; Ap2; An2 = 6 in total
2 Do you agree with the plan of TF’s owner to use only IT methods of
communication in future? Justify your answer.
[6]
Student’s answer
IT methods of communication include emails and social media. [K]
These can be quick ways of communicating with large numbers of
people. They are also cheap as no postage costs are involved.
Feedback can also be given quickly, e.g. by replying to an email or
replying to a message on Twitter. This should help TF’s owner to
understand why targets have not been met [An]– restaurant
managers can say why the targets are too high or what problems
they have had this week. [Ap] Gaining feedback would be the most
important reason why IT methods should be used by TF so I agree
with the manager. [Ev]
Examiner’s comments
This answer has some real strengths – IT communication is
understood with some appropriate examples. The answer is applied
to TF. The potential benefits of IT methods are clearly explained.
BUT there are no arguments against using only IT methods so this
limits the answer’s marks for analysis and evaluation. The student
could have suggested that meeting restaurant managers face-to-face
or meeting restaurant workers in team briefings would also be a very
effective way of encouraging discussion and two-way communication.
So IT methods should not be the only forms of communication used
within TF.
Marks: K1; Ap1; An1; Ev1 = 4 in total

Exam-style questions
UPA is a manufacturer of high quality handbags and wallets. It sells
to exclusive retailers in many countries. The Managing Director
wants to communicate effectively with the final consumers to help
establish customer relations and gain feedback about UPA’s
products. In the UPA factory, employing 300 workers, the Operations
Manager believes that one-way communication works best. ‘We
have strict output deadlines to meet. If workers take time out to send
messages back, we will not meet our targets.’
a) What is meant by ‘feedback’?
[2]
b) State two methods that UPA could use to communicate with its
employees.
[2]
c) Identify and explain two barriers that might prevent UPA from
communicating with its consumers effectively.
[4]
d) Identify and explain two methods that UPA could use to
communicate with consumers.
 [6]
e) Do you agree with UPA’s Operations Manager that one-way
communication is always the best form of communication? Justify
your answer.
[6]
People in business: case study

MH Hotels
MH is a small hotel owned and run by Pierre and Pedro. The hotel
has 150 rooms and a restaurant for the use of hotel guests but also
customers who are not guests. The hotel also has a sports centre
with a gymnasium and gardens for hotel guests to use. The owners
are planning to close the gymnasium due to it not being used by
many guests. This means that one of the gymnasium workers will
need to be made redundant and the other two employees will be
retrained to work in the restaurant.
The main hotel guests are business people visiting companies in
the city centre. A small number of guests are tourists.

Appendix 1 – MH Hotel organization chart

Appendix 2 – Details of the three gymnasium

employees
1 a Identify and explain the spans of control and the chain of
command for MH Hotels as shown in the organisation chart in
Appendix 1.
[8]
Student’s answer
The span of control is the number of employees working directly
under a manager. In the case of MH Hotels the span of control for
Pierre and Pedro is four as there are four people directly below them
in the organisation chart. For the Sports Centre Manager there are
six workers below them and so their span of control is six.
The chain of command is the route taken by instructions that are
passed down from senior management to the lowest levels in the
organisation. In the case of MH Hotels the chain of command has
two levels because for an instruction to go from Pierre and Pedro to
the waiters it will have to go through two other levels before it gets to
the waiters.
Examiner’s comments
The span of control is clearly explained and correctly applied to the
organisation chart in Appendix 1. However, the chain of command is
correctly defined but there are four levels in the hierarchy not two. So
this answer gains 5 marks in total (4 for span of control + 1 for chain
of command).
b Consider the information about the three employees in Appendix
2. Recommend which employee Pierre should make redundant.
Justify your answer.
[12]
Student’s answer
Max has qualifications as a personal trainer and has worked for the
hotel for 12 years. He is friendly and works well in a team, which will
make him useful in the restaurant, as he will need to work with the
other waiters.
Tom has no qualifications but has worked at the hotel for 25 years.
He is a reliable, honest and punctual worker, which will make him
useful in the restaurant. He will always be there on time and never let
them down.
Harry has 7 IGCSEs and 2 A levels and has worked at the hotel for
10 years. He is thoughtful and caring and will make a good employee
in the restaurant.
I recommend making Harry redundant as he is often late and likes to
be a leader which is not needed in the restaurant. The other two
workers are friendly and reliable and will make better workers in the
restaurant.
Examiner’s comments
The student just repeats the information provided and makes little
comment on what it means for the job in the restaurant. The
information is used but the student should comment on whether the
information makes the employee more or less suited to working in the
restaurant. For example, Max will be friendly to the customers and
make them welcome so they will be more likely to return again.
This means that only level 1 can be awarded as the answer does not
go into any detail about the advantages or disadvantages of
employing these workers in the restaurant. The recommendation
makes statements about the employees but again does not really
explain why Harry should be the one chosen to be made redundant
and why the other two employees are the better ones to retrain.
Marks: 3 level 1 marks and 2Ap = 5 in total

Exam-style questions
2 a Identify and explain two ways in which the hotel will benefit from
well-motivated employees.
[8]
b Consider on-the-job and off-the-job training methods to retrain
gymnasium workers for work in the restaurant. Recommend
which method of training to use. Justify your answer.
[12]
10 Marketing, competition and
the customer

Key objectives
The objectives of this chapter are to revise:
• the role of marketing and the marketing department
• market changes and how businesses can respond
• the difference between mass and niche marketing
• why market segmentation is often used
• how to recommend and justify an appropriate method of
segmentation.
Key definitions
Term Definition
Marketing Identifying and meeting the needs of customers.
Market share The proportion (%) of total market sales held by one
brand or business
Customer The willingness of customers to continue to buy the
loyalty same product from the same business.
Customer Communication with customers to encourage them to
relationships become loyal to the business and its products.
Mass market Where there is a large number of sales of a product.
Niche A small specialised segment of a large market.
market
Market Identifiable sub-group of a whole market in which
segment consumers have similar characteristics or preferences.
Marketing
Market segmentation
Common errors
Error Why it is wrong
‘Marketing is Marketing includes many roles – but only one of
about selling them is about selling the product. ‘Identifying and
goods and satisfying customer needs’ is more than just
services to ‘selling’.
customers.’
‘Promoting to Keeping existing customers – customer loyalty –
new customers has been shown to be less costly than trying to
is more attract new customers! So, customer relations are
important than very important.
keeping
existing
customers.’
‘Market It might lead to higher profits – but market
segmentation segmentation can also be expensive for a business,
will always lead e.g. developing slightly different products and using
to higher profits different promotions for each segment. Revenue
for the from market segmentation will not always cover
business.’ these extra costs.
Sample questions and answers
GF produces frozen food products such as pizzas and ice cream. It
aims its products at mass markets. The Marketing Manager recently
said: ‘Mass marketing is always going to be more profitable than
niche marketing.’ The Managing Director thinks GF should consider
market segmentation. ‘The market for frozen food could be divided
into sub groups. With our good reputation, we could aim products at
these groups successfully.’ A food industry report recently suggested
that consumers’ incomes were being hit by rising unemployment and
there was increasing consumer interests in ‘healthy foods’.

Examiner’s tip
When asked for ways or ‘suggestions’ make sure that the points you
make can be applied to the business in the data.

1 Identify two ways in which GF could segment the market for frozen
food.
[2]
Student’s answer
Low income consumers [K]
Food for babies [K]
Examiner’s comments
Two relevant suggestions for how a food business could segment its
market.
Marks: K2
2 Identify and explain two ways in which GF could respond to the
market changes.
[6]
Student’s answer
As consumers’ incomes are falling due to rising unemployment they
will not have much money to spend. GF could reduce prices [K] so
that the pizzas and ice creams become more affordable to
consumers. [Ap] This should lead to higher sales and revenue. [An]
As consumers are more interested in healthy foods, GF could
introduce new products [K] such as low fat pizzas. [Ap]
Examiner’s comments
The first point is relevant with some application and analysis. The
second point is relevant and applied – but there is no explanation or
analysis of why this suggestion might be a good idea for GF.
Marks: K2; Ap2; An1 = 5 in total
3 Do you agree with the Marketing Manager that ‘mass marketing is
always going to be more profitable than niche marketing’?
[6]
Student’s answer
Niche marketing is selling products in small markets to specific
consumer groups. [K] GF seems to use mass marketing at present,
which is when it sells the same pizzas and ice creams to everyone.
[Ap] This can keep costs such as product development costs and
promotion costs low. Low costs might help GF make a profit. [An]
Examiner’s comments
This is a well written and well balanced answer. There is an argument
in favour of mass marketing. There is an argument in support of niche
marketing.
Student’s answer
By making food items for particular ethnic or social groups, GF might
be able to sell these at higher prices. If no other business produces
foods for particular ethnic groups, GF might have high sales in these
market segments and make a high profit. [An]
GF could sell its existing products to the mass market but try to use
market segmentation to sell new products like curries at higher
prices than its existing products. [Ev] If these are successful then
niche marketing might be more profitable than mass marketing. [Ev]
Examiner’s comments
The answer is clearly applied to food and there is a clear conclusion –
about the possible profitability of these alternative ways of marketing.
Full marks!

Exam-style questions
CC produces soaps and washing powder. It sells several different
brands aimed at different types of customers, e.g. low income
families, families with babies, sports enthusiasts and businesses
that operate laundries. CC plans to produce a new soap. CC’s
marketing department will undertake market research among people
interested in protecting the environment. If demand seems to be
high for an environmentally friendly soap it will produce this product
and promote and distribute it to this group of consumers.
a) What is meant by ‘marketing’?
[2]
b) State two roles of CC’s marketing department.
[2]
c) Identify and explain two ways, other than those mentioned, in
which CC could segment the market for soaps and washing
powder.
[4]
d) Identify and explain two reasons why the demand for CC’s
products might change over time.
[6]
e) Do you think CC should continue to use market segmentation?
Justify your answer.
[6]
11 Market research

Key objectives
The objectives of this chapter are to revise:
• the meaning of primary research and secondary research
• the suitability of these two research methods for gathering data for
a particular purpose
• questionnaire construction
• analysing data collected
• assessing accuracy of methods used and data collected
• how to present market research results.
Key definitions
Term Definition
Market Gathering, analysing and interpreting information
research about a market.
Market Carrying out market research to find out consumer
orientated wants before developing and producing a product.
Product Business that focuses on the product itself, not the
orientated market for it.
business
Primary Collection of original data – also known as field
research research.
Secondary Information that has already been collected but is
research available for use by others (desk research).
Sample Group of people selected to respond to a research
survey.
Random Everyone has an equal chance of being selected for
sample the sample.
Quota Sample is selected on a particular basis, e.g. people
sample aged between 18 and 25 years.
Focus group A group, representative of the target market, which
provides market research information – often during a
discussion.
Types of market research
Market research helps companies to understand whether people will
buy their products. Being market-orientated involves finding out:
consumer tastes and preferences; types of consumer; competitors’
products; market trends and market demand.
Undertaking market research
Sample questions and answers
Khan plc produces chocolate bars. It sells them in country X. It has
segmented the market and produces many different brands of
chocolate bar. Most of these are selling well but one brand, ‘Chocnut’,
has experienced falling sales. Karl, the Marketing Director, plans to
increase the number of brands the company targets at consumers
who are between 14 and 18 years old. Before developing these
products he wants to conduct research by using a postal
questionnaire to 25 people in this age range.
1 Identify and explain two benefits to Khan plc of carrying out
detailed market research.
[6]
Student’s answer
Benefit one: gives information about consumer demand. [K]
Benefit two: could provide information that explains why sales are
falling. [K] Sales of Chocnut are falling. [Ap]
Examiner’s comments
This answer is not detailed enough and only gains 3 marks [K2; Ap1].
The first benefit is not applied or explained – the student could have
added: ‘Before launching new chocolate bars for 14–18-year-old
consumers Karl needs to find out what these people want most in a
chocolate bar. [Ap] If the new bar is based on this information it has a
good chance of selling well as it will meet customer needs.’ [An]
Can you see why the second benefit does not gain any analysis
marks? Could you add one sentence to it that is ‘analytical’?
Common errors
Error Why it is wrong
‘Primary research Not necessarily – if secondary research has been
is always more obtained from reliable sources it can be accurate.
accurate than Primary research can be inaccurate if poor
secondary questions and small samples have been used.
research.’
‘Primary research Secondary research may have to be paid for –
is cheaper than from a specialist research agency, for example.
secondary But much secondary data is free, e.g. internet
research which sources.
often has to be Primary research always involves some cost and
paid for.’ time in carrying it out.
‘A large sample Data collected from a large sample is often more
makes sure that accurate than data from a small sample. but if a
primary research sample has been chosen that does not represent
is accurate.’ the consumers in the market, the data will be
unreliable, even with a large sample.
2 Do you think that Karl’s proposed market research will provide him
with the information he needs? Justify your answer.
[6]
Student’s answer
It will provide useful data because only 14–18-year-old people are
being used in the research. This is Karl’s target market for the new
bars. [Ap] This will make the results more useful than if older people
were asked what sort of chocolate bar they wanted. [An]
The data will not be very reliable because it is a very small sample
[k] and many will not bother to reply. It would be risky to develop a
new product on very few answers to the postal questionnaire of only
25 people who may not be representative of the target age range.
[An]
Examiner’s comments
A well laid out and structured answer.
Two short paragraphs explain one benefit and one limitation of the
research Karl is planning.
Student’s answer
Overall, Karl’s research will not give him the information he needs.
Online surveys rather than postal questionnaires will have a better
chance of being answered by young people as they use the internet
a lot. [Ev] A focus group would allow Karl to discuss with young
people the most important features of a new bar leading to the
development of brands which meet their preferences and are more
likely to be successful. [Ev]
Examiner’s comments
The final paragraph gives an overall judgement – and suggests better
methods of market research.
Full marks!

Exam-style questions
Best Books (BB) publish textbooks for most school subjects. Sales
of textbooks are falling. This is because schools and students are
cutting back on spending and starting to prefer electronic learning
resources, produced by BB’s competitors. BB is a market orientated
business and plans to carry out primary research with schools and
students before launching its own electronic versions of its printed
textbooks. BB’s Marketing Manager is planning a focus group of 16-
year-old students. He thinks the most important question to ask the
group is ‘how many textbooks do you buy each year?’
a) What is meant by ‘primary research’?
[2]
b) What is meant by ‘market orientated’?
[2]
c) Identify and explain two benefits to BB of using secondary
research.
[4]
d) Identify and explain two methods of primary market research,
other than focus groups, that would be useful for BB.
[6]
e) Do you agree with BB’s Marketing Manager that the most
important question to ask the focus group is ‘how many textbooks
do you buy each year’? Justify your answer by referring to other
possible questions that could be asked.
[6]
12 The marketing mix: product

Key objectives
The objectives of this chapter are to revise:
• the four elements of the marketing mix
• the role of product decisions in the marketing mix
• why product is important
• the costs and benefits of developing a new product
• brand image and the importance of this
• the role of packaging
• the product life cycle (PLC), including how stages of the PLC can
influence marketing decisions
• ways to extend the product life cycle.
Key definitions
Term Definition
Marketing All the activities that go into marketing a good or
mix service: product, price, promotion, place.
Unique The special feature of a product that differentiates it
selling point from the products of competitors.
(USP)
Brand name The unique name of a product that distinguishes it from
other brands.
Brand The identity of a product that consumers can recognise
image and which gives it a ‘personality’ distinct from other
products.
Packaging The physical container or wrapping used for a product.
Product life The stages the sales of a product pass through from
cycle introduction, growth, maturity to decline.
Extension A way of keeping a product at the maturity stage of the
strategy life cycle and extending the cycle.
The marketing mix: product
A typical product life cycle
Impact on marketing
Common errors
Error Why it is wrong
‘A product Don’t forget that the term ‘product’ includes
always has to services sold by tertiary sector businesses.
look good to sell Some ‘cheap’ products sell well even though they
well.’ might not ‘look good’!
‘All products are Some products – Coca Cola is one example –
eventually have been marketed for over 100 years; perhaps
withdrawn from some products can be kept ‘fresh’ by constant use
the market as of extension strategies. High tech products would
they enter the be unlikely to survive for more than a few years,
decline stage.’ though.
‘Packaging is Businesses often spend a lot of money on clever,
only there to attractive and effective packaging as a form of
protect the promoting a product and helping to support its
product.’ brand image.
Sample questions and answers
Chung is a limited company that makes mobile (cell) phones. It used
to make them for well known mobile phone retail businesses to be
sold under their own brand names. Recently, Chung has started to
sell its own brand of mobile phones directly to consumers. Promotion
has focused on establishing a brand image that consumers can relate
to and remember.
There are many competing mobile phone manufacturers. Chung
has three main mobile phone products – the oldest model is called
the e-mobile and it has few modern features but it is still quite popular
with low income consumers.
1 Identify and explain two benefits to Chung of establishing a brand
image.
[4]
Student’s answer
Branding will help consumers identify Chung’s mobile phones [Ap]
and, if they are of good quality, will help develop brand loyalty. [K]
When there are many competitors that manufacture mobile phones
[Ap], a well recognised brand name can help a business stand out
from these competitors. [K]
Examiner’s comments
Two relevant points about branding – and both are sufficiently applied
to Chung and the industry it operates in.
Marks: K2; Ap2 = 4 in total
2 Recommend the best way for Chung to effectively extend the
product life cycle of the e-mobile phone. Justify your answer.
[6]
Student’s answer
As a product ages so its sales usually start to decline unless an
extension strategy is used. [K]
Chung could change the product slightly to make it more appealing.
Perhaps new colours could be used or a better box could be
designed. Packaging can help to create a good image for a product
and make it easily recognisable. [An]
Chung could lower prices. This might encourage more people to buy
the product even though it is quite old. [An]
I think Chung should advertise more as some consumers might
have forgotten that the product exists.
Examiner’s comments
The student understands the PLC and extensions strategies BUT the
points made could apply to many products, not just Chung’s mobile
phones. These products – and the low income consumers that buy
the e-mobile – are not referred to so there is no application.
There is no judgement in the answer for Chung’s own best strategy –
it is a general statement about what the student thinks might be the
best extension strategy.
Marks: K1; An2 = 3 in total

Exam-style questions
SW produces four main confectionery products. The ChewBar has
been on the market for 15 years and sales are now falling. The
FabChoc bar has just been launched but sales are disappointing.
The two other products sell well even though there is now little
promotion of them. ‘We need products at different stages of their
product life cycle,’ said Franc, the Managing Director. ‘SW has
always thought it best to price products quite highly at all stages of
their life cycles and promote them when they are first launched.’
a) What is meant by ‘product life cycle’?
[2]
b) Identify and explain one element of the marketing mix not
referred to above.
[2]
c) Identify and explain at which stage of their product life cycle
ChewBar and FabChoc seem to be.
[4]
d) Identify and explain one benefit and one drawback of SW
developing new products.
[6]
e) Do you agree with Franc that product prices should not be varied
as they go through their product life cycles? Justify your answer.
[6]
13 The marketing mix: price

Key objectives
The objectives of this chapter are to revise:
• the role of pricing in the marketing mix
• different pricing methods and their benefits and limitations
• how to select a suitable pricing strategy
• the difference between price elastic and price inelastic demand
• the importance of price elasticity of demand in pricing decisions.
Key definitions
Term Definition
Cost-plus Unit cost of the product plus a profit mark-up.
pricing
Competitive The price is the same as or just below the price of
pricing competitors’ products to try to capture more of the
market.
Psychological The price is set to match the consumers’ expectations
pricing and perceptions of the product.
Price The price is set high for a new product on the market.
skimming
Penetration The price is set lower than competitors’ prices to
pricing enter a new market and gain market share.
Promotional The price is set at a low level for a short time period.
pricing
Price A measure of the responsiveness of demand
elasticity following a price change.
Price elastic Demand changes by a greater proportion than price
demand change.
Price inelastic Demand changes by a smaller proportion than price
demand change.
The marketing mix: price summary
The role of pricing is to help achieve marketing objectives such as
breaking into new markets, to cover costs and to integrate with the
rest of the marketing mix.
Common errors
Error Why it is wrong
‘Cost-plus Not necessarily – although the unit cost is covered
pricing always by the sale of each item and a profit mark-up is
leads to a made. If sales are not high enough then total costs
business might exceed revenue.
making a
profit.’
‘Lowering It is true that for most products, a lower price will
prices will lead to higher sales volume. Revenue will not
always lead to increase if demand is price inelastic however. This is
higher because demand will rise by a lower proportion than
revenue.’ price has fallen so total revenue will fall.
‘Raising prices This might be true – but again it depends on price
will reduce elasticity of demand. If the demand for a product is
revenue and price inelastic then the demand will fall by a smaller
profits as proportion than the price has risen. In this case,
consumers will revenue will increase – and probably profit too.
buy less.’
Sample questions and answers
Shula owns and manages a small restaurant. At lunchtime, she offers
a special menu for $9. It is very popular with customers as it is slightly
less than her main competitors’ prices for similar food. Shula thinks
her business makes very low profits. She thinks it will be best to use
price skimming for a new range of take-away meals made using the
freshest ingredients. For the special lunch menu she might switch to
cost-plus pricing – the unit cost per meal is $8. A new café is opening
close to Shula’s business. She is worried that it might use penetration
pricing for the first few months.
1 Identify and explain one advantage and one disadvantage to
Shula’s business of using competitive pricing.
[6]
Student’s answer
Advantage: Competitive pricing means that prices are similar to
competitors’ prices so should attract customers. [K] Shula’s menu
price at lunchtime is slightly less than her competitors’ [Ap] so this
should mean customers spend more money in her restaurant. [An]
Disadvantage: Competitive pricing might mean that the profit made
on each unit sold is low. [K] This means that the profits of the
business might be less than if cost-plus pricing was used. [An]
Examiner’s comments
This answer gains 5 out of 6 marks as the disadvantage is not
applied to Shula’s restaurant. Marks: K2; Ap1; An2 = 5 in total
If the student had referred to the fact that Shula thinks the profits of
her business are too low, then the argument against competitive
pricing would have been in context.
2 Do you agree with Shula that it would be best to use price
skimming for the new range of take-away food?
[6]
Student’s answer
Price skimming means using high prices for new products [K] such
as the range of take-away foods – this should mean high profits for
each meal sold. [An] This will help Shula raise the profits of her
business which she thinks are too low. [Ap] As the freshest
ingredients are used these might be expensive and high prices will
be necessary to cover costs. [An]
Examiner’s comments
A well laid out and structured answer.
There is a good point made about the profits of the business and how
price skimming might lift these.
Student’s answer
However, another café is opening soon. It might use penetration
pricing and Shula might find demand for her food is price elastic if
she puts the price up too high so it would not be a good idea. [Ev]
Examiner’s comments
The threat of the new café is also explained and the use of
penetration pricing is also explained.
Student’s answer
Shula should not use penetration pricing for the new take-away
meals as customers might think they are cheaply made. It would be
better to compete on quality and use price skimming for these new
products. [Ev]
Examiner’s comments
Finally, the recommendation not only supports price skimming but
rejects one of the other pricing methods that Shula could use.
Full marks!

Exam-style questions
Sports Clothing Ltd (SCL) manufacture sportswear including football
shirts. They produce shirts in the colours of many famous teams.
Each shirt costs SCL $14 to make. The Marketing Manager
calculates the selling price by adding a 40% profit mark-up. A new
competitor in the football shirt market has offered to supply shirts to
retailers for $19. SCL’s Managing Director wants SCL to use
competitive pricing but the Marketing Manager thinks that the
demand is price inelastic. ‘Retailers and consumers buy our shirts
because of our designs and our reputation for quality,’ she said.
a) What is meant by ‘price inelastic’?
[2]
b) Calculate the current selling price of a SCL football shirt.
[2]
c) Identify and explain two reasons why the pricing decision is
important to SCL.
[4]
d) Identify and explain one advantage and one disadvantage to
SCL if it used penetration pricing for a new range of sports
clothing.
[6]
e) Do you think SCL’s Marketing Manager should use competitive
pricing for SCL’s football shirts? Justify your answer.
[6]
14 The marketing mix:
promotion and technology in
marketing

Key objectives
The objectives of this chapter are to revise:
• the role of promotion in the marketing mix
• the aims of promotion
• how to select appropriate advertising and sales promotion
methods
• the importance of the marketing budget
• how technology influences promotion decisions.
Key definitions
Term Definition
Promotion Marketing activities that aim to raise customer
awareness of a product or brand, generating sales
and helping to create brand loyalty.
Advertising Paid-for communication with customers:
Informative (giving information about the product);
Persuasive – creating an image that increases
customer desire for it.
Sales promotion Incentives such as special offers or rewards to
achieve a short-term increase in sales.
Target The consumer groups that are the potential buyers
market/audience of a product.
Marketing The financial plan for the marketing of a product
budget over a specific time period – includes the amount
to be spent on promotion.
e-commerce Buying and selling of goods and services using
computers linked to the internet.
Promotion
The aims of promotion are to inform customers (about new products,
for example) and to allow for comparison with competitors’ products.
Technology in marketing
Common errors
Error Why it is wrong
‘Increased Not necessarily – if advertising is using inappropriate
advertising media and is aimed at the wrong target market it might
always not increase sales. If consumers find advertisements
increases misleading or offensive it could actually lead to reduced
sales.’ sales.
‘Television Selling to other businesses rarely involves TV
is usually advertising. TV advertising might not be appropriate for
the best some consumer goods and services and may be far
media for too expensive, e.g. for a local hairdressing business.
advertising.’
‘Advertising Not quite true – advertising is an important form of
is the same promotion but it is not the only method of promotion –
as in fact, some businesses rely more on other methods
promotion.’ of promotion apart from advertising.
Sample questions and answers
KT Carpets makes mats and carpets which are sold through three
market stalls owned by the business. Demand is seasonal – foreign
tourists are the main target market but there are fewer tourists in the
off-peak season lasting for several months each year. The owner of
KT Carpets, Abhi, has a small marketing budget. This is mainly used
for advertising in hotel magazines. Attractive point-of-sale displays
are the main form of sales promotion. Abhi believes he could export
his carpets and mats to increase demand all year round.

Examiner’s tip
Make sure you understand the difference between advertising and
sales promotion techniques.

1 Identify and explain two sales promotion methods, other than

point-of-sale displays, that Abhi could use to increase demand
during months when there are few tourists.
[6]
Student’s answer
He could advertise on television. These adverts would be seen by
tourists and people who live in the country. They might encourage
people to visit KT’s market stalls and buy more carpets.
He could offer discounts to tourists during the off-peak months. [K]
This might attract tourists to buy from KT rather than his
competitors. [Ap] This should increase KT’s sales in the short term.
[An]
Examiner’s comments
Only the second part of this answer is relevant. Advertising is not a
form of sales promotion so no marks are awarded for the first
paragraph. The second paragraph is much more clearly focused on
sales promotion and gains 3 marks – K1; Ap1; An1.
2 Do you think that Abhi should use the internet to promote KT
Carpets’ products? Justify your answer.
[6]
Student’s answer
The internet could be used to promote KT Carpets if the business
created a website. [K]
KT could also use social media to communicate with potential
customers, e.g. through Facebook.
The website would be good because potential consumers across the
world could see colour pictures of the carpet designs. [Ap] These
pictures might attract them to ordering carpets online and increasing
demand for KT’s product. This would help the business increase
demand during the off-peak seasons when there are few tourists.
[An]
So I do think that the internet should be used by KT Carpets.
Examiner’s comments
The student makes some very good points in this answer – but can
you see that there is no real judgement or evaluation?
Even though a simple recommendation is given at the end this is not
awarded a mark. This is because the answer is all ‘one-sided’ and
there is no attempt to consider the problems, costs or limitations of
using the internet/website.
As there is no balance to the answer, analysis is awarded 1 mark and
the recommendation is not awarded a mark.
Marks: K1; Ap1; An1 = 3 in total

Exam-style questions
WT sells hand-crafted wooden toys. These are bought in from many
workshops in the city where WT has its Head Office. WT has ten
shops located in the largest towns and cities in the country. WT
charges high prices for the toys as its target market is high income
consumers who buy expensive presents for their children at
birthdays and festival times. The business has a marketing budget
that allows for $3m to be spent on advertising each year. Aditi, the
Managing Director, insists on very attractive window displays in the
shops but uses few other forms of sales promotion.
a) What is meant by ‘marketing budget’?
[2]
b) What is meant by ‘target market’?
[2]
c) Identify and explain two reasons why WT spends a lot of money
on advertising.
[4]
d) Identify and explain two methods of sales promotion, other than
window displays, that WT could use to attract high income
consumers.
[6]
e) Do you think that WT should aim its advertising at children or their
parents? Justify your answer.
[6]
15 The marketing mix: place

Key objectives
The objectives of this chapter are to revise:
• the role of place in the marketing mix
• the advantages and disadvantages of each distribution channel
• the business threats and opportunities offered by e-commerce
• selecting the most suitable distribution channels.
Key definitions
Term Definition
Distribution The means by which a product is passed from the
channel place of production to the customer.
Agent Appointed to deal with the distribution of products –
often in another country.
Place
Distribution methods include:
• department stores
• chain stores
• discount stores
• supermarkets
• direct sales
• mail order
• local retail store
• e-commerce
Channel choice depends on:
• business customers or consumers
• perishability and size
• competitors’ channels
• high or low price and image of product
• location of consumers
e-commerce
Common errors
Error Why it is wrong
‘Place is Place decisions in the marketing mix are more about
about where how to make a product available to consumers rather
to sell a than where. Location decisions are used for deciding
product.’ where a shop should be located. Place decisions
make a choice between, for example, using shops or
e-commerce to distribute products to consumers.
‘Place is No – ‘place’ is not about transport decisions but about
about which how to make a product available to consumers when
method of and where they want to buy it.
transport to
use to
distribute the
products.’
‘e-commerce It is true that many traditional retailers have suffered
can be used from e-commerce competitors – but will all shops be
for all goods affected? What about specialist retailers that offer
and services great/excellent pre-sales service? Also, hairdressing
and will lead and restaurants are two examples of businesses
to the decline offering services that may advertise on the internet
of all but cannot distribute their services through e-
retailers.’ commerce.
Sample questions and answers
Absolute Phones (AP) makes top range mobile (cell) phones. The
cheapest is sold in retail stores for $1000. AP currently only sells in
its home country, country Y, but is planning to export for the first time.
In country Y, AP sells its output to large specialist mobile phone
shops that sell to consumers. This is the only channel of distribution
that AP uses. ‘I think we should use an agent to make decisions on
distributing our products in our new export market,’ said Alex, the
Managing Director of AP.
1 Identify and explain one advantage and one disadvantage to AP of
its current channel of distribution.
[6]
Student’s answer
By using retailers AP is able to keep lower inventory levels. [K] This
means less money is tied up in inventories [An] which is important
as mobile phones can get outdated quickly. [Ap]
Retailers aim to make a profit. The specialist mobile phone shops
will have high costs [Ap] so will sell AP’s phones at a higher price [K]
than AP would charge for phones if they were sold directly to
consumers. [An]
Examiner’s comments
Two good points – inventory holdings and higher costs/prices. These
are put into context and applied. The impact of both the advantage
and the disadvantage is briefly explained/analysed.
Full marks!
2 Do you agree with Alex that AP should use an agent to make
decisions on distributing AP’s phones in a new export market?
Justify your answer
[6]
Student’s answer
Yes, using an agent would be a good idea. Agents located in the
export market will know more about consumers, the main cities and
local competition than AP will. [K] This would allow the agent to
select the best marketing mix in this country. [An]
If AP tried to sell the phones themselves then they might end up
trying to sell the wrong type of products at prices too high for local
consumers. [An]
So using an agent is the best option.
Examiner’s comments
On first read this seems like a good answer BUT it lacks certain key
skills.
There is no clear application of the points made to mobile phones –
these points could apply to any product.
There is no consideration of any possible disadvantages of using an
agent – such as higher costs or loss of some marketing control but
there is brief consideration of not using an agent. So, a second mark
for analysis is awarded but there are no marks for evaluation as the
judgement is not justified. Marks: K1; An2 = 3 in total

Exam-style questions
TR manufactures a large range of bicycles. Its models range in price
from $100 ‘town’ bicycles to $5000 ‘SR racing’ bicycles which are
bought by many professional cyclists. TR uses several different
distribution channels. Town bicycles are mass produced and sold to
wholesalers. TR only sells SR racing bicycles through small
specialist retailers. The business has just introduced its first electric
bicycle but a decision has not been made about how to distribute it.
Max, TR’s Manager, believes that e-commerce is unsuitable for
selling TR’s products.
a) What is meant by ‘distribution channel’?
[2]
b) List two benefits of TR using a wholesaler for its ‘town’ range of
bicycles.
[2]
c) Identify and explain two factors that TR should consider before
deciding on a distribution channel for the electric bicycle.
[4]
d) Identify and explain two likely reasons why TR distributes SR
racing bicycles through small specialist retailers.
[6]
e) Do you agree with Max that e-commerce is unsuitable for selling
TR’s products? Justify your answer.
[6]
16 Marketing strategy

Key objectives
The objectives of this chapter are to revise:
• the development of appropriate marketing strategies in given
circumstances
• the nature and impact of legal controls related to marketing
• opportunities and problems of entering foreign markets.
Key definition
Term Definition
Marketing A plan with the appropriate marketing mix for a product
strategy to achieve a marketing objective.
Marketing strategy summary
Common errors
Error Why it is wrong
‘The marketing Objectives must always come first – and the 4 Ps
strategy needs decisions must focus on achieving the marketing
to be decided objective.
before
objectives can
be set.’
‘The marketing All 4 Ps decisions need to be integrated and
mix decisions combined to reflect and support the image of the
can be made product.
separately
from each
other.’
‘All businesses Most businesses recognise that some consumer
want to see protection is essential. It means that responsible
legal controls businesses can compete effectively against those
over marketing firms which, without legal controls, would act
removed.’ unethically to cut costs and put consumers at risk.
‘A successful Not necessarily! There have been many examples
product will of well-known businesses failing to enter foreign
always sell well markets successfully. They may need to adapt
in a foreign famous products to suit foreign market tastes and
market.’ cultures.
Sample questions and answers
TT manufactures children’s breakfast cereals. Currently all products
are sold in country Y, a European country where TT is based. The
company is experiencing increased competition. The Managing
Director of TT wants the business to start selling cereals to a country
in Asia. TT has three main brands but managers are planning to
introduce a fourth. This will contain corn, sugar and chocolate. The
aim is to achieve 20% of the children’s breakfast cereal market within
two years.
1 Identify and explain one opportunity and one problem for TT of
starting to sell cereals in a foreign market.
[6]

Examiner’s tip
Read the question carefully to make sure you are following the key
demands of the question.
Student’s answer
One problem is the distance and the cost of transport. [K] Cereals
are perishable and they might be damaged during transport to
another country [Ap] and this would lead to low sales and failure in
the Asian market. [An]
Another problem is the different consumer tastes. Chocolate and
sugar might be a popular flavour for cereals in Europe. In some
Asian countries it might be less popular so even with advertising TT
might not sell enough cereals.
Examiner’s comments
This answer shows a common error! The student explains two
problems – and not one problem and one opportunity!
In fact, both problems are well explained and applied – so 3 out of 6
marks can be awarded.
The student could have explained that there is much competition for
cereals in country Y. Selling to another country – perhaps one that
has a small but growing cereal market – could be more profitable
than introducing new products into country Y.
2 Recommend an appropriate marketing mix for the new children’s
breakfast cereal. Justify your strategy.
[6]
Student’s answer
The marketing mix includes product, price, place and promotion.
The product should be researched on children first to make sure
they like it. [K] The brand name must be catchy, easy for children to
say and written clearly on the packet. The pricing method should be
penetration pricing as TT are aiming for a high market share. Low
prices will encourage parents to buy this cereal [An] and this is the
most important factor apart from the flavour of the cereal. [Ap]
Advertising should be done to inform children and parents that the
new cereal is available. This should not be too expensive to produce
as the cost might exceed the revenue as the price is being set low.
[An] Small toys might be offered as sales promotion.
The cereal should be available in all supermarkets and food shops
but perhaps not in cheap looking discount stores because parents
might think the cereals are cheaply produced. [Ev]
These parts of the mix fit together well as cereal needs to be priced
low enough to attract parents to buy it and sold in supermarket
where parents are likely to do their shopping and this is important
otherwise the marketing strategy will not work. [Ev]
Examiner’s comments
This is a well balanced answer. It refers to all 4 Ps and it tries to make
sure that they support each other, i.e. not suggesting high prices and
cheap packaging!
The student is clearly referring to children’s breakfast cereal and
points are well explained. There is some judgement/evaluation too –
for identifying that some factors are most important and for rejecting
the idea of using discount shops as a distribution channel.
Full marks!

Exam-style questions
Grand Hotels (GH) operates ten hotels in country Z. The business
promotes its hotels to business travellers by claiming that they are
‘the best in the country’ with the ‘cleanest restaurants’. The Directors
want to open two more hotels in country Z to maintain market share
as new hotel businesses have recently set up. These hotels will be
aimed at a lower income segment than the existing GH hotels.
Country Y is a low income country but with an expanding tourist
industry. It is attracting visitors from many other countries.
a) What is meant by ‘marketing strategy’?
[2]
b) Suggest two other objectives, apart from increasing market
share, which GH could set.
[2]
c) Identify and explain two ways in which Grand Hotels might be
affected by consumer protection laws.
[4]
d) Identify and explain two reasons why Grand Hotels needs to
ensure that the marketing mix for the two new hotels in country Z
is appropriate.
[6]
e) Do you think that Grand Hotels should open a hotel in country Y?
Justify your answer.
[6]
Marketing: case study

Eddie’s Bikes (EB)

EB is a large private limited company that manufactures a range of
high quality adult and children’s bicycles. It sells these products to
several specialist bicycle shops and toy shops located around
country X.
This year EB spent $1m on researching and developing a new
folding bicycle. The bicycle folds up for easy storage and
transportation so it can easily be put into cars or taken on trains. EB
needs to decide the market segment for this new product but it will
probably be aimed at adults as it is made of high quality materials
and will be priced using price skimming.
The bicycles are produced using batch production methods. EB
employs 50 workers in the factory and will need to expand to start
producing these new bicycles. It may need to change the channels of
distribution it uses.

Appendix 1 – MEMO

To: Managing Director (EB)

From: Marketing Director (EB)
Date: 1 June 2016
Re: Marketing the new folding bicycle
We currently use cost-plus pricing for our existing bicycles we sell
but I think we will be able to use price skimming for the new bicycle.
Also, we promote our existing bicycles by sending out brochures to
bicycle retailers and toy shops. However, we might want to start
selling the new folding bicycle direct to customers. This may involve
 setting up our own website. This is something to discuss at our next
meeting.

Appendix 2 – Competitor’s advertisement

1 a Identify and explain four ways EB could research customer

needs for its products.
[8]
Student’s answer
1 EB could carry out questionnaires to ask adults what type of
bicycle they currently use.
2 EB could carry out interviews with the owners of the toy shops
where they sell the existing bicycles to see if they already sell
folding bicycles.
3 EB could research on the internet to see if there are already
folding bicycles for sale.
4 EB could set up a focus panel to ask customers what they like.
Examiner’s comments
A good answer with four suitable examples of research methods EB
could use. However, only the first three examples are in context, so 7
marks are awarded and not 8. This answer could have easily been
increased to full marks by ensuring the last example was also in the
context of this company.
b ‘Place’ is an important part of the marketing mix. Consider the
advantages and disadvantages of each of the following channels of
distribution. Recommend which channel EB should choose. Justify
your answer.
[12]
• existing specialist bicycle shops
• through EB website
• toy shops
Student’s answer
Existing specialist bicycle shops will be a good way to use as EB
already sells its bicycles to these shops and they will have built up a
good relationship with the shops. This means that the staff in the
shops will be able to advise customers on EB products and will be
easily updated on the new bicycle. However, if EB wants to aim the
new bicycle at a new market segment then selling to existing outlets
may not be good as the new target market may not shop at these
outlets.
A website might be a good idea as EB does not have a website at
the moment and it could put all of its bicycles on the website for
customers to purchase directly. This will cut out one of the channels
of distribution and should increase the profits of EB. However,
customers might want to try the new bicycle and they will not be able
to do this if they buy through a website.
Toy shops – EB sells children’s bicycles to toyshops and they also
have close links with these shops. However, the new folding bicycle
is probably going to be aimed at adults and priced at a high price so
it is unlikely that potential customers will see the new bicycle in toy
shops unless they also have children.
The best place to sell the new folding bicycle is through specialist
retail outlets. EB already has a good relationship with these shops
and the staff will be able to give advice to potential customers on the
quality of the new bicycle. If EB sets up a website it is a cheap way to
advertise the bicycle but unless potential customers are searching for
a folding bicycle they will probably not see the advert or the website.
Also these consumers may want to try the bicycle and look at it to be
convinced that it is of a high quality. Toy shops are unlikely to attract
the potential market segment as it is to be aimed at adults and is
expensive. So this makes specialist bicycle shops the best channel
of distribution to use for the new folding bicycle.
Examiner’s comments
This is a good answer. It has the advantages and disadvantages of
the three options explained in context.
There is then a recommendation which compares the three options
and explains why specialist bicycle shops are chosen and why the
other two channels of distribution are rejected.
This answer receives full marks because it shows consideration of
why the other two options are rejected.

Exam-style questions
2 a Identify and explain two marketing objectives EB might set for
the new folding bicycle.
[8]
b EB will need to let consumers know about their new product.
Consider the advantages and disadvantages of the following
three alternative ways to promote the new product. Recommend
which method EB should choose. Justify your answer.
[12]
• social media
• specialist bicycle magazines
• billboards on the side of roads and train stations
17 Production of goods and
services

Key objectives
The objectives of this chapter are to revise:
• the difference between production and productivity and how to
increase productivity
• reasons why businesses hold inventories
• how to identify and explain ways of implementing lean production
• how to identify and explain the most appropriate method of
production in a given situation – job; batch; flow
• how technology has changed production methods.
Key definitions
Term Definition
Productivity Output measured against inputs used to create it, e.g.
labour

Inventory Materials, work in progress or completed goods held by

a business which are or will be ready for sale.
Buffer Inventory held to deal with unexpected changes, e.g. in
inventory consumer demand or suppliers’ ability to deliver.
level
Lean Cutting out waste and inefficiency in the production
production process.
Kaizen Continuous improvement through the elimination of
waste.
Just-in-time Reducing or eliminating the need to hold inventories of
materials and finished goods.
Job A single product is made at a time.
production
Batch A quantity (batch) of one product is made, then a
production quantity of another item will be produced (e.g. bread,
dresses).
Flow Large quantities of a product are produced in a
production continuous process.
Production of goods and services
Technology in production
Common errors
Error Why it is wrong
‘If more If more inputs are used then output (production)
resources are should increase. This is not the same as productivity.
used then Productivity can increase if output rises faster than
productivity input, e.g. greater efficiency with each worker
will increase.’ producing more than before.
‘Higher This is not quite correct. Higher productivity should
productivity lead to lower average/unit costs of production and
will reduce this is a sign of increased efficiency and
the costs of competitiveness.
the business.’
‘Lean No – the concept of ‘reducing waste’ by using inputs
production more efficiently can be applied by all businesses,
can only be e.g. a hotel using a computer controlled inventory
used by system for drinks and food to reduce the risk of ‘out-
manufacturing of-date’ supplies being thrown away.
businesses.’
‘Job Not necessarily! Job production is more ‘handmade’
production and can be adapted to make special one-off designs
always but the quality depends greatly on individual
produces craftspeople. Flow production (especially using
higher quality automated machinery) often produces consistent
goods than quality standardised products.
flow
production.’
Sample questions and answers
SD specialises in providing food for weddings and birthday parties. All
SD meals are promoted as being ‘individually handmade and cooked
by specialist chefs’. SD receives more customer requests than it can
cope with – it has to refuse some orders. ‘If we used automatic
mixers, food processing equipment and other catering technology we
could double output,’ said the Operations Manager. Inventories of
food ingredients used regularly are high. Some suppliers are
unreliable. Some fresh ingredients that are used less often are stored
for no more than two days.

Examiner’s tip
As you write your answers, ask yourself – could this point apply to
any business or am I applying it to the business in the data?

1 Identify and explain one opportunity and one problem of SD

introducing food processing and catering technology into the
production process.
[6]
Student’s answer
An opportunity would be to increase output. [K] Machinery such as
automatic mixers would allow higher productivity and higher output.
[Ap] This would mean that SD would not have to turn orders away
and this would increase revenue. [An]
A problem would be that the business seems to be well known for
quality food handmade and prepared by chefs. [K] Perhaps
technology would make the food taste less individual or special [Ap]
and this might damage SD’s reputation and sales. [An]
Examiner’s comments
The student makes a clear distinction between the opportunity and
the problem. They are both realistic, applied and well explained
(analysed).
Marks: K2; Ap2; An2 = 6 in total
2 Recommend whether SD should use just-in-time (JIT) inventory
control. Justify your answer.
[6]
Student’s answer
Just-in-time would mean SD cutting down on the level of inventories.
[K] It could order goods just as they are needed. This would save
working capital and reduce opportunity cost of the money tied up.
[An]
JIT means that there are no buffer inventories. If there is a sudden
increase in demand then SD would not be able to increase output as
it would not have the inventories needed. [An]
On balance I do not think SD should use JIT.
Examiner’s comments
The student clearly understands JIT. There is one potential benefit
and one potential problem from introducing JIT – and these are
analysed by considering the likely impact on revenue/sales.
Unfortunately, the student does not refer to ‘food ingredients’ (and the
fact that they are perishable). Also, there is no reference to SD’s
current inventory holding method.
So, no application marks and no evaluation either as JIT is not
discussed in the context of SD.
Marks: K1; Ap0; An2; Ev0 = 3 in total

Exam-style questions
GR makes clothing for many different police forces. Each police
force uniform is of a different design. Batch production is used.
Labour turnover in the GR factory is high and this is one of the
reasons why productivity is low. Unit costs are also quite high as a
large quantity of material is wasted in production and high inventory
levels are held. GR’s directors plan to set up a new factory to start
making T-shirts and denim jeans for the general consumer market.
They hope that demand for these products will be high and
consistent throughout the year.
a) What is meant by ‘productivity’?
[2]
b) Identify two activities carried out by the Operations Manager at
GR.
[2]
c) Identify and explain two ways in which GR could try to increase
labour productivity.
[4]
d) Identify and explain two benefits to GR of using lean production.
[6]
e) Do you think that GR should use batch production within the new
factory? Justify your answer.
[6]
18 Costs, scale of production
and break-even analysis

Key objectives
The objectives of this chapter are to revise:
• the difference between fixed costs and variable costs
• why cost data is useful to business managers
• the main causes of economies and diseconomies of scale
• what the break-even level of output means
• how to use break-even charts to find the break-even level of
output and how to draw break-even charts
• the uses and disadvantages of break-even analysis.
Key definitions
Term Definition
Fixed costs Costs that do not vary with the number of items
produced (in the short run).
Variable costs Costs that vary directly with the number of items sold
or produced.
Total costs Fixed costs plus variable costs.
Average costs Total costs divided by number of units sold/produced;
also called cost per unit.
Economies of Factors that lead to a reduction in average costs as a
scale business increases in size.
Diseconomies Factors that lead to an increase in average costs as a
of scale business increases in size.
Break-even The quantity that must be sold for total costs to equal
output total revenue.
Break-even Graphs that show how costs and revenue of a
chart product change at different output levels – showing
the B-E point.
Contribution Selling price minus variable cost per unit.
Costs and scale of production
Break-even analysis
This is an example of a break-even graph.
Common errors
Error Why it is wrong
‘All labour Not usually – if labour is paid by piece rate or workers
costs are can be employed on part-time/temporary contracts
variable when demand is high, then these labour costs will vary
costs.’ with output. The wages/salaries of workers with
permanent contracts or management employees are
likely to be fixed costs – they cannot easily be changed
as output changes.
‘Economies Total costs are almost certain to rise as a business
of scale expands – but average (unit) costs often fall as the
lead to business increases efficiency due to economies of
lower costs scale.
as a
business
expands.’
‘Break-even This is wrong for two reasons:1) Break-even is not
is when about ‘when’ but about the level of output 2) at which
variable total costs equal revenue.
costs equal
revenue.’
‘Increasing Assuming unit variable costs and fixed costs do not
the price of change, then a higher price will reduce the level of
a product output at which a business breaks even. BUT will it sell
will increase as many products as before the price rise?
the break-
even level
of
production.’
Sample questions and answers
The SLR Gaming business develops computer games which are very
popular. It has been very profitable but recent expansion has actually
resulted in higher average costs per game and lower profits. ‘Our
employees complain about management never having time to
support them and claim that they never know what is going on in the
business these days,’ said Jed, the CEO, to his directors. Jed
suggested encouraging games development employees to work from
home. This would allow SLR to move to premises with lower rents. ‘I
have drawn a break-even chart to show how much our profit would
rise,’ Jed said. ‘This is the best way to support this kind of decision.’
1 Identify and explain two diseconomies of scale that SLR might be
experiencing.
[4]
Student’s answer
Management might be so busy that they make bad decisions or do
not coordinate the different departments as much as when the
business was smaller. [K]
Poor communication can result when a business grows. [K] It might
slow down the receiving of important messages as more people
have to read and understand them. This is why SLR workers ‘did not
know what was going on’. [Ap]
Examiner’s comments
Two good points here which show that the student understands
diseconomies of scale.
Only the second point is really applied to SLR, however.
Marks: K2; Ap1 = 3 in total
2 Jed believes that break-even charts are very helpful when making
important decisions. Do you agree with him? Justify your answer.
[6]
Student’s answer

The diagram above shows how B-E charts are constructed. Jed
could draw two of these to show how the B-E point falls when fixed
costs are reduced [An] by moving to a cheaper location. [Ap]
However, B-E charts may not be very accurate if costs and prices
change a lot. Higher costs resulting from SLR’s growth need to be
shown on a new B-E chart for it to be accurate. [An]
So Jed should not rely on these alone to make decisions because if
the cost information is not accurate the B-E chart will also be wrong.
[Ev] He should consider other factors like the impact on worker
morale if they are forced to work from home. [Ev]
Examiner’s comments
This is a well balanced answer. There are points both for and against
the use of B-E charts for SLR’s decision making. These points are
explained and applied.
There is a good final evaluation suggesting that B-E charts need to
be considered with other factors before important decisions can be
made.
Full marks!

Exam-style questions
‘We did not break even last week,’ said Dave, a partner in the Food
Republic (FR) pizza restaurant, to the other partner, Kati. ‘Our high
street location and decision to buy only the best food ingredients
have resulted in high costs,’ he continued. Dave showed Kati the
break-even chart he had prepared and explained how it could be
used to help decide how to make their business more profitable. ‘We
could increase pizza prices to raise revenue or reduce our variable
costs. Our main competitors are all larger than FR and benefit from
economies of scale,’ he told Kati.
a) What is meant by ‘variable costs’?
[2]
b) Identify two likely fixed costs for a business such as FR.
[2]
c) Identify and explain two economies of scale that a pizza
restaurant business might benefit from as it expands.
[4]
d) Identify and explain one use and one limitation of break-even
charts to FR.
[6]
e) Do you think that increasing the price of meals is the best way for
FR to reduce its break-even level of production? Justify your
answer.
[6]
19 Achieving quality production

Key objectives
The objectives of this chapter are to revise:
• the meaning of quality and its importance to businesses
• the meaning of quality control and how businesses implement
quality control
• the meaning of quality assurance.
Key definitions
Term Definition
Quality A good or service is produced which meets customer
expectations.
Quality Checking at the end of the production process to see
control if the good or service is of the correct quality before a
customer receives it.
Quality Checking the standard of the good or service
assurance throughout the production process to ensure there are
no errors or defects.
Total Quality The continuous improvement of goods and services
Management and processes by focusing on quality at each stage of
(TQM) production.
Quality and how it is achieved
Common errors
Error Why it is wrong
‘Quality means Quality is about producing a good or service
producing a good or which meets the quality a customer expects
service to the highest given the price they have paid. This may not
standards.’ be to the highest standards if the price paid is
low.
‘Quality control This is not always possible due to the cost of
means testing all quality control and also testing products
products to make might mean damaging/destroying them, e.g.
sure they meet chocolate bars or air bags on cars!
customer
expectations.’
Sample questions and answers
Kamal is a sole trader who owns and runs a small hotel in a tourist
area of the main city. The hotel has 4* awarded to it by government
inspectors and this shows potential customers that it has been
checked to ensure it is high quality. There are a lot of hotels in the
same area as Kamal’s hotel but they are mainly 3* hotels. Kamal
wants to expand the hotel and open an extension to the hotel with
more rooms.
1 Identify and explain two advantages to Kamal of having 4*
awarded to the hotel.
[6]
Student’s answer
Kamal will be able to charge higher prices. [K] This will mean that
Kamal will gain higher revenue from the hotel rooms which may
yield higher profits for the hotel. [An] As a sole trader Kamal may be
able to keep a higher profit for himself and will not need to share it
with anyone else. [Ap]
The 4* shows that the hotel has a high quality service and this might
attract more customers. [K] This would help the business to build up
a good reputation among customers. [An] A good reputation would
keep the occupancy in the hotel high with fewer empty rooms. [Ap]
Examiner’s comments
Two good points – clearly related to the hotel being higher quality and
the benefits this may bring Kamal. They are both briefly explained.
Full marks.
2 Do you think quality should be more important than price for
Kamal? Justify your answer.
[6]

Examiner’s tip
Always make a justified decision with an ‘evaluation’ question.
Student’s answer
Kamal needs to keep prices as low as possible to attract lots of
customers. [K] If he puts up the price of his hotel rooms then
customers will go to his competitors. [Ap] Quality is important to
Kamal and he will have to keep a high quality or customers will go to
the competitors’ hotels.
Examiner’s comments
This answer has some strengths but also a major weakness. The
student identifies a possible benefit – and applies it – of using high
quality as a way of attracting customers from competitors’ hotels but
this point is not fully explained.
However, the answer does not make the link between price and high
quality. Kamal is unlikely to be able to keep prices low and maintain
high quality service at the hotel or he will make very little profit. Also a
low price may make customers think that the quality is low. There is
no final recommendation made between the two alternatives.
Marks: K1 (max); Ap1 (max); An0; Ev0 = 2 in total

Exam-style questions
Selina set up a private limited company called KidsKlothes (KK) ten
years ago. The company manufactures children’s clothes and sells
them to large retailers across the country. The clothes are sold at
low prices to retailers and KK buys cheap cloth from local suppliers.
In the factory the Operations Manager uses quality control to check
the clothes before they are sent to the retailers. There have been
complaints from retailers that some of the clothes have holes in
them or they come apart when worn.
a) What is meant by ‘quality?’
[2]
b) Identify two reasons why quality is important to KK.
[2]
c) Explain how quality control and quality assurance could be used
in the factory to check on the quality of children’s clothes being
made.
[4]
d) Identify and explain one advantage and one disadvantage to KK
of purchasing cheap materials to make its products.
[6]
e) Do you think the Operations Manager should change to using
quality assurance in the factory? Justify your answer.
[6]
20 Location decisions

Key objectives
The objectives of this chapter are to revise:
• factors that affect the location of manufacturing businesses
• factors that affect the location of a service sector business
• factors that affect the location of retailing businesses
• factors that affect the decision about in which country a business
should locate its operations
• how legal controls affect location decisions.
Key definitions
Term Definition
Infrastructure The basic physical systems of a business or nation,
e.g. transportation, communication, sewerage, water
and electric systems.
External Cost benefits to a business resulting from locating in a
economies of region with other businesses or organisations
scale operating in the same industry.
Importance of location
Common errors
Error Why it is wrong
‘Businesses Businesses only need to be near their raw materials if
need to be they are a manufacturing business and produce a lot
near to the of waste as part of the process. It is not so important to
raw material be near the raw material source with today’s improved
source.’ transport links.
‘It is always Many businesses locate where their costs will be low.
better to This may be in another country where wages are low if
locate near labour costs are a large part of total costs. It may not
to be near to customers.
customers.’
‘The internet Businesses that use the internet to sell their products
has not do not need to be near to customers any more, as they
affected receive orders over the internet and then post the
where goods out to customers. Many of these businesses
businesses can locate anywhere.
locate.’
Sample questions and answers
XYZ is a private limited company that manufactures sailing boats. It
was started 20 years ago and sells high quality boats to customers in
many different countries. The boats are designed to the exact
requirements of the customer. XYZ employs specialist workers who
are skilled in boat building. However, other production workers are
semi-skilled and are trained when they start working for XYZ. Wages
are high in country X and XYZ are finding it difficult to keep down
costs. The directors are thinking of relocating and building a new
factory in another country where manufacturing costs are lower.
1 Identify and explain two factors that affect the location of the new
factory.
[6]
Student’s answer
Factor 1: the number of skilled workers in the area. [K] XYZ needs
skilled workers to build the sailing boats [Ap] and if there are no
skilled workers in the area then XYZ will have to train workers, which
will raise its costs. [An]
Factor 2: it needs to be near water to build the products. [K] This
would help the product get to the customer.
Examiner’s comments
One good point – both factors are clearly related to the location of a
sailing boat factory. However, the second point is not explained in the
context of this business so does not gain an application mark.
Marks: K2; Ap1; An1 = 4 in total
2 Do you think XYZ should relocate to another country? Justify your
answer.
[6]
Student’s answer
If XYZ relocated to a lower wage country then costs could be
reduced [K] and it could either increase profit or lower costs and
prices to make the sailing boats more competitive. [An] However,
skilled workers are needed to build the boats and workers with these
skills may not be available in other countries. [Ap] This will raise the
costs for XYZ at least in the short run when they will have to train
new workers. [An] XYZ should not relocate to another country
because they will not be able to produce boats straight away, as
they will not have the skilled workers they need. This could mean
that orders are not fulfilled and they will gain no revenue. [Ev] Also
as boats are built to the customer specification it suggests that a
high price is charged and so increasing wage costs may be less of a
problem as customers may be willing to pay higher prices for a
unique boat. [Ev]
Examiner’s comments
There are points both for and against relocating to another country
and both points are in context. This means 1 mark for knowledge (1
K), 1 mark for application (1 AP) and 2 marks for analysis (2 AN) can
be awarded. The answer then makes a recommendation in context
and based on the earlier points [2 Ev].
Full marks!

Exam-style questions
James is in a partnership with his sister. They own four shops that
sell fashion shoes. Two of the shops are in shopping malls in the city
centre and two are located in small towns near to the city. James
wants to expand the business but profit has been falling. He thinks
he should open a new shop, but where? The two shops that sell the
most shoes are in the city centre in shopping malls but the costs of
operating the shops are lowest in nearby towns.
a) What is meant by ‘infrastructure’?
[2]
b) Give two examples of government influence on the location of a
shoe manufacturer.
[2]
c) Identify and explain two location factors that will affect a
manufacturing business and not a retailing business.
[4]
d) Identify and explain two factors that affect the location of shoe
shops.
[6]
e) Do you think James should open a new shop in a new shopping
mall or in a nearby town where there are few shoe shops? Justify
your answer.
[6]
Operations management: case
study

The Light House (LH)

LH is a public limited company established 25 years ago in country
X. The business manufactures light bulbs for home and business
use. The products are sold to retailers located in all the main cities
and towns in country X.
LH employs only 20 skilled workers in the factory and uses flow
production. It has three production lines making three different sizes
of light bulbs. The Operations Manager thinks they should improve
the productivity in the factory and is considering different ways of
achieving this.
LH buys most of the components from an importer and they are
purchased in large quantities. The light bulbs have to meet strict
safety laws and are required to last a minimum amount of time when
being used. Samples of bulbs are tested from the three production
lines each day to check that they meet the required standard.
Sales of LH products are continuing to increase each year and
they want to start exporting their light bulbs. To meet this expected
increase in demand, LH plans to open a new factory and is
considering the three sites outlined in Appendix 2.

Appendix 1 – Diagram to show the assembly of light

bulbs at LH
Appendix 2 – Three possible sites for the new LH
factory

1 a Identify and explain two possible factors which resulted in LH

choosing to use flow production methods.
[8]
Student’s answer
1 The nature of the product itself: as LH produces a standard light
bulb that is not unique it is more suited to flow production. If the
light bulb had many different sizes then batch production might be
better but there are only three different sizes produced and so flow
production is better to use as large quantities of a standard
product are produced.
2 The size of the market: as LH sells a large quantity of its products
it is better to produce a large quantity using flow production.
Examiner comments
The first factor is well explained and is applied clearly to the business
in the case study.
However, the second factor is generic and only mentions the company
name of LH. Therefore 4 marks are awarded for the first factor but
only 2 marks for the second factor = 6 marks in total.
For full marks the second point needs to be clearly applied to this
business.
b Consider the following three ways productivity could be
improved in the factory. Recommend the best way for LH to
choose to achieve this. Justify your answer.
[12]
• increased training for factory workers
• introduction of lean production
• introduction of new technology
Student’s answer
Increased training will mean that the 20 factory workers will be
quicker at carrying out their jobs, as they will have been trained in
how to do their job more efficiently. It will also make the workers
more motivated as they will feel more confident in their jobs.
However, this will increase costs for LH to carry out the training.
Introduction of lean production will involve ways to cut down on
waste and therefore increase efficiency. This will mean the
Operations Manager will find ways to reduce any waste such as
cutting down the amount of glass bulbs the business holds as this
increases storage costs. It should also reduce defects and therefore
reduces costs because light bulbs will not be scrapped for being
faulty. However, it will take time to introduce these methods and if
there are too few inventories being held then LH might not be able to
meet urgent orders.
Introducing new technology such as computer-aided manufacture
(CAM) will reduce the number of workers needed on the production
line but it will be expensive to purchase this equipment. If it speeds
up production a lot then LH may be able to eliminate one of the
production lines and just operate two lines.
The best way to increase productivity is to increase the amount of
training as this will not cost a lot of money and the workers will be
able to produce more light bulbs. That is assuming the increase in
the costs of training is less than the revenue from the increase in
output.
Examiner comments
The advantages and disadvantages of the three ways are clearly
explained. All three ways are in the context of this case study as they
include reference to the 20 workers, light bulbs, number of production
lines and glass bulbs as components of the finished product.
However, the recommendation only chooses one of the ways to justify
and does not justify why the other two ways are rejected. Therefore 10
marks in total can be awarded. If there had been a justification of why
increased training was better than the other two ways then full marks
could have been awarded.

Exam-style questions
2 a Identify and explain four reasons why quality is important to LH.
[8]
b Consider the advantages and disadvantages of the three sites
for the location of the new factory. Recommend which is the best
site for the directors of LH to choose. Justify your answer.
[12]
21 Business finance: needs and
sources

Key objectives
The objectives of this chapter are to revise:
• why a business needs finance
• the different sources of finance available to a business in the short
term and long term
• factors that affect which sources of finance are chosen by
managers for different uses.
Key definitions
Term Definition
Start-up The finance required by a new business to pay for the
capital essential fixed assets and current assets so that it can
start trading.
Working Capital available to a business in the short term to pay
capital for day-to-day expenses.
Capital The money spent on non-current assets (fixed assets)
expenditure lasting more than one year.
Revenue Money spent on day-to-day expenses, e.g. wages, raw
expenditure materials.
Internal Finance from within the business itself.
finance
External Finance from sources outside of and separate from the
finance business.
Micro- This provides financial services to poor people who
finance cannot use traditional banks, e.g. small loans.
Short-term Finance that must be paid back within a year and
source of includes: overdraft facility, trade credits, factoring.
finance
Long-term Funding obtained for a time frame exceeding one year
source of in duration and includes: owner’s savings/share capital;
finance loans; debentures; a mortgage; hire purchase or
leasing; grants.
Business finance needs
Business finance is needed for starting a business, expansion of an
existing business and increasing working capital.
The factors to consider when choosing a source of finance are:
• the amount required
• the size and type of business organisation
• control over the business
• risk and gearing (if it already has loans)
• the purpose and period of time required.
Long-term external sources of finance
Short-term external sources of finance
Internal sources of finance
Common errors
Error Why it is wrong
‘All limited Only public limited companies can sell shares on
companies can the Stock Exchange – private limited companies
sell shares on can only sell shares to family and friends.
the Stock
Exchange.’
‘Selling more Even though shareholders own a company they
shares is an are ‘outside’ providers of capital – the company is
example of a separate legal identity. This is different to sole
internal finance.’ traders and partners who are the same as the
business and therefore are classed as internal
sources.
‘Shares form a No: shares do not have to be paid back. The
long-term loan.’ shareholder can sell them to someone else but
the company will not get any of this money. All
loans have to be paid back eventually.
‘An overdraft is a No: the bank at very short notice can call an
long-term loan.’ overdraft back. That means they can demand it is
paid back quickly. A long-term loan will be paid
back over an agreed time of several years.
‘The money from Shares sold on the Stock Exchange are second-
the sale of hand shares and the payment goes to the seller
existing shares of the shares and not the company. Only when it
on the Stock is a new issue of share capital does the money
Exchange goes paid go to the company.
to the company.’
Sample questions and answers
F&G is a private limited company. It owns a chain of ten restaurants
located all around country X. The directors are planning to expand
the chain by opening five more restaurants in other towns and cities
around country X. The company has two bank loans for $50 000 each
which are still being paid for another five years and it has share
capital of $500 000. The directors are considering taking out a further
bank loan for $100 000 instead of issuing more shares. The Finance
Director also wants to arrange an overdraft as she thinks there might
be a cash flow problem when they are expanding.
1 Identify and explain one advantage and one disadvantage to F&G
of having an overdraft.
[4]
Student’s answer
An overdraft means they only pay interest on any money overdrawn
which makes it cheaper than a bank loan. [K]
However, the interest rate is often higher than the interest rate on a
bank loan and therefore this is a more expensive form of borrowing
money. [K]
Examiner’s comments
Two good points – but neither point is clearly related to this business.
Therefore only 2 knowledge marks can be awarded. The answer
could have made reference to the business expanding and possibly
having a cash flow problem during the first opening of the new
restaurants.
Marks: K2; ApO = 2 in total
2 Do you think the directors are right to take out another bank loan to
finance the expansion rather than issue more shares? Justify your
answer.
[6]
Student’s answer
The business is expanding and if they issue more shares then the
money will not need to be paid back. [K] This will help the expenses
of the business, as they will not have to repay interest on the loan
when they are expanding when they may not have sufficient
revenue coming in from the new restaurants. [An]
However, a bank loan can be budgeted for and the additional
revenue from the new restaurants will eventually pay for the loan.
[An] The directors could ask for a long term loan to help them get
the new restaurants open and gaining revenue before they start to
pay back the loan. [Ap]
Overall, I think they should have issued more shares as this is less
risky than taking out a further loan when they already have
repayments on $100 000 of loans. [Ev] It may mean that the
ownership of the business is now spread across more shareholders
but as long as the original owners do not lose their majority
shareholding it is the better way to finance the expansion. [Ev]
Examiner’s comments
This answer considers both options and then comes to a justified
conclusion. The answer is in the context of this restaurant business
and so application is awarded.
Marks: K1 (max); Ap1 (max); An2; Ev2 = 6 in total

Examiner’s tip
Always consider both sides of an issue with an ‘evaluation’ question.

Exam-style questions
Jim is a sole trader and runs a business repairing roofs. He employs
five workers and carries out most of his repairs during the winter
when people need roofs repairing. He employs the workers all year
round as they are skilled and it would be hard to replace them if they
left. This does give Jim a problem as he often has to carry out
repairs and buy materials before he gets paid and there are certain
times of the year when he runs short of working capital. He is
thinking of using trade credit. He is also considering external finance
to buy new equipment.
a) What is meant by ‘working capital’?
[2]
b) What is meant by ‘external finance’?
[2]
c) Identify and explain one advantage and one disadvantage of
using retained profit to help Jim through the quiet times of the
year.
[4]
d) Identify and explain two advantages to Jim of using trade credit.
[6]
e) Do you think Jim should take out a loan from family to help him
through the quiet times of the year? Justify your answer.
[6]
22 Cash flow and working
capital

Key objectives
The objectives of this chapter are to revise:
• why cash flow is important to business operations
• what to include in a cash flow forecast
• effects on business of running short of cash
• how cash flow problems can be overcome
• the importance of working capital.
Key definitions
Term Definition
Cash flow Cash inflows and outflows over a period of time.
Cash flow Estimate of future cash inflows and outflows of a
forecast business, usually on a monthly basis. This shows the
expected cash balance at the end of each month.
Working Capital available to a business in the short term to pay
capital for day-to-day expenses.
Cash Sums of money received by a business during a period
inflows of time.
Cash Sums of money paid out by a business during a period
outflows of time.
Cash flow Shows the stages between paying out cash for labour,
cycle materials, etc., and receiving cash from the sale of
goods.
Profit Surplus after total costs have been subtracted from
sales revenue.
Opening Amount of cash held by the business at the start of the
cash (or month.
bank)
balance
Net cash Difference, each month, between the inflows and the
flow outflows.
Closing Amount of cash held by the business at the end of each
cash (or month. This becomes the opening cash balance for the
bank) next month.
balance
Common errors
Error Why it is wrong
‘New Cash flow forecasts are very important to new
businesses do businesses:
not need cash • when applying for a start-up bank loan, to prove
flow forecasts they can pay it back
as they have • to encourage people to invest in the business
only just • to ensure that the business does not run out of
started.’ cash at such an expensive time for the business.
‘If a business Cash and profit are very different. A profitable
has cash in business can run out of cash – especially when it
the bank it has to pay for manufacturing costs before the
must be revenue from sales has been received. Similarly a
making a business may have a large number of unpaid costs
profit.’ but have plenty of cash in the bank.
Forgetting the Mistakes will be made with minus additions if the
negative signs minus signs are not shown.
– put the
figures in
brackets.
Cash flow cycle
Cash flow forecasting and working
capital
Cash is needed for day-to-day costs and buying inventories.
Sample questions and answers
K and Z is a private limited company that produces a range of
children’s books. The directors are planning to expand the business
by purchasing new printing equipment. This machinery can print
books quickly when sales are made and means large amounts of
inventories do not need to be held. The books are sold to wholesalers
and they are given two months’ credit. The Finance Manager is
looking at the cash flow forecast for the next three months to see if
the equipment can be purchased without taking out a bank loan.

1 Identify and explain two reasons why K and Z should produce a

cash flow forecast.
[6]
Student’s answer
The directors of K and Z should produce a cash flow forecast to
show the bank manager. [K] The company wants to invest in new
equipment [Ap] which will make the business more efficient and
show the bank manager that the business can repay the loan. [An]
The second reason is so that the business can manage its working
capital [K] so that it does not run short of cash and not be able to
pay the expenses and wages when they fall due. [An]
Examiner’s comments
Two clear reasons for producing a cash flow forecast are explained –
however, only the first reason is related to the case. Therefore marks
gained are K2, An2 but only Ap1 = 5 in total.

Examiner’s tip
Always justify the recommendation, don’t just make a statement.

2 Do you think K and Z should improve its cash flow by taking out a
loan? Justify your answer.
[6]
Student’s answer
The business could take out a loan to purchase new printing
equipment. [Ap] This would reduce the chances of having cash flow
problems [K] because the loan would provide a cash inflow to pay
for the cash outflow when the equipment is purchased. [An] Looking
at the cash flow forecast suggests that the business can pay for the
equipment without taking out a loan as June is predicted to have a
large cash inflow from sales. [An] Therefore, no, it doesn’t need a
bank loan.
Examiner’s comments
Two clear reasons for producing a cash flow forecast are explained –
however, only the first reason is related to the case. Therefore marks
gained are K1, An2 but only Ap1 = 4 in total.

Exam-style questions
Rishav and Abdullah are friends who want to set up their own taxi
service. They will need a large amount of capital to buy the taxis.
They are planning to finance this with the money they invested
themselves and a bank loan. They think it will take several weeks
before they get well known and take enough bookings to cover all
their monthly costs. Below is the cash flow forecast for the first three
months of trading.

a) What is the closing balance in May and June?

[2]
b) Identify two examples of the ‘other expenses’ for Rishav and
Abdullah.
 [2]
c) Identify and explain two reasons why working capital is important
to Rishav and Abdullah.
[4]
d) Identify and explain two ways Rishav and Abdullah could improve
the closing balance in April.
[6]
e) Do you think Rishav and Abdullah should allow their regular
customers to pay at the end of the following month? Justify your
answer.
[6]
23 Income statements

Key objectives
The objectives of this chapter are to revise:
• the need for businesses to keep accounting records
• why profit (net profit) is not the same as cash
• the importance of profit (net)
• the difference between gross profit and net profit
• the contents of an income statement.
Key definitions
Term Definition
Accounts Financial records of a business’s transactions.
Accountants Professionally qualified people who have responsibility
for keeping accurate accounts and for producing final
accounts.
Final Produced at the end of the financial year and give
accounts details of the profit or loss made over the year and how
much the business is worth.
Income A document that records the income of a business and
statement all costs incurred to earn that income over a period of
time. It will show if the business has made a profit or
loss.
Gross profit Sales revenue minus the cost of sales (or cost of
goods sold).
Sales Income to a business during a period of time from the
revenue sales of goods or services.
Cost of The direct cost of producing or buying in the goods
goods sold actually sold by the business during a time period.
or cost of
sales
Trading This shows how the gross profit is calculated.
account
Net profit Profit made after all costs have been deducted from
sales revenue. It is calculated by gross profit minus
expenses. Now referred to as ‘profit’.
Depreciation The fall in value of a fixed (non-current) asset over
time.
Retained Net profit reinvested into a company after deducting tax
profit and payments to owners.
Dividends Annual payments from company profits to
shareholders.
Income statements and profit
Common errors
Error Why it is wrong
‘Liabilities and assets Liabilities and assets should be included in
should be included in the balance sheet and not on the income
the income statement.
statement.’
‘An income statement A balance sheet shows what the business is
shows what a worth. An income statement shows how
business is worth much profit or loss has been made by the
today’. business.
‘Gross profit is less Net profit is gross profit after expenses have
than net profit.’ been deducted and therefore net profit
cannot be higher.
Sample questions and answers
Sam runs a small café in the centre of the main city. He started the
business two years ago with all of his savings and wants to improve
the business performance. Sam has been looking at the following
income statement to see what he can do.
Income statement for Sam’s Café for the last year.
$
Sales 80 000
Cost of sales 20 000
Gross profit 60 000
Expenses 50 000
Profit (net) 10 000
1 Identify and explain two reasons why Sam needs to make a profit.
[4]
Student’s answer
Sam needs a profit to reward his risk taking. [K] He risked all of his
savings to set up the cafe. [Ap]
Sam may want to retain some of the profit (net) [K] instead of taking
out a loan.
Examiner’s comments
Two clear knowledge marks for identifying the reasons for Sam to
make a profit but only the first point makes reference to the
information provided.
Therefore 3 marks can be awarded (K2; Ap1).
2 Sam thinks he should buy cheaper ingredients to increase his
profit. Do you agree? Justify your answer.
[6]
Student’s answer
Sam could buy cheaper ingredients for his café and this will reduce
his cost of sales [K] and increase his gross and net profit. [An]
However, if the meals are made of cheaper ingredients customers
may feel meals are of lower quality and go to other cafés. [Ap]
Perhaps it might be better for Sam to reduce his expenses, as they
are a high proportion of total costs. [An] So overall I think trying to
reduce expenses would be the better way to increase the profits of
the café [Ev] as this will maintain the quality of the food served and
keep customers happy. This will mean they stay loyal and maintain
sales but increase profit. [Ev]
Examiner’s comments
The answer is balanced as it gives a reason in context of why Sam
might reduce the ingredient costs and then gives an alternative way
of increasing profit. There is then a justified recommendation that is
still in the context of the café.
Full marks!

Exam-style questions
Titanic Ships plc transports cargo across the world from many
countries. The company has been trading successfully for 25 years
and wants to continue to expand by purchasing two more ships at a
cost of $10m each.
Summary of income statement for Titanic Ships plc
$m
Sales 100
Cost of sales 40
Gross profit 60
Expenses 40
(Net) profit before tax 20
Tax 2
(Net) profit after tax ?
Dividends 5
Retained profit ?
a) What is meant by ‘dividends’?
[2]
b) Calculate the retained profit.
[2]
c) Identify and explain why the government and employees would
be interested in these accounts.
 [4]
d) Identify and explain two reasons why comparing these accounts
with other companies’ accounts is useful to the managers at
Titanic Ships plc.
[6]
e) Do you think the owners of Titanic Ships plc should sell more
shares to raise the finance required for expansion? Justify your
answer using the information in the income statement.
[6]
24 Balance sheets

Key objectives
The objectives of this chapter are to revise:
• the main elements of a balance sheet
• classification and examples of assets and liabilities
• how to interpret and make deductions from a simple balance
sheet.
Key definitions
Term Definition
Balance Shows the value of a business’s assets and liabilities at a
sheet particular point in time. Sometimes referred to as
‘Statement of financial position’.
Assets These are items of value owned by the business. Can be
fixed (non-current) or short-term current assets.
Liabilities Debts owed by the business.
Current Short-term debts owed by the business.
liabilities
Non- Long-term debts owed by the business.
current
liabilities
Current Items of value owned by the business and used within one
assets year.
Non- Items owned by the business for more than one year.
current
assets
Common errors
Error Why it is wrong
Putting sales This should appear on the income statement –
revenue in the only assets and liabilities appear on the balance
balance sheet sheet.
‘Accounts Accounts receivable are customers who have not
receivable yet paid – they owe the business money. The
(creditors) owe business owes money as shown by the accounts
the business payable.
money.’
Assets and liabilities
Balance sheets
Sample questions and answers
Better Builders is a private limited company and has been building
houses for over ten years. The directors want to expand the business
and are thinking of taking out a new loan to fund this. Below is their
end of year balance sheet.
$000
Non-current assets
Buildings 14 000
Equipment 6 000
20 000
Current assets
Inventories 1 000
Accounts receivable 1 000
Cash 500
2 500
Total assets 22 500
Current liabilities
Accounts payable 500
Bank overdraft 500
1 000
Non-current liabilities
Long-term bank loan 11 500
Total liabilities 12 500
Total assets – total liabilities 10 000
Shareholders’ equity/owner’s funds
Share capital/owner’s funds 5 000
Retained profit 5 000
Total shareholders’ equity/owner’s funds 10 000
1 Identify and explain two ways the shareholders of Better Builders
can use this balance sheet.
[4]
Student’s answer
The shareholders of Better Builders can use this balance sheet to
see how many assets and liabilities the business has. They can also
see if the business can repay its short-term debts. [K]
Examiner’s comments
The first point only states what is on the balance sheet, it does not
explain a way the shareholders can use this information. The second
point does state a way the balance sheet can be used. The answer is
not in context and does not make reference to the balance sheet
provided and so no application marks are awarded. Marks: K1
A better answer could have been achieved by giving a second way
such as to see if the value of the business has increased or
decreased. The retained profit is $5m so this business has increased
in value. This would have given application marks and so 2 marks for
this way. A similar addition could have been added to the other
correct way to raise the answer to full marks.
2 Do you think the directors should be satisfied with the financial
position of Better Builders as indicated by its balance sheet?
Justify your answer.
[6]
Student’s answer
The current assets are more than the current liabilities and so the
business can repay its short-term debts. [K] It has $5m in retained
profit which is also good as it could use this for expansion. [Ap] The
business already has a large long-term bank loan of $12.5m and so
the bank may be reluctant to give them another loan as this will be
costing the business a lot in interest payments. [An] However, the
business does have non-current assets of £20m and so if the loans
were not repaid the bank could reclaim these assets to repay the
loan. [An]
Overall I think the directors should be satisfied with the financial
position of the business as it can repay all its debts. [Ev] If the
directors want to expand the business they should consider using
future retained profits or even a sale of shares to raise finance. If
they were to increase bank loans this could leave the business in a
risky position with more interest to pay and more debts to repay. [Ev]
Examiner’s comments
The student identifies possible strengths and weaknesses of this
balance sheet and makes good use of the information provided.
There is a conclusion made based on the previous analysis with a
further justification considering the gearing position of the business.
Marks: K1 (max); Ap1 (max); An2; Ev2 = 6 in total

Exam-style questions
John owns a small garage that repairs cars. His business has been
running for five years and he is looking at the balance sheet to see if
it is worth more than the $5 000 he started the business with. John
also wants to buy some new equipment for the garage and he thinks
it might be best to take on a partner in order to pay for it.
$
Non-current assets 18 000
Current assets 2 000
Total assets 20 000
Current liabilities 3 000
Non-current liabilities 2 000
Total liabilities 5 000
Total assets – total liabilities 15 000
Owner’s funds 15 000
a) What is meant by ‘liabilities’?
[2]
b) Calculate the working capital for John’s business.
[2]
c) Identify and explain two reasons why working capital is important
to John.
[4]
d) Identify and explain two reasons why owner’s funds are important
to John’s business.
[6]
e) Do you think John should pay for the new equipment by taking on
a partner? Justify your answer using the information in the
balance sheet.
[6]
25 Analysis of accounts

Key objectives
The objectives of this chapter are to revise:
• interpretation of financial statements by calculating and analysing
profitability ratios
• interpretation of financial statements by calculating and analysing
liquidity ratios
• who uses accounts and how they are used to help make
decisions.
Key definitions
Term Definition
Liquidity The ability of a business to pay back its short-term debts.
Illiquid Assets are not easily convertible into cash.
Capital This is shareholders’ equity plus non-current liabilities and
employed is the total long-term and permanent capital invested in a
business.
Common errors
Error Why it is wrong
‘Current ratio A result of 1 is acceptable – it means that all short-
below 1 term debts are covered by current assets. Even below
means the 1, a business may be liquid enough as it is unlikely that
business is it will have to repay all short-term debts at the same
bankrupt.’ time.
‘The higher A ratio of greater than 2 may mean that too much
the liquidity working capital is being tied up in inventory which is
ratio the not earning the business any return. There are better
better.’ places to put this money to earn a return.
Not You need to remember three profitability ratios and two
remembering liquidity ratios.
the ratios
Ratio analysis of accounts
Analysis of accounts
Sample questions and answers
CanCan is a public limited company which manufactures packaging
for other businesses. It has been trading successfully for 25 years
and the shareholders want to assess whether the business has
continued to be successful over the last two years. The following is a
summary of this company’s accounts:
All figures are in $000 Last year This year
Sales 800 1 000
Gross profit 450 500
Expenses 400 400
Gross profit margin 56% ?
(Net) profit margin 6% ?
1 Identify two stakeholders and explain how they use these
accounts.
[4]
Student’s answer
Managers [K] of CanCan might use these accounts to see if they
have been managing the costs of raw materials to produce the
packaging efficiently. [Ap]
Shareholders [K] will also look at the accounts to see if they should
be paid a dividend on their shares in CanCan. [Ap]
Examiner’s comments
Two users of the accounts are correctly identified and both refer to
this business in the stem of the question.
Full marks!
2 Do you think CanCan plc is more successful this year than last
year? Justify your answer by calculating the profitability ratios for
this year.
[6]
Student’s answer
The gross profit margin has fallen [K] this year to 50% [An] from
56% last year, [Ap] while the net profit margin has increased to 10%
from 6% last year. [An]
This suggests that overall the shareholders should be pleased with
the improvement in both the amount of profit made as well as the
profit margin. [Ev] However, the reduction in the gross profit margin
suggests that costs relative to revenue have deteriorated. This
should be something that is looked into improving for the following
year. [Ev]

Examiner’s tip
Always show your calculations in case you make a mistake. If you
have used the correct figure and correct formula then you may still
gain some credit.
Examiner’s comments
This is a good answer with both ratios being correctly calculated from
the information provided and although no calculations are shown, the
answers are correct and so the correct figures must have been used.
Correct conclusions are drawn from the figures.
Marks: K1 (max); Ap1 (max); An2; Ev2 = 6 in total

Exam-style questions
Bright Places is a cleaning company that cleans offices for other
businesses. It has been steadily expanding the number of
customers but is worried that many of the new companies do not
pay their invoices on time. Look at the summary of their balance
sheet below to assess if they have a problem with their liquidity.
$000
Non-current assets 1 000
Current assets (including inventories) 200
Inventory 50
Current liabilities 200
Non-current liabilities 300
a) What is meant by ‘non-current assets’?
[2]
b) Identify two likely current liabilities of Bright Places.
[2]
c) Identify and explain two possible reasons why the current assets
might have increased this year for Bright Places.
[4]
d) Identify and explain two limitations of using these accounts to
compare Bright Places’ financial position with previous years.
[6]
e) Do you think the owners of Bright Places should be worried about
the liquidity of the business? Justify your answer using the
financial information above.
[6]
Financial information and
financial decisions: case study

Samah’s Café
Samah runs a small café in the centre of the main city. She started
the business two years ago with $50 000 of her own money and a
bank loan for $20 000. The capital employed in the café had risen to
$95 000 by year 2. Samah wants to improve the business
performance. Samah has been looking at the following financial
information to see what she can do.

Appendix 1 – Income statement for Samah’s Café

for the last two years ($)
Year 1 Year 2
Sales revenue 80 000 120 000
Cost of sales 20 000 30 000
Gross profit 60 000 90 000
Expenses 40 000 65 000
Net profit 20 000 25 000

Appendix 2 – Cash flow forecast for Samah’s

Café for the next six months ($)
1 a Identify and explain four ways Samah could improve her profit.
[8]
Student’s answer
Samah could try to increase her sales revenue still higher, by using
promotion. [K] It has already increased in the first two years of
trading and she could try to increase it still higher. [Ap]
Samah could try to reduce her expenses [K] as expenses need to be
kept low.
She could increase her prices. [K] This could increase the sales
revenue from sales of coffee and food sales in the café. [Ap]
Samah could buy her food ingredients from a cheaper supplier [Ap]
to reduce her her costs. [K]
Examiner’s comments
Four clear knowledge marks for identifying how Samah could increase
her profit but the second point makes no reference to the information
provided. Therefore 7 marks can be awarded. The student could have
easily gained the eighth mark by referring to the increase in expenses
in the table.
b Do you think Samah should be pleased with the profitability of her
café in the first two years of trading? Justify your answer using
the information provided in Appendix 1 and other information in
the case.
[12]

Examiner’s tip
Always calculate the profitability margins where the information
allows, in order to support your analysis and also use the other
information provided to support your recommendations/conclusions.
Student’s answer
The café had a gross profit margin of:
Year 1: $60 000/$80 000 × 100 = 75%
Year 2: $90 000/$120 000 × 100 = 75%
Net profit margin of:
Year 1: $20 000/$80 000 × 100 = 25%
Year 2: $25 000/$120 000 × 100 = 21%
ROCE of:
Year 1: $20 000/$70 000 × 100 = 29%
Year 2: $25 000/$95 000 × 100 = 26%
Gross profit remained the same in both years but net profit margin
fell by 4% from year 1 to year 2. So although the gross profit margin
stayed the same indicating that ingredient costs had not changed
and the net profit increased from $20 000 to $25 000, the net profit
margin fell meaning that the café performed less well in year 2 than
in year 1. Also the return on capital employed fell slightly indicating
that the business returned 29c for each $1 invested in the first year
but this fell to 26c for each $1 in year 2. However, this is still a good
return on the capital invested in the café.
So overall the café has performed slightly less well in year 2 than
year 1 and this was due to the increase in the expenses in year 2
being greater than the increase in sales revenue in year 2. So
Samah should use one of the suggestions in part a of the question
with reducing expenses being the best one to choose. This is
because if she reduces the cost of her ingredients then the food may
not be so good and customers may be unhappy and stop visiting the
café. Wages stay the same all year as shown in the cash flow
forecast and perhaps Samah could reduce the hours of the waiters
during the months when the café is not busy.
Examiner’s comments
This answer correctly calculates all three profitability ratios and then
draws a conclusion based on the figures in the table and other
information provided in the context. This is a really good answer that
gains full marks.

Exam-style questions
2 a Identify four stakeholders who would be interested in Samah’s
accounts. Explain why each stakeholder group would want to
see these accounts.
[8]
b i Calculate the following missing figures from the cash flow
forecast in Appendix 2.
W: X:
Y: Z:
ii Consider the following three ways Samah could use to
improve her cash flow forecast. Recommend the best method
for her to choose. Justify your answer.
[12]
• increase prices
• buy cheaper ingredients
• use trade credit with her suppliers
26 Government economic
objectives and policies

Key objectives
The objectives of this chapter are to revise:
• government economic objectives
• main stages of the business cycle
• tax and spending changes and the effects of business and
consumers
• interest rate changes and the effect on business or consumers
• business reactions to economic changes.
Key definitions
Term Definition
Business cycle The four stages an economy goes through over a
period of time, as an economy does not grow at a
steady rate.
Inflation Increase in the average price level of goods and
services over time.
Unemployment This exists when people who are willing and able to
work cannot find a job.
Gross The total value of output of goods and services in a
Domestic country in one year.
Product (GDP)
Economic A country’s GDP increases, i.e. more goods and
growth services are produced than in the previous year.
Balance of This records the difference between a country’s
payments exports and imports.
Real income The value of income or what the income will buy – it
falls if prices rise faster than money income.
Recession A period of falling GDP.
Exports Goods and services sold from one country to other
countries.
Imports Goods and services bought in by one country from
other countries.
Exchange rate The price of one currency in terms of another, e.g.
£1 = $1.50.
Exchange rate A rise in the value of a currency compared to other
appreciation currencies.
Exchange rate The fall in the value of a currency compared with
depreciation other currencies.
Monetary A change in interest rates by the government or
policy central bank, e.g. the European Central Bank.
Supply-side Policies to increase the competitiveness of industries
policies in an economy against those from other countries.
Policies to make the economy more efficient.
Fiscal policy Any change by the government in tax rates or public
sector spending.
Direct taxes Paid directly from incomes, e.g. income tax or profit
tax.
Indirect taxes This is added to the prices of goods and taxpayers
pay the tax as they purchase the goods. e.g. VAT.
Disposable The level of income left after a taxpayer has paid
income income tax and any other taxes on income plus any
money benefits from the government.
Import tariff Tax on an imported product.
Import quota A physical limit to the quantity of a product that can
be imported.
The business cycle
The business cycle is the four stages an economy goes through over
a period of time as an economy does not grow at a steady rate. The
diagram below shows these stages.
Government economic objectives
Government economic policies
Common errors
Error Why it is wrong
‘Economic booms are They can lead to higher incomes, but
always good for the ‘booms’ can lead to high inflation and
economy.’ lower levels of output eventually.
‘Inflation means the Inflation is the measure of the rate of
economy is expanding.’ general price increases in an economy
and not necessarily an increase in
output.
‘A recession will lead to a A recession lowers consumers’ incomes
fall in demand for all – they could switch to buying cheaper
goods and services.’ goods so the demand for these goods
could rise.
‘An exchange rate No – it has fallen in terms of other
depreciation means the currencies.
value of a country’s
currency has risen.’
‘Exchange rate Exports rise in price after an appreciation
appreciation makes of the currency.
exports cheaper.’
Sample questions and answers
The government wants to use supply-side policies to increase the
competitiveness of the businesses in country X. It hopes that more
car and electronic goods manufacturers will export their products.
The exchange rate is low at the moment and the government is
worried that it may appreciate.
1 Identify and explain two ways supply-side policies could benefit
businesses in country X.
[4]
Student’s answer
The government could improve education and training as part of its
supply- side policies. [K] This would benefit car and electronic goods
manufacturers because it will be easier to recruit trained workers.
[Ap]
The government could also find ways to increase competition [K]
and this may not be good for car and electronic goods
manufacturers.
Examiner’s comments
Two effects of supply-side policies are correctly identified. However,
only one application mark is awarded as the same application has
been used in each point. Also, the second point is not developed in
context. Therefore 3 marks are awarded.
2 Do you think that an appreciation in the exchange rate will benefit
all businesses in country X? Justify your answer.
[6]

Examiner’s tip
Always justify the conclusion in an ‘evaluation’ question.
Student’s answer
An appreciation in the exchange rate will make exports more
expensive [K] which may make it more difficult for car and electronic
goods manufacturers to be able to sell their products abroad. [An]
However, the cost of imported car components or raw materials will
now be lower [Ap] and this will help to reduce costs for businesses
[An] in country X. Therefore some businesses will benefit but some
will not.
Examiner’s comments
This answer has one benefit and one drawback of the exchange rate
appreciating and the answer does use the information provided.
However, there is no attempt to justify the final conclusion to earn any
evaluation marks.
Marks: K1 (max); Ap1 (max); An2; Ev0 = 4 in total

Exam-style questions
The economy of country Z has been in a recession for the last year.
Unemployment is 20% and businesses are not investing. The
government wants to help get the economy growing again and has
lowered interest rates. It has also lowered income tax and profits
tax. Polaris is a company based in country Z. It produces low cost
furniture, which it sells to retail stores across the country. It has not
had falling sales over the last year, in fact it has had a sales
increase.
a) What is meant by ‘recession’?
[2]
b) Identify two effects on businesses of lower taxes in country Z.
[2]
c) Identify and explain one advantage and one disadvantage to
Polaris of unemployment being at 20%.
[4]
d) Identify and explain two effects for Polaris of the government
lowering interest rates.
[6]
e) Do you think Polaris will benefit from a growing economy? Justify
your answer.
[6]
27 Environmental and ethical
issues

Key objectives
The objectives of this chapter are to revise how business decisions
might be affected by:
• the concept of externalities
• environmental concerns and pressure groups
• legal controls to protect the environment
• ethical issues.
Key definitions
Term Definition
Social When a business decision benefits stakeholders other
responsibility than shareholders, e.g. a decision to reduce pollution
by using the latest and ‘greenest’ production
equipment.
Environment The natural world including, e.g. pure air, clean water
and undeveloped countryside.
Private costs Costs paid for by the business from an activity.
Private Gains to a business from an activity.
benefits
External Paid for by the rest of society, other than the business,
costs as a result of a business activity.
External Gains to the rest of society, other than the business,
benefits resulting from a business activity.
Social costs External costs + private costs.
Social External benefits + private benefits.
benefits
Sustainable Development that does not put at risk the living
development standards of future generations.
Sustainable Methods that cause minimum damage to the
production environment.
methods
Pressure A group made up of people who want to change
group business (or government) decisions; they take action
such as organising consumer boycotts.
Consumer Deciding not to buy from businesses that do not act in
boycott a socially responsible way.
Ethical Decisions based on a moral code. Sometimes
decisions referred to as ‘doing the right thing’.
Ethical issues
Environmental issues
Common errors
Error Why it is wrong
‘Environmental Not necessarily, as some processes may do
considerations less harm to the environment and reduce
always cost the waste which leads to lower unit costs.
business more
money.’
‘Pressure groups No, pressure groups may try to influence their
cause a lot of government by writing to it and not
disturbance to a necessarily demonstrating in public.
country by
demonstrating in
public.’
‘Being unethical is No, a business can follow the laws but still be
illegal.’ unethical, e.g. the way it treats workers may
not be illegal in the country it operates in but it
could still be considered to be ‘not right’.
Sample questions and answers
Reed Cars is a private limited company that manufactures hand-built
sports cars. The business has a huge customer waiting list. The
directors want to build an additional factory near to their main factory
but the only land available nearby is in a forest, which is the home for
many endangered animals. Some local people complain that the
company should not employ children in the factory and building an
additional factory will only make this situation worse. Reed Cars says
that it has to keep wage costs low to be competitive.
1 Identify and explain two external costs if the factory is built in the
forest.
[4]
Student’s answer
Lost habitat for rare animals [Ap] which will mean that these species
will die out and people who visit the forest will no longer be able to
see them. [AN]
Building costs of the factory as Reed Cars will need to raise finance
to invest in the new factory.
Examiner’s comments
The first point is a correctly identified cost to a third party, i.e. people
other than the factory owners or the customers of the cars. However,
the second point is a private cost to the company of building the
factory. So only 2 marks are awarded for the first cost. The second
point could have been, e.g., increased traffic causing congestion on
nearby roads or noise from the factory being built. Marks: Ap1; An1 =
2 in total
2 Do you think the directors should use all possible ways to keep
their costs low? Justify your answer.
[6]
Student’s answer
A company’s main objective [K] is to make a profit and therefore it
should keep its costs as low as possible. This is to ensure it can
keep its prices lower than competitors’ prices and increase sales.
[An]
However, the directors should also be ethical in their decisions and
keeping costs low in any way possible may not be ethical.
Employing children in the factory is not ethical [Ap] and if customers
knew this is how the cars were being manufactured then they may
not buy them. [An]
So the directors should try to keep costs low but it should not be in
any way possible as sales may fall if customers do not approve. As
the cars are hand-built they are sold at a high price and customers
may be more concerned about the way the cars have been made
than the price charged. [Ev] Also the directors and workers
themselves may not be happy working or owning a business that
does not act ethically. [Ev]
Examiner’s comments
This answer identifies arguments both for and against keeping costs
as low as possible by any means. It is a balanced answer. The final
recommendation is evaluated and the answer is in the context of
cars.
Marks: K1 (max); Ap1 (max); An2; Ev2 = 6 in total

Exam-style questions
The local government is considering building a new airport. It will be
located in an area of high unemployment and flights into the area
should lead to more tourists and increased exports. As it will be
cheaper to transport goods out of the country it is hoped that new
businesses will set up in the area. Many local people are against the
new airport and have formed a pressure group called ‘SAN’ – Stop
Airport Now. Several local businesses want the airport to be built but
many others are worried about increased competition and the
possible shortage of skilled workers. The local government wants to
raise more tax revenue from the new businesses in the area but it is
worried about the effect of more pollution in the area.
a) What is meant by ‘pressure group’?
[2]
b) Identify two ways the pressure group can influence the local
government.
[2]
c) Identify and explain one private cost and one private benefit from
the airport being built.
[4]
d) Identify and explain the impact on two stakeholder groups, other
than the local government, if the new airport is built.
[6]
a) Do you think the local government should build the airport? Justify
your answer.
[6]
28 Business and the
international economy

Key objectives
The objectives of this chapter are to revise:
• threats and opportunities for businesses created by globalisation
• what is meant by and the benefits of becoming a multinational
business
• impact of multinationals on an economy in which they operate
• impact of exchange rate changes on businesses.
Key definitions
Term Definition
Globalisation Increases in worldwide trade and movement of
people and capital between countries.
Free trade Exists when countries agree to trade imports/exports
agreement/free with no barriers such as tariffs and quotas, e.g.
trade area ASEAN.
Import tariff A tax on imported goods.
Import quota A restriction on the quantity of a product that can be
imported.
Protectionism When a government protects domestic businesses
from foreign competition using, e.g. tariffs and
quotas.
Multinational Businesses with factories, production or service
business operations in more than one country.
Exchange rate The price of one currency in terms of another, e.g.
£1 = $1.50.
Currency When the value of a currency rises – it buys more of
appreciation another currency than before.
Currency When the value of a currency falls – it buys less of
depreciation another currency than before.
Common When a group of countries agree to use the same
(single) currency, e.g. Euro.
currency
Economic Agreements between countries to trade freely with
union each other and have common economic institutions,
e.g. The European Union (EU).
Globalisation
Multinationals, trade and exchange
rates
Common errors
Error Why it is wrong
‘International Although trading with other countries can
trade is bad for increase competition, businesses also have
business as it much larger markets and can often purchase
leads to more supplies cheaply from other countries.
competition.’
‘A business can Selling to other countries is not always easy. For
easily sell its example, products and marketing may need to be
products to other changed to meet local market conditions and
countries.’ there might be import barriers such as tariffs.
‘Multinationals To be termed a multinational, a business should
sell products in have production operations in more than one
more than one country.
country.’
Sample questions and answers
Four countries W, X, Y and Z are located next to each other and they
are thinking of forming a free trade agreement. They all produce
different agricultural products, which are then traded between each
other as well as being sold to developed countries. These four
countries are growing rapidly and want to encourage more
manufacturing businesses to set up. They all have high tariffs on
imports from all countries. The governments in these four countries
think that globalisation may not benefit their countries.
1 Identify and explain two possible drawbacks of globalisation to
businesses in these four countries.
[4]

Examiner’s tip
Always consider both sides of an issue with an ‘evaluation’ question.
Student’s answer
More competitive imports [K] from multinational businesses setting
up in these countries and selling manufactured goods at cheaper
prices than local businesses. [Ap]
Wages increasing [K] because foreign manufacturers pay higher
wage rates and local manufacturing businesses will have to increase
their wages to stop their workers from leaving. [Ap]
Examiner’s comments
Two good points – both clearly related to the information provided.
Full marks!
2 Do you think businesses in these four countries will benefit from
the free trade agreement? Justify your answer.
[6]
Student’s answer
There will no longer be import tariffs on their goods [K] reducing
prices and so businesses in country W can now sell their goods
more easily in the other three countries. [Ap] Businesses can also
buy agricultural products at a cheaper cost than before which will
allow them to reduce their costs and possibly prices to improve their
competitiveness in export markets. [An]
So yes, businesses will benefit from the free trade area.
Examiner’s comments
The student identifies possible benefits to businesses of being in a
free trade area – and uses some of the evidence to apply these
points to businesses in these four countries.
However, it is not a balanced answer. There is no attempt to consider
any of the potential disadvantages of the free trade area – so the final
recommendation is not evaluated sufficiently to earn any evaluation
marks.
Marks: K1 (max); Ap1 (max); An1; Ev0 = 3 in total

Exam-style questions
Zircon is a large public limited company that manufactures paint.
Currently it only manufactures paint in country Y. Zircon is planning
to set up another paint factory in country X, which is a rapidly
developing country. Country X has high tariffs on all imports. Zircon
has applied to the government for permission to build a factory, as it
wants to start selling paint to countries around country X as well as
country X. There are several small companies producing paint in
country X and they are worried about Zircon entering their market.
The exchange rate of country X has appreciated and Zircon is
worried about the effect this will have on their exports from country
X.
a) What is meant by ‘multinational’?
[2]
b) Identify two problems Zircon might face when setting up a factory
in country X.
[2]
c) Identify and explain two possible reasons why the government of
country X puts tariffs on all imports.
[4]
d) Identify and explain two reasons why Zircon might want to
become a multinational company.
 [6]
e) Do you think the government of country X should allow Zircon to
build the factory? Justify your answer.
[6]
External influences on
business activity: case study

Eco Campsites (EC)

Three friends, Luther, Dilip and Virang, plan to set up a campsite in
country Z. Each friend has $20 000 to invest in the business and
they want to form a partnership with each having an equal share in
the business. They think they will also need a $30 000 bank loan to
help finance the building of the campsite.
The partners have applied to buy a large area of a local forest
and plan to build log cabins on the campsite for tourists to rent.
There will also be places for caravans and tents after the forest has
been cleared of trees. The partners will need to dig up quite a lot of
the forest to put in drains to take away waste water as well as
connect to a water supply. A road will be built to connect the
campsite to the main road and this will improve access for several
local villages.
The forest has many rare species of animals and the partners
hope that this will attract visitors to stay at the campsite. There is a
temple nearby which was built several thousand years ago and is a
World Heritage site. The government hopes that tourists will visit
this ancient site.

Appendix 1 – News Today, 21 May 2016

The government is encouraging more tourists to visit the country. It
wants to encourage economic growth, as unemployment is high
and also the exchange rate in country Z has depreciated.
There has been economic growth in many other countries and
this will be good news for any businesses in country Z that rely on
tourism. Rising world oil prices have been causing inflation in
country Z and this is a worry for all businesses.

1 a Identify and explain one external cost and one external benefit if
the campsite is located on the chosen site.
[8]
Student’s answer
External costs are costs borne by third parties and in this case the
campsite visitors could cause pollution by litter they drop. The litter
may cause animals to become entangled in it or eat some of the
food waste causing them to become ill. Litter will also be an
eyesore to the area making it look less attractive for visitors. It may
even put off some tourists from visiting the area and lose revenue
to local businesses.
An external benefit is that the campsite will create jobs. As
unemployment is high in country Z this will be beneficial, as it will
increase the income going to local households, which will in turn
create more spending in the local economy. Tourists coming to the
area will also create more spending and further increase jobs and
household income.
Examiner’s comments
These are two good examples of an external cost and an external
benefit. Both are well explained and in the context of this case study.
Full marks.
b Consider the effect on EC of the following economic changes.
Which change is likely to have the biggest effect on EC? Justify
your answer.
[12]
• an increase in interest rates
• an increase in inflation
• an increase in unemployment
Student’s answer
An increase in interest rates will increase the cost of borrowing $30
000 to set up the campsite. This will increase the monthly
repayment of the bank loan and will mean the campsite will make
less profit while the loan is being repaid. However, the effect on the
partners will depend on how much the interest rate increases: the
lower the increase the less effect it will have on the business.
An increase in inflation will cause the costs of the business to rise
and also employees are likely to ask for a pay rise to keep up with
the increase in the cost of living. However, inflation affects all
businesses in country Z and so even if the partners have to
increase their prices for the caravans and tents to stay at the
campsite they will not become less competitive.
An increase in unemployment will have an effect on EC as they will
want to recruit employees to work at the campsite. This may mean
the partners can offer lower wages to attract workers, as they may
prefer to work for a lower wage than not to work at all. However,
higher unemployment may mean that fewer domestic tourists use
the campsite.
The change with the biggest effect on EC is likely to be the increase
in interest rates because the partners want to borrow $30 000
which is a large amount of money and so the interest repayments
will cause costs to rise considerably. As most of the tourists are
likely to be from abroad the effect of increasing unemployment and
demand is not likely to be negative and the effect may even be
positive if local workers are willing to accept a lower wage. This
may be short-lived though if unemployment starts to fall again and
wages rise. Finally, inflation will affect all businesses so even if it
does mean some costs increase for EC it will not affect the
business in terms of lost sales. So an increase in interest rates will
have a bigger impact on EC than an increase in inflation or an
increase in unemployment, as it will definitely increase their costs
whereas the other two effects may not be negative.
Examiner’s comments
The effects of the changes are considered in detail and the context is
used in each of the changes. The recommendation compares the
three changes and justifies why increasing interest rates will have
the biggest impact on EC.
Full marks.

Exam-style questions
2 a Identify and explain two effects on EC of a depreciation in the
exchange rate of country Z.
[8]
b The partners want to act ethically in the business. They are
considering the following actions and are not sure if they are
ethical. Consider each of these actions and justify whether you
think they are ethical or not.
[12]
• purchasing low cost wood to build the log cabins from local
forests that are not using sustainable methods
• employing children to clean the log cabins as they are
unemployed and can be paid low wages
• making payments to local officials to gain planning
permission for the campsite
Answers

Exam-style answers
Chapter 1
a) Production is split into separate tasks and each worker specialises
in one task.
[2]
b) Added value = price – bought in costs, so
$50 – $15 = $35
[2]
c) Labour – to mix ingredients, put cake in oven, decorate it.
Capital – bakery with ovens and preparation tables, etc., for
making/baking cakes and bread.
Other answers are possible.
[4]
d) They are more efficient at producing these – labour will become
very skilled and quick at decorating cakes. This will help to make
BB competitive and increase their reputation for this type of
product.
Demand could fall – consumers’ incomes might fall and they will
be less likely to buy expensive specialist products. As a result of
specialising, workers and machines that will have been used for
making products will no longer be needed and might become
redundant.
Other answers are possible.
[6]
e) Added value will rise if BB can reduce the $15 spent on
ingredients for each cake – and price stays the same.
 Cheaper ingredients could reduce the quality of the cake –
damaging their image/reputation. BB might have to lower its
prices.
It might be better to increase prices from $50 – this would
increase added value too.
Overall judgement needed – supporting one way and rejecting the
other way.
[6]

Chapter 2
a) This has both private sector businesses and public sector
businesses.
[2]
b) The sale of public sector businesses to the private sector.
[2]
c) Any two from the list below:
[4]
• Best Foods – tertiary sector as it sells, as a retailer, the pies and
soups produced by other businesses.
• Local farmers who supply Foodsure with meat and vegetables –
farmers are in the primary sector as they do not process these
primary food products.
• Foodsure – secondary sector of industry as it processes primary
meat and vegetable products and manufactures finished
processed food products.
d) Foreign competition – China is producing many manufactured
products more cheaply than most countries can. Imports from
China would reduce the demand for goods manufactured in
country P.
Consumer incomes are rising in country P – Consumer spending
patterns might be changing and consumers are now able to afford
more restaurant meals and holidays. This would increase tertiary
 sector activity and make secondary sector activity relatively less
important.
[6]
e) Private sector: profit motive; more efficient to increase profits;
competition from other firms more likely.
Public sector: objectives other than profit; other stakeholders
(other than owners) might benefit; profit returned to government.
Overall judgement needed (either sector acceptable) which
includes clear and supported opinion.
[6]

Chapter 3
a) i A
[1]
ii C
[1]
b) Someone who organises, operates and takes the risk for a new
business venture.
[2]
c) D was a new business. It might have been short of capital, e.g.
working capital to finance start-up operations.
D’s entrepreneur might have lacked experience.
They might not have understood consumer preferences for shoes.
Other answers are possible.
[4]
d) Owners/managers might not want to have growth as an objective.
They might prefer to keep the business relatively small (smaller
than others in the table) as this is easier to manage.
The business might be focusing on a segment of the shoe market
that is not growing. They would need to do some market research
to find out about faster growing segments.
Other answers are possible.
 [6]
e) Yes, they should take over the leather supplier: backward vertical
integration will give assured supplies of (quality) leather, which is
used in their shoes. Business A will be able to control cost of its
main raw material.
No, they shouldn’t take over the leather supplier: the management
of a leather business is not necessarily the same as a shoe
making business. Business A may have to use capital and
management time which could be spent on shoe making.
Any decision requires overall judgement – supporting a decision
to take over or not to take over and explaining why the other
option should be rejected.
Also, more information would be useful to make a decision.
[6]

Chapter 4
a) The business is jointly owned by two or more people.
[2]
b) Any two of the following:
• Can issue shares to family or friends
• Owners have limited liability
• Share capital
• Separate legal identity from the owners.
[2]
c) Suki wanted to set her business up quickly – this is possible with a
sole trader as there are few legal formalities.
Suki is an independent person – sole traders are able to make all
decisions themselves.
Other answers are possible.
[4]
d) CfK is already a large business. Suki and her managers might not
have enough time to open this school in another country without
support (finance and management) from CCC.
 CCC is aware of local laws related to schools and children’s
care/welfare. These might be different from the laws in the country
CfK currently operates in. This could help CfK avoid major
mistakes when setting up the school.
Other answers are possible.
[6]
e) Yes, they need additional finance for expansion, e.g. opening a
school in another country.
No, Suki may not want to lose more ownership/control – she still
takes most decisions.
Other answers are possible.
Any decision requires an overall conclusion and more information,
e.g. risk of takeover, level of share prices in the country.
Your answer should give a clear choice to be made and
supported.
[6]

Chapter 5
a) A business owned by shareholders and it can sell shares to the
public and its shares are tradable on the Stock Exchange.
[2]
b) Any two stakeholders, including managers, banks, government,
consumers, etc.
[2]
c) Market share – gaining a particular % of the oil market in the
countries SureOil operates in.
Growth, e.g. measured in total annual sales of oil products.
Other answers are possible.
[4]
d) The company is able to reward owners – in this case,
shareholders in SureOil as it is a public limited company – with a
share of the profits (dividends).
It is able to use some retained profits to reinvest back in the
 business and reduce loans, e.g. to finance new oil wells
Other answers are possible.
[6]
e) Yes, if SureOil uses profits from the oil wells found to improve the
local environment; consumers might benefit from lower oil/petrol
prices; employees will have more secure jobs in the oil company,
etc.
No, local community is likely to suffer noise, pollution and damage
to environment and this will conflict with (for example) SureOil’s
shareholders who might only be interested in the profits to be
made.
Other answers are possible.
Overall judgement: it might depend on how carefully SureOil drills
for oil and the amount of money they spend on the local
community/environment.
[6]

Chapter 6
a) Wage based on number of hours worked.
[2]
b) Importance of work done; seniority; length of service; output
(piece rate).
Other answers are possible.
[2]
c) Teamworking – training staff to be multi-skilled so they could do
any job in the shop as a member of the team.
Employee of the month award – giving status and recognition to
shop workers, e.g. those who get the best feedback from
customers.
Other answers are possible.
[4]
d) Retailing is a service business – customers must be ‘satisfied’ if
they are to return. Well motivated shop workers – spend longer
 with each customer and give better advice.
Expensive to replace staff – improved motivation will reduce
labour turnover and reduce recruitment costs.
Other answers are possible.
[6]
e) If the hygiene factors (working conditions, etc.) are not good then
workers will be unhappy.
Herzberg – hygiene factors remove dissatisfaction, they do not
promote motivation.
Motivators – e.g. job enrichment and teamworking – are not about
money or conditions.
Overall conclusion necessary with supporting arguments about
which factors are most important.
[6]

Chapter 7
a) A level of management where people have the same level of
responsibility.
[2]
b) Workers able to identify their manager/who they report to.
Lines of communication made clear.
Other answers are possible.
[2]
c) To bargain together (collectively) for higher pay as they have not
received a rise this year.
To push for better safety conditions which are a problem in this
mine. Workers have more power when in a union.
Other answers are possible.
[4]
d) Commanding – making decisions and giving clear instructions. If
not done well, workers will have no direction to follow. Jin ‘has
given instructions to tin mine managers’…
Coordinating – making sure different departments/divisions work
 towards the same objectives to avoid conflict. TinCo’s operations
need to be coordinated as it operates in several countries.
Other answers are possible.
[6]
e) Yes, he should adopt a democratic leadership style. Democratic
leadership is likely to lead to better motivation; workers’ opinions
can help run the business, e.g. machines too big.
No, he should not adopt a democratic leadership style. Working in
a mine is dangerous – clear authority/decision making is needed,
e.g. at times of accidents.
Your answer should give a clear choice to be made and supported
with reasons against the alternative. Suggesting that a democratic
leadership style is ‘sometimes’ recommended but not at all times
is acceptable if supported.
[6]

Chapter 8
a) Workers who want to work hard and do their best.
[2]
b) Jobs with a full working week (length varies between businesses).
Full-time employees will usually work 35 hours or more a week.
[2]
c) Workforce planning, e.g. planning ahead to prepare for replacing
workers who retire.
Pay and conditions – deciding on the pay level of full-time
workers/method of the new people who have to be recruited to
replace workers who leave from any of the nine teams.
[4]
Other answers are possible.
d) Improved efficiency/skill levels – workers will able to make bikes
of high quality which is important to ASP as its reputation would
be damaged with poor quality bicycles.
Multi-skilled – staff will be able to do all tasks in building bikes.
 This would mean they would be able to cover for absent
colleagues, maintaining production levels.
Other answers are possible.
[6]
e) Yes, they should recruit externally: external recruits can bring new
ideas, such as better ways of building bicycles; existing workers
might not have personal qualities needed.
No, external recruitment takes longer and is more expensive; it
can demotivate existing workers as there is no chance of
promotion.
Your answer should give an overall recommendation, supported
by arguments and explaining why the other option is rejected.
[6]

Chapter 9
a) Reply from receiver to sender to confirm message
received/understood.
[2]
b) Any two of:
• noticeboards
• meetings
• emails
• letters.
[2]
c) UPA’s consumers are in many different countries – language
problems.
UPA sells to retailers not to consumers directly – this intermediary
might make communication with consumers difficult.
[4]
d) Social media – increasingly popular especially with higher income
consumers who can afford the latest mobile (cell) phones. It
allows for quick and easy feedback.
Emails direct to consumers – can be personalised with special
 offers, etc. Most consumers of UPA products would have internet
access.
Other answers are possible.
[6]
e) Yes, it is quick; one-way communication is easy to understand,
workers can get on with work efficiently without taking time to
reply (output deadlines); effective in an emergency.
No, workers cannot feed back or offer suggestions, e.g. how to
further improve quality of these ‘high end’ products; demotivating
– need to keep skilled workers.
Overall conclusion: one-way communication is sometimes better
but not always. Supporting arguments are essential in your
conclusion.
[6]

Chapter 10
a) Identifying and meeting the needs of customers.
[2]
b) Any two of the following:
• market research
• anticipate demand changes
• identify and satisfy customer needs
• achieve customer loyalty
• gain information about customers.
[2]
c) Consumers with and without washing machines – producing mild
soaps for people who ‘hand wash’.
Geography – using different products/brand names/promotions for
different countries/cultures, e.g. powders used to clean the thick
woollen fabrics used to make clothing in cold countries.
Other answers are possible.
[4]
d) Population change, e.g. high population growth should increase
demand for this basic necessity product as more people will need
powder to wash clothes.
Competition – new washing powder rivals are likely to lead to
lower demand for CC’s powders and soaps especially if the price
is lower than CC’s.
Other answers are possible.
[6]
e) Yes, segmentation allows more consumers to be reached with
products suitable for them – higher sales and possibly profits; may
be able to charge higher prices in some segments.
No, it is expensive to develop and promote different product
ranges for different segments. Segmentation costs might outweigh
extra revenue.
Overall conclusion – supported by arguments (other arguments
possible) and may include a justification for rejecting the other
option.
[6]

Chapter 11
a) The collection of original data – also known as field research.
[2]
b) Carrying out market research to find out consumer wants before
developing and producing a product.
[2]
c) Quickly available, e.g. from internet research – BB may need to
act quickly.
Relatively cheap – BB may be short of finance as sales are falling.
Other answers are possible.
[4]
d) Online/postal questionnaire – likely to reach more than 16-year-
old people. Questions can be put online to existing customers
who have given an email address.
 Interviews with students/school managers – the meaning and
purpose of questions can be explained to each respondent as
required and follow-up questions can be based on previous
answers.
Other answers are possible.
[6]
e) Yes, important to know how significant each student is to overall
sales of textbooks; if they buy many books, more likely to yield
useful information from other questions.
No, need to know why, not just how many – and if they don’t buy
books, why not and what other resources are used?
Overall conclusion: your judgement should be based on
considering at least one other question.
[6]

Chapter 12
a) The stages the sales of a product pass through from introduction,
growth, maturity to decline.
[2]
b) Place – how/where the product is sold to consumers.
[2]
c) ChewBar – decline, as it has been on the market for years and
sales are falling.
FabChoc – introduction, as it has just been launched.
[4]
d) Benefit: keep up with consumer tastes as they change and new
products can reflect these changes, e.g. low fat or low sugar
confectionery. SW will see sales increase as it meets customer
tastes.
Drawback: developing new products is expensive and increases
costs for SW. If the new product such as FabChoc does not
increase sales then the costs may be higher than sales and will
 cause profit to fall.
Other answers are possible.
[6]
e) Yes, consumers will know what to expect to pay; they will not think
quality is reduced if price falls; no need to change price lists, etc.
No, price – as well as other marketing mix factors – should be
varied throughout the product life cycle (PLC). Price could be low
to start with to attract new consumers – perhaps this is why
FabChoc is not doing well.
Overall conclusion – should be supported by arguments (other
arguments possible) and may include a justification for rejecting
the other option.
[6]

Chapter 13
a) Demand changes by a smaller proportion than the price change.
[2]
b) 40% of $14 = $5.60
$14 + $5.60 = $19.60
Price = $19.60
[2]
c) It helps to establish the quality image of the product – a higher
price might reflect a high quality product.
To cover costs – if prices do not cover costs ($14) then a loss will
be made.
Other answers are possible.
[4]
d) Advantage: low penetration prices should lead to high consumer
demand – especially if demand is elastic. This might help to build
brand loyalty – good for future sales.
Disadvantage: low prices mean a low profit margin – overall
profits might be low even though sales are high. Consumers might
think SCL’s shirts are poor quality. The business may have
 problems raising prices later.
Other answers are possible.
[6]
e) Yes, they should use competitive pricing: a competitor is offering
lower prices so demand for SCL’s shirts will fall, especially if
quality/designs are similar.
No, they should not use competitive pricing: lower prices lowers
profit on each shirt – and consumers might think that quality of
cloth used by SCL has fallen.
Your overall conclusion could say that it might depend on how
price elastic demand for SCL shirts is and whether competition
will reduce prices further.
Other answers are possible.
[6]

Chapter 14
a) The financial plan for the marketing of a product over a specific
time period – it includes the amount to be spent on promotion.
[2]
b) The consumer groups that are the potential buyers of a product.
[2]
c) Advertising will attract children towards toy products and
encourage them to pester their parents to buy.
Shops are located in large towns/cities where there will be
competitors. Advertising will help to keep WT in consumers’ minds
when they consider purchasing toys.
[4]
d) Small gifts when a large toy is purchased – this might attract more
consumers to buy the larger, more expensive toys.
Competitions to enter if an expensive toy is bought – with prizes
of toys from other ranges in the shop.
Other answers are possible.
[6]
e) Parents: they are the ones with the income to buy the toys. They
need to be convinced that the toys are top quality but good value
too.
Children: they express wants for toys which can force/encourage
parents to buy them. Parents would not buy toys that they knew
children did not want.
Your overall conclusion should be based on these arguments, and
might also consider the ethical issue of advertising to children (for
example, pester power and problems for lower income families).
[6]

Chapter 15
a) The means by which a product is passed from the place of
production to the customer.
[2]
b) Wholesaler holds stocks/inventories.
They will arrange transport to retailers.
Other answers are possible.
[2]
c) Location of potential consumers – a high street retailer might not
be good if consumers are mainly in country areas.
Profit margin expected by intermediaries – these will increase
prices of electric bicycles and may make TR products
uncompetitive.
Other answers are possible.
[4]
d) The pre- and after-sales service offered by specialists will
encourage consumers to have confidence in these products and
therefore be more likely to buy. This is important for specialist
products such as racing bicycles.
Consumers expect to see and try/ride these expensive products
before buying. Direct selling is likely to be less effective for
expensive products like these and the SR factory may be a long
way from where most consumers live.
 [6]
e) Yes, customers want to see/try/ride bicycles before buying and
this is best done in shops. You can easily compare with
competitors’ products and if TR has good products this should be
an advantage.
No, more products are being bought online. Consumers know
what a bicycle looks like/can do; lower prices offered by online
selling (reduce intermediaries’ margins) could be important for
cheaper models.
Your overall conclusion should be supported by arguments such
as ‘it might be best to use different channels for different
types/prices of bicycles’.
[6]

Chapter 16
a) A plan with the appropriate marketing mix for a product to achieve
a marketing objective.
[2]
b) Increase profit.
Increase sales to business customers.
Other answers are possible.
[2]
c) Health and safety in hotel kitchens – cleanliness of food
preparation area.
Advertising claims – they cannot mislead consumers, e.g. ‘This
hotel is the best hotel in town’ when there are several others with
higher ratings.
Other answers are possible.
[4]
d) They need to make sure the marketing mix is suitable for the new
location (segment, income levels) and appeals to tourists to the
country. Using the existing marketing mix will not do.
The marketing mix needs to be integrated. It would be misleading
 to consumers to have expensive promotions for these hotels if
food quality and prices are aimed at lower income consumers.
Consumers will complain that the hotel promotion was misleading.
Other answers are possible.
[6]
e) Yes, country Z market might be mature/saturated with much
competition; allows growth of the business; may be less
competition as it is a low income country.
No, language/culture/distance/legal problems, e.g. kitchen health
and safety rules might be very different.
Other answers are possible.
Your overall conclusion should be based on these arguments –
justifying your decision and explaining why the other option was
rejected.
[6]

Chapter 17
a) Output measured against inputs used to create it, e.g. labour
productivity

[2]
b) Ordering/storing raw materials.
Overseeing/production methods.
Other answers are possible.
[2]
c) They could improve worker training/skill levels – this should
reduce wastage of ingredients.
They could buy automated sewing or cutting machines. This
would reduce labour levels but maintain/increase output.
Other answers are possible.
[4]
d) Reducing waste – this will reduce production costs and unit costs
which are currently a problem for this business, making GR more
 competitive.
Reducing inventory levels (e.g. with JIT) – keeping inventories low
will free up space and working capital and GR may be able to use
this space for T-shirts.
Other answers are possible.
[6]
e) Yes, they should use batch production: it allows for many different
styles and sizes of T-shirts and denim jeans to be made in large
quantities before machines are switched over for other
styles/sizes. Less capital cost is required.
No, they shouldn’t use batch production: if demand is high, flow
production will give lower unit costs and output would be likely to
be higher.
Your overall conclusion could include: it might depend on
consumer demand and whether it is for large numbers of similar
products (flow) or smaller quantities of different products (batch).
[6]

Chapter 18
a) Costs that vary directly with the number of items sold or produced.
[2]
b) Restaurant rent.
Restaurant manager’s salary.
Other answers are possible.
[2]
c) Managerial economies – employing specialists in HR to recruit the
best chefs.
Purchasing economies – bulk buying of food ingredients such as
flour.
Other answers are possible.
[4]
d) FR can use them to assess break-even/likely profit from different
restaurant locations as the business expands. For example, the
 existing location did not break even last week – perhaps it is
poorly located?
A break-even chart assumes all ingredients bought are used to
make products which are sold – costs will be difficult to predict if
this is not the case, which makes calculating FR profit/loss more
difficult.
Other answers are possible.
[6]
e) Higher input prices could lead to increased revenue and profit – if
costs remain the same – and reduce the break-even level of
production.
However, sales might fall – especially if demand is elastic. Lower
revenue might mean that the break-even point is not reached.
Inventories might build up.
Overall conclusion – including one other suggestion of how else
the business could reduce its B-E level of output.
[6]

Chapter 19
a) A good or service is produced which meets customer
expectations.
[2]
b) Any two of the following:
• Helps to maintain a good reputation
• Helps to increase sales
• Helps to prevent loss of customers.
[2]
c) Quality control – checking a sample of items of completed
clothing.
Quality assurance – checking the clothes throughout the
production process to ensure there are no faults in the garments.
[4]
d) Advantage – lower cost of cloth can lead to reduced prices and
increased sales.
Disadvantage – poor quality cloth can lead to poor quality clothes
which could damage their reputation and lose sales.
[6]
e) Yes, as some clothes have faults and quality control is not finding
them, leading to a poor reputation.
No, it is expensive to train all workers to carry out quality
assurance.
Overall judgement needed (either method acceptable) which
includes clear and supported opinion.
[6]

Chapter 20
a) The basic physical systems of a business or nation e.g.
transportation, communication, sewerage, water and electric
systems.
[2]
b) Planning regulations.
Government grants or subsidies.
[2]
c) Raw materials source – if this is nearby transportation costs will
be reduced, especially if bulk reducing.
Skilled labour in the factory – able to operate factory equipment –
only cash registers in a retailer.
[4]
d) Shoppers – shoe shops need to be in areas with high footfall; as
shoes are not bought regularly they need a large number of
passing customers to ensure sufficient sales to cover costs.
Customer parking nearby – this is convenient for shoppers and
encourages more people to buy shoes at these shops, so
increases sales.
[6]
e) New shopping mall - yes, high footfall means many potential sales
but the high costs of rent and taxes on buildings would raise
prices of shoes.
Nearby town - lower rent and taxes lowers costs and few
competitors but fewer customers so sales will be lower.
Overall judgement needed (either option acceptable) which
includes clear and supported opinion.
[6]

Chapter 21
a) The finance required by a business to pay for its day-to-day costs.
[2]
b) Finance from sources outside of and separate from the business.
[2]
c) Advantage – no interest paid so eases cash flow during quiet time
of the year.
Disadvantage – Jim must take lower drawings out of the business
which would mean lower payment.
Other answers are possible.
[4]
d) Delays paying for stock such as roof tiles – eases cash flow and
increases working capital available.
Like an interest free loan – better for Jim during quiet times when
not many roofs need repairing.
[6]
e) Yes, he should – it might be interest free (a cheap form of
borrowing). He is a sole trader so he would need it.
No, he should not – if not paid back it could lead to him falling out
with his family. It would be difficult to avoid paying it back.
Overall judgement needed (yes or no acceptable) which includes
clear and supported opinion.
[6]
Chapter 22
a) ($8 000) in May and ($7 000) in June
[2]
b) Any two of the following:
• Rent
• Salaries
• Bank loan repayments.
[2]
c) It is needed to pay wages, etc. – if there are few taxi fares, the
expenses will still need to be paid.
If there is no working capital the taxis won’t have fuel, and
therefore they cannot run the taxi service.
[4]
d) Increase inflows: such as advertising the taxi business to increase
revenue from taxi services, taking out a larger bank loan, offering
introductory offers to encourage more customers when the
business starts.
Decrease outflows: such as reducing costs of rent by finding a
cheaper garage to store the taxis, leasing vehicles instead of
buying them or paying lower salaries at the start of the business.
Other answers are possible.
[6]
e) Yes, they should – as this will encourage more customers to use
the taxi service and increase sales.
No, they shouldn’t – this may give them cash flow problems. The
taxi business may be quiet at certain times of the year and this will
mean the business will lack working capital.
Overall judgement needed (either yes or no acceptable) which
includes clear and supported opinion.
[6]

Chapter 23
a) Dividends are payments made to shareholders from the profits
(after tax) of a company. They are the return to shareholders for
investing in the company. (See text in Chapter 4)
[2]
b) $13m
[2]
c) Government – to see the amount of tax due. In this case $2m.
Employees – to see how much profit has been made and assess
if the business can afford a wage increase for the workers on the
cargo ships.
[4]
d) To see if the company is making higher or lower profit than their
competitors. They may need to change what the business does.
They could perhaps try to reduce expenses on the cargo ships.
To see if the other businesses have different cost of sales or
expenses. It gives managers an idea of where they should
concentrate on reducing costs when shipping cargo.
[6]
e) Yes, they should sell shares: shares do not have to be paid back
and no interest would need to be paid on the $20m. Two more
ships will increase sales revenue to pay for dividends and they
may need to pay out more dividends than $5m if more
shareholders mean less retained profit.
No, they should not sell shares: they may lose control of the
business if they sell more shares.
Overall judgement needed (either yes or no acceptable) which
includes clear and supported opinion.
[6]

Chapter 24
a) Debts owed by the business.
[2]
b) $2 000 − $3 000 = −$1 000
 [2]
c) Without working capital a business will not survive. In this case it
is negative which is a worry.
It is needed to pay for the bills of the business such as rent on the
garage or spare parts for repairs.
[4]
d) Equity shows what the business is worth. In this case the
business is now worth $15 000, whereas John invested just $5
000 originally.
The owner’s funds/equity can be used for reinvestment in new
equipment – in this case John has up to $15 000 (if in the form of
cash) to reinvest in the garage instead of borrowing the money,
reducing interest payments (he can only do this if the owner’s
funds/equity are available in a cash form – the equity might
already be invested in the business).
[6]
e) Yes, he should take on a partner: he would not need to borrow the
money for investment, therefore reducing expenses on interest
payments.
No, he should not take on a partner: this will mean he does not
have sole control of the garage that he started himself and he will
need to share the profits.
Overall judgement needed (either yes or no acceptable) which
includes clear and supported opinion.
[6]

Chapter 25
a) Items owned by one business for more than one year.
[2]
b) Overdraft
Accounts payable
[2]
c) Any two of the following:
 • There is more cash in the business as a result of more
customers paying for cleaning by cash.
• There is increased accounts receivable. An increase in the
number of customers who could pay for cleaning using
invoices/trade credit.
• Increased inventories – Bright Places increases the amount of
inventories of cleaning materials.
[4]
d) The accounts may not reflect the current situation of the business.
The performance in the past is no guarantee of success in the
future – there may be more customers and therefore there may be
increased working capital/the accounts don’t show the most
recent changes.
The figures might have been affected by inflation. Figures may
appear to increase but they may be the same in real terms, for
example the current assets could increase by 10 % but if inflation
has also increased by 10 % then the value of current assets has
not really changed.
[6]
e) The current ratio is 1, which means that there are just enough
current assets to pay all the current liabilities. The acid test is
0.75, which means that there is not sufficient liquidity to cover all
the current liabilities. There are 75c available for each $1 of short-
term debt.
Overall conclusion: Yes, the owners should be worried about the
liquidity of the cleaning business as it may be at risk of not being
able to pay all of its current liabilities.
[6]

Chapter 26
a) A period of falling GDP.
[2]
b) Keep more of the profit made.
Increased demand for goods or services.
[2]
c) Advantage: it is easy to recruit new workers – and this is helpful,
as sales have been increasing.
Disadvantage: high unemployment means people have less
money to spend and may result in lower demand for their
furniture.
[4]
d) Lower interest payable on new loans means lower costs of
expansion and possibly increased profit as the business increases
output.
Encourages increased sales. Furniture is a high priced item and
customers will often borrow money to purchase furniture.
[6]
e) Yes, they will benefit: a growing economy means increased
incomes as more people gain jobs, so furniture sales may
increase.
No, they will not benefit: the furniture is low-priced which may
mean that as incomes increase consumers will buy more
expensive furniture and sales of Polaris furniture might fall.
Overall judgement needed (either conclusion acceptable) which
includes clear and supported opinion.
[6]

Chapter 27
a) A group made up of people who want to change business (or
government) decisions; they take action such as organising
consumer boycotts.
[2]
b) They can:
• write letters to local government officials
• protest outside local government buildings with posters.
 [2]
c) Private cost: the cost of building the airport (e.g. the building
materials required).
Private benefit: the revenue from the landing and take-off charges
will provide the government with revenue from charges for using
the airport.
[4]
d) Local businesses: it will be cheaper to export goods, increasing
sales and possibly profit.
Tourists wanting to use the airport: it will be more convenient to
use than other airports further away. The costs of transport will be
less and the time to get to and from the airport will be shorter.
Other answers are possible.
[6]
e) Yes, they should build the airport: it would lower unemployment
and lead to increased business in the area from tourists.
No, they should not build the airport: it would increase competition
for local businesses and it would be difficult to employ skilled
workers. There would also be increased pollution from the flights.
Overall judgement needed (either conclusion acceptable) which
includes clear and supported opinion.
Other answers are possible.
[6]

Chapter 28
a) Those businesses with factories, production or service operations
in more than one country.
[2]
b) Not being aware of the cultural differences when marketing the
paint.
Difficulty in finding skilled employees.
[2]
c) To protect domestic manufacturers – for example to keep paint
manufacturers from going bankrupt.
To gain revenue from the tariff – this will give the government
additional funds to help the economy develop.
[4]
d) To produce paint in country X – to reduce costs of production,
allowing for lower prices and/or higher profits.
To avoid tariff barriers in country X – allows the paint to have
lower prices, increase sales and possibly profit.
Other answers are possible.
[6]
e) Yes - increase investment, more jobs created, more exports for
country X and fewer imports, taxes paid to the government.
No - existing paint manufacturers in danger of falling sales, profits
flow out of country X, only low-skilled jobs in paint factory created.
Overall judgement needed (either conclusion acceptable) which
includes clear and supported opinion.
[6]
Case study answers
Section 1 case study
2 a Increase price: a larger gap between price and cost of raw
materials would mean that furniture will have an increased price
but the wood costs stay the same. Increased added value of the
wooden garden furniture, but must be able to justify a higher
price perhaps by improving the design of the furniture.
Lower input costs: purchase cheaper wood to make the furniture
but keep price of furniture the same. This increases the gap
between the two, but the quality of furniture needs to be
maintained especially if he imports the wood.
[8]
b By opening his own shops he would keep the profit margin of
the retailer by cutting out one of the channels of distribution.
However, it would increase the costs of setting up shops and
there may be some difficulty in managing the shops.
By buying a 40% share in a major retail company, he would
have influence in the management of the retailer and they might
be more likely to sell WWP furniture. This would increase sales
and reduce competitors’ sales. However, he would have to
consider the costs of purchasing shares and still would not be a
majority shareholder, so would have less influence.
Overall judgement needed (either option acceptable) which
includes clear and supported opinion and explanation of why the
alternative option is rejected.
[12]

Section 2 case study

2 a Increased productivity: this may mean hotel rooms are cleaned
more quickly and more rooms can then be cleaned by each
room cleaner, reducing costs for the hotel.
Improved service: waiters would be more welcoming to the
 guests. This ensures the guests enjoy a good service and would
improve the hotel reputation.
[8]
b On-the-job: cheaper (some production while training) and
provides training specific to the hotel requirements. However,
waiters may pass on bad habits and the trainer will not be fully
productive while training the gymnasium worker.
Off-the-job: staff learn specific skills from an expert trainer, and
there would be no lost output if training occurs after working
hours. However, the costs are high and if staff gain additional
qualifications they may leave the hotel. Wages are paid but
trainees do not provide any output.
Overall judgement needed (either training method acceptable)
which includes clear and supported opinion and explanation of
why the alternative method is rejected.
[12]

Section 3 case study

2 a To raise customer awareness of the new folding bicycle: it is a
new product and will not be known about. There will be
increased sales if customers are aware of the bicycle.
To target a new market – a new market segment for the folding
bicycle as a new product, probably adults with higher incomes
(as it is made from expensive materials leading to high price of
the folding bicycle).
[8]
b Social media: cheap to use and you can target the specific
market segment of high income adults (as adults likely to use
smartphones) – but may not reach potential customers – cannot
emphasise the qualities of the new bicycle.
Specialist bicycle magazines: target customers read these
magazines. However, it would be relatively expensive (more
expensive than the alternative methods) and may not be read by
some target customers who just ride bicycles to work.
 Billboards on the side of roads and train stations: a relatively
cheap form of promotion that would be seen by a potential
target market who ride on trains or drive on roads. However,
they may not see the billboards when they drive past, the
billboards may get damaged and it’s not easy to include much
detail on a billboard.
Overall judgement needed (either promotional method
acceptable) which includes clear and supported opinion and
explanation of why the alternative methods are rejected.
[12]

Section 4 case study

2 a Establishes the brand image – bulbs last a long time.
Maintains a good reputation – customers keep buying the bulbs
in country X.
Helps to increase sales – as light bulbs meet health and safety
regulations.
Attracts new customers – in export markets.
[8]
b Site A – skilled labour is easy to recruit for the factory and low
wages reduce labour costs; cheap rent reduces costs (if
government grants given). However, costs of raw materials
would be higher and communication links would not be as good
as other sites (and not reach all parts of the country) so some of
the market might not be reached.
Site B – communication links are excellent; could sell to all parts
of the country as costs are lower; easy access to port for
imported components, so quicker to deliver; cheap rent would
mean lower costs. However, labour costs would be expensive
and it would be harder to find employees as unemployment is
low; there are no grants to reduce setup costs.
Site C – road links are excellent, making the costs of selling to
all parts of the country lower; easy to employ skilled workers
and labour costs would be subsidised by government grants;
near to airport. However, labour costs are high; airports are
 more expensive to use than ports; rent is high so this would
increase costs.
Overall judgement needed (any of the sites are acceptable)
which includes clear and supported opinion and explanation of
why the alternative sites are rejected.
[12]

Section 5 case study

2 a Samah – because she has risked $50 000 of her own money.
Bank manager – to be sure the loan of $20 000 will be repaid.
Creditors – so that Samah will keep buying the food ingredients
from the suppliers.
Employees – to see if their jobs are likely to be secure in future.
[8]
b i W: ($3 000) X: $4 500
Y: ($4 500) Z: ($1 500)
ii Increasing prices increases sales revenue and cash inflows –
assuming high prices don’t result in losing sales to
competitors.
Using cheaper ingredients reduces the cash outflows, but it is
important to try to maintain quality (or she might lose sales).
Using trade credit with her suppliers would delay cash
outflows. She could buy food ingredients when needed, sell
the food and gain cash and pay the supplier later.
Overall judgement needed (any one way acceptable) which
includes clear and supported opinion and explanation of why
the alternative ways are rejected.
[12]

Section 6 case study

2 a Cheaper export prices – the campsite will be cheaper for
tourists, which would encourage more tourists to visit country Z
and result in a high number of tourists wanting to stay at the
campsite.
 Higher import prices – might deter domestic tourists from going
abroad, increasing demand for EC campsite from domestic
tourists. This might result in high sales for the campsite when it
opens.
[8]
b Demand for local forest timber would mean lower costs and
higher profit for EC. However, the wood is not produced using
sustainable methods (the forests will eventually be gone if
nothing else is done), therefore this approach is not ethical as it
is not environmentally friendly (not sustainable production
methods).
Providing children with jobs would mean low wages (low labour
costs) and higher profit. However, children should be in school
and should only be employed part-time if at school, so this
option is not ethical if children are not in school. It could be
ethical if children are only employed for a short time and do still
attend school. The children employed should not be too young.
Only older children should be employed if EC wants to be
ethical.
Making payments to local officials to gain planning permission
would help to ensure planning permission is granted. This would
increase costs, and may be thought of as a bribe, which is illegal
in some countries. This is not ethical as it is not fair competition.
Judgement needed (either way acceptable) which includes clear
and supported opinion and explanation of why the actions are
ethical or not ethical.
[12]