Cambridge

IGCSE
®

Business
Studies
STUDY AND REVISION GUIDE
Karen Borrington
Peter Stimpson

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 Karen Borrington and Peter Stimpson 2015
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 Contents
Introduction iv
Section 1 Understanding business activity
1 Business activity 1 n
2 Classification of businesses 4 n
3 Enterprise, business growth and size 7 n
4 Types of business organisation 10 n
5 Business and stakeholder objectives 13 n
Understanding business activity: case study 16 n

Section 2 People in business

6 Motivating workers 18 n
7 Organisation and management 22 n
8 Recruitment, selection and training 26 n
9 Internal and external communication 30 n
People in business: case study 33 n

Section 3 Marketing
10 Marketing, competition and the customer 35 n
11 Market research 38 n
12 The marketing mix: product 41 n
13 The marketing mix: price 45 n
14 The marketing mix: promotion and technology in marketing 48 n
15 The marketing mix: place 51 n
16 Marketing strategy 54 n
Marketing: case study 57 n

Section 4 Operations management

17 Production of goods and services 60 n
18 Costs, scale of production and break-even analysis 63 n
19 Achieving quality production 67 n
20 Location decisions 70 n
Operations management: case study 73 n

Section 5 Financial information and financial decisions

21 Business finance: needs and sources 75 n
22 Cash flow and working capital 79 n
23 Income statements 82 n
24 Balance sheets 85 n
25 Analysis of accounts 88 n
Financial information and financial decisions: case study 91 n

Section 6 External influences on business activity

26 Government economic objectives and policies 93 n
27 Environmental and ethical issues 97 n
28 Business and the international economy 100 n
External influences on business activity: case study 103 n

Answers 105
Index 115

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 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 Examiner’s comments
The key points covered in the chapter Feedback from an examiner showing what was good, and what
could be improved in the student answers
Examiner tips
Advice to help you give the perfect answer
Exam-style questions
Common errors Mistakes that students often make, and how to Paper 1 style examination questions for you to try
avoid them
to see what you have learned
Definitions of the key terms you need to know
Case studies
●● Sample questions End of section case studies to practice the skills
Exam-style questions for you to think about needed for the Paper 2 exam

Sample student answers to see how the question might

be answered ●● 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.
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Karen Borrington and Peter Stimpson

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 Business activity
1
Key objectives
The objectives of this chapter are to revise: ● economic activity and the importance of specialisation
● the nature and purpose of business activity
● what the economic problem means
● how businesses can increase added value.
● the difference between wants and needs
● the scarcity of resources and why this leads to
opportunity cost

●● 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 problem Unlimited wants but limited resources – this creates scarcity.
Scarcity Lack of sufficient products to satisfy total wants of population.
Opportunity cost The next best item given up by choosing another.
Factors of production Resources needed to produce goods and services – 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 labour Production is split into separate tasks and each worker specialises in one task.
Added value The difference between a product’s selling price and the cost of bought in materials.

●● Business activity 
People have wants and
Increasing added value carries needs – business activity aims Unlimited wants and limited
risks. Will consumers pay higher to satisfy these resources create scarcity (the
prices? Will lower cost materials economic problem) so choices
reduce product quality? must be made

Businesses often try to increase

Business Choice results in opportunity
added value by increasing
cost. The next best
prices or cutting material activity item is given up
and component costs
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Businesses will produce

Factors of production are
more efficiently if they
essential for production: land,
specialise and use
labour, capital, enterprise
division of labour

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 1 Business activity

●● Common errors 
Error Why it is wrong
‘More money will solve the economic problem.’ The economic problem is caused by scarce resources rather than lack
of money.
‘Division of labour means that each worker performs many Division of labour leads to specialisation of labour – workers
different tasks.’ concentrate on one task.
‘Added value is the same as profit.’ Added value is not the same 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 Examiner’s

Division of labour means that workers and machines specialise in particular comments
tasks [K] – such as filling perfume bottles. [Ap] This specialisation improves Good start. Student defines
efficiency as workers can now produce more in the same time. [An] division of labour and also
applies an advantage to ARC
Workers can become bored if they just do one task all the time. [K] This could be
and explains (analyses) it. The
the reason why several workers have left ARC recently. [Ap] Boredom at work
disadvantage is also applied
can lead to low motivation and this is one reason why workers can leave a job,
to ARC and well explained.
increasing recruitment costs for ARC. [An]
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 Examiner’s comments

Added value is the difference between the selling price and Another good start – there is a clear definition
the cost of bought in materials. [K] In the case of the Bella and worked examples that are applied to ARC.
perfume it is $5 per bottle. [Ap] A price increase to, say, $9 Analysis of the possible effect of raising price
would raise the added value to $7 a bottle. If sales and other and analysis of the possible effect of using
costs stayed the same, ARC’s profit would increase. [An] cheaper materials are both included.
However, the consumers might buy less Bella than before – This answer shows very good understanding
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especially as supermarkets will sell a large number of competing of added value and some worked examples.
perfumes. If sales fall, profits could decrease too. Both ways of increasing added value are
A better idea might be to reduce costs of bought in materials. explained and a clear final judgement is made.
ARC could use a plastic bottle and not a glass one. Lower Full marks.
material costs will also increase added value but consumers (NB: There are more marks indicated in this
might think the quality has fallen and buy less Bella than answer to show different ways of achieving
before. [An] However, I think that this is better than raising application and analysis.)
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]

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 Sample questions and answers

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]

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 Classification of businesses
2
Key objectives
The objectives of this chapter are to revise: ● the differences between the private sector and public
sector in mixed economies
● the differences between the three sectors of business activity
● arguments for and against privatisation.
● the reasons why these sectors vary in importance:
between countries and over time

●● 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.

Primary sector Secondary sector Tertiary sector

Activities extract and Manufacture of Providing
use natural resources, goods using the raw services to other
e.g. mining and materials produced businesses and final
farming by the primary sector consumers

Privatisation increases
the number of
businesses that
operate in the private
sector

Mixed economies Business/economic sector

have businesses in the size varies over time,
private sector and Classification e.g. depletion of
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businesses in the of businesses natural resources such as

public (state owned) timber; growth of service
sector sector in rich countries

The size of the three

business/economic sectors
differs between countries,
e.g. Qatar is
dependent on oil – a
primary product

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 Sample questions and answers

●● Common errors 
Error Why it is wrong
‘Businesses can only operate in one business sector.’ Some businesses operate in all three sectors, e.g. an oil company that
extracts oil, refines it and retails petrol to consumers.
‘Organisations in the public sector of an economy include public Public limited companies (see Chapter 4) are in the private sector of
limited companies.’ the economy.

●● 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 Examiner’s tip
to become more important in country X? Justify your answer. [6] Use the information
provided and apply it to
Student’s answer your answers!

Tertiary sector business activity becomes more important in most rich

countries as consumers have more money to spend. [K] Once consumers
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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]

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 2 Classification of businesses

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]
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 Enterprise, business growth and size
3
Key objectives
The objectives of this chapter are to revise: ● different ways in which businesses can grow and possible
problems resulting from growth
● what an entrepreneur is and what characteristics they have
● reasons why some businesses remain small and why some
● needs of a new business
businesses fail.
● importance of business plans
● how business size is measured

●● Key definitions 
Term Definition
Entrepreneur Someone who organises, operates and takes the risk for a new business venture.
Business plan The objectives and details of the operations, finance and owners of a new business.
Capital employed The total value of capital used in a business (see page 90 also).
Internal growth The business expands its existing operations, e.g. a retailer opening more shops.
External growth The business expands by merging with or taking over 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 industry at the same stage of
integration production – such as two fashion shops.
Vertical integration The business integrates with another in the same 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 industry (also known as
integration diversification) – such as an insurance company merging with a food-processing business.

●● Enterprise and entrepreneurs 

Main characteristics:
Business plans help:
hard working confident
gain finance from lenders and investors risk taker innovative
reduce risk by assessing future problems creative independent
optimistic good
set objectives
communicator

Government support includes:

grants to set up Entrepreneur advantages:
advice
low interest loans independence
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provide enterprise zones Enterprise and using own ideas

with low cost premises entrepreneurs could be profitable
grants for training
using own interests and
university research facilities
skills
available to new business
entrepreneurs

Governments support business start-ups to: Entrepreneur disadvantages:

create jobs the business could fail
increase competition
own capital might be lost
increase output
benefit society lack of experience
help them expand opportunity cost

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 3 Enterprise, business growth and size

●● Size of business and business growth 

Comparing business size:

Why some businesses fail: value of output or sales

number of employees Businesses often grow to:
poor management
no planning capital employed increase market share
increase profit for owners
lack of finance
lower average costs
start-up risks
greater status
over-expansion

Why some businesses stay small: Businesses grow:

owners’ objectives, e.g. keep Business growth internal/organic growth
control slower than external
small market and size growth – but may be
type of industry less risky

External growth:
Business growth problems:
costs of growth merging with or taking
over another business
diseconomies of scale
horizontal
management problems
vertical – backward and forward
poor communication
conglomerate (diversification)

●● Common errors 
Error Why it is wrong
‘Business plans guarantee the success of a Business plans can help to reduce risk and uncertainty for new businesses – but nothing can
new business.’ ‘guarantee success’.
‘Profits are a good way of comparing the Profit levels depend on many factors such as efficiency and effectiveness – but not necessarily
size of businesses.’ the size of a business. Even though two businesses are the same size (e.g. measured by
output or numbers employed) profits could be very different.
‘There is both backward and forward Horizontal integration is always between businesses at the same stage of production.
horizontal integration.’ Vertical integration can be backwards (towards the supplier) or forward (towards the market).

●● Sample questions and answers 

Yasmin started her own small bakery business last year. She had previously
Examiner’s tips
worked for a large bakery. Yasmin works six days a week. She has developed
• For questions which
several new recipes for tasty bread and cakes. These are very popular with her
require evaluation
customers. Her bank manager loaned her a large amount of money last year after it is important to
reading her business plan. An old established bakery near to Yasmin’s is currently consider ‘both sides’
for sale.
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of an argument and
explain clearly why
1 Identify and explain two ways in which Yasmin has contributed to the you are making your
success of her business. [6] conclusion.
• Read questions
carefully and check
that your answer is
appropriate.

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 Sample questions and answers

Student’s answer Examiner’s comments

Yasmin is creative and this is an important characteristic for This is a good point. The answer identifies one
entrepreneurs. [K] She has thought up some new recipes which are of Yasmin’s characteristics and explains why
this has led to the success of her bakery.
popular with customers. [Ap] If customers buy more bread and
The second point is not answering the question
cakes from Yasmin her sales and profit will increase. [An]
because it is not a way in which Yasmin has
Yasmin might not have much competition. Low competition contributed to the success of her business.
will mean that customers will have to buy bread and cakes from Marks: K1; Ap1; An1 = 3 in total
her shop. This will make her business more successful.

2 Do you think Yasmin should take over the bakery business

that is for sale? Justify your answer. [6]

Student’s answer Examiner’s comments

If Yasmin took over this bakery business it would be horizontal This answer is very good. The student has
integration [K] as both businesses bake bread and make cakes. [Ap] correctly identified and defined horizontal
integration. There is an argument in favour of
The takeover would give her a bigger market share and she might be
the takeover and an argument against. Both are
able to buy in materials more cheaply because of bulk buying. This
applied and explained. The recommendation is
would help to increase the profits of her business. [An]
clear and Yasmin’s objectives are recognised as
However, Yasmin’s business is only one year old and she might being important to this decision.
not have the capital needed to buy the other business. [An] She Full marks.
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]

Exam-style questions
The table below shows data for three shoe manufacturers in 2015.
Sales ($000) Capital employed ($000) Employees
Business A 360 35 15
Business B 150 10 8
Business C 200 40 4

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:

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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]

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 Types of business organisation
4
Key objectives
The objectives of this chapter are to revise: ● difference between private and public limited companies
● franchises and joint ventures
● differences between sole traders and partnerships
● business organisations in the public sector
● difference between unincorporated businesses and limited
● recommending suitable forms of business organisation to
companies
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 business A business with separate legal identity from its owners, e.g. a limited company.
Unincorporated business A business without separate legal identity from its owners, e.g. a sole trader or
partnership.
Private limited company A business owned by shareholders but it cannot sell shares to the public.
Public limited company A business owned by shareholders but it can sell 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 corporation A business, in the public sector, that is owned and controlled by the state (government).

●● Types of business organisation summary 

Sole trader:
• own boss
Public corporations: • easy to set up Partnership:
• owned and controlled by state • work incentive • more capital
• profit not the only objective – • close to customer • responsibilities divided
e.g. could include ‘improvements • accounts not published • bigger range of skills than
in infrastructure’ sole trader
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Joint venture: Private limited company:

Main types • limited liability
• joint capital invested
• risks shared
of business • share capital
organisation • legal identity
• management responsibilities shared • owners in control

Public limited company:

Franchise:
• limited liability
• licence from franchisor
• shares sold to public – ability to raise
• support of large business
large sums of capital
• lowers risk
• well-known brand • shares tradable on stock exchange
• legal identity

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 Sample questions and answers

●● Common errors 
Error Why it is wrong
‘A sole trader business only employs one A sole trader can be quite a large business, employing many people – but it is only owned by
person.’ one person.
‘Partnerships can sell shares to raise capital.’ Only limited companies can sell shares.
‘Private limited companies do not have Yes, they do, and shareholders are a major source of capital for them – but these companies
shareholders.’ cannot sell shares to the public or trade their shares on the Stock Exchange.
‘Public limited companies are controlled by Most public limited companies appoint professional directors to manage and control the business
shareholders.’ – and there is therefore a division between ownership (shareholders) and control (directors).
‘Public corporations aim to make profits for Public corporations are owned by the state (government) and do not have ‘shareholders’.
shareholders.’ Although they might aim to make a profit they might have other objectives too, e.g. public
service.

●● 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]
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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

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 4 Types of business organisation

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 Examiner’s tip
Sami do not have limited liability. [K] They could lose all of their personal assets Always consider both
if the business fails completely. The risk is greater if they buy the new car sides of an issue with an
washer as this will mean using more of their savings in the business. [An] They ‘evaluation’ question.
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 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]
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 Business and stakeholder objectives
5
Key objectives
The objectives of this chapter are to revise: ● the objectives of public sector organisations
● what stakeholder groups are and the objectives they have
● why a business needs objectives and the different
● the potential for conflict between objectives.
objectives that can be set

●● Key definitions 
Term Definition
Business objectives The aims or targets that a business works towards.
Profit Total income (revenue) of a business less total costs.
sales of business ($)
Market share The proportion (%) of total market sales held by one brand or business = × 100
total market sales ($)

Social enterprise An organisation with profit, environmental and social objectives.

Stakeholder Any person or group with a direct interest in the performance and activities of a business.

●● Business objectives summary 

Reasons for objectives:
• give clear target to staff
• compare performance with
objectives Survival:
Public sector organisations:
• unify business • new business
• objectives set by government
• financial • important during economic
recession
• customer service
• could be more important than
• social
profit in short term

Community service: Business objectives: Profit:

can change over • rewards investors
• social enterprise aims
are environmental,
time and as • pays owners a return
external conditions • source of finance for expansion
social and financial • an indicator of success
change

Shareholder returns: Growth:

• aim to keep shareholders
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• could lead to higher market

happy
share and profits
• discourage them from selling
shares Market share: • increases managers’ status
• ‘returns’ in form of dividends • economies of scale
• more control over suppliers
and higher share price
• more control in setting prices
• publicity especially if ‘market
leader’

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 5 Business and stakeholder objectives

●● Stakeholder objectives summary 

Any business has a number of stakeholders. Conflicts between stakeholder
groups and their objectives might exist.

Owners:
• security of investment
• profit to pay returns
Community: • business growth Consumers:
• jobs • safe and reliable products
• protection of environment • value for money
• after sales service
• social responsibility, e.g. safe • reliability
products • quality

Banks: Workers:
Stakeholder • job security
• repayment of loans on time
• reasonable and regular pay
• payment of interest on loans objectives • contract
• business must remain liquid • job satisfaction and motivation

Managers:
Government:
• high salaries
Suppliers: • successful and growing business
• job security
• quick payment for goods/services • pay all taxes due, e.g. profit tax
• business growth – offers higher • operate legally, e.g. low pollution
pay and status supplied
• regular orders

●● Common errors 
Error Why it is wrong
Confusing the terms ‘stakeholder’ and Shareholders (owners of limited companies) are just one of the stakeholder groups – but there are
‘shareholder’ several others too.
‘All business organisations aim to make Not necessarily – for example, survival might be more important for a new business and many
as much profit as possible.’ businesses, such as social enterprises, will have other objectives apart from profit.
‘Consumers’ objectives always conflict Managers want to keep customers satisfied – that way they will return to buy again! Managers
with those of managers.’ want the business to be profitable – but consumers might benefit if profits are used to develop
new and better products.

●● Sample questions and answers 

Luis and Jez are partners in a business that operates a parcel delivery service.
Examiner’s tip
There is increasing competition in this industry. The partners aimed to build
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When asked to explain

up customer numbers and just ‘survive’ during the first two years of business. two factors/reasons
Now in its third year of operation, the partners have decided to set new make sure that these
objectives of ‘growth’ and ‘profit’. They plan to buy three new motor vehicles really are different from
to offer more delivery routes to customers. The government encourages small each other.
businesses to expand but also allows the state owned parcel delivery business
to operate a public service without making a profit.

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 Sample questions and answers

1 Identify and explain two reasons why Luis and Jez changed
the objectives of the business as it expanded. [6]

Student’s answer Examiner’s comments

Reason one: profit is a source of finance. [K] When the business This is a good answer. The student makes
was set up survival was important. Now that the partners have really good use of the evidence provided.
completed two years in business they have set other objectives. Both of the ‘new’ objectives are referred to
Profit will help the partners finance the three new vehicles [Ap] and understood. The impact of setting each
as they will not have to borrow if the profits are high enough. [An] of these two objectives is explained – profit
as a source of finance and growth leading
Reason two: growth will mean that the business increases sales (possibly) to increased market share.
each year. [K] Growth will be able to achieve more success Full marks!
against ‘increasing competition’. [Ap] This growth might help the
business increase market share. [An]

2 Do you think that these new objectives will make sure the
partners’ business is successful? Justify your answer. [6]

Student’s answer Examiner’s comments

The partners’ objectives will help them make decisions as they This answer briefly explains the benefits of
know what they are aiming for. [K] Also, all of the workers will setting objectives. These benefits will help
be able to work towards the same targets and this will make the the business achieve success. However, the
business more united. For these reasons the business is more likely student recognises that success cannot be
to be successful. [An] ‘guaranteed’ for Luis and Jez’s business. In
particular, increasing competition will make life
However, if other businesses started offering delivery services more difficult for the partners and the public
then Luis and Jez’s business is less likely to be successful. [Ap] They sector delivery service does not have to make
might have to reduce prices too much. [An] The business cannot a profit.
be sure of success as there is ‘increasing competition’ [Ev] and Full marks!
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]

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]

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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]

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 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

A transport
The wood for 20 The tables are
Carpenters business collects
tables is cut finished in the
assemble the the tables to
by a specialist polishing
tables deliver them to
machine department
furniture retailers

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.
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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.

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 Sample questions and answers

Student’s answer Examiner’s

WWP employees are interested in the business because they want to keep their comments
jobs and perhaps get a wage increase. If the business is successful and increases A detailed answer that
the sales of wooden garden furniture then the business may also benefit from explains each of the
increased profit. This increased profit may be paid out as a bonus or an increase stakeholder groups in
in wages to the employees. context.
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.
There may be conflict between these stakeholder groups because the The conclusion discusses
employees will want higher wages and therefore they will want to have higher possible conflicts between
prices charged for the furniture. However, customers will want good quality the different groups and
furniture at low prices. The government will want satisfied customers who then ends with a final
are not being exploited and a business that does not go bankrupt but it will conclusion. The conclusion is
also want high taxes to be paid from employees and the business. So it may in context as well. Full marks!
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.

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.
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 Motivating workers
6
Key objectives
The objectives of this chapter are to revise: ● which motivation methods are most appropriate for
different situations
● reasons why people work and the importance of
● different methods of increasing job satisfaction for
motivated workers
different types of work.
● different motivation theories
● financial and non-financial rewards

●● 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 sharing Payment to employees based on a share of the profits of the business.
Bonus Additional payment to workers, above the basic wage/salary, as a reward for good work.
Performance-related pay Pay is related to the performance of an employee, e.g. meeting pre-set objectives.
Share ownership scheme Giving employees shares in a company to encourage a sense of belonging and ownership.
Appraisal Assessing the effectiveness of employees (important for performance-related pay).
Fringe benefits Non-financial rewards.
Job satisfaction Enjoyment employees can derive from work if they 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 enlargement Tasks of a similar level of difficulty/responsibility are added to a worker’s job description.
Job enrichment Adding tasks that are more challenging, more skilful and more responsible.

●● Motivating workers 
Why work?
• money to live • social contact
• security • esteem/
• satisfaction self-importance
Herzberg’s views: Motivated workers:
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• high productivity
• hygiene/maintenance factors: pay,
• low labour turnover
work conditions, security
• participation and ideas for
• motivators: nature of work, improvement
achievement, recognition, promotion Motivating
• higher profits
workers

Taylor’s views: Maslow’s needs hierarchy:

• workers only motivated by money • self-actualisation • security
• piece rate best • esteem • physical
• set target output – pay more if exceeded • social

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 Sample questions and answers

●● Rewards and job satisfaction summary 

Time rate wages:
Teamworking: • weekly pay based on hours Piece rate wages:
• builds team spirit worked
• wages based on output
• social needs met • no need to calculate output
• more produced – more pay
• BUT: no incentive to work received
• leads to more participation
harder
and employee involvement • BUT: can output be measured?
• greater sense of belonging • will quality suffer?

Job enrichment:
Salaries:
• challenging work gives Financial rewards; • annual pay but paid monthly
greater satisfaction
non-financial • level based on nature/
• prepares employees for
promotion rewards; importance of work
job satisfaction • BUT: not directly linked to
• feedback on performance
output/effort
• complete unit of work

Non-financial:
Job rotation: • company car
• health care
• provides variety
• ‘employee of the year’
• reduces risk of boredom
• discounts or gift cards
• more training might be needed
• improved office/better working
• widens skills of employees conditions
• increased holidays

●● Common errors 
Error Why it is wrong
‘More money always motivates workers.’ Pay is important to allow workers to satisfy important needs but beyond a certain level of pay
it could be that other factors – such as job satisfaction – motivate workers more than money.
‘Herzberg’s hygiene factors motivate According to Herzberg hygiene factors (pay, working conditions, supervision) can remove
employees to work harder.’ dissatisfaction at work but they do not directly motivate employees. Only the ‘motivators’
can do this.
‘Job rotation is a form of job enrichment.’ Asking workers to do different jobs without giving them more independence or more
authority is not 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
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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]

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 6 Motivating workers

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]
Workers pay / week ($)

[K]
Output of bottles / week

Production workers could be offered a share buying scheme like the senior
managers of ABC are. [AP]

Examiner’s comments
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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

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 Sample questions and answers

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 Examiner’s tips
workers’ pay to output. This is called piece rate. [K] He thought that all workers • You are encouraged
are motivated by more money. The chance of being paid more for producing to use sketches or
more might motivate ABC’s workers. [An] diagrams to support
your answers if they
Herzberg did not think that more money motivates – it only removes are relevant.
dissatisfaction. He thought that job enrichment is a good way of motivating
• Always look at both
workers, e.g. by giving them more challenging and responsible jobs which will sides of the question
increase job satisfaction [An] as the existing work is repetitive and boring. [Ap] when answering the
final 6 mark question
If ABC’s workers are very badly paid, they should get a rise. If they are well on Paper 1.
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 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 busi-
ness 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
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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]

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 Organisation and management
7
Key objectives
The objectives of this chapter are to revise: ● the role of management
● different leadership styles
● organisation charts
● why employees join trade unions.
● key terms related to organisational structure
● the roles, responsibilities and inter-relationships between
people in organisations

●● Key definitions 
Term Definition
Organisational structure The levels of management and divisions of responsibility in an organisation.
Chain of command The route taken by instructions passed down from senior management.
Level of hierarchy A level of management where people have the same level of responsibility.
Span of control The number of employees working directly under a manager.
Line managers Have direct responsibility over people below them in the hierarchy of an organisation.
Staff managers Specialists who provide support, information and assistance to line managers.
Delegation Giving subordinates (employees/junior managers) the authority to perform
particular tasks.
Autocratic leadership Where the manager is in charge of the business, takes all decisions and expects
orders to be followed.
Democratic leadership All employees are involved in the decision making process.
Laissez-faire leadership Makes broad objectives known to employees who 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 
Span of control: An organisation chart shows:
• an organisation chart with few • how jobs/roles are linked
levels will have wide spans of • lines of command and
control communication
• this can lead to more delegation • who each worker should report to

Organisational
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structure

Chain of command:
Hierarchical structure:
• the more levels of hierarchy
the longer the chain of command • shows levels of management –
will be from highest to lowest
• higher levels have more authority
• long chain of command may lead
and control
to poor communication

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 Sample questions and answers

●● Management, leadership and trade unions 

Why join a trade union? Management roles:
• strength in numbers – • planning
e.g. employer negotiations • organising
• strikes, etc., more effective • coordinating
• commanding
• support for workers
• controlling

Delegation:
Laissez-faire leadership: Management • employees trusted
• objectives explained to workers – and leadership; • less work for manager to
they organise and plan own work trade union undertake
• BUT: limited role for leader membership • increases esteem of employees
• BUT: less control

Democratic leadership: Autocratic leadership:

• worker involvement • senior manager(s) take all
decisions
• motivating
• one-way communication
• employee ideas encouraged
• no employee involvement
• BUT: time consuming • BUT: quick decisions

●● Common errors 
Error Why it is wrong
‘Delegation means that workers have final Delegation gives the authority or power to junior managers or workers to do a
responsibility for decisions.’ job – the senior manager still has the final responsibility.
‘The democratic leadership style is best for all It depends on the nature of the business and the situation it is in. There is no single
businesses.’ leadership style that is best for all businesses and all situations.
‘Wider spans of control mean that more managers A wider span of control means that more workers report to each manager – so
are needed.’ fewer managers might be 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

Administration
Retail manager
manager
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Deputy retail managers

Finance Marketing
manager manager
Departmental Departmental
managers managers
Kitchen Lounge Dining Bedroom

Junior departmental managers

Retail employees

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 7 Organisation and management

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
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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

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 Sample questions and answers

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]

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 Recruitment, selection and training
8
Key objectives
The objectives of this chapter are to revise: ● benefits and limitations of full- and part-time employees
● the importance of training and different training methods
● the role of the Human Resources department
● reducing the size of the workforce – reasons for and
● stages of recruitment and selection including job
choosing who to make redundant
description, job specification and advertising of vacancies
● 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 description Responsibilities and duties to be carried out by the job holder.
Job (person) The requirements, qualifications, experience and characteristics of people needed to
specification fill a job vacancy.
Internal recruitment The vacancy is filled by someone who is an existing employee of the organisation.
External recruitment The vacancy is filled by someone who is not an existing employee of the organisation.
Part-time employment Jobs with less hours than a full working week, e.g. 20 hours per week instead of 40.
Full-time employment Jobs with a full working week (length varies between businesses). Full-time
employees will usually work 35 hours or more a week.
On-the-job training Training at the place of work – watching and being instructed by experienced workers.
Off-the-job training Training away from place of work, e.g. at college, being instructed by specialist trainers.
Induction training Training for new employees explaining the business structure, activities and procedures.
Redundancy Employees are no longer required – the job no longer exists.
Workforce planning Establishing the size and skills of the workforce 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 

HR department:
Selection:
• recruitment/selection/ • health and safety
• letter of application • interview training • redundancy and
• CV/résumé • selection tasks, e.g. dismissal
• industrial relations
• short list aptitude and
• pay system/levels • workforce
personality tests
planning

Recruitment:
Advertising vacancy: • job description
HR; • job specification
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• internal: intranet; notice-boards

• external: newspapers; website; employee • advertise vacancies
recruitment agencies; specialist recruitment and • internal – known to business,
media/papers; government job selection quick and motivating
centres • external – new ideas and
experience

Job description:
Job specification:
• details/responsibilities of vacancy
• details about the type of person looked
• candidates can assess job and their
for – qualifications, experience, abilities,
suitability for it
skills, characteristics
• selection more likely to be appropriate • allows job/person specification to be
drawn up

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 Downsizing workforce

●● Contract of employment and other legal controls 

Employment contracts:
Unfair dismissal and discrimination: • job title
• protects employees and gives more • role/responsibilities
security – improves motivation • hours of work
• employees treated fairly not on basis • pay level and method
of, e.g., race • holiday
• notice period

Part-time:
Health and safety:
• more flexible workforce
• raises sense of security Employment
• better use made of employees,
• fewer accidents/days lost contracts and other e.g. more hours worked at busy
• workers feel safer legal controls times
• BUT: costs of health/safety measures • suits some employees

Full-time:
Minimum wage:
• limits exploitation of employees • fewer workers needed than with
part-time contracts
• may increase motivation
• easier to communicate
• more will look for work
• employees could be more
• BUT: increases labour costs
committed/secure

●● Training 
Training

Induction training:
Benefits of training: On or off-the-job?
• new employees • on-the-job: cheaper
• improves employee efficiency • business structure
• specific to business
• enables use of new technology • layout of buildings
• employee still able to do some work
• raises skill levels • HR policies
• employment conditions • BUT: no external input into training;
• motivates employees can be less up to date
• business procedures
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●● Downsizing workforce 

Reasons for downsizing and workers made redundant:

Dismissal:
• fall in demand
• not same as redundancy – dismissed worker replaced
• takeover/merger and jobs duplicated
• work or behaviour unsatisfactory – may have been warned
• new technology – less labour needed

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 8 Recruitment, selection and training

●● Common errors 
Error Why it is wrong
‘Job descriptions state the qualifications needed for Job descriptions outline the duties and responsibilities of a job; job specifications give
each job.’ details of the qualifications of the person likely to fill the vacancy.
‘On-the-job training does not cost anything because Although a specialist trainer at a college is not being paid for, on-the-job training is
other employees train the new recruit.’ not ‘free’. The experienced employee undertaking the training may not be able to
work as fast as normal as he/she is explaining the job and the tasks it requires to the
new employee.
‘On-the-job training is suitable for skilled employees, An accountant (and many other skilled employees) will need college training to gain
such as accountants.’ recognised qualifications – and this is off-the-job training.

●● 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
Student’s answer worth 4 marks or
more in IGCSE Business
Preparing a job description is important. [K] In the case of TH the chef’s job Studies include marks
description would include ‘to prepare high quality meals’. [Ap] This would help for making relevant
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identify the right people qualities for the job – such as chef’s qualifications. [An] references to the
case study.
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

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 Sample questions and answers

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]
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 Internal and external communication
9
Key objectives
The objectives of this chapter are to revise: ● the most common causes of communication failure
● how businesses can overcome these barriers.
● why internal and external communication is important
● how to select the best methods of communication

●● 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 communication Between members of the same organisation.
External communication Between the organisation and another 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 communication How the message is communicated, e.g. meeting, letter, email.
One-way communication Message is sent without receiver required or expected to give feedback.
Two-way communication Gives feedback to a received message – there may be discussion about it.
Formal communication Messages sent through established channels.
Informal communication Messages sent casually, not through established channels.
Communication barriers Factors that stop effective communication.

●● Communication methods 
Verbal methods, e.g. meetings, phone,
one-to-one conversation:
• message sent quickly
• immediate feedback
• immediate clarification
• body language can reinforce message

Written methods, e.g. letter,

Two-way: notices:
• encourages feedback and discussion • hard evidence
• less autocratic than one-way Communication • complex details possible
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• motivating – employees more • can be re-read

methods
involved • easily copied
• BUT: takes time • BUT: direct feedback slow; no body
language; feedback not quick/easy

IT-based methods, e.g. email/social media:

Visual methods, e.g. video:
• quick, allows feedback, used internally and
externally • attractive/appealing
• social media widely used especially by • numerical data best shown in this way
the young • images more memorable
• BUT: too many emails limits effective • BUT: some graphs, etc., may be complex
communication

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 Sample questions and answers

● Barriers to communication 
Sender:
• difficult language
• unclear speech
• wrong message or wrong receiver
• unclear message or unnecessary
detail

Barriers to
Method used:
communication Receiver:
• inappropriate method for the message
• poor listener
• no feedback possible
• not paying attention
• IT failure
• inadequate language skills
• postal failure
• does not like sender – unwilling
• long chain of command – message to understand or cooperate
distorted

●● Common errors 
Error Why it is wrong
‘All internal communication in a business passes down Many messages will pass ‘down the hierarchy’ but two-way communication
the organisation.’ methods will mean that feedback will pass back up the organisation. Some
communication will also be horizontal – between departmental managers, for
example.
‘One-way communication is more effective than two- It might be true that one-way communication is more effective for emergency
way communication as it is quicker.’ situations where clear instructions must be given quickly. However, as there is no
feedback, how can the sender be sure that messages have been received and
understood? Two-way communication also encourages employee involvement and
this can be a motivating experience, e.g. when discussing with managers a problem
that has arisen on the production line.
‘Barriers to communication can always be solved by ‘Always’ is not necessarily correct but it might be true that if a message is not
using more than one method of communicating a received or understood using one method – e.g. a letter – then using another
message.’ method might help to remove the barrier – e.g. a follow-up phone call. In other
cases of ‘barriers’, it is important to identify the precise cause of communication
breakdown to adopt the appropriate solution.

●● Sample questions and answers 

Top Food (TF) operates 15 restaurants. There are 20 employees in each
Examiner’s tip
restaurant, most of them part-time. The owner of TF sends out instructions
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Make sure that, when

and targets each week by letter to each restaurant manager. Employees are you are asked for two
told to read the noticeboard in each restaurant daily to pick up important reasons/factors/benefits/
messages. A monthly printed newsletter containing details about the business disadvantages, etc.,
is given to each manager and employee. TF’s owner often complains in that the two points
the newsletter that his targets are not met and instructions ignored. He is mentioned really are
different – and not the
planning to use only IT-based methods of communication in future.
same point expressed in
a different way!

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 9 Internal and external communication

1 Identify and explain two barriers to communication within TF. [6]

Student’s answer Examiner’s

One barrier is that the wrong method is used. Noticeboards are a bad way to comments
communicate as the notices might not be read. [K] Workers in the restaurants This is a good answer as
are probably too busy [Ap] to read daily notices so important messages will be two separate points are
ignored. [An] explained. Some evidence
from the case study is used
The second barrier is that with the weekly newsletter there is no chance of
to support each explanation.
feedback [K] to say that there are messages in it which have been read or
Marks: K2; Ap2; An2 = 6 in
understood. [An] It might not even be read by part-time workers. [Ap]
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 Examiner’s comments

IT methods of communication include emails This answer has some real strengths – IT communication is
and social media. [K] These can be quick ways of understood with some appropriate examples. The answer is
communicating with large numbers of people. They applied to TF. The potential benefits of IT methods are clearly
are also cheap as no postage costs are involved. explained.
Feedback can also be given quickly, e.g. by replying BUT there are no arguments against using only IT methods
to an email or replying to a message on Twitter. This so this limits the answer’s marks for analysis and evaluation.
should help TF’s owner to understand why targets The student could have suggested that meeting restaurant
have not been met [An]– restaurant managers can managers face-to-face or meeting restaurant workers
say why the targets are too high or what problems in team briefings would also be a very effective way of
they have had this week. [Ap] Gaining feedback encouraging discussion and two-way communication. So IT
would be the most important reason why IT methods should not be the only forms of communication
methods should be used by TF so I agree with the used within TF.
manager. [Ev] 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
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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]

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 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

Pierre and Pedro

Finance/Administration Restaurant Guest Services Sports Centre

Manager Manager Manager Manager

2 workers 3 chefs 3 receptionists 3 gymnasium workers +

3 sports centre workers

6 waiters 6 room cleaners

Appendix 2 – Details of the three gymnasium employees

Max Tom Harry

Qualifications Personal trainer qualifications None 7 IGCSEs
2 A levels
Number of years worked for 12 25 9
hotel
Warnings for being late 4 0 10
Personal characteristics Friendly; confident; IT skills; Reliable; honest; punctual; IT Thoughtful; caring; likes to
works well in a team skills; follows orders be a leader
Previous jobs Waiter; gardener Retailing Administration; Accounts

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
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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).

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 9 Internal and external communication

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]
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 Marketing, competition
and the customer
10
Key objectives
The objectives of this chapter are to revise: ● why market segmentation is often used
● how to recommend and justify an appropriate method of
● the role of marketing and the marketing department
segmentation.
● market changes and how businesses can respond
● the difference between mass and niche marketing

●● Key definitions 
Term Definition
Marketing Identifying and meeting the needs of customers.
sales of business ($)
Market share The proportion (%) of total market sales held by one brand or business = × 100
total market sales ($)
Customer The willingness of customers to continue to buy the same product from the same business.
loyalty
Customer Communication with customers to encourage them to become loyal to the business and its
relationships products.
Mass market Where there is a large number of sales of a product.
Niche market A small specialised segment of a large market.
Market Identifiable sub-group of a whole market in which consumers have similar characteristics or
segment preferences.

●● Marketing 
Niche marketing:
Marketing department:
• suitable for small businesses
• market research
• able to meet needs of small group of
• sales
consumers
• promotion/public relations
• BUT: sales may be low
• distribution
• no economies of scale

Mass marketing: Role of marketing:

• potential for high sales • identify and satisfy customer
• economies of scale needs
• same product/promotion Marketing • customer loyalty
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to all consumers • gain information about customers

• growth opportunities • anticipate changes in customer
• BUT: no segmentation demand

Business response to market changes: Market changes:

• new tastes/fashions
• maintain good customer relationships
• new technology products
• adapt existing products
• changes in incomes
• new products
• ageing population
• keep costs low to be competitive • increased competition, e.g. globalisation

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 10 Marketing, competition and the customer

●● Market segmentation 
Types of segmentation:
• age
• geographical
• socio-economic group
• gender
• lifestyle
• business or consumer

Market
Advantages: Disadvantages:
segmentation
• meets special needs of groups of • detailed market research needed
consumers • expensive to adapt products/
• effective marketing – directed at promotion for each group
each group • segment may be too small to be
• customer loyalty more likely profitable

●● Common errors 
Error Why it is wrong
‘Marketing is about selling goods and Marketing includes many roles – but only one of them is about selling the product.
services to customers.’ ‘Identifying and satisfying customer needs’ is more than just ‘selling’.
‘Promoting to new customers is more Keeping existing customers – customer loyalty – has been shown to be less costly than trying
important than keeping existing customers.’ to attract new customers! So, customer relations are very important.
‘Market segmentation will always lead to It might lead to higher profits – but market segmentation can also be expensive for a
higher profits for the business.’ business, e.g. developing slightly different products and using different promotions for each
segment. Revenue from market segmentation will not always cover these extra costs.

●● Sample questions and answers 

GF produces frozen food products such as pizzas and ice cream. It aims Examiner’s tip
its products at mass markets. The Marketing Manager recently said: ‘Mass When asked for ways or
marketing is always going to be more profitable than niche marketing.’ The ‘suggestions’ make sure
Managing Director thinks GF should consider market segmentation. ‘The that the points you make
market for frozen food could be divided into sub groups. With our good can be applied to the
reputation, we could aim products at these groups successfully.’ A food business in the data.
industry report recently suggested that consumers’ incomes were being hit
by rising unemployment and there was increasing consumer interests in
‘healthy foods’.
1 Identify two ways in which GF could segment the market for
frozen food. [2]
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Examiner’s
Student’s answer comments
Low income consumers [K] Two relevant suggestions for
Food for babies [K] how a food business could
segment its market.
Marks: K2

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 Sample questions and answers

2 Identify and explain two ways in which GF could respond to

the market changes. [6]

Student’s answer Examiner’s comments

As consumers’ incomes are falling due to rising unemployment The first point is relevant with some application
they will not have much money to spend. GF could reduce prices and analysis. The second point is relevant
[K] so that the pizzas and ice creams become more affordable to and applied – but there is no explanation or
consumers. [Ap] This should lead to higher sales and revenue. [An] analysis of why this suggestion might be a
good idea for GF.
As consumers are more interested in healthy foods, GF could Marks: K2; Ap2; An1 = 5 in total
introduce new products [K] such as low fat pizzas. [Ap]

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 Examiner’s comments

Niche marketing is selling products in small markets to specific This is a well written and well balanced answer.
consumer groups. [K] GF seems to use mass marketing at present, There is an argument in favour of mass
which is when it sells the same pizzas and ice creams to everyone. marketing. There is an argument in support of
[Ap] This can keep costs such as product development costs and niche marketing.
promotion costs low. Low costs might help GF make a profit. [An]
By making food items for particular ethnic or social groups, GF The answer is clearly applied to food and there
might be able to sell these at higher prices. If no other business is a clear conclusion – about the possible
produces foods for particular ethnic groups, GF might have high profitability of these alternative ways of
sales in these market segments and make a high profit. [An] marketing. Full marks!
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]

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]

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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]

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 Market research
11
Key objectives
The objectives of this chapter are to revise: ● questionnaire construction
● analysing data collected
● the meaning of primary research and secondary research
● assessing accuracy of methods used and data collected
● the suitability of these two research methods for gathering
● how to present market research results.
data for a particular purpose

●● Key definitions 
Term Definition
Market research Gathering, analysing and interpreting information about a market.
Market orientated Carrying out market research to find out consumer wants before developing and
producing a product.
Product orientated business Business that focuses on the product itself, not the market for it.
Primary research Collection of original data – also known as field research.
Secondary research Information that has already been collected but is available for use by others
(desk research).
Sample Group of people selected to respond to a research survey.
Random sample Everyone has an equal chance of being selected for the sample.
Quota sample Sample is selected on a particular basis, e.g. people 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.

Primary research:
• collects data for • up to date
specific purpose • BUT: expensive
• original data • time consuming

Secondary research Questionnaires:

(existing data): • online or postal
• cheap • specific questions
• quick • quantitative (how many would you
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• BUT: available to competitors buy?) and qualitative (why would

• not for specific purpose Types of you buy?) possible
• not up–to–date
market • BUT: response rate often low
research

Interviews: Focus groups:

• phone or face-to-face • provide quick feedback on product
• can provide suggestions for
• follow-up questions can be asked
improvement
• clarification given
• BUT: expensive
• BUT: interviewer might ‘lead’ • people may not be honest in group
consumer to certain answers discussion

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 Sample questions and answers

●● Undertaking market research 

Sources of secondary data:
• internet
• government
• research agencies
• trade associations
• newspapers/media

How accurate?
Depends on: Questionnaire design:
• sample size • clear questions
• sample selection • not too long
• primary/secondary Undertaking • range of yes/no and open questions
• bias • order questions carefully
market
• quality of research methods
research

Presenting results: Samples:

• tables – many figures • keeps costs down
• bar chart – show totals/ sub totals • not too small – leads to inaccuracy
• pie chart – show proportions • representative as possible
• graphs – show trends • quota; random

●● 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]
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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’?

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 11 Market research

●● Common errors 
Error Why it is wrong
‘Primary research is always more accurate than Not necessarily – if secondary research has been obtained from reliable sources it can be
secondary research.’ accurate. Primary research can be inaccurate if poor questions and small samples have been
used.
‘Primary research is cheaper than secondary Secondary research may have to be paid for – from a specialist research agency, for example.
research which often has to be paid for.’ But much secondary data is free, e.g. internet sources.
Primary research always involves some cost and time in carrying it out.
‘A large sample makes sure that primary Data collected from a large sample is often more accurate than data from a small sample.
research is accurate.’ but if a sample has been chosen that does not represent 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 Examiner’s

It will provide useful data because only 14–18-year-old people are being used comments
in the research. This is Karl’s target market for the new bars. [Ap] This will make A well laid out and
the results more useful than if older people were asked what sort of chocolate structured answer.
bar they wanted. [An] Two short paragraphs
explain one benefit and one
The data will not be very reliable because it is a very small sample [k] and
limitation of the research
many will not bother to reply. It would be risky to develop a new product on
Karl is planning.
very few answers to the postal questionnaire of only 25 people who may not be
representative of the target age range. [An]
Overall, Karl’s research will not give him the information he needs. Online The final paragraph gives
surveys rather than postal questionnaires will have a better chance of being an overall judgement – and
answered by young people as they use the internet a lot. [Ev] A focus group suggests better methods of
would allow Karl to discuss with young people the most important features of market research.
a new bar leading to the development of brands which meet their preferences Full marks!
and are more likely to be successful. [Ev]

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]

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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]

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 The marketing mix: product
12
Key objectives
The objectives of this chapter are to revise: ● brand image and the importance of this
● the role of packaging
● the four elements of the marketing mix
● the product life cycle (PLC), including how stages of the
● the role of product decisions in the marketing mix
PLC can influence marketing decisions
● why product is important
● ways to extend the product life cycle.
● the costs and benefits of developing a new product

●● Key definitions 
Term Definition
Marketing mix All the activities that go into marketing a good or service: product, price,
promotion, place.
Unique selling point (USP) The special feature of a product that differentiates it from the products of
competitors.
Brand name The unique name of a product that distinguishes it from other brands.
Brand image The identity of a product that consumers can recognise and which gives it a
‘personality’ distinct from other products.
Packaging The physical container or wrapping used for a product.
Product life cycle The stages the sales of a product pass through from introduction, growth,
maturity to decline.
Extension strategy A way of keeping a product at the maturity stage of the life cycle and extending
the cycle.

●● The marketing mix: product 

Marketing mix:
• product
• price
• place
• promotion

Process of developing new products:

Role of packaging: • market research
• product protection • designing and creating new
product
• promotional effect
• trialling sales in a test market
• information helps consumer Marketing
• possible sales ‘flop’
• recyclable mix:
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product

Benefits of developing new products:

Branding:
• establish and develop brand name • help create USP
• keep products up to date
• create brand image and identity
• enter new market
• encourage brand loyalty
• diversification

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 12 The marketing mix: product

●● A typical product life cycle 

Development
↓
Introduction
↓
Growth Sales volume
↓
Maturity
↓
Saturation
↓
Decline
Stages of the life cycle Development Introduction Growth Maturity Saturation Decline
Time

●● Impact on marketing 
The stages of the product life
cycle (see diagram above) have
an impact on the marketing
strategy

Introduction:
• price skimming or penetration
Decline:
• reduce price to sell inventories • informative advertising
• adopt extension strategies • attractive packaging
• prepare for eventual product • place selection to reflect image
replacement
Impact on
marketing

Maturity/saturation: Growth:
• strengthen brand image –
• consider foreign markets
e.g. original promotion material
• competitive pricing
• more ‘place’ options to meet
• prepare extension strategies consumer demand

●● Common errors 
Error Why it is wrong
‘A product always has to look good to Don’t forget that the term ‘product’ includes services sold by tertiary sector businesses.
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sell well.’ Some ‘cheap’ products sell well even though they might not ‘look good’!
‘All products are eventually withdrawn from Some products – Coca Cola is one example – have been marketed for over 100 years;
the market as they enter the decline stage.’ perhaps some products can be kept ‘fresh’ by constant use of extension strategies. High
tech products would be unlikely to survive for more than a few years, though.
‘Packaging is only there to protect the Businesses often spend a lot of money on clever, attractive and effective packaging as a
product.’ form of promoting a product and helping to support its brand image.

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 Sample questions and answers

●● 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.
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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

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 12 The marketing mix: product

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]
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 The marketing mix: price
13
Key objectives
The objectives of this chapter are to revise: ● the difference between price elastic and price inelastic
demand
● the role of pricing in the marketing mix
● the importance of price elasticity of demand in pricing
● different pricing methods and their benefits and
decisions.
limitations
● how to select a suitable pricing strategy

●● Key definitions 
Term Definition
Cost-plus pricing Unit cost of the product plus a profit mark-up.
Competitive pricing The price is the same as or just below the price of competitors’ products to try to
capture more of the market.
Psychological pricing The price is set to match the consumers’ expectations and perceptions of the product.
Price skimming The price is set high for a new product on the market.
Penetration pricing The price is set lower than competitors’ prices to enter a new market and gain market share.
Promotional pricing The price is set at a low level for a short time period.
Price elasticity A measure of the responsiveness of demand following a price change.
Price elastic demand Demand changes by a greater proportion than price change.
Price inelastic demand Demand changes by a smaller proportion than price 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.
Cost-plus pricing:
• total cost per unit plus
profit mark-up, e.g. 50% Competitive pricing:
Dynamic pricing:
e.g. cost = $2 + 50%
• flexible pricing – price changed to • sets price at or similar to level of
price = $3
match market demand/type of competitors
• ensures all unit costs covered
consumer • requires research into competitors’
• e-commerce – prices can be changed • does not consider competitors’ prices prices
quickly • if unit costs are higher than those of
• sales revenue likely to rise with this competitors, a loss might be made
method on each item

Promotional pricing:
• sells off old inventories Psychological pricing:
• part of extension strategy • high quality = high price
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Pricing
• short-term strategy to make it • reinforces consumers’ perception of
difficult for other firms to compete methods product, e.g. 99c not $1!
• raises cash inflows – but a loss
could be made

Price skimming:
Penetration pricing:
• new product/design
• new product that must be
• likely to have unique selling point
established in market quickly
(USP)
• competition in market likely to
be high • high price gives high profit margin –
helps to pay development costs
• if product becomes successful, price
can be raised • price lowered as competitors enter
market

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 13 The marketing mix: price

●● Common errors 
Error Why it is wrong
‘Cost-plus pricing always leads to a business Not necessarily – although the unit cost is covered by the sale of each item and a profit
making a profit.’ mark-up is made. If sales are not high enough then total costs might exceed revenue.
‘Lowering prices will always lead to higher It is true that for most products, a lower price will lead to higher sales volume. Revenue will
revenue.’ not increase if demand is price inelastic however. This is because demand will rise by a lower
proportion than price has fallen so total revenue will fall.
‘Raising prices will reduce revenue and profits This might be true – but again it depends on price elasticity of demand. If the demand for a
as consumers will buy less.’ product is price inelastic then the demand will fall by a smaller proportion than the price has
risen. In this case, revenue will increase – and probably profit too.

●● 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.
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 Sample questions and answers

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 Examiner’s comments

Price skimming means using high prices for new A well laid out and structured answer.
products [K] such as the range of take-away foods –
There is a good point made about the profits of the
this should mean high profits for each meal sold. [An]
business and how price skimming might lift these.
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]
However, another café is opening soon. It might use The threat of the new café is also explained and the use of
penetration pricing and Shula might find demand for penetration pricing is also explained.
her food is price elastic if she puts the price up too
high so it would not be a good idea. [Ev]
Shula should not use penetration pricing for the new Finally, the recommendation not only supports price
take-away meals as customers might think they skimming but rejects one of the other pricing methods
are cheaply made. It would be better to compete that Shula could use.
on quality and use price skimming for these new Full marks!
products. [Ev]

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]
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 The marketing mix: promotion
and technology in marketing
14
Key objectives
The objectives of this chapter are to revise: ● how to select appropriate advertising and sales promotion
methods
● the role of promotion in the marketing mix
● the importance of the marketing budget
● the aims of promotion
● 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 market/audience The consumer groups that are the potential buyers of a product.
Marketing budget The financial plan for the marketing of a product 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.

Promotion choice depends on: Advertising process:

• product life cycle stage • sets objectives
• producer or consumer good • sets budget
• cultural issues in some countries • decides on campaign
• cost compared to marketing • media choice
budget • evaluation of campaign

Marketing budget: Media choice depends on:

• too small – may not match Marketing • cost
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competitors’ spending mix: • target market – type

• too big – cost of promotion and location of customers
promotion
may exceed the revenue • visual/moving image
gained from sales • hard copy

Advantages of sales promotion:

Sales promotion:
• boosts off-peak sales
• discounts or offers • displays
• encourages trial purchases and repeat
• gifts • free samples
purchases
• competitions • after sales service
• encourages switching from competitors

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 Sample questions and answers

●● Technology in marketing 
Product:
Place:
adapting products to incorporate
e-commerce – buying and
the latest technology can make
selling of goods and services
them more attractive to the
using computers linked to
market, e.g. 4G mobile phones;
the internet (see Chapter 15)
hybrid powered cars

Technology
in
marketing

Promotion: Price:
using social media and websites using the internet to gain
to reach more potential information about consumers
consumers and communicate and purchasing habits that
with them allows dynamic pricing

●● Common errors 
Error Why it is wrong
‘Increased advertising always Not necessarily – if advertising is using inappropriate media and is aimed at the wrong target market it
increases sales.’ might not increase sales. If consumers find advertisements misleading or offensive it could actually lead to
reduced sales.
‘Television is usually the best Selling to other businesses rarely involves TV advertising. TV advertising might not be appropriate for some
media for advertising.’ consumer goods and services and may be far too expensive, e.g. for a local hairdressing business.
‘Advertising is the same as Not quite true – advertising is an important form of promotion but it is not the only method of promotion
promotion.’ – in fact, some businesses rely more on other methods of promotion apart from advertising.

●● Sample questions and answers 

KT Carpets makes mats and carpets which are sold through three market Examiner’s tip
stalls owned by the business. Demand is seasonal – foreign tourists are the Make sure you
main target market but there are fewer tourists in the off-peak season lasting understand the
for several months each year. The owner of KT Carpets, Abhi, has a small difference between
marketing budget. This is mainly used for advertising in hotel magazines. advertising and sales
promotion techniques.
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.
1 Identify and explain two sales promotion methods, other than point-of-sale
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displays, that Abhi could use to increase demand during months when there
are few tourists. [6]

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 14 The marketing mix: promotion and technology in marketing

Student’s answer Examiner’s comments

Only the second part of this answer is
He could advertise on television. These adverts would be seen
relevant. Advertising is not a form of sales
by tourists and people who live in the country. They might
promotion so no marks are awarded for the
encourage people to visit KT’s market stalls and buy more carpets.
first paragraph. The second paragraph is
He could offer discounts to tourists during the off-peak months. much more clearly focused on sales promotion
[K] This might attract tourists to buy from KT rather than his and gains 3 marks – K1; Ap1; An1.
competitors. [Ap] This should increase KT’s sales in the short
term. [An]

2 Do you think that Abhi should use the internet to promote

KT Carpets’ products? Justify your answer. [6]

Student’s answer Examiner’s comments

The internet could be used to promote KT Carpets if the business The student makes some very good points in
created a website. [K] this answer – but can you see that there is no
real judgement or evaluation?
KT could also use social media to communicate with potential Even though a simple recommendation is given
customers, e.g. through Facebook. at the end this is not awarded a mark. This is
The website would be good because potential consumers across because the answer is all ‘one-sided’ and there
the world could see colour pictures of the carpet designs. [Ap] is no attempt to consider the problems, costs
These pictures might attract them to ordering carpets online and or limitations of using the internet/website.
increasing demand for KT’s product. This would help the business As there is no balance to the answer, analysis
increase demand during the off-peak seasons when there are few is awarded 1 mark and the recommendation is
tourists. [An] not awarded a mark.
Marks: K1; Ap1; An1 = 3 in total
So I do think that the internet should be used by KT Carpets.

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]
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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]

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 The marketing mix: place
15
Key objectives
The objectives of this chapter are to revise: ● the business threats and opportunities offered by
e-commerce
● the role of place in the marketing mix
● selecting the most suitable distribution channels.
● the advantages and disadvantages of each distribution
channel

●● Key definitions 
Term Definition
Distribution channel The means by which a product is passed from the 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 • supermarkets • local retail store
• chain stores • direct sales • e-commerce
• discount stores • mail order

Channel choice depends on:

• business customers or consumers • high or low price and image of product
• perishability and size • location of consumers
• competitors’ channels

4 Producer – agent – wholesaler – 1 Producer – consumer:

retailer – consumer • the most direct channel used for most
• often used when exporting – gent has services
‘local knowledge’ • cuts out ‘middlemen’ – lowers costs and
usually prices
• BUT: adds a cost level
• BUT: not suitable for all products
• reduces producers’ control over marketing • producers hold all inventories

Marketing mix:
place (distribution channels)
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3 Producer – wholesaler – retailer – 2 Producer – retailer – consumer

consumer • larger deliveries and low transport costs
• wholesaler ‘breaks bulk’; holds inventories to big retailers
and delivers to retailer • retailers hold inventories
• retailer can buy in small quantities • BUT: producer has no direct contact
• BUT: adds another cost level with consumer

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 15 The marketing mix: place

●● e-commerce 
Consumer threats: Business opportunities:
• no face-to-face contact with • global promotion
producer/retailer • customers order and pay online
• no ‘try before you buy’ • cuts out shops
• access to internet essential • supplies/components can be
• security risks, e.g. fraud/identity theft ordered

e-commerce

Consumer opportunities: Business threats:

• customers compare with
• easy comparison
competitors easily
• wider choice
• good website essential
• competitive prices
• no face-to-face contact
• convenience • no shops to hold stocks
• easy payment • transport costs to customers

●● Common errors 
Error Why it is wrong
‘Place is about where to sell a product.’ Place decisions in the marketing mix are more about how to make a product available to
consumers rather than where. Location decisions are used for deciding 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 about which method of transport to No – ‘place’ is not about transport decisions but about how to make a product available to
use to distribute the products.’ consumers when and where they want to buy it.
‘e-commerce can be used for all goods and It is true that many traditional retailers have suffered from e-commerce competitors – but
services and will lead to the decline of all will all shops be affected? What about specialist retailers that offer great/excellent pre-sales
retailers.’ service? Also, hairdressing and restaurants are two examples of businesses offering services
that may advertise on the internet but cannot distribute their services through e-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
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market,’ said Alex, the Managing Director of AP.

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 Sample questions and answers

1 Identify and explain one advantage and one disadvantage to AP of its

current channel of distribution. [6]

Student’s answer Examiner’s comments

By using retailers AP is able to keep lower Two good points – inventory holdings and higher costs/prices.
inventory levels. [K] This means less money is tied These are put into context and applied. The impact of both
up in inventories [An] which is important as mobile the advantage and the disadvantage is briefly explained/
phones can get outdated quickly. [Ap] analysed.
Retailers aim to make a profit. The specialist Full marks!
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]

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 Examiner’s comments

Yes, using an agent would be a good idea. Agents On first read this seems like a good answer BUT it lacks
located in the export market will know more about certain key skills.
consumers, the main cities and local competition There is no clear application of the points made to mobile
than AP will. [K] This would allow the agent to select phones – these points could apply to any product.
the best marketing mix in this country. [An] There is no consideration of any possible disadvantages
of using an agent – such as higher costs or loss of some
If AP tried to sell the phones themselves then marketing control but there is brief consideration of not
they might end up trying to sell the wrong type of using an agent. So, a second mark for analysis is awarded but
products at prices too high for local consumers. [An] there are no marks for evaluation as the judgement is not
So using an agent is the best option. 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
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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]

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 Marketing strategy
16
Key objectives
The objectives of this chapter are to revise: ● the nature and impact of legal controls related to
marketing
● the development of appropriate marketing strategies in
● opportunities and problems of entering foreign markets.
given circumstances

●● Key definition 
Term Definition
Marketing strategy A plan with the appropriate marketing mix for a product to achieve a marketing
objective.

●● Marketing strategy summary 

Marketing objectives:
• establish new product
• increase sales of existing
Marketing strategy must:
product
Entering a foreign market: • be focused on marketing
• increase market share
• joint venture objective
• maintain market share as
• combine the four elements of
• licensing competition grows
the marketing mix in a consistent
• international franchising • develop brand for niche market and integrated way
• localise existing brands • not exceed the marketing
budget

Foreign market problems: Legal controls:

• lack of knowledge, • weights/measures
e.g. about cultural differences • description of goods
• different language
Marketing • safety requirements for products
• import controls strategy • consumer rights with faulty
• exchange rate changes products
• transport costs • some products illegal

Foreign market opportunities: Impact of legal controls:

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• high sales growth potential, • may increase costs to business,

e.g. developing countries e.g. redesign to meet legal safety
• lower trade barriers requirements
• home markets might be • BUT: can reassure consumers –
saturated/mature gives them confidence to buy

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 Sample questions and answers

●● Common errors 
Error Why it is wrong
‘The marketing strategy needs to be decided Objectives must always come first – and the 4 Ps decisions must focus on achieving the
before objectives can be set.’ marketing objective.
‘The marketing mix decisions can be made All 4 Ps decisions need to be integrated and combined to reflect and support the image of
separately from each other.’ the product.
‘All businesses want to see legal controls over Most businesses recognise that some consumer protection is essential. It means that
marketing removed.’ responsible businesses can compete effectively against those firms which, without legal
controls, would act unethically to cut costs and put consumers at risk.
‘A successful product will always sell well in a Not necessarily! There have been many examples of well-known businesses failing to enter
foreign market.’ foreign markets successfully. They may need to adapt famous products to suit foreign
market tastes and 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
Examiner’s tip
to sell cereals in a foreign market. [6]
Read the question
carefully to make sure
Student’s answer you are following the
key demands of the
One problem is the distance and the cost of transport. [K] Cereals are question.
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.
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 16 Marketing strategy

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 b ­ usiness
­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
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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]

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 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

d
t h e worl
ore
Expl with abike!
ley
Br om

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Good value
Prices start from $50
Only available through toy shops
Only children’s bicycles sold

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 16 Marketing strategy

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
Examiner’s comments
they currently use. A good answer with four suitable
2 EB could carry out interviews with the owners of the toy shops examples of research methods
where they sell the existing bicycles to see if they already sell folding EB could use. However, only the
bicycles. first three examples are in context,
3 EB could research on the internet to see if there are already folding so 7 marks are awarded and not 8.
bicycles for sale. This answer could have easily been
4 EB could set up a focus panel to ask customers what they like. increased to full marks by ensuring
the last example was also in the
b ‘Place’ is an important part of the marketing mix. Consider the context of this company.
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
Examiner’s comments
Student’s answer This is a good answer. It has the
Existing specialist bicycle shops will be a good way to use as EB already sells advantages and disadvantages
its bicycles to these shops and they will have built up a good relationship of the three options explained in
with the shops. This means that the staff in the shops will be able to advise context.
customers on EB products and will be easily updated on the new bicycle. There is then a recommendation
However, if EB wants to aim the new bicycle at a new market segment which compares the three options
then selling to existing outlets may not be good as the new target market and explains why specialist bicycle
may not shop at these outlets. shops are chosen and why the other
two channels of distribution are
A website might be a good idea as EB does not have a website at rejected.
the moment and it could put all of its bicycles on the website for This answer receives full marks
customers to purchase directly. This will cut out one of the channels of because it shows consideration
distribution and should increase the profits of EB. However, customers of why the other two options are
might want to try the new bicycle and they will not be able to do this if rejected.
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.
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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.

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 Sample questions and answers

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

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 Production of goods and services
17
Key objectives
The objectives of this chapter are to revise: ● how to identify and explain ways of implementing lean
production
● the difference between production and productivity and
● how to identify and explain the most appropriate method
how to increase productivity
of production in a given situation – job; batch; flow
● reasons why businesses hold inventories
● how technology has changed production methods.

●● Key definitions 
Term Definition
Productivity Output measured against inputs used to create it, e.g. labour
output per time period
productivity =
number of employees
Inventory Materials, work in progress or completed goods held by a business which are or will
be ready for sale.
Buffer inventory level Inventory held to deal with unexpected changes, e.g. in consumer demand or
suppliers’ ability to deliver.
Lean production Cutting out waste and inefficiency in the 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 production A single product is made at a time.
Batch production A quantity (batch) of one product is made, then a quantity of another item will be
produced (e.g. bread, dresses).
Flow production Large quantities of a product are produced in a continuous process.

●● Production of goods and services 

Production process:
Just-in-time: • converts inputs into outputs
• zero or low inventories • inputs: land, labour, capital, Operations management:
• supplies arrive when needed enterprise
• goods made to order or sold • outputs: goods and services • factory/production manager
immediately • purchasing manager
• cuts costs/storage space • research and development manager
• risk if suppliers fail to deliver

Lean production: reduce

waste by cutting: Productivity:
• overproduction • a measure of operational efficiency
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• waiting Production of • labour productivity =

• unnecessary transport goods and output per time period
• excess inventories services number of employees
• defects
• increasing productivity makes
• over processing
• movement of goods business more competitive

Holding inventories: Ways to increase productivity:

• give consumers choice and good • improve factory/office organisation
availability to save time
• keep production supplied with • improve labour skills
resources • more efficient machinery,
• provide cover for supplier hold up e.g. automation

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 Sample questions and answers

●● Technology in production 
Impact of technology:
Job production:
• higher productivity and quality
• new products • one-off products and personal services
• high skill level • flexible designs meet customer needs
• BUT: jobs lost • high skilled varied work
• higher training costs • BUT: costs high and time consuming
• loss of capital

Technology: Batch production:

• automation • output higher than job production
• CAD Technology • some product flexibility
• CAM
• CIM
in • BUT: high inventories of work in
• EPOS production progress
• EFTPOS • machines reset after each product

Factors influencing method: Flow production:

• nature of product • high output of standard product
• size of market • unit costs low
• capital intensive and specialised
• demand for standard or unique
labour
product? • BUT: can be inflexible and risk
• size of the business of boredom

●● Common errors 
Error Why it is wrong
‘If more resources are used then productivity If more inputs are used then output (production) should increase. This is not the same as
will increase.’ productivity. Productivity can increase if output rises faster than input, e.g. greater efficiency
with each worker producing more than before.
‘Higher productivity will reduce the costs of This is not quite correct. Higher productivity should lead to lower average/unit costs of
the business.’ production and this is a sign of increased efficiency and competitiveness.
‘Lean production can only be used by No – the concept of ‘reducing waste’ by using inputs more efficiently can be applied by all
manufacturing businesses.’ businesses, e.g. a hotel using a computer controlled inventory system for drinks and food to
reduce the risk of ‘out-of-date’ supplies being thrown away.
‘Job production always produces higher Not necessarily! Job production is more ‘handmade’ and can be adapted to make special
quality goods than flow production.’ one-off designs but the quality depends greatly on individual craftspeople. Flow production
(especially using automated machinery) often produces consistent quality standardised products.

●● Sample questions and answers 

SD specialises in providing food for weddings and birthday parties. All SD Examiner’s tip
meals are promoted as being ‘individually handmade and cooked by specialist
As you write your
chefs’. SD receives more customer requests than it can cope with – it has to answers, ask yourself –
refuse some orders. ‘If we used automatic mixers, food processing equipment
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could this point apply

and other catering technology we could double output,’ said the Operations to any business or am I
Manager. Inventories of food ingredients used regularly are high. Some applying it to the
suppliers are unreliable. Some fresh ingredients that are used less often are business in the data?
stored for no more than two days.

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 17 Production of goods and services

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 Examiner’s

An opportunity would be to increase output. [K] Machinery such as automatic comments
mixers would allow higher productivity and higher output. [Ap] This would mean The student makes a clear
that SD would not have to turn orders away and this would increase revenue. distinction between the
[An] opportunity and the problem.
They are both realistic,
A problem would be that the business seems to be well known for quality food
applied and well explained
handmade and prepared by chefs. [K] Perhaps technology would make the food
(analysed).
taste less individual or special [Ap] and this might damage SD’s reputation and
Marks: K2; Ap2; An2
sales. [An]
= 6 in total

2 Recommend whether SD should use just-in-time (JIT) inventory control.

Justify your answer. [6]

Student’s answer Examiner’s comments

Just-in-time would mean SD cutting down on the The student clearly understands JIT. There is one potential
level of inventories. [K] It could order goods just as benefit and one potential problem from introducing JIT –
they are needed. This would save working capital and these are analysed by considering the likely impact on
and reduce opportunity cost of the money tied up. revenue/sales.
[An] Unfortunately, the student does not refer to ‘food
ingredients’ (and the fact that they are perishable). Also,
JIT means that there are no buffer inventories. there is no reference to SD’s current inventory holding
If there is a sudden increase in demand then SD method.
would not be able to increase output as it would not So, no application marks and no evaluation either as JIT is not
have the inventories needed. [An] discussed in the context of SD.
On balance I do not think SD should use JIT. 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]
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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]

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 Costs, scale of production and
break-even analysis
18
Key objectives
The objectives of this chapter are to revise: ● what the break-even level of output means
● how to use break-even charts to find the break-even level
● the difference between fixed costs and variable costs
of output and how to draw break-even charts
● why cost data is useful to business managers
● the uses and disadvantages of break-even analysis.
● the main causes of economies and diseconomies of scale

●● 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 scale Factors that lead to a reduction in average costs as a business increases in size.
Diseconomies of scale Factors that lead to an increase in average costs as a business increases in size.
Break-even output The quantity that must be sold for total costs to equal total revenue.
Break-even chart Graphs that show how costs and revenue of a product change at different
output levels – showing the B-E point.
Contribution Selling price minus variable cost per unit.

●● Costs and scale of production 

Cost information helps:
• when making pricing decisions
• to calculate profit/loss Fixed costs do not vary with output
Diseconomies of scale:
in short run and include:
• poor communication • to compare different options,
• rent
• low morale leading to low e.g. which location, which machine
to buy, whether to stop making • interest on loans
efficiency
a product • insurance
• slow decision making
• management salaries

Economies of scale: Variable costs change directly with

output:
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• purchasing Costs and • raw materials

• marketing
scale of • electricity used in production
• financial
production • some labour costs, e.g. piece
• managerial rate pay and wages of
• technical temporary workers

total costs Total costs = fixed costs +

Average costs =
output variable costs:
These are also known as unit costs These can be compared with
and form the basis of ‘cost plus revenue (in same time period) to
pricing’ calculate profit/loss

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 18 Costs, scale of production and break-even analysis

●● Break-even analysis 
This is an example of a break-even graph.
sales revenue
15 000 ($16 000)

fit
ro profit
Costs and revenue ($)

ofp
break-even ea
10 000 point ar total costs
($11 000)

s
of los variable cost
5000 area fixed costs

0
1000 2000
Units of production

Break-even charts (see diagram

above) require:
• fixed costs (FC)
• variable costs (VC)
• total costs (FC + VC)
• sales revenue (SR)
• break-even at output
where TC = SR
Uses:
Break-even graphs can also show:
• can determine break- even output
• the margin of safety • may influence bank decisions for
• profit/loss at different output levels loans to new business
• impact on break-even if costs/ • make break-even comparisons,
prices change Break-even e.g. alternative locations
analysis

Limitations:
• costs and prices might change
Break-even calculation:
frequently – new graph required
fixed costs
• assumes products sold
contribution per unit
• costs and revenue might not be
‘straight lines’

●● Common errors 
Error Why it is wrong
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‘All labour costs are variable costs.’ Not usually – if labour is paid by piece rate or workers can be employed on part-time/temporary
contracts when demand is high, then these labour costs will vary 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 of scale lead to lower costs as Total costs are almost certain to rise as a business expands – but average (unit) costs often fall
a business expands.’ as the business increases efficiency due to economies of scale.
‘Break-even is when variable costs equal This is wrong for two reasons:1) Break-even is not about ‘when’ but about the level of output
revenue.’ 2) at which total costs equal revenue.
‘Increasing the price of a product Assuming unit variable costs and fixed costs do not change, then a higher price will reduce the
will increase the break-even level of level of output at which a business breaks even. BUT will it sell as many products as before the
production.’ price rise?

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 Sample questions and answers

●● 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
sales revenue
15 000 ($16 000)

fit
ro profit
Costs and revenue ($)

p
break-even of
ea
10 000 point ar total costs
($11 000)

loss variable cost [K]

of
5000 area fixed costs
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0
1000 2000
Units of production

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] (continued on next page)

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 18 Costs, scale of production and break-even analysis

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]
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 Achieving quality production
19
Key objectives
The objectives of this chapter are to revise: ● the meaning of quality control and how businesses
implement quality control
● the meaning of quality and its importance to businesses
● the meaning of quality assurance.

●● Key definitions 
Term Definition
Quality A good or service is produced which meets customer expectations.
Quality control Checking at the end of the production process to see if the good or service is of the
correct quality before a customer receives it.
Quality assurance Checking the standard of the good or service throughout the production process to
ensure there are no errors or defects.
Total Quality The continuous improvement of goods and services and processes by focusing on
Management (TQM) quality at each stage of production.

●● Quality and how it is achieved 

Importance of quality to business:
• establishes a brand image
Quality control benefits:
• builds brand loyalty
Quality assurance drawbacks: • maintains a good reputation • attempts to eliminate faults before
• expensive to train employees • helps to increase sales customer receives the product or
service
• relies on employees following • attracts new customers
• less workforce training required
instructions of standards set
compared with quality assurance
and TQM

Quality assurance benefits: Quality control drawbacks:

• attempts to eliminate faults before • expensive as need to pay someone
customer receives the product or Achieving to check product or service
service quality • identifies fault but not why it has
• fewer customer complaints production occurred; problem not removed
• reduced costs if product not • increased costs to scrap product or
scrapped or service repeated repeat the service
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Total Quality Management

(TQM) benefits:
Total Quality Management • quality built into every part of the
(TQM) drawbacks: production
• expensive to train employees • eliminates all faults and errors
• relies on employees following TQM (right first time)
ideology • no customer complaints
• waste removed and efficiency
improved

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 19 Achieving quality production

●● Common errors 
Error Why it is wrong
‘Quality means producing a good or service to Quality is about producing a good or service which meets the quality a customer expects given
the highest standards.’ the price they have paid. This may not be to the highest standards if the price paid is low.
‘Quality control means testing all products to This is not always possible due to the cost of quality control and also testing products might
make sure they meet customer expectations.’ mean damaging/destroying them, e.g. chocolate bars or air bags on cars!

●● 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 Examiner’s

Kamal will be able to charge higher prices. [K] This will mean that Kamal will comments
gain higher revenue from the hotel rooms which may yield higher profits for Two good points – clearly
the hotel. [An] As a sole trader Kamal may be able to keep a higher profit for related to the hotel being
himself and will not need to share it with anyone else. [Ap] higher quality and the
benefits this may bring
The 4* shows that the hotel has a high quality service and this might attract Kamal. They are both briefly
more customers. [K] This would help the business to build up a good reputation explained.
among customers. [An] A good reputation would keep the occupancy in the Full marks.
hotel high with fewer empty rooms. [Ap]

2 Do you think quality should be more important than price for Kamal? Examiner’s tip
Justify your answer. [6] Always make a justified
decision with an
Student’s answer ‘evaluation’ question.

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
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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

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 Sample questions and answers

Exam-style questions
Selina set up a private limited company called KidsKlothes (KK) ten years ago. The company manufac-
tures 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]

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 Location decisions
20
Key objectives
The objectives of this chapter are to revise: ● factors that affect the location of retailing businesses
● factors that affect the decision about in which country a
● factors that affect the location of manufacturing
business should locate its operations
businesses
● how legal controls affect location decisions.
● factors that affect the location of a service sector business

●● Key definitions 
Term Definition
Infrastructure The basic physical systems of a business or nation, e.g. transportation,
communication, sewerage, water and electric systems.
External economies of scale Cost benefits to a business resulting from locating in a region with other
businesses or organisations operating in the same industry.

●● Importance of location 
Location factors for manufacturing
business:
• production methods
• location of the market
• raw materials/components
• external economics of scale
• availability of labour
• government influence
• transport/communications
• site costs
• power/water supplies

Location factors for retailing Location factors for service sector

business: business:
• shoppers • customers’ location
• nearby shops • personal preference of owners
• customer parking available • technology
• suitable premises available
• availability of labour
• rent/taxes Location • near to other businesses
• delivery vehicles access
• security • rent/taxes
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Locating to a different country:

Legal controls:
• to encourage business to set • new markets overseas
up/expand • cheaper or new sources of
materials
• to discourage firms from locating
• labour force requirements
in overcrowded areas/areas of
• rent/taxes
natural beauty or environmental
• government grants
interest
• trade and tariff barriers

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 Sample questions and answers

●● Common errors 
Error Why it is wrong
‘Businesses need to be near Businesses only need to be near their raw materials if they are a manufacturing business and produce a lot of
to the raw material source.’ waste as part of the process. It is not so important to be near the raw material source with today’s improved
transport links.
‘It is always better to locate Many businesses locate where their costs will be low. This may be in another country where wages are low if
near to customers.’ labour costs are a large part of total costs. It may not be near to customers.
‘The internet has not affected Businesses that use the internet to sell their products do not need to be near to customers any more, as they
where businesses locate.’ receive orders over the internet and then post the goods out to customers. Many of these businesses can
locate anywhere.

●● 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
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 20 Location decisions

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]
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 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

Attach Push in the Place in large
Put into the Put bulb into
filament to base of the boxes for
glass bulb packaging
metal screw bulb dispatch

Appendix 2 – Three possible sites for the new LH factory

Site A Site B Site C

Market Large local market Small local market Small local market
Communications Good rail links; good road links to Excellent road and rail links to all Excellent road links to all parts of
most parts of the country parts of the country the country; rail links poor
Raw materials/ Available nearby but expensive Near to port for imported Near to airport for imported
components components components
Wage rates Low High High
Skilled labour No shortage of skilled labour Few skilled workers available Many skilled workers nearby
Unemployment High Low Low
Rent/land taxes Low Low High
Government grants Grants available No grants Some grants available if
employing high number of
workers

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

choosing to use flow production methods. [8]

Student’s answer Examiner comments

1 The nature of the product itself: as LH produces The first factor is well explained and is applied clearly to the
a standard light bulb that is not unique it is more business in the case study.
suited to flow production. If the light bulb had However, the second factor is generic and only mentions the
many different sizes then batch production might company name of LH. Therefore 4 marks are awarded for
be better but there are only three different sizes the first factor but only 2 marks for the second factor = 6
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produced and so flow production is better to use marks in total.

as large quantities of a standard product are For full marks the second point needs to be clearly applied to
produced. this business.
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.

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 20 Location decisions

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]
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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]

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 Business finance: needs and sources
21
Key objectives
The objectives of this chapter are to revise: ● factors that affect which sources of finance are chosen by
managers for different uses.
● why a business needs finance
● the different sources of finance available to a business
in the short term and long term

●● Key definitions 
Term Definition
Start-up capital The finance required by a new business to pay for the essential fixed assets
and current assets so that it can start trading.
Working capital Capital available to a business in the short term to pay for day-to-day expenses.
Capital expenditure The money spent on non-current assets (fixed assets) lasting more than one year.
Revenue expenditure Money spent on day-to-day expenses, e.g. wages, raw materials.
Internal finance Finance from within the business itself.
External finance Finance from sources outside of and separate from the business.
Micro-finance This provides financial services to poor people who cannot use traditional
banks, e.g. small loans.
Short-term source of finance Finance that must be paid back within a year and includes: overdraft facility,
trade credits, factoring.
Long-term source of finance Funding obtained for a time frame exceeding one year in duration and
includes: owner’s savings/share capital; 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.
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 21 Business finance: needs and sources

●● Long-term external sources of finance summary 

Bank loans (long term):
Grants and subsidies: • usually quick to arrange
• varying repayment period
• government grants not repaid
• large companies pay a low rate
• BUT: may have conditions of interest
attached • BUT: repaid with interest
• security/collateral often required

Issue of shares (long term):

Selling debentures (long term): Long-term • do not have to be repaid
• raise long-term finance external • no interest paid
(e.g. 25 years) sources of • BUT: dividends expected
• BUT: repaid with interest • ownership could change hands
finance
• only used by companies

Hire purchase (long term): Leasing (long term):

• large cash outlay not required to • large cash outlay not required to
purchase asset purchase asset
• BUT: interest paid • maintenance paid for by leasing
• asset not owned until last company
payment made • BUT: total payment higher than
• may require a deposit purchase price of the asset

●● Short-term external sources of finance summary 

Micro-finance:
• very small amounts borrowed
Trade credit (short term):
• available to poorer groups in society
• interest free
• may be nowhere else to borrow
• BUT: needs to be paid or goods from
not supplied
• no security required
• BUT: interest paid

Short-term
external
sources of
finance

Overdraft (short term):

• interest only paid on amount borrowed
Factoring debt (short term):
• flexible form of borrowing
• immediate cash
• cheaper than loans in short run
• no risk of debt not being repaid
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• BUT: more expensive than loans over

• BUT: receive less than the full amount long run
of the debt
• often repayable on demand
• interest rate higher than bank loan

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 Sample questions and answers

●● Internal sources of finance 

Sale of inventories:
Sole trader/partnership/owners’
• reduces storage costs
savings:
• less capital tied up in inventories
• available quickly
• no interest paid • BUT: if inventories are too low
customers disappointed as
• BUT: may not be sufficient
demand not quickly satisfied

Internal sources
of finance

Sale of existing assets: Retained profit:

• better use of assets • not repaid
• debts not increased • no interest to pay
• BUT: it takes time to sell assets • BUT: not suitable for new business
• may not have spare asset to sell • limited amount available

●● Common errors 
Error Why it is wrong
‘All limited companies can sell shares Only public limited companies can sell shares on the Stock Exchange – private limited companies can
on the Stock Exchange.’ only sell shares to family and friends.
‘Selling more shares is an example of Even though shareholders own a company they are ‘outside’ providers of capital – the company is a
internal finance.’ separate legal identity. This is different to sole traders and partners who are the same as the business
and therefore are classed as internal sources.
‘Shares form a long-term loan.’ No: shares do not have to be paid back. The 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 long-term loan.’ No: the bank at very short notice can call an 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 the sale of existing Shares sold on the Stock Exchange are second-hand shares and the payment goes to the seller of
shares on the Stock Exchange goes to the shares and not the company. Only when it is a new issue of share capital does the money paid
the company.’ go 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
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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.

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 21 Business finance: needs and sources

1 Identify and explain one advantage and one disadvantage to F&G of

having an overdraft. [4]

Student’s answer Examiner’s comments

An overdraft means they only pay interest on any Two good points – but neither point is clearly related to this
money overdrawn which makes it cheaper than a business.
bank loan. [K] Therefore only 2 knowledge marks can be awarded. The
answer could have made reference to the business expanding
However, the interest rate is often higher than the and possibly having a cash flow problem during the first
interest rate on a bank loan and therefore this is a opening of the new restaurants.
more expensive form of borrowing money. [K] 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 Examiner’s

The business is expanding and if they issue more shares then the money will not comments
need to be paid back. [K] This will help the expenses of the business, as they will This answer considers both
not have to repay interest on the loan when they are expanding when they may options and then comes to
not have sufficient revenue coming in from the new restaurants. [An] a justified conclusion. The
answer is in the context of
However, a bank loan can be budgeted for and the additional revenue from
this restaurant business and
the new restaurants will eventually pay for the loan. [An] The directors could
so application is awarded.
ask for a long term loan to help them get the new restaurants open and gaining
Marks: K1 (max); Ap1 (max);
revenue before they start to pay back the loan. [Ap]
An2; Ev2 = 6 in total
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
Examiner’s tip
loans. [Ev] It may mean that the ownership of the business is now spread across
Always consider both
more shareholders but as long as the original owners do not lose their majority sides of an issue with an
shareholding it is the better way to finance the expansion. [Ev] ‘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]
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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]

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 Cash flow and working capital
22
Key objectives
The objectives of this chapter are to revise: ● effects on business of running short of cash
● how cash flow problems can be overcome
● why cash flow is important to business operations
● the importance of working capital.
● what to include in a cash flow forecast

●● Key definitions 
Term Definition
Cash flow Cash inflows and outflows over a period of time.
Cash flow forecast Estimate of future cash inflows and outflows of a business, usually on a
monthly basis. This shows the expected cash balance at the end of each month.
Working capital Capital available to a business in the short term to pay for day-to-day expenses.
Cash inflows Sums of money received by a business during a period of time.
Cash outflows Sums of money paid out by a business during a period of time.
Cash flow cycle Shows the stages between paying out cash for labour, materials, etc., and
receiving cash from the sale of goods.
Profit Surplus after total costs have been subtracted from sales revenue.
Opening cash (or bank) balance Amount of cash held by the business at the start of the month.
Net cash flow Difference, each month, between the inflows and the outflows.
Closing cash (or bank) balance Amount of cash held by the business at the end of each month. This
becomes the opening cash balance for the next month.

●● Common errors 
Error Why it is wrong
‘New businesses do not need cash Cash flow forecasts are very important to new businesses:
flow forecasts as they have only • when applying for a start-up bank loan, to prove they can pay it back
just started.’ • to encourage people to invest in the business
• to ensure that the business does not run out of cash at such an expensive time for the business.
‘If a business has cash in the bank Cash and profit are very different. A profitable business can run out of cash – especially when it has to
it must be making a profit.’ pay for manufacturing costs before the revenue from sales has been received. Similarly a business may
have a large number of unpaid costs but have plenty of cash in the bank.
Forgetting the negative signs – Mistakes will be made with minus additions if the minus signs are not shown.
put the figures in brackets.

●● Cash flow cycle 

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1 cash needed to 2 materials, wages,

3 goods produced
pay for rent, etc.

5 cash payment
received for 4 goods sold
goods sold

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 22 Cash flow and working capital

●● Cash flow forecasting and working capital 

Cash is needed for day-to-day costs and buying inventories.
Cash flow forecasts are used:
Long-term solutions to • when starting a new business
cash flow problems: • to obtain a bank loan Cash inflows are from:
• attract new investors • to manage cash flow to avoid • sale of products
• cut costs unning out of cash • sale of assets
• increase efficiency • to reduce need for an overdraft • borrowed money, e.g. loans or
• develop new products to attract overdraft
• to help managers plan ahead
more sales • investors’ money
• find ways to increase sales revenue
(in short term may increase costs)

Short-term solutions to cash flow

problems: Cash flow
• delay payments to suppliers Working capital =
forecasting current assets − current liabilities
• ask debtors to pay more quickly
• delay or cancel payment of
and working
(See Chapter 24).
capital equipment capital
• take out a bank loan/overdraft

Cash outflows are used for:

Cash flow problems: • purchasing goods/components/
• too little cash – cannot pay bills raw materials using cash
and workers • paying bills, e.g. wages
• production will stop • purchasing fixed assets
• forced into liquidation • repaying loans
• paying creditors

●● 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.
$ April May June
Cash inflows
Cash from sales 221 000 200 000 800 000
Cash inflows: 221 000 200 000 800 000
Cash outflows
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Purchase of equipment 500 000 0 0

Salaries 200 000 200 000 300 000
Other expenses 100 000 100 000 200 000
Cash outflows: 800 000 300 000 500 000
Net flow (579 000) (1 000) 300 000
Opening balance 300 000 (279 000) (280 000)
Closing balance (279 000) (280 000) 20 000

1 Identify and explain two reasons why K and Z should produce a cash flow
forecast.[6]

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 Sample questions and answers

Student’s answer Examiner’s comments

The directors of K and Z should produce a cash flow forecast to show the Two clear reasons for producing a
bank manager. [K] The company wants to invest in new equipment [Ap] cash flow forecast are explained –
which will make the business more efficient and show the bank manager however, only the first reason is
that the business can repay the loan. [An] related to the case. Therefore
marks gained are K2, An2 but only
The second reason is so that the business can manage its working capital Ap1 = 5 in total.
[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 tip
Always justify the
2 Do you think K and Z should improve its cash flow by taking out recommendation, don’t just
a loan? Justify your answer. [6] make a statement.

Student’s answer Examiner’s comments

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

Exam-style questions $ April May June

Rishav and Abdullah are friends who want to set up Cash inflows
their own taxi service. They will need a large amount Cash from customers 1 000 2 000 4 000
of capital to buy the taxis. They are planning to Capital and loans 20 000
finance this with the money they invested themselves Cash inflows: 21 000 2 000 4 000
and a bank loan. They think it will take several
Cash outflows
weeks before they get well known and take enough
Purchase of vehicles 25 000
bookings to cover all their monthly costs. Below is
Salaries 2 000 2 000 2 000
the cash flow forecast for the first three months
Other expenses 1 000 1 000 1 000
of trading.
Cash outflows: 28 000 3 000 3 000
a) What is the closing balance in May Net flow (7 000) (1 000) 1 000
and June? [2] Opening balance 0 (7 000) (8 000)
b) Identify two examples of the ‘other Closing balance (7 000) ? ?
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
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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]

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 Income statements
23
Key objectives
The objectives of this chapter are to revise: ● the importance of profit (net)
● the difference between gross profit and net profit
● the need for businesses to keep accounting records
● the contents of an income statement.
● why profit (net profit) is not the same as cash

●● 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 accounts Produced at the end of the financial year and give details of the profit or loss made
over the year and how much the business is worth.
Income statement A document that records the income of a business and 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 revenue Income to a business during a period of time from the sales of goods or services.
Cost of goods sold or The direct cost of producing or buying in the goods actually sold by the business
cost of sales during a time period.
Trading account This shows how the gross profit is calculated.
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 profit Net profit reinvested into a company after deducting tax and payments to owners.
Dividends Annual payments from company profits to shareholders.

●● Income statements and profit 

• Gross profit = sales
revenue – cost of sales
• (Net) profit =
gross profit – expenses

Income statements are used to:

Why are cash and profit • judge if cost of sales has risen or
(net) different? fallen
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• a business could have made a Income • judge if expenses need reducing

profit but not been paid for the statements • assess how much retained profit is
goods yet and so have no cash available
in the business and profits • assess how much profit is available
for dividends/drawings

Why is profit (net) important?

Used by business owners, managers,
potential investors, government to: • rewards entrepreneur
• compare with previous years to judge • rewards risk taking
success • retained profit is a source of finance
• compare with other companies to judge • indicator of success
success
• attracts investors

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 Sample questions and answers

Lack of financial records would result in:

Income statements:
• not knowing how much is owed by business and
• financial records are called accounts
to whom it is owed
• they need to be accurate and up to date
• the business cannot meet orders if it runs out of cash
• companies are required by law to produce accounts
• not know if made profit/loss

●● Common errors 
Error Why it is wrong
‘Liabilities and assets should be included in the Liabilities and assets should be included in the balance sheet and not on the income
income statement.’ statement.
‘An income statement shows what a business is A balance sheet shows what the business is worth. An income statement shows how
worth today’. much profit or loss has been made by the business.
‘Gross profit is less than net profit.’ Net profit is gross profit after expenses have 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
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the first point makes reference to the information provided.

Therefore 3 marks can be awarded (K2; Ap1).

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 23 Income statements

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
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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]

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 Balance sheets
24
Key objectives
The objectives of this chapter are to revise: ● classification and examples of assets and liabilities
● how to interpret and make deductions from a simple
● the main elements of a balance sheet
balance sheet.

●● Key definitions 
Term Definition
Balance sheet Shows the value of a business’s assets and liabilities at a 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 liabilities Short-term debts owed by the business.
Non-current liabilities Long-term debts owed by the business.
Current assets Items of value owned by the business and used within one year.
Non-current assets Items owned by the business for more than one year.

●● Common errors 
Error Why it is wrong
Putting sales revenue in the balance This should appear on the income statement – only assets and liabilities appear on the balance sheet.
sheet
‘Accounts receivable (creditors) owe Accounts receivable are customers who have not yet paid – they owe the business money. The
the business money.’ business owes money as shown by the accounts payable.

●● Assets and liabilities 

Non-current assets – kept for more
than one year, e.g. the value of land, Current assets – only held for short
buildings, machinery, vehicles. These Total assets periods of time, e.g. cash, inventories,
lose value over time which is called accounts receivable
depreciation

Assets
and
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liabilities

Current liabilities – amounts owed by Non-current liabilities – long-term

the business that must be paid within borrowings that are paid back over
one year, e.g. bank overdraft, accounts
Total liabilities more than one year, e.g. long-term
payable bank loan

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 24 Balance sheets

●● Balance sheets 
Total value of the business is shown on Show:
the balance sheet
• if value of a business has increased
Total assets − total liabilities = owners’ or decreased
equity/funds
(shareholders’ funds in a limited company or • if a business has sufficient liquidity
owner’s funds in a partnership or sole trader) to pay all its short-term debts

Balance sheets

Capital employed = shareholders’ funds

(owner’s funds) + long-term liabilities Analyse:
Show the total long-term and permanent capital • how expansion has been paid for
Working capital = • business performance using liquidity ratios
current assets – current liabilities

●● 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
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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]

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 Sample questions and answers

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 Non-current assets 18 000
if it is worth more than the $5 000 he started the business with. Current assets 2 000
John also wants to buy some new equipment for the garage and he Total assets 20 000
thinks it might be best to take on a partner in order to pay for it. Current liabilities 3 000
a) What is meant by ‘liabilities’? [2] Non-current liabilities 2 000
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Total liabilities 5 000

b) Calculate the working capital for John’s business. [2]
Total assets – total liabilities 15 000
c) Identify and explain two reasons why working capital is Owner’s funds 15 000
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]

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 Analysis of accounts
25
Key objectives
The objectives of this chapter are to revise: ● interpretation of financial statements by calculating and
analysing liquidity ratios
● interpretation of financial statements by calculating and
● who uses accounts and how they are used to help make
analysing profitability ratios
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 employed This is shareholders’ equity plus non-current liabilities and is the total long-term and
permanent capital invested in a business.

●● Common errors 
Error Why it is wrong
‘Current ratio below 1 means the A result of 1 is acceptable – it means that all short-term debts are covered by current assets. Even
business is bankrupt.’ below 1, a business may be liquid enough as it is unlikely that it will have to repay all short-term
debts at the same time.
‘The higher the liquidity ratio the A ratio of greater than 2 may mean that too much working capital is being tied up in inventory which
better.’ is not earning the business any return. There are better places to put this money to earn a return.
Not remembering the ratios You need to remember three profitability ratios and two liquidity ratios.

●● Ratio analysis of accounts 

Used by shareholders,creditors, Managers use them for taking

governments to check on company decisions and controlling the
performance operations of a business

How accounts
are used
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Limitations of accounts:
• not full details of accounts for
external users
Other companies use them for • ratios based on past data
comparing performance • accounting data over time
affected by inflation
• different accounting methods
used by different companies

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 Sample questions and answers

●● Analysis of accounts 
(using the income statement)
Net profit margin % =
net profit
× 100
sales revenue
• if NPM increases then gross profit was
higher or expenses lower
• compare with previous years or other
companies

(from the income statement and balance

sheet) (from the income statement)
Return on capital employed = Gross profit margin % =
net profit gross profit
× 100% × 100
capital employed sales revenue
• compare with previous years or other • if GPM increases then either prices were
companies to see if business more increased or cost of goods are cheaper
efficient or not
• shows profit earned from capital used Analysis of • compare with previous years or other
companies
in business accounts

(from the balance sheet)

Current ratio = (from the balance sheet)
current assets Acid test ratio =
current liabilities current assets – inventories
current liabilities
• result of 1+ business has sufficient current
assets to pay off current liabilities • similar to current ratio but can be slightly
<1 and still be able to repay current
• if <1 then illiquid liabilities as they fall due
• >2 too much working capital

●● 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]
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Student’s answer Examiner’s comments

Managers [K] of CanCan might use these accounts to see if they Two users of the accounts are
have been managing the costs of raw materials to produce the correctly identified and both refer
packaging efficiently. [Ap] to this business in the stem of the
question.
Shareholders [K] will also look at the accounts to see if they should Full marks!
be paid a dividend on their shares in CanCan. [Ap]

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 25 Analysis of accounts

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, Examiner’s tip
[Ap] while the net profit margin has increased to 10% from 6% last year. [An] Always show your
calculations in case you
This suggests that overall the shareholders should be pleased with the make a mistake. If you
improvement in both the amount of profit made as well as the profit margin. have used the correct
[Ev] However, the reduction in the gross profit margin suggests that costs figure and correct
relative to revenue have deteriorated. This should be something that is looked formula then you may
still gain some credit.
into improving for the following year. [Ev]

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
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information above. [6]

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 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 ($)
March April May June July August
Cash inflows
Cash sales 10 000 16 000 17 000 3 000 2 000 2 000
Cash outflows
Wages 4 000 4 000 4 000 4 000 4 000 4 000
Expenses 2 000 2 000 2 000 2 000 2 000 2 000
Food ingredients 2 500 4 000 4 250   750   500   500
Total cash out 8 500 10 000 10 250 6 750 6 500 6 500
Opening balance W (1 500) X 11 250 7 500 3 000
Net cash flow 1 500 6 000 6 750 (3 750) (4 500) (4 500)
Closing balance (1 500) 4 500 11 250 7 500 3 000 Z

1 a Identify and explain four ways Samah could improve her profit. [8]

Student’s answer Examiner’s comments

Samah could try to increase her sales revenue Four clear knowledge marks for identifying how
still higher, by using promotion. [K] It has already Samah could increase her profit but the second
increased in the first two years of trading and she point makes no reference to the information
could try to increase it still higher. [Ap] provided. Therefore 7 marks can be awarded.
The student could have easily gained the eighth
Samah could try to reduce her expenses [K] as mark by referring to the increase in expenses in
expenses need to be kept low. the table.
She could increase her prices. [K] This could
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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]

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 25 Analysis of accounts

b  Do you think Samah should be pleased with the profitability of her café Examiner’s tip
in the first two years of trading? Justify your answer using the information Always calculate the
provided in Appendix 1 and other information in the case.[12] profitability margins
where the information
Student’s answer allows, in order to
support your analysis
The café had a gross profit margin of: and also use the other
information provided
Year 1: $60 000/$80 000 × 100 = 75% to support your
recommendations/
Year 2: $90 000/$120 000 × 100 = 75% conclusions.
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% Examiner’s
from year 1 to year 2. So although the gross profit margin stayed the same comments
indicating that ingredient costs had not changed and the net profit increased
This answer correctly
from $20 000 to $25 000, the net profit margin fell meaning that the café
calculates all three
performed less well in year 2 than in year 1. Also the return on capital employed
profitability ratios and then
fell slightly indicating that the business returned 29c for each $1 invested in
draws a conclusion based on
the first year but this fell to 26c for each $1 in year 2. However, this is still a
the figures in the table and
good return on the capital invested in the café.
other information provided
So overall the café has performed slightly less well in year 2 than year 1 and this in the context. This is a really
was due to the increase in the expenses in year 2 being greater than the increase good answer that gains full
in sales revenue in year 2. So Samah should use one of the suggestions in part marks.
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.

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.
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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

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 Government economic objectives
and policies
26
Key objectives
The objectives of this chapter are to revise: ● interest rate changes and the effect on business or
consumers
● government economic objectives
● business reactions to economic changes.
● main stages of the business cycle
● tax and spending changes and the effects of business and
consumers

●● 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 Domestic The total value of output of goods and services in a country in one year.
Product (GDP)
Economic growth A country’s GDP increases, i.e. more goods and services are produced than in the
previous year.
Balance of payments This records the difference between a country’s 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 currencies.
appreciation
Exchange rate The fall in the value of a currency compared with other currencies.
depreciation
Monetary policy A change in interest rates by the government or central bank, e.g. the European
Central Bank.
Supply-side policies Policies to increase the competitiveness of industries in an economy against those from
other countries. Policies to make the economy more efficient.
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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 income The level of income left after a taxpayer has paid 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.

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 26 Government economic objectives and policies

●● 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.

Boom

Boom Growth
Recession
GDP ($)

Slump

Growth

Years

●● Government economic objectives 

Economic objectives:
• low inflation
• low unemployment
• increasing GDP
• balance of payments between exports
and imports

Rapid inflation can be a problem:

High unemployment can be a problem: • purchasing power of wages falls and
• lower level of output living standards fall
• pressure to raise wages
• government spends more on unemployed
Government • prices of goods and services increase –
• BUT: larger pool of workers to recruit foreign goods more competitive
• less pressure on wage increases
economic
• business reluctant to expand as less
objectives certain about future demand

Balance of payments: No or falling economic growth (recession):

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• ideally will balance over a period of time • output is falling and unemployment
• if exports (sold to other countries) are increasing
less than imports (products bought in • average standard of living falls – lower
from other countries), there will be a demand
deficit and the country can run out of • business less likely to expand as future
foreign currency to pay for imports uncertain

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 Sample questions and answers

●● Government economic policies 

Fiscal policy (tax changes): Three government policies:
• taxes higher – spending reduces • monetary policy – change interest rates
• can be income tax or profits tax or tax • supply-side policies – ways to make the
on sales of goods and services economy more efficient
• import tariff – raises price of imports – • fiscal policies – taxes and government
owers demand spending

Fiscal policy (changes in government Economic policies:

spending): • if unemployment high or growth low
• increase in spending on government Government then try to expand spending in the
services or investment in schools, economic economy
hospitals or infrastructure (e.g. roads) policies • if inflation too high or balance of
• increases demand and possibly payments in deficit then try to reduce
economic growth spending in the economy

Supply-side policy (making the economy Monetary policy (changing interest rates):
more efficient): • higher interest on new loans and
• privatisation – increases competitiveness overdrafts increases costs
of business • less new investment
• improvement in education and training • mortgages higher so demand less for
• ways to increase competition between other spending
businesses • could lead to higher exchange rate if
• encourage investment attracts currency

●● Common errors 
Error Why it is wrong
‘Economic booms are always good for the They can lead to higher incomes, but ‘booms’ can lead to high inflation and lower levels
economy.’ of output eventually.
‘Inflation means the economy is expanding.’ Inflation is the measure of the rate of general price increases in an economy and not
necessarily an increase in output.
‘A recession will lead to a fall in demand for all A recession lowers consumers’ incomes – they could switch to buying cheaper goods so
goods and services.’ the demand for these goods could rise.
‘An exchange rate depreciation means the value No – it has fallen in terms of other currencies.
of a country’s currency has risen.’
‘Exchange rate appreciation makes exports cheaper.’ Exports rise in price after an appreciation of the currency .

●● Sample questions and answers 

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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.

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 26 Government economic objectives and policies

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 Examiner’s tip
businesses in country X? Justify your answer. [6] Always justify the
conclusion in an
Student’s answer ‘evaluation’ question.

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]

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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]

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 Environmental and ethical issues
27
Key objectives
The objectives of this chapter are to revise how business ● environmental concerns and pressure groups
decisions might be affected by: ● legal controls to protect the environment
● ethical issues.
● the concept of externalities

●● Key definitions 
Term Definition
Social responsibility When a business decision benefits stakeholders other 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 benefits Gains to a business from an activity.
External costs Paid for by the rest of society, other than the business, as a result of a business activity.
External benefits Gains to the rest of society, other than the business, resulting from a business activity.
Social costs External costs + private costs.
Social benefits External benefits + private benefits.
Sustainable Development that does not put at risk the living standards of future generations.
development
Sustainable Methods that cause minimum damage to the environment.
production methods
Pressure group A group made up of people who want to change business (or government) decisions;
they take action such as organising consumer boycotts.
Consumer boycott Deciding not to buy from businesses that do not act in a socially responsible way.
Ethical decisions Decisions based on a moral code. Sometimes referred to as ‘doing the right thing’.

●● Ethical issues 
Benefits of businesses acting ethically:
• attract consumers who care about the way
products are produced
• good publicity for the business
• profits in the long term may increase
• may attract workers or investors who want
to be ethical
• less likely to be fined
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Ethical
issues
Examples of ethical questions, e.g. Should
a business:
• take or offer bribes to government officials? Potential drawbacks of businesses acting ethically:
• use child labour? • higher costs
• buy raw materials from environmentally • prices may have to rise
damaging businesses? • lose sales from price sensitive customers
• agree to fix ‘high prices’ with competitors? • short-term profits may fall
• pay the directors large bonuses while making
workers redundant?

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 27 Environmental and ethical issues

●● Environmental issues 
Drawbacks of environmental concern:
• can be expensive – adding to costs
and prices
• businesses become uncompetitive – Benefits of environmental concern:
Externalities can be positive or negative
(i.e. external benefits or costs): lose sales • global warming affects us all – social
• higher prices–lower demand responsibility
• social costs =
• difficult to prove who is polluter • non-renewable resources – not
external costs + private costs
• government ought to clean it sustainable growth and increases price
• social benefits =
• consumers want environmentally
external benefits + private benefits
aware businesses – socially responsible

Ways to deter businesses from being

Sustainable development: businesses can: ‘environmentally unfriendly’:
• use renewable energy • laws/fines
• recycle waste
Environmental • additional taxes on products
• use fewer resources issues that pollute
• develop new ‘environmentally friendly’ • pollution permits –
products and production methods businesses need to buy
these – raises costs

Laws: Pressure groups:

• e.g. cannot locate in environmentally • try to make businesses give the
sensitive area such as National Park environment a higher priority
• cannot dump waste products into • effective when support of public,
rivers or sea consumer boycotts reduce sales
• should make products that can be • BUT: less effective with
recycled business2business sales

●● Common errors 
Error Why it is wrong
‘Environmental considerations always cost the Not necessarily, as some processes may do less harm to the environment and reduce
business more money.’ waste which leads to lower unit costs.
‘Pressure groups cause a lot of disturbance to a No, pressure groups may try to influence their government by writing to it and not
country by demonstrating in public.’ necessarily demonstrating in public.
‘Being unethical is illegal.’ No, a business can follow the laws but still be 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
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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.

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 Sample questions and answers

1 Identify and explain two external costs if the factory is built in the forest. [4]

Student’s answer Examiner’s comments

Lost habitat for rare animals [Ap] which will The first point is a correctly identified cost to a third party,
mean that these species will die out and people i.e. people other than the factory owners or the customers of
who visit the forest will no longer be able to see the cars. However, the second point is a private cost to the
them. [AN] company of building the factory. So only 2 marks are awarded
for the first cost. The second point could have been, e.g.,
Building costs of the factory as Reed Cars will increased traffic causing congestion on nearby roads or noise
need to raise finance to invest in the new factory. 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 Examiner’s comments

A company’s main objective [K] is to make a profit and therefore it This answer identifies arguments both
should keep its costs as low as possible. This is to ensure it can keep for and against keeping costs as low as
its prices lower than competitors’ prices and increase sales. [An] possible by any means. It is a balanced
answer. The final recommendation is
However, the directors should also be ethical in their decisions and evaluated and the answer is in the context
keeping costs low in any way possible may not be ethical. Employing of cars.
children in the factory is not ethical [Ap] and if customers knew Marks: K1 (max); Ap1 (max); An2; Ev2 = 6
this is how the cars were being manufactured then they may not in total
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]

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.
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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]

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  usiness and the international
B
economy
28
Key objectives
The objectives of this chapter are to revise: ● impact of multinationals on an economy in which they
operate
● threats and opportunities for businesses created by
● impact of exchange rate changes on businesses.
globalisation
● what is meant by and the benefits of becoming a
multinational business

●● Key definitions 
Term Definition
Globalisation Increases in worldwide trade and movement of people and capital between countries.
Free trade agreement/ Exists when countries agree to trade imports/exports with no barriers such as
free trade area tariffs and quotas, e.g. 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 business Businesses with factories, production or service operations in more than one country.
Exchange rate The price of one currency in terms of another, e.g. £1 = $1.50.
Currency appreciation When the value of a currency rises – it buys more of another currency than before.
Currency depreciation When the value of a currency falls – it buys less of another currency than before.
Common (single) currency When a group of countries agree to use the same currency, e.g. Euro.
Economic union Agreements between countries to trade freely with each other and have common
economic institutions, e.g. The European Union (EU).

●● Globalisation 
Opportunities for businesses:
• opening up new markets
• opening factories/operations in
other countries
Reasons for increased globalisation: • more imports to buy from other Threats for businesses:
• increasing number of free trade countries • increasing imports in the home
agreements • importing materials and market – increased foreign
• improved and cheaper travel/ components at lower costs competition
• increasing investment from
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communication links
multinationals setting up in
• many emerging markets are home market
industrialising rapidly – increased • wages increase to match
global exports Globalisation multinational wage rates

Issues:
• workers in home industries lose
Effects for consumers:
jobs (leading to pressure for tariffs
• more choice of goods and and quotas to be introduced to
services protect these industries and home
• lower prices workers’ jobs)
• increased efficiency (keeps costs • BUT: tariffs and quotas lead to
and prices from increasing) higher prices than foreign goods

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 Sample questions and answers

●● Multinationals, trade and exchange rates 

Exchange rates: Drawbacks to a country of
multinationals location:
• currency appreciation means
exchange rate rises – export prices • existing firms in danger
may rise/import prices may fall • profits flow out of country
• currency depreciation means • only low-skilled jobs created
exchange rate falls – export rices • uses up scarce resources
may fall /import prices may rise • influence on government – not
environmentally friendly

Multinationals,
trade and
exchange rates

Benefits to businesses of being a Advantages to a country of

multinational: multinationals location:
• new markets and increased sales • new investment
• can obtain raw materials cheaper • more exports/fewer imports
• avoid barriers to trade • jobs created
• low wage costs • more competition
• spreads risks from more markets • taxes paid to government

●● Common errors 
Error Why it is wrong
‘International trade is bad for business as it leads Although trading with other countries can increase competition, businesses also have
to more competition.’ much larger markets and can often purchase supplies cheaply from other countries.
‘A business can easily sell its products to other Selling to other countries is not always easy. For example, products and marketing may
countries.’ need to be changed to meet local market conditions and there might be import barriers
such as tariffs.
‘Multinationals sell products in more than one To be termed a multinational, a business should have production operations in more than
country.’ one 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 Examiner’s tip
and want to encourage more manufacturing businesses to set up. They all Always consider both
have high tariffs on imports from all countries. The governments in these four sides of an issue with an
countries think that globalisation may not benefit their countries. ‘evaluation’ question.

1 Identify and explain two possible drawbacks of globalisation to businesses

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in these four countries. [4]

Student’s answer Examiner’s

More competitive imports [K] from multinational businesses setting up in comments
these countries and selling manufactured goods at cheaper prices than local Two good points – both
businesses. [Ap] clearly related to the
information provided.
Wages increasing [K] because foreign manufacturers pay higher wage rates and Full marks!
local manufacturing businesses will have to increase their wages to stop their
workers from leaving. [Ap]

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 28 Business and the international economy

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]
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 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.
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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

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 28 Business and the international economy

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
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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

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 Answers
are now able to afford more restaurant meals and
● Exam-style answers holidays. This would increase tertiary sector activity
and make secondary sector activity relatively less
Chapter 1 important.[6]
a) Production is split into separate tasks and each e) Private sector: profit motive; more efficient to
worker specialises in one task. [2] increase profits; competition from other firms
b) Added value = price – bought in costs, so more likely.
$50 – $15 = $35 [2] Public sector: objectives other than profit; other
c) Labour – to mix ingredients, put cake in oven, stakeholders (other than owners) might benefit;
decorate it. profit returned to government.
Capital – bakery with ovens and preparation tables, Overall judgement needed (either sector acceptable)
etc., for making/baking cakes and bread. which includes clear and supported opinion. [6]
Other answers are possible. [4]
d) They are more efficient at producing these – labour Chapter 3
will become very skilled and quick at decorating a) i A[1] ii C [1]
cakes. This will help to make BB competitive and b) Someone who organises, operates and
increase their reputation for this type of product. takes the risk for a new business venture. [2]
Demand could fall – consumers’ incomes might c) D was a new business. It might have been short
fall and they will be less likely to buy expensive of capital, e.g. working capital to finance start-up
specialist products. As a result of specialising, workers operations.
and machines that will have been used for making D’s entrepreneur might have lacked experience.
products will no longer be needed and might become They might not have understood consumer
redundant. preferences for shoes.
other answers are possible. [6] Other answers are possible. [4]
e) Added value will rise if BB can reduce the $15 spent d) Owners/managers might not want to have growth
on ingredients for each cake – and price stays the as an objective. They might prefer to keep the
same. business relatively small (smaller than others in the
Cheaper ingredients could reduce the quality of the table) as this is easier to manage.
cake – damaging their image/reputation. BB might The business might be focusing on a segment of the
have to lower its prices. shoe market that is not growing. They would need
It might be better to increase prices from $50 – this to do some market research to find out about faster
would increase added value too. growing segments.
Overall judgement needed – supporting one way and Other answers are possible. [6]
rejecting the other way. [6] e) Yes, they should take over the leather supplier:
backward vertical integration will give assured
Chapter 2 supplies of (quality) leather, which is used in their
a) This has both private sector businesses and public shoes. Business A will be able to control cost of its
sector businesses. [2] main raw material.
b) The sale of public sector businesses to the private No, they shouldn’t take over the leather supplier: the
sector. [2] management of a leather business is not necessarily
c) Any two from the list below: [4] the same as a shoe making business. Business A may
• Best Foods – tertiary sector as it sells, as a retailer, have to use capital and management time which
the pies and soups produced by other businesses. could be spent on shoe making.
• Local farmers who supply Foodsure with meat and Any decision requires overall judgement –
vegetables – farmers are in the primary sector as supporting a decision to take over or not to take
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they do not process these primary food products. over and explaining why the other option should be
• Foodsure – secondary sector of industry as it rejected.
processes primary meat and vegetable products Also, more information would be useful to make a
and manufactures finished processed food decision.[6]
products.
d) Foreign competition – China is producing many Chapter 4
manufactured products more cheaply than most a) The business is jointly owned by two or
countries can. Imports from China would reduce the more people.[2]
demand for goods manufactured in country P. b) Any two of the following:
Consumer incomes are rising in country P – Consumer • Can issue shares to family or friends
spending patterns might be changing and consumers • Owners have limited liability

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 Answers

• Share capital Overall judgement: it might depend on how

• Separate legal identity from the owners. [2] carefully SureOil drills for oil and the amount
c) Suki wanted to set her business up quickly – this of money they spend on the local community/
is possible with a sole trader as there are few legal environment.[6]
formalities.
Suki is an independent person – sole traders are able Chapter 6
to make all decisions themselves. a) Wage based on number of hours worked. [2]
Other answers are possible. [4] b) Importance of work done; seniority; length of
d) CfK is already a large business. Suki and service; output (piece rate).
her managers might not have enough time to open Other answers are possible.  [2]
this school in another country without support c) Teamworking – training staff to be multi-skilled so
(finance and management) from CCC. they could do any job in the shop as a member of
CCC is aware of local laws related to schools and the team.
children’s care/welfare. These might be different Employee of the month award – giving status and
from the laws in the country CfK currently operates recognition to shop workers, e.g. those who get the
in. This could help CfK avoid major mistakes when best feedback from customers.
setting up the school. Other answers are possible. [4]
Other answers are possible. [6] d) Retailing is a service business – customers must be
e) Yes, they need additional finance for expansion, e.g. ‘satisfied’ if they are to return. Well motivated shop
opening a school in another country. workers – spend longer with each customer and give
No, Suki may not want to lose more ownership/ better advice.
control – she still takes most decisions. Expensive to replace staff – improved motivation
Other answers are possible. will reduce labour turnover and reduce
Any decision requires an overall conclusion and recruitment costs.
more information, e.g. risk of takeover, level of share Other answers are possible. [6]
prices in the country. e) If the hygiene factors (working conditions, etc.) are
Your answer should give a clear choice to be made not good then workers will be unhappy.
and supported. [6] Herzberg – hygiene factors remove dissatisfaction,
they do not promote motivation.
Chapter 5 Motivators – e.g. job enrichment and teamworking –
a) A business owned by shareholders and it can sell are not about money or conditions.
shares to the public and its shares are tradable on the Overall conclusion necessary with supporting
Stock Exchange. [2] arguments about which factors are most
b) Any two stakeholders, including managers, banks, important.[6]
government, consumers, etc. [2]
c) Market share – gaining a particular % of the oil Chapter 7
market in the countries SureOil operates in. a) A level of management where people have the same
Growth, e.g. measured in total annual sales of level of responsibility. [2]
oil products. b) Workers able to identify their manager/who they
Other answers are possible. [4] report to.
d) The company is able to reward owners – in this Lines of communication made clear.
case, shareholders in SureOil as it is a public limited Other answers are possible.  [2]
company – with a share of the profits (dividends). c) To bargain together (collectively) for higher pay as
It is able to use some retained profits to reinvest they have not received a rise this year.
back in the business and reduce loans, e.g. to finance To push for better safety conditions which are a
new oil wells problem in this mine. Workers have more power
Other answers are possible. [6] when in a union.
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e) Yes, if SureOil uses profits from the oil wells found Other answers are possible.  [4]
to improve the local environment; consumers might d) Commanding – making decisions and giving clear
benefit from lower oil/petrol prices; employees will instructions. If not done well, workers will have no
have more secure jobs in the oil company, etc. direction to follow. Jin ‘has given instructions to tin
No, local community is likely to suffer noise, mine managers’…
pollution and damage to environment and this will Coordinating – making sure different departments/
conflict with (for example) SureOil’s shareholders divisions work towards the same objectives to avoid
who might only be interested in the profits to be conflict. TinCo’s operations need to be coordinated
made. as it operates in several countries.
Other answers are possible. Other answers are possible.  [6]

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 Answers

e) Yes, he should adopt a democratic leadership style. d) Social media – increasingly popular especially with
Democratic leadership is likely to lead to better higher income consumers who can afford the latest
motivation; workers’ opinions can help run the mobile (cell) phones. It allows for quick and easy
business, e.g. machines too big. feedback.
No, he should not adopt a democratic leadership Emails direct to consumers – can be personalised
style. Working in a mine is dangerous – clear with special offers, etc. Most consumers of UPA
authority/decision products would have internet access.
making is needed, e.g. at times of accidents. Other answers are possible. [6]
Your answer should give a clear choice to be made e) Yes, it is quick; one-way communication is easy to
and supported with reasons against the alternative. understand, workers can get on with work efficiently
Suggesting that a democratic leadership style is without taking time to reply (output deadlines);
‘sometimes’ recommended but not at all times is effective in an emergency.
acceptable if supported. [6] No, workers cannot feed back or offer suggestions,
e.g. how to further improve quality of these
Chapter 8 ‘high end’ products; demotivating – need to keep
a) Workers who want to work hard and do skilled workers.
their best. [2] Overall conclusion: one-way communication is
b) Jobs with a full working week (length varies between sometimes better but not always. Supporting
businesses). Full-time employees will usually work arguments are essential in your conclusion. [6]
35 hours or more a week. [2]
c) Workforce planning, e.g. planning ahead to prepare Chapter 10
for replacing workers who retire. a) Identifying and meeting the needs of
Pay and conditions – deciding on the pay level of customers.[2]
full-time workers/method of the new people who
b) Any two of the following:
have to be recruited to replace workers who leave
• market research
from any of the nine teams. [4]
• anticipate demand changes
Other answers are possible.
• identify and satisfy customer needs
d) Improved efficiency/skill levels – workers will able
• achieve customer loyalty
to make bikes of high quality which is important to
• gain information about customers. [2]
ASP as its reputation would be damaged with poor
c) Consumers with and without washing machines –
quality bicycles.
producing mild soaps for people who ‘hand wash’.
Multi-skilled – staff will be able to do all tasks in
Geography – using different products/brand
building bikes. This would mean they would be
able to cover for absent colleagues, maintaining names/promotions for different countries/cultures,
production levels. e.g. powders used to clean the thick woollen fabrics
Other answers are possible. [6] used to make clothing in cold countries.
e) Yes, they should recruit externally: external recruits Other answers are possible. [4]
can bring new ideas, such as better ways of building d) Population change, e.g. high population growth
bicycles; existing workers might not have personal should increase demand for this basic necessity product
qualities needed. as more people will need powder to wash clothes.
No, external recruitment takes longer and is more Competition – new washing powder rivals are likely
expensive; it can demotivate existing workers as there to lead to lower demand for CC’s powders and soaps
is no chance of promotion. especially if the price is lower than CC’s.
Your answer should give an overall recommendation, Other answers are possible. [6]
supported by arguments and explaining why the e) Yes, segmentation allows more consumers to be
other option is rejected. [6] reached with products suitable for them – higher
sales and possibly profits; may be able to charge
Chapter 9
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higher prices in some segments.

a) Reply from receiver to sender to confirm message No, it is expensive to develop and promote different
received/understood.[2] product ranges for different segments. Segmentation
b) Any two of: costs might outweigh extra revenue.
• noticeboards • emails Overall conclusion – supported by arguments (other
• meetings • letters. [2] arguments possible) and may include a justification
c) UPA’s consumers are in many different countries – for rejecting the other option. [6]
language problems.
UPA sells to retailers not to consumers directly – Chapter 11
this intermediary might make communication with a) The collection of original data – also known as
consumers difficult. [4] field research. [2]

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 Answers

b) Carrying out market research to find out consumer Chapter 13

wants before developing and producing
a) Demand changes by a smaller proportion than the
a product. [2]
price change. [2]
c) Quickly available, e.g. from internet research – BB
b) 40% of $14 = $5.60
may need to act quickly.
$14 + $5.60 = $19.60
Relatively cheap – BB may be short of finance as
Price = $19.60 [2]
sales are falling.
c) It helps to establish the quality image of the product
Other answers are possible. [4]
– a higher price might reflect a high quality product.
d) Online/postal questionnaire – likely to reach more
To cover costs – if prices do not cover costs ($14)
than 16-year-old people. Questions can be put
then a loss will be made.
online to existing customers who have given an Other answers are possible. [4]
email address. d) Advantage: low penetration prices should lead to
Interviews with students/school managers – the high consumer demand – especially if demand is
meaning and purpose of questions can be explained elastic. This might help to build brand loyalty –
to each respondent as required and follow-up good for future sales.
questions can be based on previous answers. Disadvantage: low prices mean a low profit margin
Other answers are possible. [6] – overall profits might be low even though sales are
e) Yes, important to know how significant each student high. Consumers might think SCL’s shirts are poor
is to overall sales of textbooks; if they buy many quality. The business may have problems raising
books, more likely to yield useful information from prices later.
other questions. Other answers are possible. [6]
No, need to know why, not just how many – and e) Yes, they should use competitive pricing: a
if they don’t buy books, why not and what other competitor is offering lower prices so demand for
resources are used? SCL’s shirts will fall, especially if quality/designs are
Overall conclusion: your judgement should be based similar.
on considering at least one other question. [6] No, they should not use competitive pricing:
lower prices lowers profit on each shirt – and
Chapter 12 consumers might think that quality of cloth used
a) The stages the sales of a product pass through from by SCL has fallen.
introduction, growth, maturity to decline. [2] Your overall conclusion could say that it might
b) Place – how/where the product is sold to depend on how price elastic demand for SCL
consumers.  [2] shirts is and whether competition will reduce
c) ChewBar – decline, as it has been on the market for prices further.
years and sales are falling. Other answers are possible. [6]
FabChoc – introduction, as it has just been
launched.[4] Chapter 14
d) Benefit: keep up with consumer tastes as they change a) The financial plan for the marketing of a product
and new products can reflect these changes, e.g. over a specific time period – it includes the amount
low fat or low sugar confectionery. SW will see sales to be spent on promotion. [2]
increase as it meets customer tastes. b) The consumer groups that are the potential buyers
Drawback: developing new products is expensive and of a product. [2]
increases costs for SW. If the new product such as c) Advertising will attract children towards toy
FabChoc does not increase sales then the costs may be products and encourage them to pester their parents
higher than sales and will cause profit to fall. to buy.
Other answers are possible. [6] Shops are located in large towns/cities where
e) Yes, consumers will know what to expect to pay; there will be competitors. Advertising will help to
they will not think quality is reduced if price falls; no keep WT in consumers’ minds when they consider
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need to change price lists, etc. purchasing toys.[4]

No, price – as well as other marketing mix factors – d) Small gifts when a large toy is purchased – this might
should be varied throughout the product life cycle attract more consumers to buy the larger, more
(PLC). Price could be low to start with to attract expensive toys.
new consumers – perhaps this is why FabChoc is not Competitions to enter if an expensive toy is bought –
doing well. with prizes of toys from other ranges in the shop.
Overall conclusion – should be supported by Other answers are possible. [6]
arguments (other arguments possible) and may e) Parents: they are the ones with the income to buy
include a justification for rejecting the other the toys. They need to be convinced that the toys
option.[6] are top quality but good value too.

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 Answers

Children: they express wants for toys which levels) and appeals to tourists to the country. Using
can force/encourage parents to buy them. Parents the existing marketing mix will not do.
would not buy toys that they knew children did The marketing mix needs to be integrated. It would
not want. be misleading to consumers to have expensive
Your overall conclusion should be based on these promotions for these hotels if food quality and prices
arguments, and might also consider the ethical issue are aimed at lower income consumers. Consumers will
of advertising to children (for example, pester power complain that the hotel promotion was misleading.
and problems for lower income families). [6] Other answers are possible. [6]
e) Yes, country Z market might be mature/saturated with
Chapter 15 much competition; allows growth of the business; may
a) The means by which a product is passed from the be less competition as it is a low income country.
place of production to the customer. [2] No, language/culture/distance/legal problems, e.g.
b) Wholesaler holds stocks/inventories. kitchen health and safety rules might be very different.
They will arrange transport to retailers. Other answers are possible.
Other answers are possible. [2] Your overall conclusion should be based on these
c) Location of potential consumers – a high street arguments – justifying your decision and explaining
retailer might not be good if consumers are mainly why the other option was rejected. [6]
in country areas.
Profit margin expected by intermediaries – these will Chapter 17
increase prices of electric bicycles and may make TR
a) Output measured against inputs used to create it,
products uncompetitive.
Other answers are possible. [4] output per time period
e.g. labour productivity =[2]
d) The pre- and after-sales service offered number of employees
by specialists will encourage consumers to b) Ordering/storing raw materials.
have confidence in these products and Overseeing/production methods.
therefore be more likely to buy. This is important Other answers are possible. [2]
for specialist products such as racing bicycles. c) They could improve worker training/skill levels –
Consumers expect to see and try/ride these this should reduce wastage of ingredients.
expensive products before buying. Direct selling is They could buy automated sewing or cutting
likely to be less effective for expensive products like machines. This would reduce labour levels but
these and the SR factory may be a long way from maintain/increase output.
where most consumers live. [6] Other answers are possible. [4]
e) Yes, customers want to see/try/ride bicycles before d) Reducing waste – this will reduce production costs
buying and this is best done in shops. You can easily and unit costs which are currently a problem for this
compare with competitors’ products and if TR has business, making GR more competitive.
good products this should be an advantage. Reducing inventory levels (e.g. with JIT) – keeping
No, more products are being bought online.
inventories low will free up space and working capital
Consumers know what a bicycle looks like/can
and GR may be able to use this space for T-shirts.
do; lower prices offered by online selling (reduce
Other answers are possible. [6]
intermediaries’ margins) could be important for
e) Yes, they should use batch production: it allows
cheaper models.
for many different styles and sizes of T-shirts and
Your overall conclusion should be supported by
denim jeans to be made in large quantities before
arguments such as ‘it might be best to use different
channels for different types/prices of bicycles’. [6] machines are switched over for other styles/sizes.
Less capital cost is required.
Chapter 16 No, they shouldn’t use batch production: if demand
is high, flow production will give lower unit costs
a) A plan with the appropriate marketing mix for a
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and output would be likely to be higher.

product to achieve a marketing objective. [2]
b) Increase profit. Your overall conclusion could include: it might
Increase sales to business customers. depend on consumer demand and whether it is for
Other answers are possible. [2] large numbers of similar products (flow) or smaller
c) Health and safety in hotel kitchens – cleanliness of quantities of different products (batch). [6]
food preparation area.
Advertising claims – they cannot mislead consumers, Chapter 18
e.g. ‘This hotel is the best hotel in town’ when there a) Costs that vary directly with the number of items
are several others with higher ratings. sold or produced. [2]
Other answers are possible. [4] b) Restaurant rent.
d) They need to make sure the marketing mix is Restaurant manager’s salary.
suitable for the new location (segment, income Other answers are possible. [2]

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 Answers

c) Managerial economies – employing specialists in HR d) Shoppers – shoe shops need to be in areas with
to recruit the best chefs. high footfall; as shoes are not bought regularly they
Purchasing economies – bulk buying of food need a large number of passing customers to ensure
ingredients such as flour. sufficient sales to cover costs.
Other answers are possible.  [4] Customer parking nearby – this is convenient for
d) FR can use them to assess break-even/likely profit shoppers and encourages more people to buy shoes
from different restaurant locations as the business at these shops, so increases sales. [6]
expands. For example, the existing location did not e) New shopping mall - yes, high footfall means many
break even last week – perhaps it is poorly located? potential sales but the high costs of rent and taxes on
A break-even chart assumes all ingredients bought buildings would raise prices of shoes.
are used to make products which are sold – costs will Nearby town - lower rent and taxes lowers costs and
be difficult to predict if this is not the case, which few competitors but fewer customers so sales will be
makes calculating FR profit/loss more difficult. lower.
Other answers are possible. [6] Overall judgement needed (either option acceptable)
e) Higher input prices could lead to increased revenue which includes clear and supported opinion. [6]
and profit – if costs remain the same – and reduce
the break-even level of production. Chapter 21
However, sales might fall – especially if demand a) The finance required by a business to pay for
is elastic. Lower revenue might mean that the break- its day-to-day costs. [2]
even point is not reached. Inventories might build up. b) Finance from sources outside of and separate from
Overall conclusion – including one other suggestion the business. [2]
of how else the business could reduce its B-E level of c) Advantage – no interest paid so eases cash flow
output.[6] during quiet time of the year.
Disadvantage – Jim must take lower drawings out of
Chapter 19 the business which would mean lower payment.
a) A good or service is produced which meets customer Other answers are possible. [4]
expectations.[2] d) Delays paying for stock such as roof tiles – eases cash
b) Any two of the following: flow and increases working capital available.
• Helps to maintain a good reputation Like an interest free loan – better for Jim during
• Helps to increase sales quiet times when not many roofs need repairing. [6]
• Helps to prevent loss of customers. [2] e) Yes, he should – it might be interest free (a cheap
c) Quality control – checking a sample of items form of borrowing). He is a sole trader
of completed clothing. so he would need it.
Quality assurance – checking the clothes throughout No, he should not – if not paid back it could lead to
the production process to ensure there are no faults him falling out with his family. It would be difficult
in the garments.  [4] to avoid paying it back.
d) Advantage – lower cost of cloth can lead to reduced Overall judgement needed (yes or no acceptable)
prices and increased sales. which includes clear and supported opinion. [6]
Disadvantage – poor quality cloth can lead to poor
quality clothes which could damage their reputation Chapter 22
and lose sales. [6] a) ($8 000) in May and ($7 000) in June [2]
e) Yes, as some clothes have faults and quality control is b) Any two of the following:
not finding them, leading to a poor reputation. • Rent • Bank loan repayments. [2]
No, it is expensive to train all workers to carry out • Salaries
quality assurance. c) It is needed to pay wages, etc. – if there are few taxi
Overall judgement needed (either method acceptable) fares, the expenses will still need to be paid.
which includes clear and supported opinion. [6] If there is no working capital the taxis won’t have fuel,
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and therefore they cannot run the taxi service. [4]

Chapter 20 d) Increase inflows: such as advertising the taxi business
a) The basic physical systems of a business or nation to increase revenue from taxi services, taking out
e.g. transportation, communication, sewerage, water a larger bank loan, offering introductory offers to
and electric systems. [2] encourage more customers when the business starts.
b) Planning regulations. Decrease outflows: such as reducing costs of rent by
Government grants or subsidies. [2] finding a cheaper garage to store the taxis, leasing
c) Raw materials source – if this is nearby vehicles instead of buying them or paying lower
transportation costs will be reduced, especially if salaries at the start of the business.
bulk reducing. Other answers are possible. [6]
Skilled labour in the factory – able to operate factory e) Yes, they should – as this will encourage more
equipment – only cash registers in a retailer. [4] customers to use the taxi service and increase sales.

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No, they shouldn’t – this may give them cash flow No, he should not take on a partner: this will mean
problems. The taxi business may be quiet at certain he does not have sole control of the garage that he
times of the year and this will mean the business will started himself and he will need to share the profits.
lack working capital. Overall judgement needed (either yes or no
Overall judgement needed (either yes or no acceptable) acceptable) which includes clear and supported
which includes clear and supported opinion. [6] opinion.[6]

Chapter 23 Chapter 25
a) Dividends are payments made to shareholders from a) Items owned by one business for more than
the profits (after tax) of a company. They are the one year.[2]
return to shareholders for investing in the company. b) Overdraft
(See text in Chapter 4) [2] Accounts payable [2]
b) $13m [2] c) Any two of the following:
c) Government – to see the amount of tax due. In this • There is more cash in the business as a result of
case $2m. more customers paying for cleaning by cash.
Employees – to see how much profit has been made • There is increased accounts receivable. An increase
and assess if the business can afford a wage increase in the number of customers who could pay for
for the workers on the cargo ships. [4] cleaning using invoices/trade credit.
d) To see if the company is making higher or lower profit • Increased inventories – Bright Places increases the
than their competitors. They may need to change what amount of inventories of cleaning materials.  [4]
the business does. They could perhaps try to reduce d) The accounts may not reflect the current situation
expenses on the cargo ships. of the business. The performance in the past is
To see if the other businesses have different cost of no guarantee of success in the future – there may
sales or expenses. It gives managers an idea of where be more customers and therefore there may be
they should concentrate on reducing costs when increased working capital/the accounts don’t show
shipping cargo. [6] the most recent changes.
e) Yes, they should sell shares: shares do not have The figures might have been affected by inflation.
to be paid back and no interest would need to be Figures may appear to increase but they may be
paid on the $20m. Two more ships will increase the same in real terms, for example the current
sales revenue to pay for dividends and they may assets could increase by 10 % but if inflation has also
need to pay out more dividends than $5m if more increased by 10 % then the value of current assets has
shareholders mean less retained profit. not really changed.  [6]
No, they should not sell shares: they may lose e) The current ratio is 1, which means that there are
control of the business if they sell more shares. just enough current assets to pay all the current
Overall judgement needed (either yes or no liabilities. The acid test is 0.75, which means that
acceptable) which includes clear and supported there is not sufficient liquidity to cover all the
opinion.[6] current liabilities. There are 75c available for each $1
of short-term debt.
Chapter 24 Overall conclusion: Yes, the owners should
a) Debts owed by the business. [2] be worried about the liquidity of the
b) $2 000 − $3 000 = −$1 000 [2] cleaning business as it may be at risk of not being
c) Without working capital a business will not survive. able to pay all of its current liabilities.  [6]
In this case it is negative which is a worry.
It is needed to pay for the bills of the business such Chapter 26
as rent on the garage or spare parts for repairs. [4] a) A period of falling GDP. [2]
d) Equity shows what the business is worth. In this case b) Keep more of the profit made.
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the business is now worth $15 000, whereas John Increased demand for goods or services. [2]
invested just $5 000 originally. c) Advantage: it is easy to recruit new workers – and
The owner’s funds/equity can be used for this is helpful, as sales have been increasing.
reinvestment in new equipment – in this case John has Disadvantage: high unemployment means people
up to $15 000 (if in the form of cash) to reinvest in have less money to spend and may result in lower
the garage instead of borrowing the money, reducing demand for their furniture. [4]
interest payments (he can only do this if the owner’s d) Lower interest payable on new loans means lower
funds/equity are available in a cash form – the equity costs of expansion and possibly increased profit as
might already be invested in the business). [6] the business increases output.
e) Yes, he should take on a partner: he would not need to Encourages increased sales. Furniture is a high
borrow the money for investment, therefore reducing priced item and customers will often borrow money
expenses on interest payments. to purchase furniture.  [6]

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e) Yes, they will benefit: a growing economy means To avoid tariff barriers in country X – allows the paint
increased incomes as more people gain jobs, so to have lower prices, increase sales and possibly profit.
furniture sales may increase. Other answers are possible. [6]
No, they will not benefit: the furniture is low-priced e) Yes - increase investment, more jobs created, more
which may mean that as incomes increase consumers exports for country X and fewer imports, taxes paid
will buy more expensive furniture and sales of Polaris to the government.
furniture might fall. No - existing paint manufacturers in danger of falling
Overall judgement needed (either conclusion sales, profits flow out of country X, only low-skilled
acceptable) which includes clear and supported jobs in paint factory created.
opinion.[6] Overall judgement needed (either conclusion
acceptable) which includes clear and supported
Chapter 27 opinion.[6]
a) A group made up of people who want to change
business (or government) decisions; they take action
such as organising consumer boycotts. [2]
● Case study answers
b) They can:
• write letters to local government officials Section 1 case study
• protest outside local government buildings 2 a Increase price: a larger gap between price and cost
with posters.[2] of raw materials would mean that furniture will
c) Private cost: the cost of building the airport (e.g. the have an increased price but the wood costs stay
building materials required). the same. Increased added value of the wooden
Private benefit: the revenue from the landing and garden furniture, but must be able to justify a
take-off charges will provide the government with higher price perhaps by improving the design of
revenue from charges for using the airport. [4] the furniture.
d) Local businesses: it will be cheaper to export goods, Lower input costs: purchase cheaper wood
increasing sales and possibly profit. to make the furniture but keep price of furniture
Tourists wanting to use the airport: it will be more the same. This increases the gap between the two,
convenient to use than other airports further away. but the quality of furniture needs to be maintained
The costs of transport will be less and the time to get especially if he imports the wood. [8]
to and from the airport will be shorter. b By opening his own shops he would keep the
profit margin of the retailer by cutting out one of
Other answers are possible. [6]
the channels of distribution. However, it would
e) Yes, they should build the airport: it would lower
increase the costs of setting up shops and there
unemployment and lead to increased business in the
may be some difficulty in managing the shops.
area from tourists.
By buying a 40% share in a major retail company,
No, they should not build the airport: it would increase
he would have influence in the management of the
competition for local businesses and it would be
retailer and they might be more likely to sell WWP
difficult to employ skilled workers. There would also be
furniture. This would increase sales and reduce
increased pollution from the flights. competitors’ sales. However, he would have to
Overall judgement needed (either conclusion consider the costs of purchasing shares and still
acceptable) which includes clear and supported would not be a majority shareholder, so would
opinion. have less influence.
Other answers are possible. [6] Overall judgement needed (either option
acceptable) which includes clear and supported
Chapter 28 opinion and explanation of why the alternative
a) Those businesses with factories, production or service option is rejected. [12]
operations in more than one country.  [2]
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b) Not being aware of the cultural differences when Section 2 case study
marketing the paint. 2 a Increased productivity: this may mean hotel rooms
Difficulty in finding skilled employees.  [2] are cleaned more quickly and more rooms can
c) To protect domestic manufacturers – for example to then be cleaned by each room cleaner, reducing
keep paint manufacturers from going bankrupt. costs for the hotel.
To gain revenue from the tariff – this will give the Improved service: waiters would be more
government additional funds to help the economy welcoming to the guests. This ensures the guests
develop.  [4] enjoy a good service and would improve the
d) To produce paint in country X – to reduce costs of hotel reputation.[8]
production, allowing for lower prices and/or higher b On-the-job: cheaper (some production while
profits. training) and provides training specific to the

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 Answers

hotel requirements. However, waiters may pass other sites (and not reach all parts of the country)
on bad habits and the trainer will not be fully so some of the market might not be reached.
productive while training the gymnasium worker. Site B – communication links are excellent; could
Off-the-job: staff learn specific skills from an sell to all parts of the country as costs are lower;
expert trainer, and there would be no lost output easy access to port for imported components, so
if training occurs after working hours. However, quicker to deliver; cheap rent would mean lower
the costs are high and if staff gain additional costs. However, labour costs would be expensive
qualifications they may leave the hotel. Wages are and it would be harder to find employees as
paid but trainees do not provide any output. unemployment is low; there are no grants to
Overall judgement needed (either training method reduce setup costs.
acceptable) which includes clear and supported Site C – road links are excellent, making the costs
opinion and explanation of why the alternative of selling to all parts of the country lower; easy to
method is rejected. [12] employ skilled workers and labour costs would be
subsidised by government grants; near to airport.
Section 3 case study However, labour costs are high; airports are more
2 a To raise customer awareness of the new folding expensive to use than ports; rent is high so this
bicycle: it is a new product and will not be known would increase costs.
about. There will be increased sales if customers Overall judgement needed (any of the sites are
are aware of the bicycle. acceptable) which includes clear and supported
To target a new market – a new market segment opinion and explanation of why the alternative
for the folding bicycle as a new product, probably sites are rejected. [12]
adults with higher incomes (as it is made from
expensive materials leading to high price of the Section 5 case study
folding bicycle). [8] 2 a Samah – because she has risked $50 000 of her
b Social media: cheap to use and you can target the own money.
specific market segment of high income adults (as Bank manager – to be sure the loan of $20 000
adults likely to use smartphones) – but may not will be repaid.
reach potential customers – cannot emphasise the Creditors – so that Samah will keep buying the
qualities of the new bicycle. food ingredients from the suppliers.
Specialist bicycle magazines: target customers read Employees – to see if their jobs are likely to be
these magazines. However, it would be relatively secure in future.  [8]
expensive (more expensive than the alternative b i W: ($3 000) X: $4 500
methods) and may not be read by some target Y: ($4 500) Z: ($1 500)
customers who just ride bicycles to work. ii Increasing prices increases sales revenue and
Billboards on the side of roads and train stations: a cash inflows – assuming high prices don’t result
relatively cheap form of promotion that would be in losing sales to competitors.
seen by a potential target market who ride on trains Using cheaper ingredients reduces the cash
or drive on roads. However, they may not see the outflows, but it is important to try to maintain
billboards when they drive past, the billboards may quality (or she might lose sales).
get damaged and it’s not easy to include much detail Using trade credit with her suppliers would
on a billboard. delay cash outflows. She could buy food
Overall judgement needed (either promotional ingredients when needed, sell the food and gain
method acceptable) which includes clear and cash and pay the supplier later.
supported opinion and explanation of why the Overall judgement needed (any one way
alternative methods are rejected. [12] acceptable) which includes clear and supported
opinion and explanation of why the alternative
Section 4 case study ways are rejected. [12]
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2 a Establishes the brand image – bulbs last a long

time. Section 6 case study
Maintains a good reputation – customers keep 2 a Cheaper export prices – the campsite will be
buying the bulbs in country X. cheaper for tourists, which would encourage
Helps to increase sales – as light bulbs meet health more tourists to visit country Z and result in
and safety regulations. a high number of tourists wanting to stay at
Attracts new customers – in export markets. [8] the campsite.
b Site A – skilled labour is easy to recruit for the Higher import prices – might deter domestic
factory and low wages reduce labour costs; cheap tourists from going abroad, increasing demand
rent reduces costs (if government grants given). for EC campsite from domestic tourists. This
However, costs of raw materials would be higher might result in high sales for the campsite
and communication links would not be as good as when it opens.  [8]

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b Demand for local forest timber would mean lower still attend school. The children employed
costs and higher profit for EC. However, the wood should not be too young. Only older
is not produced using sustainable methods (the children should be employed if EC wants
forests will eventually be gone if nothing else is to be ethical.
done), therefore this approach is not ethical as it Making payments to local officials to gain planning
is not environmentally friendly (not sustainable permission would help to ensure planning
production methods). permission is granted. This would increase costs,
Providing children with jobs would mean and may be thought of as a bribe, which is illegal
low wages (low labour costs) and higher profit. in some countries. This is not ethical as it is not
However, children should be in school and fair competition.
should only be employed part-time if at school, Judgement needed (either way acceptable)
so this option is not ethical if children are which includes clear and supported opinion and
not in school. It could be ethical if children explanation of why the actions are ethical or
are only employed for a short time and do not ethical.[12]
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 Index
A economic problem 1
accountants and accounts 82 Economic Union 100
accounts analysis 88–90 economies of scale 63, 64, 70
accounts receivable 85 employment 26; contracts 27, 29; legal controls 27, 28;
added value 1 part-/full-time 26, 27; unemployment 93, 94
advertising 26, 48, 49 enterprise & entrepreneurs 7, 8–9
agents 51 environmental issues 97, 98–9
appraisal 18 ethical issues 97, 99
assets 85, 86 exchange rate 93, 95, 96, 100, 101
exports 93
B extension strategy 41
B-E point 63 external benefits/costs 97
balance of payments 93, 94 external influences on business activity 103–4
balance sheets 85–7
bank loans 76, 78 F
bank objectives 14 factors of production 1
batch production 60, 61 feedback 30
bonuses 18 financial information and decisions 75–92
branding 41, 43 financial/non-financial rewards 19
break-even analysis 63, 64–6 fiscal policy 93, 95
buffer inventory level 60 flow production 60, 61
business activity 1–13, 16–17 focus groups 38
business cycle 93, 94 franchises 10
business finance needs & sources 75–8 free trade agreements 100, 101–2
business growth and size 7, 8, 9 fringe benefits 18
business objectives 13–15
business plans 7 G
globalisation 100, 101–2
C government economic objectives/policies 14, 93–6
capital employed 7, 88 government support 7
capital expenditure 75 grants 76
cash/bank balance 79 Gross Domestic Product (GDP) 93
cash flow forecasting 79–81
chain of command 22 H
classification of businesses 4–6 health and safety 27
commission 18 hierarchical structure 22
common (single) currency 100 hire purchase 76
communication 30–2, 35 horizontal integration 7
community objectives 14 Human Resources department 26–9, 33–4
community service 13 I
conglomerate integration 7 illiquid assets 88
consumer boycotts 97 imports 93, 100
consumer objectives 14 income 93
cost of goods sold/sales 82 income statements 82–4
costs 1, 63–6, 97 incorporated/unincorporated businesses 10
currency appreciation/depreciation 100 inflation 93, 94, 95
customers 35 infrastructure 70
international economy 100–2
D
interviews 38
debentures 76
inventories 60
debt factoring 76
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debtors 80 J
deindustrialisation 4 job descriptions/specifications 26, 28
delegation 22, 23 job enlargement 18
depreciation 82, 93, 95, 100 job enrichment/satisfaction 18, 19
dismissal 26, 27 job production 60, 61
distribution channels 51 job rotation 18, 19
dividends 10, 82 joint ventures 10
division of labour 1 just-in-time 60
downsizing workforce 27
K
E kaizen 60
e-commerce 48, 49, 52
economic growth 93

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 Index

L public corporations 10
leadership 22, 23, 24 public limited companies 10
lean production 60, 61 public sector 4, 13
leasing 76
liabilities 86 Q
limited liability 10 quality production 67–9
line managers 22 questionnaires 38
liquidity 88 R
location decisions 70–2 recession 93, 94, 95, 96
recruitment of workers 26–9
M
redundancy 26, 27
management 22–9, 33–4
revenue expenditure 75
managers’ objectives 14
market oriented businesses 38 S
market research 38–40 salaries 18, 19
market segmentation 35, 36 sales promotion 48
market share 13, 35 sales revenue 82
marketing 35–59 samples 38, 40
marketing budget 48 scale of production 63
marketing mix 41–53 scarcity 1
marketing strategy 54–6 secondary sector 4
mass market 35 share ownership schemes 18
media choice 48 shareholders 10, 13, 14
mergers 7 shares 76, 77, 78
messages 30 social benefits/costs 97
micro-finance 75, 76 social enterprises 13
minimum wage 27 social responsibility 97
mixed economies 4 sole traders 10
monetary policy 93, 95 span of control 22, 23
motivating workers 18–21, 26 specialisation 1
multinational businesses 100, 101 stakeholders 13, 14, 15
start-up capital 75
N
subsidies 76
needs 1, 18
supply-side policies 93, 95
niche market 35
survival 13
O sustainability 97, 98
operations management 60–74
opportunity cost 1 T
organisation and management 22–5, 33–4 takeovers 7
overdrafts 76, 77, 78 target audience/market 48
owners’ objectives 14 taxes 93, 95
teamworking 19
P technology 30, 48, 49, 52, 61
packaging 41, 42 tertiary sector 4
partnerships 10 time rate 18, 19
performance-related pay 18 Total Quality Management (TQM) 67
piece rate 18, 19 trade 101
place 51–3 trade credit 76
pressure groups 97, 98, 99 trade unions 22, 23
price & pricing 45–7, 49 trading account 82
primary sector 4 training of workers 26, 27
types of business organisation 10–12
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private benefits/costs 97
private limited companies 10
private sector 4 U
privatisation 4 unique selling point (USP) 41
product 41–4 V
product life cycle (PLC) 41, 42, 43, 44 vertical integration 7
production of goods and services 60–2, 63, 67–9
productivity 60, 61 W
profit 13, 79, 82–4 wages 18, 19, 27
profit sharing 18 wants 1
promotion and technology 48–50 workers’ objectives 14
protectionism 100 working capital 75, 79–81

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