Now test yourself answers: AS Level
Chapter 1
1 Added value is the additional value gained at each
stage of production. It can be economic (work done
on inputs) or marketing (consumers see more value).
Example: A sandwich shop creates sandwiches to
customer order, combining choices of bread and
fillings.
2 Opportunity cost is the next best alternative given
up when a choice is made.
Example: I buy a new pair of jeans for $50. The
opportunity cost is the opportunity lost, which is
the computer game I could have bought instead.
3 Characteristics of a successful entrepreneur/
intrapreneur include: Determination, drive and
energy; passion, initiative and self-confidence;
good leadership — being able to persuade and
involve others.
4 Possible changes in a business environment include:
A new law; a new product from a competitor; a new
technology; a change in taxes.
5 Primary: Marble quarry, rice farm, palm oil
plantation, gold mine.
Secondary: Food-processing factory, house-building
company.
Tertiary: Accountant, clothes shop, doctor, car
mechanic.
Quaternary: IT consultancy, search engine company.
6 Public sector: Local government car park, council
refuse collection, government school.
Private sector: Market stall, Coca-Cola, clothing
manufacturer.
7 Private sector businesses often have profit
objectives; public sector businesses have other
objectives, like providing a service at a set
standard.
8 A private limited company is usually owned by
family and friends and its accounts do not need to
be published, whereas a public limited company’s
shares may be bought by anyone and its accounts
are open for inspection.
A private limited company cannot sell shares on the
stock exchange, whereas a public limited company
can.
A private limited company is not vulnerable to
hostile takeover, as all existing shareholders have
to agree on any change in share ownership, whereas
a public limited company may be taken over by
anyone who gains control of more than 50 per cent
of the shares.
9 A shelter for homeless people; a food-growing
cooperative; a Grameen lending scheme for
businesses led by women.
10 The triple bottom line is used to assess
business performance in all social, financial and
environmental targets/achievements (people,
profit, planet).
11 Profit-making businesses aim to make profits, but
social enterprises aim to achieve social impact.
Profits belong to the owners in the profit-making
business, but to the business in a social enterprise.
The assets in a profit-making business that stops
trading belong to the owners; the assets in a social
enterprise that stops trading usually have to be
passed to similar businesses.
12 Limited liability means that the financial liability of
the owners of a business is limited to the amount
they have invested. In other words, this is the
maximum amount they could lose in the event of
business failure.
13 Owners of the business will not be personally
responsible for paying the loan back, so they will
be willing for the company to take the loan out.
Also, a bank will be willing to lend to a company,
knowing the business is legally responsible and will
use its resources to pay the loan back.
14 Number of employees, capital employed, market
share, sales revenue.
15 A public sector business does not generate revenue
so cannot be measured in this way. It also does not
issue/sell shares, so market capitalisation is not an
option.
It would be very difficult to put a value on the
assets of a public sector organisation such as a
school or hospital, as these are dedicated public
facilities and assets such as land would never be
available for alternative use.
The best way to measure the size of a public sector
business may be by the number of employees.
16 Advantages: Quick response to changes in customer
tastes; personal service.
Disadvantages: Lack of finance; difficult to employ
a range of specialists; sometimes small range of
goods/services.
17 Emotional involvement or family feuds affecting the
decision-making in the business.
18 The small start-up businesses of today can be the
big businesses of tomorrow and can create a lot of
jobs, leading to economic growth.
Cambridge International AS & A Level Business Revision Guide
1
19 Slow, steady growth from activities and finance
such as retained profit can lead to economies of
scale. To increase potential for sales; to gain status;
to increase market power through larger market
share.
20 This is a vertical backwards integration and will
help the bakery business ensure its supply of the
raw materials needed to make flour for bread.
21 To increase sales revenue month by month. To
survive, for the business not to fail in the first six
months.
22 Specific; measurable; agreed/achievable; realistic;
time-specific or time-bound.
23 The state of the economy — in a recession,
businesses will sell more ‘budget’ products as
consumers will tend to buy cheaper products.
The culture of the business, i.e. whether or not it is
risk averse — a risk-keen business may be keen to
grow faster and take over competitors or develop
innovative products.
24 CSR means that a business considers the potential
impact of its activities on society; it aims to
behave in an environmentally friendly and ethical
manner.
25 Customers might refuse to buy the products of
a business that is judged to be behaving in an
unethical manner, especially if alternatives are
available from ethical businesses. An example of
this may be ‘fast fashion’ that is made in developing
countries where factory employees may be
exploited.
26 Shareholders; employees; suppliers; local
community; lenders of finance; government.
Examples include:
Shareholders expect the business to be profitable
and give a return on their investment, i.e.
dividends.
Employees such as sewing machine operators hope
that they will continue to have employment and be
paid a fair wage.
27 Employees such as waiters might lose their jobs;
shareholders might fear lower profits in the future;
the local community might suffer a multiplier effect
as those now without work cannot afford to spend
in the local shops.
28 Examples include: Shareholders might sell their
shares if they do not receive dividends; employees
might seek employment elsewhere if their needs for
good wages and working conditions are not met;
the local community might fight any plans, such as
building development, that the business has if they
have not been treated well in the past.
2
Chapter 2
1 Profit = Total revenue – Total costs
If the HRM department recruits good quality,
productive employees, then this could increase
output, potentially increasing sales and possibly
profit.
If the HRM department does not control costs, such
as spending on recruitment or offering very high
wages and other benefits, then this could decrease
profit.
2 Labour turnover
=
=
3
4
5
6
7
Number of employees leaving in a year
× 100
Average number of employees
1200
× 100
10,000
= 12 %
You would need to look at the nature of the
employees. For instance, supermarkets often
take on student labour, so the labour turnover
percentage may be high as they work during
holidays and then leave at the end of their holidays
and/or at the end of their courses. You could also
compare with other supermarkets.
An internal recruit for a promotion will already
be familiar with the culture and workings of the
company and will not need induction training. Their
strengths (and weaknesses) will already be known
so there will be no surprises.
Observing others being promoted will also lead to
motivation within the workforce.
Internal recruitment is when a vacant position is
filled by someone already working in the business.
External recruitment is when a vacant post is
advertised outside the business; the applicants do
not currently work for the business and are likely to
be unknown to the business.
A job specification details the tasks and
responsibilities that will be performed by the
person doing the job. It might detail hours of work,
place of work and holiday entitlement.
A person specification details the qualifications
and qualities that the applicants are expected to
have. These could be personal qualities, such as
patience and confidence, or could be the amount of
experience that they should have of doing similar
work.
Advertise in local or national newspapers; place
details on a job-search internet site; advertise in a
specialist trade magazine.
Using a recruitment agency; using a head hunter;
inviting suitable existing employees to apply.
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8 Interview: Ask pre-planned questions of each
candidate and compare their responses; this enables
body language to be seen plus follow-up questions
can be asked if necessary.
Aptitude tests: Give each candidate a test on the
skills that they will need in the job to see if the
candidate is physically/mentally able to do the
work.
9 Details of the work; job title; working hours; length
of contract; holiday entitlement; how the contract
can be ended.
10 Redundancy occurs when the work/job is no longer
required and so the person doing that work is also
no longer required.
Dismissal is when the contract of employment is
terminated by the employer, due to unsatisfactory
work or ‘gross misconduct’, and the person is asked
to leave the place of work.
11 Employees will be more skilled and productive due
to acquiring more skills and knowledge; motivates
employees because they feel valued because the
business has invested in them; helps to prepare
employees for promotion.
12 On-the-job training takes place within the business
and often involves watching other workers doing
their work.
Off-the-job training takes place in a school or
college away from the business premises and is
usually given by external specialists.
13 Motivation is the desire, enthusiasm and willingness
to work towards a stated goal.
14 Social needs: People usually need to feel part of a
group and to have interaction with other people,
for instance by working as part of a team.
Esteem needs: People need to feel the respect of their
peers; they need to feel recognised and appreciated
either as a worker and/or as a person. Esteem needs
may be met by promotion or other recognition, such
as an ‘employee of the month award’.
15 Piece work means that employees will be paid
a stated amount for each unit or piece of work
completed.
16 The more that employees produce, the more they
will earn. This will motivate those workers who are
motivated by money (Taylor’s economic man theory)
and who desire a higher income.
17 Commission: Sales people could receive a
percentage of the total sales that they achieve. This
would motivate them to sell more.
Profit-related pay: If the retail business becomes
more profitable due to the efforts of its employees,
it could reward its workers with a share of the
profits. This ensures that all employees strive to
make the business as profitable as possible.
18 Promotion: For instance the opportunity to lead a
team.
Participation: The workers could be involved in
making production decisions.
19 Achievement: The need to reach goals and to be
recognised for doing so.
Authority: The need of employees to have some
control and power over the way they work.
Affiliation: The need to be part of a group, to be
liked — the desire to work in a friendly atmosphere.
20 Vroom’s theory is based on expectancy of rewards
that employees value if targets are achieved.
Without an effective appraisal system, it would
not be possible to determine whether targets had
been achieved and who had met them and who had
not. The system must be fair so that people who do
achieve their targets are rewarded and those who
do not reach pre-set targets do not receive rewards.
Without this, the expectations of workers are
undermined.
21 Managers can set suitable objectives that are
challenging but realistic and support employees
to work to their full potential to achieve these.
If managers also have access to good-quality
information, for instance from market research, they
can be proactive rather than reactive in launching
new products. All these functions can increase
profits, if carried out successfully.
22 Quick decisions can be made, which is essential in
some situations. Employees are told what to do and
time is not spent gaining feedback from them. Some
employees do not want to be included in decisionmaking and would be more comfortable being given
instructions.
23 More ideas can be gained because employees
can make valuable contributions. Workers are
more highly motivated because they feel valued
and included in business decisions. Workers get
feedback from managers and are able to feed back
to managers on ideas put forward. All this can
increase productivity and the flow of innovative
ideas.
24 Consulting with employees can be very timeconsuming. In emergency situations and some
business situations, there is not time to consult
as quick decisions must be made. Times when
management do not consult employees can cause
resentment. Employees might not know best how to
deal with a particular situation; they do not have
the experience or skills, unlike the managers.
25 Highly skilled and self-motivated workers. This
means that they do not need constant supervision
as they are probably doing highly technical work,
e.g. R&D. They are driven by their interest in what
they do and therefore do not need supervising.
They are motivated by the nature of the work.
Cambridge International AS & A Level Business Revision Guide
3
Chapter 3
1 Business objective: Increase profits on toy trains by
10 per cent in the next year.
Marketing objectives: Increase customer recognition
of the toy train product by 20 per cent and increase
sales by 10 per cent over the next year.
2 A marketing objective may be to successfully
promote recycled fabric as part of a ‘premium’
brand image, so that a higher price may be charged.
This could be measured by price elasticity of
demand/consumer perceptions before and after the
campaign.
3 Price of the boots; income of consumers; attitude
of consumers to wearing boots; how fashionable the
boots are; advertisement campaigns for the boots.
4 a Demand shifts to the right as more people
choose to use taxis as they can afford to pay for
the convenience.
b Demand curve shifts to the left as trains are a
substitute product and lower fares will encourage
more people to use this transport option rather
than taxis.
5 Price: More of a particular cereal may be supplied
at a higher price, for instance if consumer tastes
change and people are willing to pay more for sugarfree cereal.
The cost of ingredients such as oats and fruit: If
costs of production increase, supply shifts to the
left as less can be supplied at each price.
6 a More taxi rides will be supplied at a higher price
— movement along (up) the supply curve.
b The supply curve will shift to the left as
production costs have increased.
7 a The supply of a good is the quantity of goods or
services being made available for sale at a range
of prices at a particular time.
b Demand is the quantity of a good or service that
customers are willing and able to buy at a range
of prices at a particular time.
c Market price is the price of a good resulting
from the interaction between demand and
supply in a market. It is the point where the
amount producers are willing to supply equals
the amount demanded.
8 Either may be correct.
9 Building market: Advertise in trade magazines and
sell to the industry.
Footwear market: Advertise as an accessory to
clothing and sell in high street shops or malls.
10 a International
b Local
c International
d Local
e International
4
f Local or national
g International
11 A market-orientated business produces goods or
services that meet the needs of the market.
A product-orientated business produces goods or
services and then tries to sell them.
12 a Market share is the percentage of the total
market held by a business or product. Formula
is: Company sales × 100
Total market sales
b Market growth is the absolute or percentage
increase in the size of a market. Formula is:
New market size – Old market size
× 100
Old market size
c A national market is the market within a
particular country.
13 a Industrial
b Consumer
c Consumer
d Industrial
e Consumer
f Consumer
14 a Niche marketing is when a business satisfies
the needs of a small segment of a larger market,
such as chocolate bars for consumers with
diabetes.
b Segmentation is the process of identifying
particular groups in a market that have similar
characteristics and so similar needs and wants.
A magazine company may segment consumers by
interests or lifestyles.
15 Mass marketing typically targets buyers in most
households in the country and therefore a very
large number of consumers. This means a very large
market to aim for. If a restaurant company also aims
for many target groups within the mass market, this
may mean low cost of marketing per consumer. The
overall cost of marketing is likely to be very high,
however, such as TV advertising.
16 By children and adults
By pedal power only or electrical/battery-assisted.
17 Customer relationship marketing (CRM) is when
companies collect and analyse data about customers
and then use this to encourage purchasing or
repeat purchasing. For example, the online
company Amazon always offers additional products
related to ones being purchased, such as books
on related subjects. Many retail businesses such
as supermarkets have loyalty schemes, usually by
a card such as the Tesco Clubcard or Sainsbury’s
Nectar card.
18 Age (as some games are regulated); platform used;
income; previous games purchased.
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Now test yourself answers: AS Level
19 a Focus groups: Allow discussion of reasons
for like/dislike; detailed responses; consumer
sees/tastes examples of products, so instant
reactions may be observed.
b Test marketing: Real marketing situation, but
on a small scale; consumer reactions may be
observed and tracked; expensive mistakes can be
corrected before full launch.
20 a Surveys: Take time to set up, carry out and
analyse results; respondents may not give
truthful answers for fear of offending the
researcher.
b Observation: Interaction between observer and
observed may affect behaviour and results;
usefulness limited to a few research objectives,
for instance measuring footfall in a shopping
area.
21 a Market research is the process of gathering
information about markets, customers,
competitors and the effectiveness of marketing
methods.
b Primary or field research is gathering
information for the first time, directly from
sources in the market. It will be up to date and
directly relevant to the reason for collection.
c Desk research is using information that
has been gathered already, either by the
business (e.g. sales figures and trends) or by
other organisations, such as market research
companies. It also includes government
statistics, and may be gathered from online
sources.
d Qualitative research is gathering information
that is expressed in words, e.g. about feelings
and attitudes. Interviews are an example of a
qualitative research method.
22 Sampling is the process of gathering information
from a representative group of all those you are
interested in (sample from the target population).
23 A quota sample takes a set number of people with
different characteristics.
A stratified sample is taken by dividing up the
population into groups with shared characteristics
and choosing from them.
24 It is important to obtain a random sample because
it will represent the total population, as each
member has an equal chance of being selected.
25 a Tangible: Colour; camera specification.
Intangible: Brand image; ability to keep in touch
with friends.
b Tangible: Shape of bottle and packaging; type of
smell.
Intangible: Celebrity endorsement of brand;
makes wearer attractive to prospective partners.
26 Product development is the creation of products
with innovative or different characteristics that
offer added value to the customer.
27 Reinforces brand image, such as updating an already
popular game; enables entry to new markets, such
as designing a game for a group who are less likely
to already play computer games, such as teenage
girls.
28 Unique selling point (USP) is the one particular
factor that makes a product different from
competitors.
29 Specific unique design or materials; ease of
assembly.
30 Product life cycle describes five stages, from
development to introduction, growth, maturity and
decline, showing sales over time.
31 An extension strategy is marketing activities
designed to maintain or increase sales of a product
that is in decline. The high-sugar soft drink could
be targeted at sports people as an ‘energy drink’.
32 Product portfolio analysis identifies ‘cash cow’
products that can be ‘milked’ to support newer
products, such as ‘question marks’. This means that
the surplus from older, successful products may be
used in the marketing of newer products.
33 Cash cows: Potato crisps of various flavours in big
and small bags.
Question marks: Newer products such as root
vegetable crisps.
Stars: Speciality branded crisp flavours in big bags,
such as ‘sea salt and cider vinegar’.
Dogs: Old-fashioned ‘salt and shake’ crisps.
34 a A launch strategy such as ‘skimming’, as this
should be innovative. This will help recover R&D
costs.
b Competitive pricing if mass market, or premium
pricing if designer brand.
c Cost plus pricing (or full cost), where a markup percentage is added to unit cost (full cost
divided by number of units).
35 Skimming or penetration.
36 Competitive; full cost; contribution.
37 Loss leaders; psychological.
38 Promotion is a range of activities to communicate
and interact with consumers in order to inform and/
or persuade so that attitudes and buying behaviour
change.
39 a Above-the-line methods use media space that is
paid for, such as TV or newspaper adverts.
Below-the-line methods are not directly paid for,
such as public relations or special offers.
b ATL (TV advertising): Reaches many people but
at a high cost.
ATL (billboards): Reach many people but in
restricted locations and are often not noticed.
BTL (in-store posters): Cheap but only reach
people who are already in the store.
Cambridge International AS & A Level Business Revision Guide
5
BTL (BOGOF): Attracts buyers but may make
product seem cheap, low quality and desperate
for a sale.
c ATL: An advert in a local newspaper or on local
radio, aimed at the population of the area.
BTL: Giving out free ‘tasters’ of products in the
shop.
40 a A wholesaler is an intermediary between a
producer and a retailer, who buys from the
producer in bulk and then ‘breaks bulk’ into
smaller quantities to sell on to smaller retailers.
(The retailers may still get some bulk discounts
buying from a wholesaler.)
b An agent acts on behalf of the seller without
taking ownership of the product. A producer may
use an agent to help them sell the product in
another country, as their local knowledge will
help.
c A retailer sells products produced by other
businesses direct to the public. Some retailers
are linked to a brand/producer, such as
technology shops linked to a brand like Apple.
41 Cost of storage and distribution may be too high
to keep for individual sales. Selling to retailer can
be done in bulk, so lower costs of distribution
and storage. Product may be perishable, making
individual deliveries difficult.
Chapter 4
1 Selecting suppliers; maintaining health and safety;
setting stock levels; hitting quality criteria.
2 a Land includes land, buildings, minerals, oil and
wood, e.g. fuel oil. For a clothing manufacturer,
land would include the physical land that the
factory is built on and any minerals involved,
such as those that might dye the fabrics.
b Labour is the work done by people, either
manually or mentally in managing and decisionmaking. For a clothing manufacturer, an example
would be a sewing machinist.
c Capital is machinery and equipment, including
intellectual capital such as qualifications. For a
clothing manufacturer, an example would be a
sewing machine.
3 a Actors; scenery; props; the theatre.
b Wool; knitting machine; machine operator.
c Financial expertise; communication device.
d Lorry; lifting equipment; diesel fuel and
operator.
4 Added value is the difference between the selling
price of a product and the cost of raw material
inputs. It is important as it is essential to enable a
business to pay other costs and make a profit.
5 The Operations function will choose the best
supplier, taking into account quality and cost,
leading to good quality of finished garments.
6
The Operations function can take unique pattern
designs for the clothing to be assembled into.
The Operations function can ensure that production
methods complete the garments to a high standard.
6 Efficiency measures the way resources are used
(cost); effectiveness measures how well the product
meets customers’ needs.
7 Labour productivity is output per worker per time
period and measures labour efficiency.
Output
Formula is:
Number of workers ( in a time period )
8 Lowers per-unit costs so price can be lowered or
profits raised; may enable fewer workers to be
needed.
9 Capital investment in more efficient machines such
as touchscreen ordering; training for employees
in the use of automatic cooking technology; use
of conveyer technology to take completed cooked
items from the cooking area to the serving area.
15,000
10
= 1667 rounded up
9
11 Sustainable production does not deplete available
resources for future generations. An example would
be using renewable energy, such as solar power.
12 a Large-scale production; availability of efficient
machinery such as robots.
b Large scale; batch or flow production; repetitive
tasks; identical products.
13 a Personal interactive service delivering different
subjects; small scale; individual needs.
b Personal service; small scale; one-to-one
attention.
14 a Job production is producing unique or smallscale products one at a time by skilled workers,
to the exact specification of customers. An
example may be a wedding cake or made-tomeasure suit.
b Mass customisation uses mass production to
meet individual customers’ needs by setting
workstations to produce a range of pre-set
options. An example may be sports shoes that
can incorporate colour options chosen by a
customer.
15 a Advantages: Flexibility; high customer
satisfaction; high added value.
Disadvantages: High unit cost; labour intensive.
b Advantages: Low unit cost; range of products
possible.
Disadvantages: High inventory costs per batch;
less flexible; time lost resetting machines.
c Advantages: Very low unit costs; easy to
automate.
Disadvantages: High start-up costs; faults stop
whole line; demotivating work.
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16 a Raw materials are the basic physical resources
needed for production, for example cloth,
thread, ingredients, metal.
b Work in progress is partly finished goods in the
process of being transformed into final products,
for example cloth that has been cut out and
pinned together awaiting sewing.
c Finished goods are products ready for sale.
17 To satisfy customer needs for different sizes and to
keep a range of styles to ensure customer choice.
18 Bakery products such as bread and cakes, also
ingredients, are perishable so it would be best to
try and match supply with likely demand and not
hold excess stock.
19 a The lowest level of minimum inventory that
avoids variations in supply that would stop
production.
b Once inventory falls to this level it is necessary
to order more. This will depend on the nature of
the inventory and the lead time.
c The time taken for inventory to arrive, after it
has been ordered.
20 The supply chain is the sequence of links involved
in the production and distribution of a product. The
likely supply chain in this instance may be farm,
abattoir, food processing plant, central supplier for
restaurant chain, individual restaurant, consumer.
21 Reduces storage costs; reduces insurance costs of
storage facilities; avoids inventory becoming out of
date, damaged or obsolete.
22 ‘Just in case’ inventory management means that
businesses hold more than minimum levels of stock
in case of short-term changes in demand. However,
if these do not happen, then inventory may perish
or go out of fashion and become worthless. This
would be a waste of the money spent on inventory.
Stockholding costs will also be high.
23 The percentage of maximum output (capacity) that
is currently being produced.
Current output
Formula is:
× 100
Maximum output
400
24 a
× 100 = 66.7 %
600
b The business may be a start-up looking to grow
output and sales every month.
The economy may be in a downturn/recession,
leading to lower sales and therefore output until
the economy recovers.
c 90 per cent is the highest recommended
capacity utilisation to ensure time for machine
maintenance, servicing, carrying out repairs.
Increasing CU to 90 per cent will mean greater
efficiency and lower unit costs (economies of
scale) as resources are being used efficiently,
with little ‘idle’ time.
25 By training workers to identify the location of
products quickly; using technology to help in
picking up products; loading into vans in order of
delivery.
26 Outsourcing means contracting another business
to carry out part of a firm’s production process,
such as a component. A toy manufacturer that is
experiencing a surge in demand and approaching
maximum capacity may pay another company
to make parts for its toys, or more specialised
components such as motors. This will enable
consumer demand to be met without major
investment in expansion of production facilities.
Chapter 5
1 Start-up capital is the money that a business needs
when first setting up. It is used to acquire premises
and equipment so that the business can begin to
operate.
2 A small business such as a sole trader or partnership
will have fewer options for finance, as it cannot
raise additional finance through share capital.
3 Assuming this applies to a country where February
is a winter month, the company may be buying
stock/inventory in readiness for the coming summer
season, but sales will not start until April/May.
Therefore there will be more cash outflow than
inflow.
4 Bankruptcy happens when an individual, sole trader
or partnership with unlimited liability is unable to
pay its debts.
Liquidation is when a limited company is dissolved,
due to being unable to continue trading. The
business assets are then sold to pay debts and
shareholders may receive the remaining money, if
there is any.
5 Working capital is the money used for day-to-day
business activities. Working capital is current
assets minus current liabilities.
6 Too much working capital means that the business
is experiencing an opportunity cost; the extra
working capital could be invested in an interestbearing account or could be used to purchase
equipment that could increase business profit.
7 Disadvantage: The money is not earning anything
for the business.
Advantage: It gives the business security that it
can settle its short-term debts.
8 Delaying trade payables may improve cash flow, but
suppliers may be reluctant to continue supplying
late payers, or even ask for interest on the
outstanding amounts.
Asking trade receivables to pay more quickly will
also improve cash flow, but the business may lose
credit sales.
9 Revenue expenditure is on day-to-day items that
will be used in the business in a short period of
Cambridge International AS & A Level Business Revision Guide
7
time (less than 1 year), such as pens, pencils,
notebooks.
Capital expenditure is spending on assets
(equipment or premises) that will be used in
the business for several years, such as desks or
computers.
10 Short-term finance is finance that will be repaid
within 1 year, such as a short-term loan or
overdraft.
11 Financial return on the project for which the money
was acquired might not occur for some time.
The amount borrowed might be very large and so
the business needs longer to repay.
12 Advantage: No interest will be payable on the
money used.
Disadvantage: The business might not have
sufficient funds to meet short-term debts.
13 Using retained earnings as a source of finance
does not require any interest to be paid. Retained
earnings are available instantly.
14 Overdraft. The money should be available once the
customers settle their debts and so the money is
only required for a short period.
15 Advantage: Regular monthly repayments help with
budgeting.
Disadvantage: Interest will have to be paid to the
bank.
16 Bank overdraft; short-term bank loan; short-term
loan from family.
17 Long-term bank loan; debentures; mortgage (on
buildings).
18 When a business is undertaking a major new
project, perhaps a new factory, that will not be very
profitable for a long time, e.g. a few years.
19 The business might not want to lose any ownership
and control to a venture capitalist. Venture
capitalists, for instance the ‘dragons’ on Dragons’
Den, often require some ownership of the business
to protect their investment.
20 Cash is the liquid money held by a business, in the
form of notes and coins or in the business current
bank account. It is readily available to pay bills.
Profit is total revenue minus total costs at the end
of a trading period. It is possible for a business to
be profitable but run out of cash, for instance due
to buying too much inventory.
21 To pay day-to-day expenses, such as wages and
purchase of inventory.
To pay short-term financial obligations, such as
monthly rent and utility bills.
22 Cash held in a current account does not earn
interest, so this would be the opportunity cost
of holding too much cash. The cash could also be
8
invested in updated machinery that would make the
business more efficient.
23 A cash-flow forecast shows predicted monthly
inflows and outflows of cash and closing balances.
It is useful in monitoring business progress against
predictions, for instance of sales revenue, and also
in predicting the need for short-term finance, such
as overdraft in months where the closing balance
may be negative.
24 If the business has bought and paid for too much
stock and not sold it yet. For example, a business
that buys Christmas trees in November may pay the
supplier for a large number of trees, but they will
not be sold until December.
25 The total outflow is $12,000 – $3000 = $9000
26 Total cash outflow = $11,000
The opening balance was ($5000)
27 Short term: Debt factoring — the outstanding
debts of customers are sold to a debt factor
who takes a percentage of the money repaid
as commission. Businesses typically receive
approximately 80 per cent of the value of the debt.
Long term: Sale of assets — unused assets can be
sold if the business will not require them in the
future.
28 Customers might object to their debts being sold to
a third party and might not buy from the business
again. In addition, the business only receives a
proportion of the outstanding debt.
29 Suppliers have to pay their suppliers, and the credit
period given to them may make them unable to
extend the credit period to their customers.
30 Reduce the credit period given to customers — this
does not bring in more money but speeds up the
flow of money into the business.
Increase revenue by targeted promotional
strategies, such as special offers.
31 Fixed costs are costs that do not vary according to
the level of output, such as rent of a factory.
32 Variable costs vary directly according to the level of
output, e.g. raw materials.
33 Direct costs are costs that can be specifically linked
to the production of a particular item, e.g. direct
labour costs.
‘Direct costs’ and ‘variable costs’ are often
interchangeable terms.
34 The full production cost of a unit of a product
is calculated and used as a basis for the price. A
percentage mark-up is usually added. This ensures
that fixed and variable costs are covered.
35 Contribution costing is a method based on the
production of one more unit within the existing
fixed cost structure. Also known as ‘marginal
costing’. This method calculates the contribution
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Now test yourself answers: AS Level
to fixed costs by calculating selling price minus
variable cost per unit.
36 Contribution costing is used, for instance, when
making a decision on whether to accept a big
special order when the customer has offered a lower
price.
If a company is using price discrimination (different
prices for different groups of customers) or dynamic
pricing, contribution costing may be used to ensure
that all units make some contribution to fixed
costs. For instance, for the budget airlines the extra
variable cost of carrying an additional passenger is
very low, as long as there are seats available on a
flight.
37 Total contribution = Total revenue – Total variable
costs, whereas to get profit you also need to take
off fixed costs. Profit = Total revenue – Total costs.
38 When deciding what price to charge for a product/
service — the price charged would need to cover all
costs incurred and possibly some profit.
Businesses use costs information to monitor the
performance of different parts of the business to
identify inefficient areas and examples of good
practice.
39 Total cost = $100k + (4000 × $5) = $120k
120k
Average cost =
= $30
4k
Profit = $144k – $120k = $24k
40 The breakeven level of output is the level of output
where the business makes neither a profit nor a
loss; Total revenue = Total costs.
Fixed costs
41
Contribution per unit
42 The margin of safety is the difference between the
actual level of output and the breakeven level of
output when the actual level is above the breakeven
level of output.
43 Use: To calculate the level of profit at any given
level of output.
Limitation: It is assumed that all output is sold,
whereas some might stay as inventory.
44 To ensure fair allocation of spending, and payment
of costs, depending on the size of the department.
To target and enable monitoring of spending by
individual departments.
45 Benefit: It helps to monitor sales, and costs and
budgets may be adjusted accordingly.
Drawback: If budgets are not flexible they can
become out of date or meaningless, for instance if
sales are low due to an economic shock.
46 Flexible budgeting adjusts future predicted figures
in the light of actual figures that are recorded once
the financial year starts. For instance, if sales are
higher than expected, cost budgets may be adjusted
upwards as more inventory will be needed.
Zero budgeting means that each department or
cost centre starts with a zero base, so all costs and
revenue budgets need to be justified.
47 Flexible budgeting is appropriate during periods of
economic uncertainty, so that budget figures can
be adjusted in the light of prevailing conditions —
fast-growing sales and costs in a boom or falling
sales in a recession.
48 If a department has a budget, such as the Marketing
department having a budget for promotion, then
this will help with decisions as to what type of
activity might be appropriate, for instance a very
large budget would be needed for TV advertising.
49 A ‘favourable variance’ means higher sales or lower
costs than the budget figure.
50 An ‘adverse variance’ means lower sales or higher
costs than the budget figure.
Cambridge International AS & A Level Business Revision Guide
9
A Level
Chapter 6
1 To increase local employment; to reduce
environmental impact; to reduce the gender pay
gap.
2 Privatisation: Assets transfer from public sector to
private sector.
Nationalisation: Assets transfer from private sector
to public sector.
3 Employment laws can affect costs and therefore
competitiveness; they may also affect how
employees can be used (e.g. working hours),
affecting productivity and competitiveness.
4 Consumer laws on packaging, safety and
labelling can increase costs, which may reduce
competitiveness.
5 Laws that promote competition can lead to lower
prices and better quality for consumers.
6 Government laws may prevent production in certain
locations, may limit building, and may provide
incentives to locate.
7 The US dollar is getting stronger in terms of Chinese
yuan, so it is appreciating.
8 An increase in a country’s exchange rate makes
its products more expensive abroad, which might
reduce profits. However, buying in supplies and
materials from outside the country will be cheaper,
which could reduce production costs.
9 Lower GDP means less income; this may reduce
demand for most (not all) products and so result in
reduced profits.
10 Higher income tax reduces consumers’ income and
therefore demand, and so profits may fall.
11 Fiscal policy involves government spending and
taxation. Monetary policy attempts to control the
money supply and uses interest rates.
12 Lower interest rates lead to cheaper borrowing,
which can increase borrowing and demand.
13 Lower income tax would increase customer incomes,
which would increase demand and profits.
Lower interest rates would encourage borrowing and
spending, leading to higher demand and profits.
High corporation tax would reduce business profits.
14 False: Social responsibility involves doing more than
the law says you have to.
15 To attract customers, investors and employees.
16 There may be costs from being more socially
responsible, which may reduce profits. There may be
more demand, which increases profits. The business
10
may attract better employees, helping to increase
profits.
17 It may be more difficult to recruit, leading to
paying higher wages. Government may need to raise
more from tax to provide for the elderly, increasing
costs.
18 It may lead to lower costs, increased flexibility,
new products.
19 Through lower taxes, government support, grants
and financial aid.
20 An objective is a target; a strategy is a plan to
achieve the objective.
21 The objective: You need the objective to know what
you are aiming for.
22 Analysis: You analyse the position to choose what
to do, then you implement it.
23 A weakness is a current area that needs improving.
A threat is a future expected change that could
damage the business.
24 SWOT analyses the current strengths and
weaknesses of a business and its future threats.
PEST analysis examines the Political, Economic,
Social and Technological factors in a business
environment to identify opportunities and threats.
25 Rivalry is when businesses that produce the same
product compete. Substitute threat refers to
different types of products that meet the same
customer need (e.g. trains and ships).
26 Greater buyer power will push down prices, reducing
profits.
27 Market penetration is the same product gaining
more sales in existing markets. Market development
is the same product gaining sales in a new market.
28 Diversification involves new products in new
markets. New product development is a new product
in an existing market.
29 Driving forces push for change; restraining forces
resist change.
30 The expected money value (EMV) is the value of
a possible outcome in money terms, based on
forecasts.
Expected value (EV) is the value of a possible
outcome, taking into account the probability of it
occurring. EV = EMV × Probability
31 Task culture focuses on teamworking, and power
is located in what people can contribute to the
task. Power culture focuses on the key people in a
business who make all the decisions.
32 Culture can affect the decisions people make and
the focus on areas such as costs, customers and
innovation, all of which can affect success.
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A Level
33 They might resist technology if they are afraid that
they may lose their jobs, or if they are worried that
they will not be able to use it and will lose power
and status, or if they don’t understand the benefits.
34 Contingency planning plans for unexpected events.
Crisis management deals with the event once it has
happened.
Chapter 7
1 Structure affects costs, which can affect price.
Structure affects the speed of decision-making.
2 In a functional structure, people can share
expertise within a given function, but the structure
may not encourage different parts of the business
to work together.
3 A regional structure may enable better decisions
that are more focused on the demands of an area.
4 A product structure may enable better decisions
based on the requirements of a particular product
group.
5 Delegation may motivate and use the skills of
subordinates, but it involves risk as a superior is
losing control.
6 Delegation may motivate as it gives employees
the chance to make decisions and gives them more
power and status.
7 A tall structure provides plenty of opportunities
for promotion, but the costs of the layers of
management are expensive.
8 A flat structure may reduce costs as there are fewer
layers of management, but it may increase workload
for individuals as the span is wider.
9 To reduce costs; to give employees more
responsibility.
10 Delegation occurs when a superior entrusts a
subordinate with a task. Decentralisation occurs
when decisions generally are passed down the
organisation.
11 A centralised organisational structure can lead to
quicker decision-making by those with an overview,
but it can mean the business is not responsive to
local conditions.
12 True: Line managers have authority over specified
people within the organisation.
13 False: The staff function is advisory.
14 It is important so people understand what to do
and managers know what has happened.
15 Horizontal communication is with someone at
same stage in the business, e.g. two managers.
Vertical communication is up and down the chain of
command, e.g. a superior to a subordinate.
16 One-way communication would be X telling Y
something. Two-way communication would be X
discussing something with Y.
17 Barrier 1: Noise. Response: Change location or
media.
Barrier 2: Information overload. Response: Reduce
content.
18 Chain networks follow the hierarchical structure
within an organisation and communication can be
either one way or two way.
In connected networks, everyone involved has the
opportunity to communicate with each other.
19 Formal communication is information passed
through the formal channels within an organisation,
e.g. the chain of command.
Informal communication is information that is
passed outside of the official communication
channels.
20 Soft HRM would invest in training in order to
develop employees.
21 The employee may fear the appraisal will be
negative and affect their pay or promotion
prospects.
22 Appraisals help individuals identify areas to develop
and help businesses identify whom to promote.
23 Management by objectives ensures that all
employees are working towards the overall business
objective by setting targets for subordinates.
24 Management by objectives helps ensure everyone
is aligned to the same targets. The objectives may
motivate staff.
Chapter 8
1 False: Quantity demanded does change but by less
proportionately than price.
2 True: Demand increases with income.
3 False: It shows it is an inferior good.
4 +0.25
5 +3
6 –0.5
7 This is a 10 per cent positive change in income, so
demand increases by 18 per cent.
8 Income changes 4 per cent; demand changes –0.8 per
cent, resulting in 4960 sales.
9 True: They are substitutes; as the price of one
rises, the quantity demanded of the other rises as
customers switch.
10 True: They are complements as this is a negative
value.
11 Demand increases 5 × 0.2 = 1 %
12 Demand rises 8 × 2.5 = 20%
4
2
13 Demand falls
= 16.7 %; price rises
= 20 %
20
12
−16.7
Cross-price elasticity =
= -0.84
+20
14 a Normal; inelastic.
b Inferior; elastic.
Cambridge International AS & A Level Business Revision Guide
11
c Demand increases with more promotion; elastic.
d Demand falls with more promotion; inelastic.
e Substitutes; elastic.
f Complements; inelastic.
15 To be more competitive with a new offering.
16 Product development can retain customers and can
attract customers away from competitors.
17 Poor market research; technical problems; changed
market conditions; competitors’ actions.
18 A patent can protect the idea so it earns more
profits.
19 Can affect decisions of what to produce, staffing
requirements, cash-flow planning.
20
Month
Sales ($000) 3-month
average
Cyclical
variation
January
50
February
60
43.33
March
20
60.00
−40
April
100
70.00
30
May
90
86.67
3.33
June
70
86.67
−16.67
July
100
106.67
−6.67
August
150
150.00
September
200
166.67
33.33
October
150
153.33
−3.33
November
110
116.67
−6.67
December
90
16.67
0
21 Different elements of the mix complement each
other; customers are more likely to buy and to
return.
22 Prices are increasing.
23 Prices are falling.
24 Need the overall corporate objective to understand
business targets as a whole. The marketing
objective then links to this.
3
A
3
8
B
5
3
8
25 Need the marketing target (objective) first. The
strategy, i.e. how to achieve this, comes next.
26 It is a marketing objective.
Chapter 9
1 Location affects costs, ease of attracting labour
and ease of access to demand.
2 It might change location as cost conditions change,
or due to new incentives from government or
changing demand conditions.
3 Offshoring means carrying out more operations
overseas. Reshoring means bringing operations back
to the country.
4 Internal economies of scale are when there
are lower unit costs as scale expands. Internal
diseconomies of scale are when unit costs rise as
scale rises.
5 Internal economies of scale occur when a business
expands. External economies of scale occur when
unit costs are lower at every level of output due to
external factors.
6 Benchmarking matches processes against the best
in this sector. Kaizen is continuous improvement.
7 Benchmarking enables a business to learn from the
best how to do something; this can improve quality
and reduce costs.
8 Process innovation improves the way that things are
done. Product innovation develops new products.
9 Better coordination of activities improves
efficiency and reduces waste; better decisionmaking.
10 Lean production reduces waste, which can increase
profit margins.
11 JIT enables more flexibility to customer demand
and reduces costs as fewer stocks are held; this can
lead to lower prices and more competitiveness.
12 a A line is an activity.
b A circle is the beginning or end of an activity.
13
D
10
18
18
0
0
22
22
H
3
25
25
I
5
30
30
C
2
F
1
1
13
G
12
14 The effective use of critical path analysis means
items can be ordered when required, so reducing
waste; it can reduce the time taken to complete a
project; it can make it easier to monitor progress.
12
E
4
15 Any suitable project: A project has a series of
activities, a specific objective and a timescale.
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A Level
Chapter 10
1 Gross profit = Revenue – Cost of sales
Operating profit = Gross profit – Expenses.
2 To identify how different costs are changing.
3
$
Sales revenue
$
400
Opening inventory
40
Purchases
80
Closing inventory
(20)
Cost of sales
(100)
Gross profit
300
Rent
25
Heat and light
20
Wages
50
Office expenses
15
Operating profit (profit from
operations)
Interest
Profit before tax
Tax (at say 20%)
Profit for the year
(110)
190
(10)
180
36
144
Profit for the year
Dividends paid
Retained earnings
(balance at year end)
4
5
6
7
8
$000
$000
Non-current assets
Premises
500
Machinery
200
Vehicles
100
800
Current assets
Inventory
100
Trade receivables
150
Cash and cash equivalents
150
400
1200
Total assets
Non-current liabilities
Long-term loan
200
Current liabilities
Statement of changes in equity
Retained earnings
(balance at start of year)
of what has actually happened in the stated period
of time.
12 False: It is a stock concept.
13 Current assets: Receivables, cash, stock (inventory).
Non-current assets: Buildings and equipment.
14 Current liabilities: Payables, tax and dividends due.
15 Non-current assets would increase; long-term
liabilities would increase.
16 Non-current assets would decrease; long-term
liabilities would reduce.
17
20
144
(10)
154
Trade payables
25
Overdraft
50
Total liabilities
275
Net assets
925
Shareholders’ equity
Ordinary shares
Retained earnings
Purchases; opening and closing inventory.
Expenses; interest payments.
Profits of the business not paid out as dividends.
Yes.
No, it would affect operating profit but not gross
profit.
9 A business owns an asset and it owes a liability.
10 A profit and loss statement shows revenue and costs
over a year (flow concept). A statement of financial
position shows assets and liabilities at a given
moment in time (stock concept).
11 True: A profit and loss statement records the
revenues and expenses of a business over a period
of time, usually one year. It is a financial statement
200
75
275
18 Inventory is a current asset.
19 True: Inventory, including materials and
components, is a cost until it is sold.
20 Current value is $15.
21 As inventory, cost is $33.
22 True: Depreciation is recorded in the accounts as an
expense as it reduces the value of an asset on the
statement of financial position. It also reduces the
profit for the year so is a cost on the profit and loss
statement.
23 Over its life cost is $55,000, so cost per year is
$11,000.
Cambridge International AS & A Level Business Revision Guide
13
24 After 3 years, the asset would have lost value by
$33,000 so would be worth $27,000.
25 Current assets are $4500; current liabilities are
$3000.
4500
Current ratio =
= 1.5
3000
26 Current assets without inventory are $3500; current
liabilities are $3000.
Acid test ratio = 1.17
27 The acid test ratio is lower as inventory is not
included.
28 ROCE shows the overall profitability of the business
so is a good measure of managers’ success.
30,000
× 100
29 Gross profit margin =
80,000
= 37.5 %
15,000
30 Operating profit margin =
× 100
75,000
= 20 %
31 If selling cakes, you would expect inventory to be
sold regularly and a high inventory turnover.
32 Receivables need to be controlled in order to
control cash flow.
75,000
× 100
33 Gearing ratio =
200,000
= 37.5 %
34 Gearing is relatively low and so the business may
be considered for a loan (depending on its overall
financial position).
0.4
× 100
35 Dividend yield =
3.65
= 10.96 %
320,000
= $0.8
400,000
0.8
Dividend yield =
× 100
5.80
= 13.79 %
36 Dividend per share =
14
37 Financial ratios are used by investors to decide
whether to invest; they are used by banks to decide
whether to lend money.
38 Data is often backward-looking and does not show
non-quantitative information, e.g. morale.
39 To be able to assess the financial performance
relative to competitors; to provide context.
40 To identify a project’s estimated returns; to help
choose a project.
41 Conditions can change, e.g. the economic
environment.
42 The time taken for net inflows to cover the
investment costs.
43 Total profit = 1,100,000 – 500,000 = $600,000
600,000
Annual profit =
= 150,000
4
150,000
ARR =
× 100 = 30 %
500,000
44 Net present value = Present value – Initial costs
45 It would be better placing funds in the bank — it
would earn more there than the project is predicted
to earn.
46 Discounted cash flow takes account of the time
value of money and discounts future expected
flows.
47 Morale of employees; ethics of the decision.
48 Suppliers; employees; investors.
49 They are backward-looking; window dressing;
different policies between businesses.
50 Stakeholders will want an independent check done
on what a business says.
51 To assess its profitability (investors) or liquidity
(suppliers) or gearing (banks).
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