complete or amend a simple break-even chart

Cambridge IGCSE Business Studies (0450) – Complete Revision Notes

How to Use These Notes

• Read each Learning Objective to know exactly what you must be able to do.
• Study the Key Concepts and Important Formulas – these are the facts the exam tests.
• Review the Worked Example(s) to see the concepts applied in a realistic context.
• Check the Common Mistakes list to avoid typical errors.
• Attempt the Practice Questions. Use the answer key at the end of each section to self‑mark.

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1. Understanding Business Activity

Learning Objective

Students will be able to describe the purpose of business, classify enterprises by sector, ownership and size, explain entrepreneurship, outline the main business objectives, and analyse how stakeholder objectives influence decision‑making.

Key Concepts

• Purpose of Business – to produce goods or services that satisfy wants and needs while achieving a chosen aim (profit, social‑enterprise, charitable, etc.).
• Classification by Sector
  • Primary – extraction of raw materials (e.g., farming, mining).
  • Secondary – manufacturing and construction.
  • Tertiary – services such as retail, banking, education.
• Classification by Ownership
  • Private sector – sole trader, partnership, limited company.
  • Public sector – state‑owned enterprises, local authority services.
  • Co‑operatives – owned and controlled by members.
  • Social enterprises – aim to achieve social or environmental goals, profit is secondary.
• Business Size – micro, small, medium, large (based on turnover, staff numbers, assets).
• Entrepreneurship – the process of creating a new business, taking risks, innovating and organising resources.
• Business Objectives
  • Profit maximisation / profit‑making.
  • Growth (sales, market share, product range).
  • Survival (especially for new or struggling firms).
  • Market share, quality, reputation.
  • Social/ethical aims (e.g., environmental sustainability, community development).
• Stakeholders and Their Objectives
  • Owners / shareholders – return on investment, share price.
  • Managers – business performance, career progression.
  • Employees – job security, wages, good working conditions.
  • Customers – value for money, quality, service.
  • Suppliers – steady orders, timely payment.
  • Government – tax revenue, employment, compliance with regulations.
  • Community / NGOs – environmental protection, ethical behaviour.

Common Mistakes

• Confusing “sector” with “industry” (e.g., retail is a sector; clothing is an industry).
• Assuming every business aims solely at profit – social enterprises and charities have different primary aims.
• Over‑generalising stakeholder objectives (e.g., “all employees want higher wages”).

Practice Questions

1. Classify a local bakery as a sole trader, partnership or limited company and justify your answer.
2. Explain two ways in which the objectives of shareholders might conflict with those of employees.

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2. People in Business

Learning Objective

Students will be able to explain how motivation, organisational structure, leadership, human‑resource practices, communication and legal controls affect business performance.

Key Concepts

• Motivation Theories
  • Maslow’s hierarchy of needs – physiological → safety → social → esteem → self‑actualisation.
  • Herzberg’s two‑factor theory – hygiene factors (salary, conditions) vs. motivators (recognition, achievement).
  • Taylor’s scientific management – piece‑rate pay, standardised tasks.
  • McGregor’s Theory X & Y – assumptions about employee nature.
• Organisational Structure
  • Simple – owner makes all decisions; low cost, limited control.
  • Functional – departments (e.g., marketing, finance); clear specialisation.
  • Divisional – separate profit centres for products/regions; good for large, diversified firms.
  • Matrix – dual reporting (functional & product); flexible but can cause conflict.
  • Flat vs. tall – number of management levels.
• Span of Control & Chain of Command
  • Span of control = number of sub‑ordinates a manager can effectively supervise.
  • Wide span → flatter structure; narrow span → taller structure.
  • Chain of command = line of authority from top to bottom.
• Delegation vs. Control
  • Delegation – assigning responsibility and authority to sub‑ordinates.
  • Control – monitoring performance and ensuring objectives are met.
• Leadership Styles – autocratic, democratic, laissez‑faire; impact on morale and decision‑making.
• Human‑Resource Management (HRM)
  • Recruitment & selection, training & development, appraisal, redundancy.
  • Part‑time vs. full‑time staff – flexibility vs. continuity.
  • Health & safety – legal requirement to protect employees (risk assessments, PPE).
  • Legal controls – minimum wage, working‑time regulations, discrimination law, health & safety legislation.
• Communication
  • Internal – formal (reports, memos), informal (rumour, grapevine), upward, downward, horizontal.
  • External – advertising, public relations, digital media, direct marketing.

Common Mistakes

• Mixing up “motivation” (what drives individuals) with “leadership” (how managers influence groups).
• Listing only the advantages of a structure without recognising its disadvantages.
• Forgetting health & safety as a specific legal control.
• Confusing “span of control” with “number of employees”.

Practice Questions

1. Identify which motivation theory best explains why a sales team is offered a commission scheme and why.
2. Compare a functional structure with a divisional structure for a multinational electronics company.
3. Explain two advantages and two disadvantages of using a wide span of control.

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3. Marketing

Learning Objective

Students will be able to analyse market information, segment markets, develop a marketing mix, evaluate consumer‑buyer behaviour, apply the product life‑cycle, and assess the impact of legal and foreign‑market issues on marketing decisions.

Key Concepts

• Role of Marketing – creating, communicating and delivering value to customers.
• Market Changes – technological advances, demographic shifts, changing consumer attitudes, environmental concerns.
• Consumer‑Buyer Behaviour
  • Psychological factors – motivation, perception, learning, attitudes.
  • Social factors – family, reference groups, social class.
  • Personal factors – age, occupation, lifestyle, economic situation.
  • Cultural factors – culture, sub‑culture, social class.
• Market Segmentation – demographic, geographic, psychographic, behavioural.
• Market Research Methods
  • Primary – questionnaires, interviews, observation, focus groups.
  • Secondary – published statistics, company records, trade journals, internet sources.
• The Marketing Mix (4 Ps)
  • Product – features, quality, branding, packaging, life‑cycle.
  • Price – strategies (penetration, skimming, psychological), discounts, credit terms.
  • Place – distribution channels, logistics, e‑commerce, location of outlets.
  • Promotion – advertising, sales promotion, public relations, personal selling, direct marketing.
• Product Life‑Cycle (PLC)
  • Introduction – low sales, high costs, need for promotion.
  • Growth – rapid sales increase, economies of scale.
  • Maturity – sales peak, competition intense, need for differentiation.
  • Decline – sales fall, possible product withdrawal or rejuvenation.
  • Extension strategies – price cuts, new features, new markets, repositioning.
• Pricing Strategies & Price Elasticity
  • Elastic demand – small price change leads to large change in quantity demanded.
  • Inelastic demand – quantity demanded changes little with price.
• Legal Controls on Marketing
  • Misleading or deceptive advertising.
  • Advertising of dangerous or harmful goods.
  • Consumer protection – right to return faulty goods, guarantee periods.
  • Intellectual property – trademarks, patents, copyright.
• Foreign‑Market Issues
  • Tariffs, import quotas, exchange‑rate risk.
  • Cultural differences – language, customs, buying habits.
  • Legal and regulatory differences – standards, labelling.

Worked Example – Pricing Decision

A company sells a gadget for £50. Variable cost per unit is £30 and fixed costs are £10 000. The manager is considering a price reduction to £45 to increase sales.

1. Contribution margin at £50: CM = SP – VC = 50 – 30 = £20.
2. Break‑even quantity at £50: Q_BE = FC ÷ CM = 10 000 ÷ 20 = 500 units.
3. Contribution margin at £45: CM = 45 – 30 = £15.
4. New break‑even quantity: Q_BE = 10 000 ÷ 15 ≈ 667 units.
5. Conclusion – the lower price raises the break‑even point; the firm must be confident that sales will increase by more than 167 units to remain profitable.

Common Mistakes

• Using total cost instead of contribution margin when calculating break‑even.
• Assuming a single market segment will respond uniformly to a price change.
• Over‑looking specific legal restrictions on advertising claims.

Practice Questions

1. Identify two primary and two secondary sources of market information for a new sports drink.
2. Explain how a company could use the “product development” strategy to increase market share.
3. Discuss how cultural differences might affect the promotion of a fast‑food chain entering Japan.

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4. Operations Management

Learning Objective

Students will be able to describe production methods, calculate productivity, explain economies and diseconomies of scale, construct and interpret a simple break‑even chart, evaluate quality‑control and location decisions, and discuss inventory holding and lean production.

4.1 Production Methods & Productivity

• Job Production – one‑off, highly customised, high labour cost, low volume.
• Batch Production – groups of identical items, moderate set‑up time, medium volume.
• Flow (Mass) Production – continuous, high volume, low unit cost, low flexibility.
• Productivity – Productivity = Output ÷ Input (e.g., units per labour‑hour).
• Lean Production
  • Just‑in‑time (JIT) – minimise inventory by receiving goods only when needed.
  • Kaizen – continuous small improvements to processes.
  • Waste reduction – over‑production, waiting, transport, excess inventory, motion, defects, over‑processing.

4.2 Economies & Diseconomies of Scale

• Internal Economies of Scale
  • Technical – specialised equipment.
  • Managerial – specialised managers.
  • Financial – better credit terms.
  • Marketing – bulk buying of advertising.
  • Risk‑bearing – spread of risk over larger output.
• External Economies of Scale – industry clusters, improved transport infrastructure, skilled labour pool.
• Diseconomies of Scale
  • Coordination problems, bureaucracy, slower decision‑making.
  • Reduced employee morale, communication breakdowns.

4.3 Break‑Even Analysis (Simple Chart)

Key Formulas

Formula	Explanation
TC = FC + (VC × Q)	Total Cost = Fixed Costs + Variable Cost per unit × Quantity
TR = SP × Q	Total Revenue = Selling Price per unit × Quantity
CM = SP – VC	Contribution Margin per unit
Q_BE = FC ÷ CM	Break‑even quantity (units)
TR_BE = SP × Q_BE	Break‑even revenue (£)

Step‑by‑Step Guide to Plotting a Simple Break‑Even Chart

1. Draw axes. Horizontal = “Units (Q)”. Vertical = “£ (Cost / Revenue)”.
2. Mark the fixed‑cost level on the vertical axis (e.g., £12 000). Draw a horizontal line from this point – this is the total‑cost line at Q = 0.
3. From the fixed‑cost point, draw an upward line with a gradient equal to the variable cost per unit. This line represents TC = FC + VC·Q.
4. From the origin (0,0), draw a steeper line whose gradient equals the selling price per unit – this is the TR = SP·Q line.
5. The intersection of the two lines is the break‑even point. Read the quantity (horizontal) and the revenue/cost (vertical) values.
6. To illustrate a change (e.g., higher fixed costs), redraw the relevant line and locate the new intersection.

Worked Example – Plotting the Chart

Data: FC = £12 000, VC = £8 per unit, SP = £20 per unit.

1. Contribution margin: CM = 20 – 8 = £12.
2. Break‑even quantity: Q_BE = 12 000 ÷ 12 = 1 000 units.
3. Break‑even revenue: TR_BE = 20 × 1 000 = £20 000.
4. Useful points for the chart:

   Units (Q)	Total Cost (TC) £	Total Revenue (TR) £
   0	12 000	0
   500	12 000 + (8 × 500) = 16 000	20 × 500 = 10 000
   1 000	20 000	20 000
   1 500	24 000	30 000

5. Plot the points, draw the two lines and label the intersection (1 000 units, £20 000).

Inventory Holding – Why Businesses Keep Stock

• To meet unpredictable demand spikes.
• To allow time for production or delivery lead‑times.
• To take advantage of bulk‑buy discounts.
• To act as a buffer against supplier unreliability.

Location Decisions – Manufacturing vs. Service

• Manufacturing – proximity to raw materials, transport links, skilled labour, markets, and utilities.
• Service businesses – accessibility for customers, visibility, footfall, local competition, and cost of premises.

Common Mistakes in Break‑Even Charts

• Drawing the total‑cost line from the origin instead of from the fixed‑cost level.
• Using total cost as the gradient for the revenue line.
• Reading the break‑even quantity from the vertical axis.
• Confusing contribution margin with profit – CM only covers fixed costs.

Practice Activity – New Data

Item	Amount (£)
Fixed Costs (FC)	9 000
Variable Cost per Unit (VC)	5
Selling Price per Unit (SP)	15

1. Calculate the contribution margin and break‑even quantity.
2. Complete the table for 0, 500, 1 000 and 1 500 units (show TC and TR).
3. Sketch the break‑even chart using the points you have calculated.
4. Identify the break‑even point on your chart and state both the quantity and the revenue value.

Answers (self‑check)

• CM = 15 – 5 = £10.
• Q_BE = 9 000 ÷ 10 = 900 units.
• TC at 0 = £9 000; TR at 0 = £0.
• TC at 500 = 9 000 + (5 × 500) = £11 500; TR at 500 = 15 × 500 = £7 500.
• TC at 1 000 = 9 000 + (5 × 1 000) = £14 000; TR at 1 000 = £15 000.
• TC at 1 500 = 9 000 + (5 × 1 500) = £16 500; TR at 1 500 = £22 500.
• Break‑even point: 900 units, £13 500 revenue (and cost).

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5. Financial Information & Decisions

Learning Objective

Students will be able to explain why finance is needed, identify and evaluate sources of finance, prepare simple cash‑flow forecasts, interpret profit and loss accounts and balance sheets, calculate key profitability and liquidity ratios, and distinguish between profit and cash.

Key Concepts

• Why Finance is Needed – start‑up costs, working capital, expansion, research & development, emergency cash.
• Sources of Finance
  • Internal – retained earnings, sale of assets, owner’s capital.
  • External – Short‑term – overdraft, trade credit, commercial paper, factoring.
  • External – Long‑term – bank loan, hire purchase, leasing, debentures, equity (shares).
  • Alternative Sources – micro‑finance, crowd‑funding, venture capital, angel investors.
• Factors Influencing Choice of Finance
  • Size of business, legal form, amount required, cost of finance, risk, control, repayment period.
• Cash‑Flow Forecast
  • Projects cash inflows (sales receipts, loans, asset sales) and outflows (payments to suppliers, wages, interest, tax).
  • Shows whether the business will have a surplus or deficit in a given period.
• Profit vs. Cash
  • Profit = total revenue – total expenses (including non‑cash items such as depreciation).
  • Cash flow shows actual money coming in and going out; a profitable business can still run into cash problems.
• Financial Statements
  • Income Statement (Profit & Loss Account) – shows revenue, cost of sales, gross profit, operating expenses, net profit.
  • Balance Sheet – assets (current & non‑current) = liabilities (current & long‑term) + owners’ equity.
• Key Ratios

  Ratio	Formula	What it Measures
  Gross Profit Margin	Gross Profit ÷ Sales × 100%	Efficiency of production/selling.
  Net Profit Margin	Net Profit ÷ Sales × 100%	Overall profitability.
  Return on Capital Employed (ROCE)	Net Profit ÷ (Fixed Assets + Working Capital) × 100%	How well capital is used.
  Current Ratio	Current Assets ÷ Current Liabilities	Short‑term liquidity.
  Quick Ratio (Acid‑test)	(Current Assets – Stock) ÷ Current Liabilities	Liquidity without relying on inventory.
  Debt‑to‑Equity Ratio	Total Liabilities ÷ Owners’ Equity	Financial risk.

Worked Example – Simple Cash‑Flow Forecast (3‑month)

Assume a start‑up sells 1 000 units each month at £20. Variable cost = £12 per unit. Fixed costs = £4 000 per month. The owner expects a bank overdraft of £2 000 at the start.

1. Calculate monthly cash inflow from sales: 1 000 × 20 = £20 000.
2. Variable cash outflow: 1 000 × 12 = £12 000.
3. Cash outflow (fixed) = £4 000.
4. Net cash flow each month = £20 000 – (£12 000 + £4 000) = £4 000 surplus.
5. Opening cash balance month 1 = £2 000 (overdraft). Closing balance month 1 = £2 000 + £4 000 = £6 000.
6. Repeat for months 2 and 3 – each month adds another £4 000, giving closing balances of £10 000 and £14 000 respectively.

Common Mistakes

• Mixing up profit (which includes depreciation) with cash flow (which does not).
• Using total cost rather than contribution margin when calculating break‑even.
• Choosing a source of finance without considering the cost of interest or loss of control.
• Reading the current ratio as “good” without checking the composition of current assets (e.g., high stock may mask liquidity problems).

Practice Questions

1. Identify three internal and three external sources of finance for a small manufacturing firm and discuss one advantage and one disadvantage of each.
2. Given the following figures, calculate the current ratio and the quick ratio and comment on the firm’s short‑term liquidity:
   • Current assets: Stock £5 000, Debtors £8 000, Cash £2 000.
   • Current liabilities: Bank overdraft £4 000, Trade creditors £6 000.
3. Explain why a profitable business might still experience cash‑flow problems.
4. Compare micro‑finance and crowd‑funding as alternative finance sources for a start‑up social enterprise.