concept of break-even

IGCSE Business Studies (0450) – Revision Notes

How to use these notes

• Read each unit to cover AO1 (knowledge) and AO2 (application).
• Use the tables, diagrams and practice tasks to develop AO3 (analysis) and AO4 (evaluation).
• Each unit ends with short practice questions – attempt them before checking the suggested answers.

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Unit 1 – Understanding Business Activity

1.1 Purpose of Business

• Profit‑maximising objective – primary aim of most private‑sector firms.
• Other common objectives – growth, survival, market leadership, social responsibility, quality, and service.

1.2 Classification of Business

Sector	Definition	Typical Examples
Primary	Extraction of natural resources	Agriculture, fishing, mining
Secondary	Transformation of raw materials into finished goods	Manufacturing, construction
Tertiary	Provision of services	Retail, banking, education
Quaternary	Knowledge‑based services and information handling	IT services, research & development, consultancy

1.3 Enterprise, Size & Growth

• Enterprise – willingness to take risks, organise resources and pursue objectives.
• Size is measured by turnover, number of employees, market share, capital employed, or assets.

Why some businesses grow

• Access to finance (e.g., loans, equity)
• Effective marketing and product development
• Economies of scale and scope
• Strong management & leadership

Problems linked to rapid growth

• Cash‑flow shortages
• Insufficient managerial capacity
• Loss of control over quality
• Difficulty maintaining organisational culture

Why some businesses stay small

• Owner’s lifestyle choice (e.g., “family‑run” businesses)
• Limited access to finance or markets
• High perceived risk of expansion
• Regulatory or licensing constraints

Causes of business failure (AO1)

• Poor cash‑flow management
• Inadequate market research / weak demand
• Over‑expansion or under‑capitalisation
• Weak leadership or poor decision‑making
• Legal or regulatory breaches
• External shocks (e.g., economic recession, natural disasters)

1.4 Forms of Business Organisation

Form	Liability	Ownership	Key Features
Sole trader	Unlimited	One owner	Full control, simple to set up, profit goes to owner
Partnership	Unlimited (unless LLP)	2‑5 owners	Shared responsibility, profit split, easy to dissolve
Limited company (private)	Limited to share capital	Shareholders	Separate legal entity, shares not offered to public
Public corporation	Limited	Shareholders (public)	Shares traded on a stock exchange, subject to stricter regulation
Joint venture	Limited (depends on agreement)	Two or more firms	Shared resources for a specific project, limited duration

1.5 Business & Stakeholder Objectives

Stakeholder	Typical Objective
Owners / shareholders	Profit, return on investment, share price growth
Managers	Performance bonuses, career progression, job security
Employees	Wages, job security, training, good working conditions
Customers	Quality, price, service, value for money
Suppliers	Long‑term contracts, timely payment, stable orders
Government	Tax revenue, compliance, employment creation
Community / NGOs	Environmental protection, local employment, ethical behaviour

Conflict of stakeholder objectives (AO4)

Example: Shareholders may demand higher dividends, while employees seek higher wages. The business must balance these competing pressures, often by using profit‑sharing schemes or phased wage increases.

Private‑sector vs. Public‑sector objectives (AO1)

• Private sector – primarily profit‑maximisation, market share growth, shareholder value.
• Public sector – service delivery, social welfare, equality, and efficient use of public funds rather than profit.

Case Study – “Baker’s Delight” (illustrates objectives & stakeholders)

A family‑run bakery aims to increase profit (objective) while maintaining high product quality for its local community (social responsibility). Stakeholders include owners, staff, regular customers, the local council (health regulations) and the flour supplier.

Key Points to Remember (AO1)

• Businesses exist to satisfy needs and wants – profit is a means, not always the only end.
• Understanding sector, size and organisational form helps predict the type of decisions a business will face.
• Stakeholder analysis is essential for evaluating the impact of any decision (AO4).

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Unit 2 – People in Business

2.1 Motivation Theories (AO2)

Theory	Key Idea	Business Application
Maslow’s Hierarchy of Needs	Physiological → Safety → Social → Esteem → Self‑actualisation	Design reward packages that first meet basic needs before targeting higher‑order motivations.
Herzberg’s Two‑Factor Theory	Hygiene factors prevent dissatisfaction; motivators create satisfaction.	Provide competitive wages (hygiene) and opportunities for achievement/recognition (motivators).
Taylor’s Scientific Management	Break jobs into simple tasks; pay by output.	Useful in repetitive manufacturing but can reduce job satisfaction.
McClelland’s Achievement Motivation	People are driven by need for achievement, affiliation or power.	Offer challenging targets for high‑achievement employees; team‑building for affiliation‑driven staff.
Self‑Determination Theory (SDT)	Intrinsic motivation thrives when autonomy, competence and relatedness are supported.	Give employees choice over how to complete tasks, provide training, and foster a supportive team culture.

Activity – Match the Scenario (AO2)

Read each short scenario and decide which theory best explains the manager’s approach. (Answers provided at the end of the unit.)

2.2 Organisation & Management (AO1‑AO3)

• Hierarchical (tall) structure – many layers, clear authority, slower decision‑making.
• Flat (horizontal) structure – few layers, rapid communication, greater employee autonomy.
• Matrix structure – dual reporting (functional & product); good for complex projects but can cause conflict.
• Delegation – assigning authority and responsibility to sub‑ordinates. Benefits: faster decisions, skill development, employee motivation. Requires trust and clear accountability.
• Trust vs. Control – high trust reduces need for detailed monitoring; excessive control can demotivate staff.

Organisational Chart Template (fill in for a chosen business)

Level	Position(s)
Top	Chief Executive Officer (CEO)
Middle	Finance Manager, Marketing Manager, Production Manager, HR Manager
Operational	Supervisors, Shop‑floor staff, Sales assistants

2.3 Recruitment, Selection, Training, Development & Downsizing (AO2‑AO4)

• Recruitment methods – internal promotion, advert (newspaper/online), recruitment agencies, university fairs.
• Selection tools – application forms, CVs, interviews, assessment centres, psychometric tests.
• Training types – on‑the‑job, off‑the‑job, apprenticeship, e‑learning, mentoring.
• Development – career pathways, succession planning, leadership programmes.
• Downsizing – reduction in workforce to cut costs.
• Dismissal – termination for performance or conduct reasons; may involve notice period and severance.
• Redundancy – role eliminated because of organisational change (e.g., automation); statutory redundancy pay may apply.

Legal Controls Checklist (AO1)

Control	Key Requirement
Minimum Wage Act	Pay at least the legal hourly rate.
Working Time Regulations	Maximum 48 h/week (average), rest breaks, paid annual leave.
Equality Act	Prohibit discrimination on protected characteristics.
Health & Safety at Work Act	Employer’s duty of care; risk assessments; training.
Employment Rights Act	Statutory redundancy pay, unfair dismissal protection.

2.4 Communication (AO1‑AO3)

• Formal channels – memos, reports, minutes, official meetings.
• Informal channels – grapevine, social media, casual conversations.
• Barriers – language, hierarchy, cultural differences, physical distance, information overload.

2.5 Trade Unions & Industrial Relations (AO1‑AO4)

Aspect	Key Points
Trade unions	Collective bargaining, industrial action, representation of workers’ interests.
Collective bargaining	Negotiation of wages, conditions, and benefits.
Industrial action	Strikes, work‑to‑rule, picketing – used when negotiations fail.
Employer strategies	Negotiation, voluntary agreements, use of “no‑strike” clauses, or legal action.

Evaluation Task (AO4)

Discuss the advantages and disadvantages of a strong trade‑union presence for a manufacturing firm. (Consider wages, productivity, flexibility, and industrial relations.)

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Unit 3 – Marketing

3.1 The Role of Marketing (AO1)

• Identifies customer needs, creates value, builds relationships, and generates revenue.
• Links directly to the business’s profit objective and to other objectives such as market share and brand reputation.

3.2 Market Segmentation & Targeting (AO2)

Segmentation Basis	Definition	Example
Demographic	Age, gender, income, occupation, education	18‑25 year‑old university students
Geographic	Region, climate, urban/rural	Urban centres in the UK
Psychographic	Lifestyle, values, personality	Eco‑conscious consumers
Behavioural	Purchase occasion, loyalty, usage rate	Frequent online shoppers

Exercise – Fill the Table

Choose a product (e.g., sports shoes) and complete a segmentation table for that product. Include at least one example for each basis.

3.3 The 4 Ps of the Marketing Mix (AO1‑AO2)

P	Key Decisions	Real‑world Example
Product	Features, quality, branding, packaging, warranty	Apple iPhone – premium design, iOS ecosystem
Price	Pricing strategy, discounts, credit terms, price‑skimming vs. penetration	Supermarket own‑brand – low‑price strategy
Place	Distribution channels, location, logistics, inventory levels	Amazon – global online platform with rapid delivery
Promotion	Advertising, sales promotion, public relations, personal selling, digital marketing	Coca‑Cola – TV ads + sponsorship of sports events

3.4 Market Research (AO2)

• Primary research – surveys, interviews, focus groups, observation.
• Secondary research – published statistics, trade journals, company reports, internet sources.
• Use research to test a new product idea before launch; analyse findings to make a justified recommendation.

3.5 E‑commerce & Digital Marketing (AO1‑AO3)

• Websites, social media, email newsletters, search‑engine optimisation (SEO), pay‑per‑click (PPC) advertising.
• Advantages – wider reach, lower cost per contact, 24/7 availability, measurable data.
• Disadvantages – security and privacy concerns, need for robust logistics, digital divide.

3.6 Legal Controls in Marketing (AO1)

• Consumer Protection Act – product safety and liability.
• Trade Descriptions Act – prohibition of false or misleading descriptions.
• Data Protection (GDPR) – lawful handling of personal data.
• Advertising Standards Authority (ASA) – rules on truthfulness, decency, and fairness.

3.7 Entering Foreign Markets (AO2‑AO4)

Entry Mode	Key Features	Risk Level
Exporting	Sell domestically produced goods abroad; may use agents or distributors.	Low
Joint venture	Partner with a local firm; shares resources, risk and profit.	Medium
Franchising	Grant rights to use brand, systems and support; franchisee bears most investment.	Medium‑Low
Foreign Direct Investment (FDI)	Set up own subsidiary or acquire existing firm; full control.	High

Mini‑Case (AO3/4)

A start‑up coffee shop wants to expand into a neighbouring city. Recommend a suitable entry mode and justify your choice using at least two elements of the marketing mix.

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Unit 4 – Operations Management

4.1 Methods of Production (AO1‑AO3)

Method	Typical Product	Key Advantages	Key Disadvantages
Job production	Custom furniture, bespoke software	Highly flexible, high quality, customer‑specific	High cost per unit, low output, skilled labour required
Batch production	Seasonal clothing, bakery items	Balance between flexibility and cost; economies of scale within batch	Set‑up time between batches, inventory of unfinished goods
Flow (mass) production	Smartphones, canned food	Low unit cost, high volume, consistent quality	Low flexibility, high initial capital, risk of large‑scale defects

4.2 Productivity (AO1‑AO2)

• Productivity = output ÷ input. Higher productivity usually reduces average cost per unit.
• Ways to improve productivity:
  • Training and skill development
  • Investment in modern equipment
  • Process redesign (e.g., lean production)
  • Incentive schemes linked to output

4.3 Inventory Management (AO1‑AO2)

• Stock‑holding (carrying) costs – storage, insurance, obsolescence, capital tied up.
• Just‑in‑Time (JIT) – minimise inventory by receiving goods only when needed; reduces holding costs but requires reliable suppliers.
• Economic Order Quantity (EOQ) (optional for A‑level):
  $$\text{EOQ} = \sqrt{\frac{2DS}{H}}$$ where D = annual demand, S = ordering cost per order, H = holding cost per unit per year.

4.4 Quality Management (AO1‑AO3)

• Quality assurance (QA) – processes to prevent defects (e.g., standards, training).
• Quality control (QC) – inspection and testing of finished products.
• Key tools:
  • ISO 9001 certification
  • Six Sigma (DMAIC cycle)
  • Total Quality Management (TQM)
  • Statistical Process Control (SPC) charts

4.5 Location Decisions (AO2‑AO4)

Factor	Why It Matters
Proximity to market	Reduces distribution cost and delivery time; improves customer service.
Proximity to suppliers	Lowers raw‑material transport costs; facilitates JIT.
Labour availability & cost	Impacts operating expenses and skill level.
Infrastructure	Roads, ports, rail, broadband – essential for efficient operations.
Government incentives	Tax breaks, grants, reduced rates – can offset higher costs elsewhere.
Environmental & planning regulations	Restrictions on emissions, waste, building permits.

4.6 Economies & Diseconomies of Scale (AO1‑AO3)

• Economies of scale – average cost falls as output rises (e.g., bulk buying, specialised staff, spreading overheads).
• Diseconomies of scale – average cost rises after a certain size due to bureaucracy, communication problems, and reduced employee motivation.

4.7 Break‑Even Analysis (AO1‑AO4)

Quick Reference

• Fixed Costs (FC) – do not vary with output (rent, salaries, insurance).
• Variable Cost per unit (VC) – change directly with output (materials, direct labour).
• Selling Price per unit (SP).
• Contribution Margin (CM) = SP – VC.
• Contribution Margin Ratio (CMR) = (SP – VC) ÷ SP.

Formulas

1. Break‑even point in units:
   $$\text{BEP}_{\text{units}} = \frac{FC}{CM} = \frac{FC}{SP - VC}$$
2. Break‑even point in sales value (£):
   $$\text{BEP}_{\text{sales}} = \frac{FC}{CMR}$$

Step‑by‑Step Calculation (AO2)

1. Identify all fixed costs for the period (e.g., £12 000 per month).
2. Determine the variable cost per unit (e.g., £8 per widget).
3. Set the selling price per unit (e.g., £20 per widget).
4. Calculate the contribution margin: £20 – £8 = £12 per unit.
5. Divide fixed costs by the contribution margin: £12 000 ÷ £12 = 1 000 units.
6. Interpretation: The business must sell **1 000 widgets** to cover all costs; any sales above this generate profit.

Graphical Representation (AO3)

Draw a line graph with:

• X‑axis: Quantity of units
• Y‑axis: £ (costs and revenue)
• Three lines:
  • Total Fixed Costs – horizontal line at £12 000.
  • Total Costs – starts at £12 000 and rises with slope equal to VC (£8).
  • Total Revenue – starts at the origin and rises with slope equal to SP (£20).
• The point where Total Revenue meets Total Costs is the break‑even point (1 000 units, £20 000 revenue).

Using Break‑Even for Decision‑Making (AO4)

• Pricing decisions – assess impact of a price change on BEP.
• Cost control – evaluate how reducing fixed or variable costs lowers the BEP.
• Product mix – compare BEP of different products to choose the most profitable line.
• Risk assessment – a high BEP indicates greater risk if sales fall short.

Practice Question (AO2‑AO4)

A company produces a hand‑crafted candle. Fixed costs are £5 000 per month. Variable cost per candle is £2. The selling price is £8.

1. Calculate the break‑even point in units and in sales value.
2. Explain how a 10 % increase in the selling price would affect the break‑even point.
3. Evaluate whether the company should consider a price increase, considering the likely impact on demand.

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Key Revision Strategies (Across All Units)

• Mind‑maps – link concepts such as objectives, stakeholders and forms of organisation.
• Past paper practice – focus on questions that require AO3 and AO4 analysis.
• Flashcards – definitions, formulas (e.g., BEP), and legal controls.
• Case‑study approach – always identify the business, its sector, objectives and relevant stakeholders before answering.

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End of Notes