Cambridge IGCSE and O Level Business Studies

16 Costs, scale of production and

break‑even analysis
Answers to Coursebook activities
Activity 16.1 (page 216)
Fixed Variable
Factory rent (✔)
Leather used in making some shoes ✔
Electricity used to power machinery ✔
Machinery maintenance ✔
Advertising ✔
Production workers’ wages ✔
Operations manager’s salary ✔
Delivery of finished goods to customers ✔
Safety equipment for production ✔
employees

Activity 16.2 (page 217)

1 Output Fixed Variable costs Total
(pairs of shoes) costs $3 per pair of shoes costs
$ $ $
0 2 000 0 2 000
1 000 2 000 3 000 5 000
2 000 2 000 6 000 8 000
3 000 2 000 9 000 11 000
4 000 2 000 12 000 14 000

2 Student’s own answer.

Activity 16.3 (page 217)

1 Output Total Costs Average Costs
$ $
1 000 5 000 5
2 000 8 000 8
3 000 11 000 3.7
4 000 14 000 3.5
5 000 17 000 3.4
6 000 20 000 3.3

2 Fixed cost spread over increasingly larger levels of output so fixed cost per unit gets smaller as output
increases.

© Cambridge University Press 2018 Chapter 16 Answers to Coursebook activities 1

Cambridge IGCSE and O Level Business Studies

Test yourself (page 218)

1 Fixed costs do not change with output, e.g. it costs as much to advertise one unit of output for sale as
it does 10 000 units. Variable costs change as output changes, e.g. if output doubles, average costs also
double. Example of variable costs is raw material.
2 Cost of producing one unit of output.
3 Total cost/output

Activity 16.4 (page 219)

1 Costs which do not change with output. If the plane is empty or full, the fixed costs remain at $14 000.
2 1925/25 = 77
3 a 116 × $10 = $1160
b $14 000 + $1160 = $15 160
c $15 160/116 = $130.69
4 Revenue per passenger is $160, which is less than the average cost of $191.82. Some flights might make
a loss but others are profitable. If EasyAir cancelled flights then it might still have to pay fixed costs of
$14 000.

Activity 16.5 (page 220)

Technical economies – able to buy more machinery and better machinery for the new factory that will
produce greater output in the same amount of time as the machinery in his current factory; Bulk-buying
(purchasing economies) – buy more raw materials from suppliers so might expect to receive discount for
buying in larger quantities; Managerial economies – as the business is expanding he might employ more
managers to improve decision-making.

Test yourself (page 222)

1 Economies of scale reduce cost per unit. Help firms to increase profit margins or reduce prices to
become more competitive.
2 If a business grows too big it might have problems managing its workforce effectively, or
communication between managers and employees might become less effective. Diseconomies of scale
will increase unit costs.

Case study (page 222)

a Bulk-buying (purchasing economies) – able to buy the products it sells in its supermarkets from
suppliers in much larger quantities. Might expect to receive a discount for buying larger quantities;
Managerial economies – can employ more managers and attract better-quality managers. Will improve
efficiency and effectiveness of the business; Financial economies – likely to find it easier to borrow
money from banks and other lenders to finance expansion plans. Often be able to borrow large sums at
lower rates of interest than small businesses who might only be borrowing small amounts of capital.
b Provide consumers with a wider choice of products in their supermarkets. If it achieves economies of
scale, it will pass some of the reduced costs to consumers in the form of lower prices.
c If Nakumatt becomes too large then it might become difficult to manage effectively. Decision-making might
be slower so it might not be able to respond quickly to changes in markets. Communication between head
office and individual supermarkets might be less effective – tasks might be completed incorrectly or not
completed at all.

Activity 16.6 (page 225)

Answers are given in Coursebook, following each stage of activity.

© Cambridge University Press 2018 Chapter 16 Answers to Coursebook activities 2

Cambridge IGCSE and O Level Business Studies

Activity 16.7 (page 226)

1 Total costs for output level of 600 pizzas = $1200
2 Revenue at a sales level of 600 pizzas = $1500
3 Molly’s profit at a sales level of 600 pizzas = $300
4 Molly’s profit if only sells 500 pizzas = $150

Activity 16.8 (page 226)

1 Straight line drawn from 0 to $1600
2 600
3 If Molly sells 800 pizzas per week, profit = $200

Test yourself (page 226)

1 Revenue = Total costs. Output where a business does not make a profit or a loss.
2 To calculate the level of profit that will be earned for any given level of sales. To know how a change in
costs (or revenue) will affect break-even.
3 Benefit: can easily show the effect on break-even and profit of a change in revenue or costs. Limitation:
assumes all output is sold, i.e. there are no inventory costs.

Activity 16.9 (page 226)

1 Fixed costs, e.g. manager’s salary, do not change with the number of guests. Variable costs change as
the number of guests rises and falls, e.g. costs of providing food for breakfast for each guest, or laundry
costs for washing linen used by each guest.
2 210 × 50 = 10 500 rooms
3 10 500 × 60% = 6300 rooms
4 Owners can calculate: how many rooms they need to sell in order to cover all costs; how much profit
they will make for a given level of occupancy; the effect on break-even and profit of any changes to
revenue (room rates) and costs. However, break-even assumes that all rooms are sold for the same price,
which might not be the case, e.g. might reduce the price of rooms during less busy periods. Some costs
are neither fixed nor variable – cannot be shown on a break-even chart. Break-even might provide a
useful guide about the relationship between revenue and costs, but it does not give 100% reliable data.

Exam-style practice questions (pages 227–228)

1 a A = Revenue; B = Total costs. [2]
b (200/4000) × 100% = 5% [2]
c Fixed costs (1), costs that do not change with the production of Product X, e.g. factory rent (1).
Variable costs (1), costs that change in direct proportion with the production of Product X, e.g. raw
materials (1). [Total: 4]
d Benefit: identify break-even point / output (1), how many units of Product X must sell to cover all
its costs (1), can compare the break-even output with current or forecast sales to measure profit (1).
Limitation: assumes all output of product X is sold (1), inventory costs are ignored (1), if inventory
costs are ignored and there are these costs then break-even and profit calculations are misleading (1).
[Total: 6]
e Can be used in break-even charts (1), might help when setting price (1), can see which costs must
be paid even if they do not sell any output (1), can be used in making decisions about whether or
not to continue producing a product (1). (Maximum of 4 marks for usefulness of cost information.)
However, not all costs can be classified into fixed or variable (1), or even fixed costs will change above
certain output levels (1). Statement about usefulness based on points made (1). [Total: 6]
© Cambridge University Press 2018 Chapter 16 Answers to Coursebook activities 3
Cambridge IGCSE and O Level Business Studies

2 a Point where a business is not making either a profit or a loss. Revenue = Total costs. [2]
b 18 000 + (15% × 18 000) = 20 700 units
c Fixed costs do not change with output/sales (1), SE’s fixed costs might include the accountant’s salary
(1). Variable costs do change as output changes (1), SE’s variable costs will include the raw materials it
uses to manufacture solar panels (1). [Total: 4]
d Purchasing economies (1), increase in sales will have needed SE to buy more raw materials to increase
output of solar panels (1), might have been able to negotiate bulk-buying discounts from suppliers
of raw materials (1), this reduces unit costs (1). Technical economies (1), expansion of solar panel
production might have been achieved through use of more technology/automation (1), machines can
produce a greater output than labour (1), a more capital-intensive production process increases SE’s
productivity (1). [Total: 6]
e Need to discuss the benefits and limitations of break-even charts. SE management can calculate
how many solar panels they need to sell in order to cover all of their costs (1). They can calculate
how much profit they will make for a given level of output/sales (1). They can calculate the effect on
break‑even and profit of any changes to the selling price and costs (1). However, break-even assumes
that SE sells all of its output (1). Inventories and associated costs are ignored (1). Break-even assumes
that all costs can be classified into fixed and variable (1). However, some costs are neither fixed nor
variable and these cannot be shown on a break-even chart (1). (Maximum of 4 marks for identifying
and explaining benefits and limitations of break-even charts.) Supported statement as to whether the
student agrees or disagrees with the managing director’s view of break-even – might provide a useful
guide to the owners about the relationship between revenue and costs, but it does not give 100%
reliable data (2). [Total: 6]

© Cambridge University Press 2018 Chapter 16 Answers to Coursebook activities 4