IGCSE Business Studies - Costs, Scale of Production, and Break Even Analysis Questions

1. Calculating total cost and average cost

A Car manufacturer produces three models of Vehicle, X, Y, and Z. It has calculated the costs of these three
products to be:
X Y Z

Variable material costs 5 10 8

($ M)

Variable labour costs 10 14 6

($M)

Allocated fixed costs 9 12 6

($M)

Annual Output of 4000 12000 5000

vehicles

I. Calculate the Total variable cost of manufacturing vehicle models X, Y, and Z

II. Calculate the total costs of manufacturing models X, Y, and Z
III. Calculate the average costs of manufacturing models X, Y, and Z.
IV. Identify and explain two possible uses of these results to managers of the car manufacturer

2. Sashas Jewellery business

Sasha rents a market stall selling jewellery. She makes most of the jewellery herself but she also buys in
items from large manufacturers. her only other variable costs is the pay of her sales assistant who receives a
small payment for each item she sells. Sasha wants to expand her business and she has found out that there is
an empty shop near her home. The fixed costs of the shop are three times greater than those of the market
stall.

I. What is meant by Variable costs (2 marks)

II. Identify two fixed costs that Sasha has (2 marks)
III. Identify and explain two ways in which Sasha could reduce the break-even level of sales from her
market stall. (4 marks)
IV. Identify and explain two reasons why large jewellery manufacturers can produce jewellery at a lower
average cost than Sasha can. (6 marks)
V. Would you advise Sasha to close her market stall and open a shop instead? Justify your answer (6 marks)

3. Popsquash PLC

Popsquash plc is one of the worlds largest makers of soft drinks. Sales have increased in recent years but
profits have not. Rising fixed and variable costs have meant that higher sales revenue has not led to higher
profits. the chief Executive recently said: Perhaps the company is just too big to manage efficienctly. A new
factory is planned for Coutnry Z. An incomplete break-even chart is shown

I. What is meant by the term fixed costs (2 marks)

II. Identify two variable costs that Popsquash plc has. (2
marks)
III. Identify and explain two reasons why being too big can
lead to higher average costs. (4 marks)
IV. Copy out and complete the break-even chart
V. Explain two ways in which Popsquash plc could try to
reduce the break-even level of output in the new factory.
Recommend to the Chief Executive which one the company
should use. Justify your answer (6 marks)
VI.
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3 Gino runs a take-away pizza business. He has estimated that he can produce as many as For
1000 pizzas per week although he is only selling 700 on average at present. Gino recently Examiners
looked again at his costs and prices. These are shown in Table 1. Use

Table 1

Direct cost per pizza $4

Weekly overheads $1800

Selling price per pizza $7

(a) Give an example of one of Ginos:

(i) Direct costs

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(ii) Overhead costs

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(b) (i) Draw a breakeven chart to show Ginos weekly revenue and costs.

[6]

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Calculate: For
Examiners
(ii) How many pizzas Gino has to sell to break even. Use

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(iii) Ginos annual profit when he sells 700 pizzas per week.

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(c) Gino invested $100000 in his business when he set it up.

Using your profit figure from (b)(iii) calculate the return on capital employed.

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(d) Ginos business is currently profitable. He thought that this meant it would be profitable For
for the next few years as well. What do you think? Examiners
Use

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1 GK Hotel is a small hotel in the city centre. It has 15 rooms. Most of its customers are tourists. Last
year the number of customers fell due to changes in consumer spending patterns and increased
competition. The Marketing manager believes GK must attract customers from different market
segments if the hotel is to increase its profits. His plan is to improve the GK website. He is not sure
whether he should change the cost plus pricing method he uses.

Table 1: Cost and price data for GK Hotel

Average price per room $40

Variable cost per room $20
Total fixed costs per month $4000
Average number of rooms booked and paid
250
for per month

(a) What is meant by market segment?

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(b) Identify two reasons why consumer spending patterns might change.

Reason 1: .................................................................................................................................

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Reason 2: .................................................................................................................................

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(c) Using the information in Table 1, draw a break-even chart for GK Hotel on Figure 1. [4]

Figure 1

10 000

9000

8000

7000

6000
costs and
revenue
5000
($ per month)

4000

3000

2000

1000

0 50 100 150 200 250 300

number of rooms booked per month

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(d) Identify and explain two benefits to GK Hotel of having a website.

Benefit 1: ...................................................................................................................................

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Explanation: ..............................................................................................................................

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Benefit 2: ...................................................................................................................................

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Explanation: ..............................................................................................................................

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(e) Do you think that cost plus pricing is the best pricing method for GK Hotel to use? Justify your
answer.

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