™

Cambridge IGCSE

BUSINESS STUDIES 0450/12

*6304921481*

Paper 1 Short Answer and Data Response May/June 2022

1 hour 30 minutes

You must answer on the question paper.

No additional materials are needed.

INSTRUCTIONS
• Answer all questions.
• Use a black or dark blue pen. You may use an HB pencil for any diagrams or graphs.
• Write your name, centre number and candidate number in the boxes at the top of the page.
• Write your answer to each question in the space provided.
• Do not use an erasable pen or correction fluid.
• Do not write on any bar codes.
• You may use a calculator.

INFORMATION
• The total mark for this paper is 80.
• The number of marks for each question or part question is shown in brackets [ ].

This document has 12 pages. Any blank pages are indicated.

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1 AHG is an established business as it has been operating for a long time. It sells garden products
including plants and flowers. AHG uses competitive pricing. The business has 4 managers and 30
other employees. All AHG’s managers use delegation. The Finance Manager is analysing AHG’s
statement of financial position as she is interested in its liquidity. An extract is shown in Table 1.1.

Table 1.1
Extract from AHG’s statement of financial position at 30 March 2022 ($000)

Non-current assets 800

Current assets 660

Current liabilities 600

(a) Define ‘current liabilities’.

The debts a business has that must be repayed in a period of 12 months or less.
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [2]

(b) Identify two examples of non-current assets.

Land
Example 1: ........................................................................................................................

...........................................................................................................................................
Machinery
Example 2: ........................................................................................................................

........................................................................................................................................... [2]

(c) Outline two possible reasons why liquidity is important to AHG.

To repay debts: It is important for AHG because they need to repay their current
Reason 1: .........................................................................................................................
liabilties of 660,000 If they cannot convert their assests into cash they will not be able
...........................................................................................................................................
to repay their debts.
...........................................................................................................................................

...........................................................................................................................................

To provide or have money for unforseen situations and emergiences. If AHG does not have
Reason 2: .........................................................................................................................
enough money to survive during emergencies it may need to shut down its business of
...........................................................................................................................................
selling garden products.
...........................................................................................................................................

........................................................................................................................................... [4]

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(d) Explain two advantages to AHG of its managers using delegation.

Motivates Employees
Advantage 1: ....................................................................................................................

...........................................................................................................................................

Explanation:When the 4 managers delegate work to employees. The employees may feel motivated as
......................................................................................................................
they may believe that their managers trust them and also may make them optimistic for
...........................................................................................................................................
future promotions which would result in them working with more effort which will reduce
...........................................................................................................................................
wastage, increase efficiency and output and hence reduce the Average Cost per unit.
...........................................................................................................................................
Developes the skills of the employees
Advantage 2: ....................................................................................................................

...........................................................................................................................................

Explanation: By delegating tasks to the 30 employees they will solve new problems which will develop
......................................................................................................................
their skills in the garden selling business and will resulting in new ideas
...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [6]

(e) Do you think competitive pricing is the best method for an established business to use? Justify
your answer.

When using competitive pricing businesses ensure that customers stay loyal to business and do not buy
...........................................................................................................................................
from competitor firms due to lower prices. Using competitive prices also means that there will no loss of
...........................................................................................................................................
market share because no customers are leaving. However, by using competitive pricing, the costs of the
...........................................................................................................................................
business may not be covered and hence they still may be loss making. Additionally, by using other methods
...........................................................................................................................................
of pricing such as cost-plus, the business will know how much profit they are making as well ensuring that
...........................................................................................................................................
all their costs are covered. Lastly, I beleive that an established business should not use competitive pricing
...........................................................................................................................................
as they already have a brand image and consumer loyalty from which they can charge higher prices to
...........................................................................................................................................
increase profits.

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [6]

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2 RWB manufactures buses.1200 people work in its factory. All employees receive off-the-job training.
RWB uses financial rewards to motivate its employees. Last year RWB made a $1.7 million loss.
The Managing Director said: ‘There are many external influences affecting our business, including
changes in the level of unemployment and new legal controls over business activities which affect
the environment.’

(a) Define ‘off-the-job training’.

Training given to employees outside the business infrastructure, where they are trained by professionals
...........................................................................................................................................
. They are given experience about the latest machinery and techniques of production.
...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [2]

(b) Identify two reasons (other than financial) why people work.
Self - Esteem
Reason 1: .........................................................................................................................

...........................................................................................................................................
Belongingness and Feeling Appreciated
Reason 2: .........................................................................................................................

........................................................................................................................................... [2]

(c) Outline two methods of financial rewards RWB might use to motivate its employees.

Providing Bonuses to employees who are most efficient and productive when
Method 1: ..........................................................................................................................
producing buses. This will result in employees trying to work harder in efforts to
...........................................................................................................................................
recieve bonuses.
...........................................................................................................................................

...........................................................................................................................................
Giving Employees a share in the business. By providing shares to the 1200 employees
Method 2: ..........................................................................................................................
they will feel part of the business and will take more accountability and responsibility leading to
...........................................................................................................................................
better productivity and effiency.
...........................................................................................................................................

........................................................................................................................................... [4]

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(d) Explain two ways RWB might be affected by new legal controls over business activities which
affect the environment.
May need to change product method
Way 1: ...............................................................................................................................

...........................................................................................................................................
As they are changing production method, they may need to buy different machinery
which will increase expenditure of business and hence increase the business losses.
Explanation: ......................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................
May have to buy pollution permits
Way 2: ...............................................................................................................................

...........................................................................................................................................
While manufacturing buses RWB will have to spend more on buying permits
which will increase business costs.
Explanation: ......................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [6]

(e) Do you think a reduction in the level of unemployment always benefits businesses? Justify
your answer.

A reduction in the level of unemployment would mean that there is less availabilty of labour
...........................................................................................................................................
increasing the scarcity which would result in having to pay wokers higher wages which would
...........................................................................................................................................
increase the business costs. A reduction in the level of unemployment may also mean that
...........................................................................................................................................
businesses do not have enough employees to meet their goals and will not be able to produce
...........................................................................................................................................
enough meet to consumer needs or be able to sell enough for survival which can result in the

...........................................................................................................................................
business having to shut down. However, a reduction in the level of unemployment would mean that
...........................................................................................................................................
businesses have more workers allowing them to increase the level of output and hence expand
...........................................................................................................................................
their business. A reduction in the level of unemployment would also mean that there would be an

...........................................................................................................................................
increase in the consumer spending and hence more sales and revenue for businesses.
...........................................................................................................................................
Lastly, I believe that businesses will be affected by a reduction in unemplyoment only if they do
...........................................................................................................................................
not have enough employees to produce their desired output. As they would have to pay higher
...........................................................................................................................................
wages due to shortages of labour as well pay existing empolyees more due to increased
........................................................................................................................................... [6]
workload.

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3 CHW manufactures electrical products including cameras. The business is developing new products.
The Managing Director knows that the stage of the product life cycle can influence CHW’s marketing
decisions about promotion. He is analysing data for one of its products. An extract is shown in
Table 3.1. The business would also like to introduce flow production into the factory.

Table 3.1
Extract from CHW’s data for one type of camera (2021)

Selling price per unit ($) 120

Variable cost per unit ($) 40

Fixed costs ($) 200 000

Margin of safety (units) 500

(a) Identify one benefit and one cost to a business of developing new products.
Reduced Risk of business failure to increased diversification
Benefit: .............................................................................................................................

...........................................................................................................................................
Additional fixed and variable costs and more business investment.
Cost: .................................................................................................................................

........................................................................................................................................... [2]

(b) Calculate the break-even level of output for 2021. Show your working.
BEP = (Fixed Cost/Selling Price - Variable cost)
...........................................................................................................................................
200,000/120-40 = 2500 units
...........................................................................................................................................

........................................................................................................................................... [2]

(c) Outline two ways CHW could increase its margin of safety.
By raising the prices at which it sells electrical products like camera’s it will increase
Way 1: ...............................................................................................................................
its total revenue and hence increase the margin of safety.
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................
By reducing costs by finding cheaper suppliers and spending less of promotion CHW can
Way 2: ...............................................................................................................................
increase its margin of safety.
...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [4]

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(d) Explain two ways in which the stage of the product life cycle might affect CHW’s marketing
decisions about promotion.
New Businesses may need to use Promotion to gain customer awareness
Way 1: ...............................................................................................................................

...........................................................................................................................................
If CHW is a new business it may need to use promotion to inform customers
Explanation: ......................................................................................................................
and other businesses that it produces electrical products. With customer
...........................................................................................................................................
awareness and a brand image CHW will not be able to sell its product forcing it
...........................................................................................................................................
to shut down.

...........................................................................................................................................
Established business should spend money elsewhere
Way 2: ...............................................................................................................................

...........................................................................................................................................

If CHW is an established business consumers are already familiar with the business
Explanation: ......................................................................................................................
and it has a brand image and CHW can instead reduce costs and focus on profit
...........................................................................................................................................
maximisation or even use the money to develop more products, which is something
...........................................................................................................................................
CHW is trying to do.
........................................................................................................................................... [6]

(e) Do you think flow production is the best method of production for a manufacturing business
to use? Justify your answer.
Flow prodcution allows manufacturing businesses to benefit from economies of scale as a large no of
goods are produced reducing the average cost. Secondly, by using flow production businesses will be
...........................................................................................................................................
able to produce much more output compared to any other method of production as machinery is
...........................................................................................................................................
working 24/7. Also, because machinery is mainly used in this type of production there is less chances
...........................................................................................................................................

of...........................................................................................................................................
errors occuring which reduces wastage and increases efficiency which results in reduction in costs

incurred by the business. Additionally, when only good is produced there is specialisation in that
...........................................................................................................................................
product which leads to better quality goods being produced which can result in higher customer
...........................................................................................................................................
satisfaction as well greater revenue. However, while using flow production, the production of the good
...........................................................................................................................................
will stop if there are any issues with the machinery. Secondly, in flow production only one good is
...........................................................................................................................................
produced and hence if it fails then the business has no alternative and may need to shut down. Lastly,
...........................................................................................................................................
I believe that flow production will only be useful to manufacturing businesses that one product in a
...........................................................................................................................................
mass quantity. As if it produces at a small scale it will not be able to benefit from economies of scale
...........................................................................................................................................
and specialisition.
........................................................................................................................................... [6]

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4 Tom wants to leave his job to become an entrepreneur. He and his sister plan to start a window
cleaning business. Tom has been told that new businesses are at a greater risk of failure than
established businesses. Tom has to decide whether a partnership is a suitable form of business
organisation for the new business. He has calculated the business will need $700 as start-up capital.
Tom knows that every decision he makes will have an opportunity cost.

(a) Define ‘entrepreneur’.

A person who takes a risk to start a business. Uses the factors of production to do so.
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [2]

(b) Define ‘opportunity cost’.

Is the next best alternative that is given up when a decision is taken.
...........................................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [2]

(c) Identify four reasons why a new business might be at greater risk of failure than an established
business.
Lack of resources / finance
Reason 1: .........................................................................................................................

...........................................................................................................................................
Lack of experience
Reason 2: .........................................................................................................................

...........................................................................................................................................
Little to No customer loyalty
Reason 3: .........................................................................................................................

...........................................................................................................................................
No Brand image
Reason 4: .........................................................................................................................

........................................................................................................................................... [4]

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(d) Explain two suitable sources of start-up capital Tom’s business might use.
Using wages from previous job
Source 1: ..........................................................................................................................

...........................................................................................................................................
By using using wages Tom recieved from the previous job
Explanation: ......................................................................................................................
as start up capital he does not need to pay any interest on this money reducing
...........................................................................................................................................
costs to raise capital
...........................................................................................................................................

...........................................................................................................................................
Bank Loans
Source 2: ..........................................................................................................................

...........................................................................................................................................
He could use bank loans to raise finance for his window cleaning business as
Explanation: he will be able to raise all capital at once.
......................................................................................................................

...........................................................................................................................................

...........................................................................................................................................

........................................................................................................................................... [6]

(e) Do you think a partnership is the best form of business organisation for a new business? Justify
your answer.

Partnership is the best form of business organisation for a new business because it splits the
...........................................................................................................................................
responsibilty between the owners, making the business less burdening. Secondly, in a partnership
...........................................................................................................................................
there will be more ideas and innovations compared to a business owned by one person like a sole
...........................................................................................................................................

trader. However as the business is new, they have some debts or liabilties. In a partnership there is
...........................................................................................................................................
unlimited liability which means the owners are personally responisble for the business debts where as
...........................................................................................................................................

...........................................................................................................................................
in business organisation like a private and public limited company owners are not personally

reponisble for business debts. It is also easier to raise finance in a public limited company compared
...........................................................................................................................................
to a partnership because they can sell shares to the public in exchange for money which can be
...........................................................................................................................................
necessary for the business to survive and grow. Lastly, I believe that Partnership is not the best form of
...........................................................................................................................................
business organisation as there is high risk for the owners who are personally liable for business debts,
...........................................................................................................................................
as well less likely to raise finance in comparison to other business organisaton like public ltd. company

...........................................................................................................................................

........................................................................................................................................... [6]

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