Cambridge IGCSE · 0450

Business Studies

Enterprise and planning — Topic 1

Name: ____________________Date: November 12, 2026

1.
A new business sets the objective 'to increase annual revenue by 10% within two years'. This is best described as: A A mission statement B A stakeholder C A SMART objective D A diseconomy of scale
[1 mark] · no calculator
Worked explanation
1. Choose C: the 10% annual-revenue increase is measurable and the two-year horizon supplies a deadline.
2. This makes progress testable, unlike a broad mission. Whether the target is achievable and relevant still requires business evidence; the label alone cannot prove feasibility.
Common mistake: A precise number does not prove the target is achievable.
Marking points
- Selects C: a SMART objective, since it is specific, measurable and time-bound.
Examiner tip: A mission statement expresses a broad purpose; a SMART objective turns that purpose into a specific, measurable target.
2.
Explain one reason why an entrepreneur starting a new business faces risk.
[2 marks] · no calculator
Worked explanation
1. The entrepreneur commits savings and working time before knowing whether customers will buy enough.
2. If receipts do not cover operating costs and the original commitment, those resources may not be recovered. A plan can reduce uncertainty, not guarantee repayment of the risk.
Common mistake: Risk concerns uncertain loss, not certain business failure.
Marking points
- Identifies that the entrepreneur commits money, time or other resources to the business.
- Explains that there is no guarantee the business will succeed or earn enough revenue to cover this commitment.
Examiner tip: Risk in enterprise means resources committed today may not be recovered if the business fails.
3.
Explain one benefit and one drawback to a business owner of writing a business plan before starting up.
[2 marks] · no calculator
Worked explanation
1. A cash forecast in the plan can reveal a funding gap early and help a lender assess repayment prospects.
2. Preparing it takes time and its sales assumptions may be wrong, so managers must update the forecast rather than follow it as a promise.
Common mistake: Writing a plan does not validate its demand assumptions.
Marking points
- States a benefit such as helping to secure finance from a bank or investor, or clarifying objectives and resources needed.
- States a drawback such as the time and cost of preparing it, or that forecasts may prove inaccurate.
Examiner tip: A business plan is most valuable for raising finance and testing an idea, but it cannot guarantee the forecasts it contains.
4.
Which is an example of an internal economy of scale for a large manufacturer? A Paying a higher price per tonne of raw material B Bulk-buying raw materials at a lower price per unit C Losing communication efficiency between departments D Higher average distribution cost per unit
[1 mark] · no calculator
Worked explanation
1. Choose B: bulk purchasing lowers the material price per unit because the manufacturer buys at larger scale.
2. The saving is internal to the growing firm. Paying higher unit prices or losing communication efficiency raises costs instead, so those alternatives are not economies.
Common mistake: Scale economies concern lower unit cost, not just more output.
Marking points
- Selects B: purchasing economies, where buying in bulk lowers the average cost per unit of raw material.
Examiner tip: Economies of scale lower average cost per unit as output grows; the other options describe rising costs or diseconomies.
5.
Explain one reason why a business might suffer a diseconomy of scale as it grows very large.
[2 marks] · no calculator
Worked explanation
1. As sites and management layers multiply, an instruction may take longer to reach the factory or be duplicated inconsistently.
2. Wasted staff time and rework then raise cost per saleable unit. That is a diseconomy of scale, unlike a proportional increase in total costs with unchanged unit cost.
Common mistake: Larger total cost does not itself mean diseconomies.
Marking points
- Identifies a cause such as poorer communication, slower decision-making or reduced employee motivation in a very large organisation.
- Explains that this raises the average cost per unit as output continues to increase.
Examiner tip: A diseconomy of scale is a rise, not a fall, in average unit cost, usually linked to the difficulty of managing a very large organisation.
6.
A local coffee shop owner is considering becoming a franchisee of a national coffee brand instead of continuing independently. Explain one advantage and one disadvantage of this for the owner.
[2 marks] · no calculator
Worked explanation
1. The national coffee brand can attract customers and supply an established operating format to the local owner.
2. Fees and royalties take part of each outlet's return, while menu and supplier rules limit local freedom. Compare added contribution with those charges rather than assume recognition guarantees success.
Common mistake: The franchisee does not keep all revenue as profit.
Marking points
- States an advantage such as using an established brand name, proven business format or head-office support and training.
- States a disadvantage such as paying an initial fee and ongoing royalties, or losing independence over how the business is run.
Examiner tip: Franchising trades independence and a share of profit for a proven, lower-risk business format.
7.
A successful local bakery chain wants to grow. Analyse one advantage of growing organically (opening new branches itself) compared with growing by taking over a rival bakery.
[3 marks] · no calculator
Worked explanation
1. New bakery branches can use the chain's recipes, equipment standards and staff training from the outset.
2. This avoids reconciling a rival's different systems or product expectations, helping preserve consistent quality. It still needs finance and time to build demand; organic growth is not automatically cheap.
Common mistake: Do not confuse avoided integration with absence of financial risk.
Marking points
- Identifies one organic-growth advantage, for example avoiding integration of a rival's systems and culture or retaining control of new branch design.
- Develops the chosen advantage for the bakery, for example using its own recipes and training standards to maintain consistency.
- Explains a resulting benefit or compares it with takeover integration risk. Organic growth is not necessarily funded only internally or invariably lower in financial risk.
Examiner tip: Compare the chosen growth mechanism in context. Both organic expansion and takeovers can use debt or equity finance.
8.
A small business owner has $50,000 saved. She can use it to expand her existing shop, or use it as a deposit to buy a franchise of a well-known brand in a new location. Recommend one option using two relevant factors.
[3 marks] · no calculator
Worked explanation
1. Expanding the existing shop builds on known customers and avoids franchise royalties; a new-location franchise offers brand recognition where the owner lacks experience.
2. I would favour shop expansion if demand justifies it and $50000 leaves a cash buffer. If the original site has no growth room, the franchise may be better, but its deposit is not its total funding requirement. Obtain full fees and working-capital needs first.
Common mistake: Do not treat the $50000 deposit as the whole franchise cost.
Marking points
- Analyses a relevant factor for expanding the existing shop, such as building on proven local customer loyalty and lower ongoing costs (no royalties).
- Analyses a relevant factor for the franchise, such as an established national brand reducing the risk of attracting customers in an unfamiliar new location.
- Makes a supported recommendation that weighs risk, cost and market knowledge.
Examiner tip: Compare what each option does with the owner's existing strength: local knowledge favours expansion, an unfamiliar market favours a recognised brand.
9.
Discuss whether 'maximising profit' is likely to be the most important objective for a newly-established small business in its first year of trading.
[4 marks] · no calculator
Worked explanation
1. In year one, uncertain demand and setup payments can make keeping sufficient cash more urgent than maximising accounting profit.
2. I would prioritise survival and a repeat-customer base where reserves are limited, while monitoring a path to sustainable margins. A well-funded startup may deliberately accept early losses; an immediately profitable niche could prioritise profit sooner. Funding and market conditions decide the emphasis.
Common mistake: Survival does not require positive accounting profit in every period.
Marking points
- Explains that survival is often the more urgent objective for a new business, given limited customers, cash and brand awareness.
- Explains that building market share or customer loyalty early may matter more than short-term profit for long-term success.
- Explains that adequate cash and financing are needed to meet bills. Break-even revenue covers accounting costs without a positive profit, and funded start-ups can survive initial losses; sustainable profitability may still be a longer-term goal.
- Reaches a judgement depending on the type of business, its funding, and the level of competition it faces.
Examiner tip: Objectives usually change over a business's life: survival first, then growth and market share, with profit maximisation more realistic once established.