Cambridge IGCSE · 0450

Business Studies

Financial information and decisions — Topic 5

Name: ____________________Date: November 12, 2026

1.
A product sells for $20. Variable cost per unit is $12. Fixed costs are $4,000 per month. Calculate the monthly break-even output in units.
[4 marks]
Worked explanation
1. Each unit contributes $20 - $12 = $8 toward monthly fixed costs.
2. Break-even sales = $4000/$8 = 500 units. Check: revenue $10000 equals $6000 variable cost plus $4000 fixed cost, leaving zero profit.
Common mistake: Dividing fixed costs by selling price ignores variable costs.
Marking points
- Uses break-even output = fixed costs ÷ (selling price − variable cost per unit).
- Calculates the contribution per unit: 20 − 12 = $8.
- Substitutes 4000 ÷ 8.
- Obtains 500 units.
Examiner tip: Break-even output is the level of sales at which total contribution exactly covers fixed costs, so profit is zero.
2.
Using the same product (break-even output 500 units), the business actually sells 650 units in a month. Calculate its margin of safety.
[3 marks]
Worked explanation
1. Safety margin = 650 actual sales - 500 break-even sales = 150 units.
2. Sales can fall by 150 before profit becomes zero under unchanged price and cost assumptions; a further decline produces a loss. The requested margin is units, not revenue.
Common mistake: Do not report 150 dollars for a quantity margin.
Marking points
- Uses margin of safety = actual output − break-even output.
- Substitutes 650 − 500.
- Obtains a margin of safety of 150 units.
Examiner tip: The margin of safety shows how far sales can fall before the business reaches its break-even point and profit turns to loss.
3.
A business has revenue of $80,000 and cost of sales of $50,000 for the year. Calculate its gross profit margin.
[4 marks]
Worked explanation
1. Gross profit = $80000 - $50000 = $30000.
2. Gross margin = $30000/$80000 x 100 = 37.5%. This leaves 37.5 cents per revenue dollar before later expenses, not 37.5% net profit available to owners.
Common mistake: Use revenue, not cost of sales, as the margin denominator.
Marking points
- Uses gross profit = revenue − cost of sales.
- Calculates gross profit = 80000 − 50000 = $30,000.
- Uses gross profit margin = gross profit ÷ revenue × 100.
- Substitutes 30000 ÷ 80000 × 100 to obtain 37.5%.
Examiner tip: Gross profit is revenue less cost of sales, before selling, administrative and other expenses. Production wages and production overheads may already be included in cost of sales.
4.
Explain why a profitable business could still run out of cash and be unable to pay its suppliers.
[2 marks] · no calculator
Worked explanation
1. Credit sales can enter profit before customers actually pay, while supplier invoices fall due sooner.
2. The resulting receivable is not bank cash, so the firm may miss payments despite accounting profit. Cash forecasts and collection dates reveal this timing gap better than profit alone.
Common mistake: An accounting profit is not an available bank balance.
Marking points
- States that profit is an accounting measure of revenue minus costs over a period, while cash is the actual money available at a point in time.
- Explains a reason profit and cash can differ, such as customers being given credit (sales made but not yet paid for) or cash tied up in unsold stock.
Examiner tip: A business can be profitable 'on paper' yet insolvent in practice if its cash inflows lag behind when bills must be paid.
5.
Which is an example of a short-term source of finance for a business? A A 10-year bank loan B Issuing new shares C A bank overdraft D Selling a fixed asset such as land
[1 mark] · no calculator
Worked explanation
1. Choose C, a bank overdraft: it provides flexible borrowing to cover a temporary cash gap.
2. A ten-year loan funds longer-lived needs and shares provide ownership capital. Overdraft flexibility still has interest and repayment conditions, making it unsuitable as automatically permanent finance.
Common mistake: Short-term finance is not necessarily low-cost finance.
Marking points
- Selects C: a bank overdraft, which lets a business borrow flexibly for short periods to cover temporary cash shortfalls.
Examiner tip: Long-term sources (loans, shares) fund major investment; short-term sources (overdraft, trade credit) manage day-to-day cash flow.
6.
Explain one advantage to a business of using retained profit, rather than a bank loan, to finance a new investment.
[2 marks] · no calculator
Worked explanation
1. Using available retained-profit cash avoids the bank loan's scheduled repayments and contractual interest.
2. This reduces debt-service pressure on the investment, but consumes cash that could fund another project or a safety buffer. Retained accounting profit does not itself prove cash is available.
Common mistake: Interest-free funding still has an opportunity cost.
Marking points
- States that retained profit does not have to be repaid and does not carry interest charges, unlike a bank loan.
- Explains that this reduces the business's financial risk and avoids giving a lender any claim over its assets.
Examiner tip: Retained profit is free of interest and repayment obligations, but it depends on the business already having made sufficient profit.
7.
In March, a small business forecasts cash inflows of $6,000 and cash outflows of $7,500. Its opening cash balance on 1 March is $2,000. Calculate its closing cash balance at the end of March.
[4 marks]
Worked explanation
1. March net cash flow = $6000 - $7500 = -$1500.
2. Closing balance = $2000 opening cash - $1500 = $500. Cash fell but stayed positive; the closing amount carries into the next month's opening balance.
Common mistake: Negative monthly flow does not imply a negative closing balance.
Marking points
- Uses net cash flow = cash inflows − cash outflows.
- Calculates net cash flow = 6000 − 7500 = −$1,500.
- Uses closing balance = opening balance + net cash flow.
- Substitutes 2000 + (−1500) to obtain a closing balance of $500.
Examiner tip: A negative net cash flow reduces the opening balance; it does not automatically mean the business has run out of cash, only that its balance has fallen.
8.
A retailer's cash flow forecast shows a negative closing balance for two consecutive months. Analyse two actions the business could take to improve its cash flow position.
[3 marks] · no calculator
Worked explanation
1. Collect overdue customer invoices earlier to bring cash inside the two forecast deficit months, while checking whether discounts cost too much.
2. Negotiate later supplier payments to shift outflows beyond the shortfall, subject to supplier agreement. These change timing rather than necessarily profit, and delaying without consent can disrupt supply.
Common mistake: Do not count unpaid bills as a saving in total cost.
Marking points
- Explains one valid cash-flow action, such as negotiating later supplier payments or collecting receivables earlier.
- Explains a second distinct valid action, such as arranging finance or reducing unnecessary stock purchases.
- Develops the timing or liquidity effect of either selected action, including a relevant constraint or trade-off. Do not require a third action.
Examiner tip: Improving cash flow means either delaying outflows, speeding up inflows, or both — it is not the same as improving profit.
9.
A profitable private limited company needs $200,000 to open a new branch. It can take out a long-term bank loan, or issue more shares to existing shareholders. Recommend one option using two relevant factors.
[3 marks] · no calculator
Worked explanation
1. A long-term loan raises $200000 without changing shareholdings, but adds interest and repayment dates that the new branch must support.
2. I would favour new equity if existing holders can subscribe and branch receipts are uncertain, reducing debt-service risk. A pro-rata issue need not change relative voting control. Reliable cash generation or unwilling shareholders could instead favour the loan; profit alone cannot settle affordability.
Common mistake: New shares to existing holders do not automatically dilute proportional control.
Marking points
- Analyses a relevant factor for the loan, such as existing owners keeping full control, offset against the obligation to pay interest and repay the capital.
- Analyses issuing shares without contractual interest or principal repayment. Relative voting control changes only if shareholders subscribe in different proportions or voting rights differ; a pro-rata issue to existing holders need not dilute relative control.
- Makes a supported recommendation weighing debt servicing, cash-flow risk, shareholder willingness and any actual control implications.
Examiner tip: Borrowing leaves ownership proportions unchanged. New shares do not necessarily dilute existing owners' relative control when all subscribe pro rata.
10.
A business has revenue of $150,000 and cost of sales of $90,000. Calculate its gross profit margin, and state what this percentage means.
[4 marks]
Worked explanation
1. Gross profit = $150000 - $90000 = $60000; gross margin = $60000/$150000 x 100 = 40%.
2. Each sales dollar leaves 40 cents after cost of sales to meet other expenses and profit. Production wages can already be inside cost of sales, so do not describe it as necessarily before all wages.
Common mistake: Gross margin is not the owners' final net return.
Marking points
- Calculates gross profit as $150,000 − $90,000 = $60,000.
- Uses the formula gross profit margin = gross profit ÷ revenue × 100.
- Calculates the margin as 40%.
- Explains that this means 40 cents of every dollar of revenue is kept as gross profit, before other expenses.
Examiner tip: Gross profit deducts cost of sales; selling and administrative expenses are normally deducted later. Production wages and some production overheads may already form part of cost of sales.
11.
Explain the difference between a business's assets and its liabilities.
[2 marks] · no calculator
Worked explanation
1. Cash, receivables and equipment are assets: resources the business controls and uses to operate.
2. A supplier invoice or bank loan is a liability, an obligation to another party. Borrowing can initially add cash and debt together, so more assets alone need not mean greater owners' wealth.
Common mistake: An asset purchase funded by debt also creates an obligation.
Marking points
- Explains that assets are items of value owned by the business, such as buildings, equipment or cash.
- Explains that liabilities are amounts the business owes to others, such as loans or unpaid supplier bills.
Examiner tip: Assets are what the business owns; liabilities are what the business owes — a balance sheet lists both side by side.
12.
Explain one benefit to a business of preparing a budget for the coming year.
[2 marks] · no calculator
Course scope: Optional enrichment
Syllabus placement evidence: Cambridge 0450 syllabus (2026); 5.2.1 and 5.5, pp.21-22 (printed pages). Expenditure-budget variance control goes beyond cash-flow forecasting/accounts.
Worked explanation
1. A budget allocates planned spending before commitments are made, helping departments coordinate scarce funds.
2. Comparing actual material spending with that plan can reveal a problem early, but investigate changed output or prices before blaming waste. The plan is a benchmark, not a guarantee.
Common mistake: A variance does not reveal its cause without investigation.
Marking points
- Explains that a budget sets a planned target for income or expenditure, against which actual performance can later be compared.
- Explains that this helps the business control spending or identify problems early, such as costs running above plan.
Examiner tip: Budgets support advance planning and resource allocation. Comparing actual results with them adds a control function by identifying variances.