Cambridge IGCSE · 0450

Business Studies

Financial information and decisions — Topic 5

Name: ____________________Date: September 28, 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]
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]
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]
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 margin measures profitability from trading alone, before deducting overheads such as rent, wages or marketing.
4.
Explain why a profitable business could still run out of cash and be unable to pay its suppliers.
[2 marks] · no calculator
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
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
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]
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
Marking points
- Explains that negotiating longer payment terms with suppliers delays cash outflows, easing pressure in the short term.
- Explains that arranging a short-term bank overdraft provides a buffer of available cash to cover the shortfall.
- Analyses a further option such as offering a discount for early customer payment to speed up cash inflows, or reducing unnecessary stock purchases.
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
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 a relevant factor for issuing shares, such as no repayment or interest obligation, offset against diluting existing shareholders' control and share of profit.
- Makes a supported recommendation that weighs control against the cost and risk of debt.
Examiner tip: Debt finance is repaid with interest but keeps ownership unchanged; share finance has no repayment but dilutes existing owners' control.