CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE
Exam-style questions and sample answers have been written by the author. In examinations, the way marks are awarded may
be different.
Workbook answers
Answers to questions that ask for ‘one or two’ points, reasons or impacts may contain more than the
required number of points, indicating that alternative responses exist that could be equally valid. The
suggested answers to questions that are testing the skills of analysis and evaluation, apart from the worked
examples and the ‘improve this answer’ examples, are in a ‘building block’ form. This means they provide
an outline of the key knowledge, application, analysis and evaluation skills required to help learners
construct a complete answer. For further details of the annotation used in some of the completed answers,
refer to the ‘How to use this book’ section.
Chapter 26
Key skills exercises
1 A business location that gives the best combination of quantitative and qualitative factors.
2 Greater convenience for customers to access the site/location.
3 The relocation of a business process done in one country to another country.
4 Language differences between managers and employees in different locations.
5 To keep tighter control over quality.
6 Site rental costs; labour costs in one area may be higher than in another location.
7 Prestigious address for a top-class fashion retailer; management preferences (e.g. where they would
like to live).
8 No spare capacity in the original country; lower costs of production.
9 Factors which lead to a reduction in unit cost as the scale of operation increases.
10 Financial economies; purchasing/bulk buying economies.
11 Unit costs could rise.
12 Internal economies of scale result from expansion of the business itself and could result from
management economies and technological economies. External economies of scale result from the
regional growth of the industry of which the business is a part. An example is the increased supply of
qualified labour from specialist colleges offering relevant training courses.
13 Lower barriers to movement of capital have allowed businesses to locate abroad more easily; the legal
formation of business operations in other countries has been made easier.
14 Unit cost is falling, improving FBC’s competitiveness.
15 Economies of scale; fixed costs spread over a higher output level, which reduces average/unit fixed costs.
16 Cheaper unit cost of buying in specialist metals used in bike manufacture; lower finance costs
(e.g. lower interest rates as the business may be more secure and may be borrowing larger sums).
17 Lower cost than expanding the existing factory when shortage of capacity.
18 WE. One benefit is higher profit. If the average cost of producing each bicycle is reduced while the
price remains the same, then profit per bicycle will increase. Higher profit per unit will then provide
additional retained profit for further expansion of FBC or for the purchase of advanced equipment,
which could help to further reduce the unit cost of bicycle manufacture.
Second benefit: FBC will be more competitive so it may be able to offer bicycles for sale at lower prices
than competitors.
1 Cambridge International AS & A Level Business – Stimpson © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE
19 Offshore production allows for the flexibility of increased output at times of higher demand, so avoids
disappointing customers. Discuss whether the overseas producer is likely to be able to maintain the
quality standards that are so important to FBC. Assess whether there could be transport hold-ups
(and higher costs) with the increased distance for bikes to be transported to market. An overall
conclusion is needed.
20 Outline: Analyse the importance to FBC of the best location possible: costs; access to suppliers and
markets; labour supply and labour costs; qualitative factors. Weigh these up from the viewpoint of
FBC, using data from Table 26.2. Make a final and justified decision. Discuss what other information
might have been useful in making this decision and why. An overall conclusion and a judgement
are needed.
Exam-style questions
Decision-making questions
1 a (2.5 4 25) 3 100 5 10% 2 a fall in unit cost of 10%
b (1 4 22.5) 3 100 5 a 4.4% rise in unit cost
2 Outline: The lower unit costs from 500 to 2 000 shirts are linked to economies of scale (e.g. technical
economies from the increased use of machinery and purchasing economies from bulk buying shirt
materials). The higher unit costs from 2 000 to 10 000 shirts are linked to diseconomies of scale
(e.g. poor coordination and communication in a larger production department; customer orders may not
be communicated accurately to production workers, so incorrect logos are printed, resulting in waste).
3 See ‘Annotate this answer’.
2 Cambridge International AS & A Level Business – Stimpson © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE
Annotate this answer
The sample answer for decision-making Q3 has been annotated.
SSC has clearly expanded in recent years judging by the increased output of the most popular sports
shirt. This seems to have caused some operations problems [K/Ap]. Unit costs have increased [Ap].
This suggests that the existing factory is too small to cope with increased output, leading to some
diseconomies and inefficiencies [An]. As SSC seems likely to grow further in future, a relocation to another
factory is inevitable. The question is, should it be located in the same country and region, or in another
country altogether?
It might be possible for SSC to build a larger factory on the existing industrial estate. This would give
the company the continued benefit of its links with local suppliers [K/Ap]. These suppliers of important
materials will know SSC and its senior managers. They will be aware of the importance of quality and
prompt delivery if SSC is to meet its seven-day promise for new orders [Ap]. Relocating internationally will
break these links and new relationships will have to be established with suppliers in another country. These
could take time to build up, and the quality of materials and the reliability of suppliers might not be as
good as is currently the case [Ap/An].
As SSC sells only online, the proximity of the market is not an issue in its location decision [Ap/An].
All orders will have to be delivered to each customer wherever the factory is located. However, the
reliability of local postal services and courier businesses will be an important qualitative factor in SSC’s
location decision [E].
Most sports clothing is manufactured in low-wage economies, even clothing which is sold under globally
known brand names. This gives the sports clothing businesses a major cost saving and helps to make them
competitive [An]. If SSC’s existing factory is in a higher-cost country, this will make SSC less competitive
[An]. This might not be a major problem if the brand image which results from selling to famous sports
stars allows the company to charge premium prices for its shirts and shorts [An/E]. However, the potential
cost advantages from an international offshore location would increase SSC’s profits unless quality is
reduced [An+]. The issue of quality is crucial. If SSC cannot be completely sure that the quality of its
products will be maintained by an international relocation, it should aim to expand its existing factory or
build a large one nearby [E].
The final location decision cannot be made without more information. SSC’s operations director needs to
evaluate quantitative data about the existing site and possible international sites [K]. Break-even analysis
and profit comparisons need to be made. An assessment of cultural differences should be made. The
potential impact on consumer demand of a switch to a low-cost country also needs to be assessed, as some
athletes will not want to be associated with a brand that is seen to operate unethically [Ap/An].
After these quantitative and qualitative factors have been assessed, a final location decision can be made.
On the basis of the evidence provided, I would advise that SSC tries to expand its existing factory and
not relocate internationally [E+]. The company could use outsourcing if it reached full capacity. This
would allow it to assess the potential quality of supplies of shirts and shorts from suppliers in another
country. This evidence could be used in future to help SSC decide whether, eventually, it should relocate its
operations internationally [E].
3 Cambridge International AS & A Level Business – Stimpson © Cambridge University Press 2021
