AQA GCSE Business: Expanding a business (8132) – Revision Notes

These notes condense section 3.1.7 Expanding a business from the AQA GCSE Business (8132) specification, for first teaching from September 2017. For full explanations and worked examples, read the study guide. Then test yourself with the practice questions.

Related pages: the topic-level Business in the real world revision notes, the AQA GCSE Business hub, the printable checklist and the free diagnostics.

The five content points

Point	One-line recall
Methods of expansion	Franchising, new stores, e-commerce, outsourcing, mergers and takeovers
Benefits and drawbacks	Discuss both sides of each method, applied to the business
Economies of scale	Average unit cost falls as output rises
Diseconomies of scale	Average unit cost rises when the business is too big
Average unit cost	Total cost divided by output; calculate and interpret

Methods of expansion: benefits and drawbacks

Method	Benefit	Drawback
Opening new stores	Owners keep control; same brand and methods; new customers	Costly premises and staff; a bad location may lose money
Franchising	Fast growth using the franchisee’s capital; fees and a share of revenue come in	Less control; shares profit; one weak outlet harms the brand
E-commerce	Wider market; open at all times; no extra shop needed	Website, delivery and returns costs; many online rivals
Outsourcing	Specialist may be cheaper or better; business focuses on its core	Less control of quality and timing; reliance on the supplier
Merger	Joint resources, customers and skills; agreed by both sides	Cultures may clash; jobs may go; benefits may not appear
Takeover	Quick growth and immediate control of the target’s assets	Often expensive; staff and managers of the target may resist

Organic growth (from the business’s own activity) is usually slower but gives more control. External growth (merger or takeover) is faster but costs more and carries integration risk.

Economies of scale

Definition: a unit cost advantage from growth, so average unit cost falls as output rises.

Type	What happens	Example
Purchasing	Bulk orders earn a lower price per unit from suppliers	A pet-food maker pays 15% less per tonne when it orders larger loads
Technical	Larger or specialised machinery; its cost is spread over more units	A big printing press cuts the cost per leaflet

Remember: total cost still rises. Only the cost per unit falls.

Diseconomies of scale

Definition: average unit cost rises because the business has grown too large.

The three causes named in the specification:

1. Poor communication.
2. Coordination issues.
3. Reduced staff motivation.

With growth, the risk of these increases. They are not guaranteed.

Cause and effect chain: more layers and sites, then slower messages and mistakes, then rework, delays and staff leaving, then higher cost per unit.

Average unit cost

Average unit cost = total cost / output

This is the standard form of the formula.

Method in steps:

1. Write the formula.
2. Substitute total cost and output (check the units: pounds and items).
3. Calculate and give the unit, for example £2.40 per unit.
4. Compare with another output level.
5. Interpret: fall means economies of scale; rise means diseconomies.

Worked reminder. A tile maker’s total cost is £90,000 for 12,000 tiles.

Average unit cost = 90,000 / 12,000 = £7.50 per tile

Rearranged: total cost = average unit cost x output. If the average unit cost is £3.40 and output is 15,000, total cost is £51,000.

Percentage change in average unit cost: (new - old) / old x 100. A fall from £5.00 to £4.20 is a fall of 16%.

Small worked reminders

Purchasing economy. A shop pays £8.00 per unit for an order of 200 units and £6.80 per unit for an order of 1,000 units. The price per unit is 15% lower on the larger order: (8.00 - 6.80) / 8.00 x 100.

Technical economy. A machine costs £1,200 a week to run. Spread over 400 units it adds £3.00 a unit (1,200 / 400). Spread over 3,000 units it adds £0.40 a unit (1,200 / 3,000).

Diseconomy. Total cost is £4,200 at 1,400 units, so average unit cost is £3.00. At 1,600 units total cost is £5,600, so average unit cost is £3.50. The £0.50 rise is a 16.7% increase (0.50 / 3.00 x 100). Output grew, but each unit now costs more, which points to diseconomies of scale.

Command words in this topic

Command word	Meaning
State, identify	A short answer with no reasoning needed
Define	Say what a term means, for example economies of scale
Calculate	Show the formula, substitution and answer with units
Explain	Give a point and a reason, linked to the business
Analyse	Develop a chain of reasoning: point, cause, effect on the business
Discuss	Give advantages and disadvantages, applied to the case
Evaluate, justify, recommend	Weigh both sides and reach a reasoned judgement

Must-know distinctions

Compare	Key difference
Merger and takeover	Merger is agreed by both; takeover means one gains control
Purchasing and technical economies	Cheaper inputs per unit versus more efficient production methods
Economies and diseconomies	Unit cost falling versus unit cost rising as output grows
Total cost and average unit cost	Whole bill versus cost per unit
Organic and external growth	Own resources versus joining or buying another business
Franchisor and franchisee	Brand owner versus the person who runs the outlet

Choosing between methods

If the business…	It may favour…	Because
Has little capital but a strong brand	Franchising	The franchisee provides money and runs the outlet
Has healthy cash reserves and wants control	New stores	It keeps the brand and decisions in its own hands
Sells a product that posts easily	E-commerce	It reaches a wider market without new premises
Is stretched on a non-core task	Outsourcing	A specialist can take over the task
Wants a rival’s customers quickly	Takeover	It gains them at once, if it can afford the price

Always test the suggestion against the facts in the stem. The same method can suit one business and not another.

Applying and evaluating

• Name the method, then explain a benefit and a drawback in the context of the case study.
• Use figures if the stem supplies them.
• For a judgement, weigh up cost, speed, control and risk, and say which matters most for this business and why.
• A reasoned conclusion is stronger when it names a condition, such as “provided the business has the cash reserves”.

Quick self-test

1. State the formula for average unit cost.
2. A business has a total cost of £90,000 and an output of 12,000 units. Calculate the average unit cost.
3. Average unit cost is £3.40 and output is 15,000. Calculate total cost.
4. Average unit cost falls from £5.00 to £4.20. Calculate the percentage fall.
5. Name two causes of diseconomies of scale.
6. Explain what a purchasing economy of scale is.
7. Give one benefit and one drawback of franchising for the franchisor.
8. Distinguish a merger from a takeover.
9. A café’s total cost is £48,000 at 8,000 meals and £63,000 at 9,000 meals. Which output has the lower average unit cost, and what does it suggest?
10. Give one drawback of outsourcing.

Answers

1. Average unit cost = total cost divided by output.
2. £90,000 / 12,000 = £7.50.
3. £3.40 x 15,000 = £51,000.
4. (5.00 - 4.20) / 5.00 x 100 = 16%.
5. Any two of: poor communication, coordination issues, reduced staff motivation.
6. A lower price per unit on materials or supplies because the business buys in bulk, which lowers average unit cost.
7. Benefit: fast growth using the franchisee’s money (or fees and a share of revenue). Drawback: less control, so a badly run outlet can damage the brand (or it shares the profit).
8. A merger is two businesses agreeing to join as one; in a takeover one business gains control of another, which the target may not want.
9. £48,000 / 8,000 = £6.00; £63,000 / 9,000 = £7.00. The lower cost is at 8,000 meals. The rise to £7.00 suggests diseconomies of scale.
10. Less control over quality or deadlines, or reliance on a supplier that may raise its price.

Where marks are usually lost

• Saying total cost falls when output rises. Write “average unit cost”.
• Dividing the wrong way round in the formula.
• Leaving out the unit, such as £ per unit, in a calculation.
• Describing purchasing economies as “cheaper” without saying the price per unit falls because of bulk orders.
• Naming a method but giving no benefit or drawback.
• Writing generic points that could apply to any business instead of using the case study.
• Treating diseconomies of scale as inevitable.
• Confusing franchising with outsourcing.
• Finishing a discuss question with no judgement.

Frequently asked questions

What are the methods of expansion in AQA GCSE Business (8132)? Franchising, opening new stores, e-commerce, outsourcing, and mergers and takeovers. Organic growth is usually slower but keeps more control than external growth.

What causes diseconomies of scale? The specification names three causes: poor communication, coordination issues and reduced staff motivation. They are a risk of growth, not a certainty.

Does total cost fall when there are economies of scale? No. Total cost still rises as output grows; it is the average unit cost, the cost per unit, that falls.

What is the difference between a merger and a takeover? A merger is two businesses agreeing to join together as one. A takeover is when one business gains control of another.

Official syllabus

AQA GCSE Business (8132) specification, for first teaching from September 2017, published by AQA. These notes cover section 3.1.7 Expanding a business.