IB DP Business Management: Costs and revenues – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

These questions cover section 3.3 (Costs and revenues) of the IB Business management guide, first assessment 2024: fixed, variable, direct and indirect/overhead costs, total revenue and revenue streams. The section applies to SL and HL. All businesses are invented and all amounts are in dollars. Formulas for total cost, total revenue and profit are the standard forms, since the guide does not print them for this section.

Links: 3.3 study guide, 3.3 revision notes, Unit 3 practice set, IB Business Management hub, checklist and free diagnostics.

Questions

1. Define the term “indirect cost (overhead)”. [2]

2. Thornbeam Cycles is a bicycle repair shop. Identify each of the following as a fixed cost or a variable cost: (a) shop rent; (b) inner tubes used in puncture repairs; (c) the mechanic’s monthly salary; (d) lubricant used up in proportion to the number of services carried out. [4]

3. Last month Thornbeam Cycles carried out 260 puncture repairs at 12 each and 85 full services at 55 each, and sold 40 accessories at an average of 22 each. Calculate its total revenue. [3]

4. Gullcrest Creamery makes yogurt and cheese. It leases a pasteuriser used only for the yogurt line, at a fixed monthly charge. Explain how this lease can be both a fixed cost and a direct cost. [3]

5. In one month Gullcrest Creamery sells 8,000 tubs of yogurt at 1.60 each and 2,000 blocks of cheese at 4.50 each.

Cost	Amount
Yogurt: milk and cultures	0.62 per tub
Yogurt: pots	0.14 per tub
Cheese: milk and rennet	1.85 per block
Cheese: wax coating	0.30 per block
Cleaning materials, all products	0.05 per item made
Pasteuriser lease (yogurt only)	960 per month
Factory rent	2,600 per month
Administration salary	2,100 per month
Insurance	400 per month

(a) Calculate the total variable costs. [3] (b) Calculate the total fixed costs and the total costs. [2] (c) Calculate the total revenue and the profit. [2]

6. Gullcrest Creamery plans to raise yogurt output from 8,000 to 12,000 tubs a month. Consider only the pasteuriser lease (960 per month) and the variable costs of 0.76 per tub. (a) Calculate the lease cost per tub at each output. [2] (b) Explain what happens to variable cost per tub and to total cost per tub (lease plus variable). [2]

7. Using the Gullcrest data in question 5, where the cheese line has direct costs of 4,300 and revenue of 9,000, analyse one reason why the creamery should separate direct from indirect costs. [4]

8. Fenwick Hollow Tutors has four revenue streams this term: 520 hours of one-to-one tuition at 32 per hour; 1,300 pupil-sessions in group classes at 8.50 each; 240 exam-preparation packs at 15 each; and 36 summer camp places at 210 each. (a) State two of the revenue streams. [2] (b) Calculate total revenue. [3] (c) Calculate the percentage of total revenue that comes from one-to-one tuition, to one decimal place. [2]

9. Fenwick Hollow Tutors pays its tutors 20 per hour for one-to-one tuition, and this is a variable cost. The owner proposes raising the one-to-one price from 32 to 36 per hour and forecasts that hours will fall from 520 to 450. Other costs will not change. Evaluate the proposal. [8]

10. Thornbeam Cycles is considering adding e-bike hire. It would lease six e-bikes for 1,100 per month. Each hire day would be priced at 25 and would cost 3 in cleaning and insurance. (a) Calculate the monthly profit from e-bike hire if there are 80 hire days. [3] (b) Calculate the monthly profit or loss if there are only 45 hire days. [2] (c) Justify whether Thornbeam Cycles should add the new revenue stream. [4]

Answers

1. A cost that supports the whole business [1] and cannot be traced to one particular product or service, such as head-office rent shared by all products [1]. [2] Examiner insight: The key phrase is that the cost cannot be traced to one product; an example on its own, without that idea, makes a weaker answer.

2. (a) Fixed [1]. (b) Variable [1]. (c) Fixed, because a monthly salary does not change with the number of repairs [1]. (d) Variable [1]. [4] Examiner insight: Look at the wording of each cost, since a salary paid regardless of output and a charge per item behave differently, and a one-word label per item is enough here.

3. Revenue is price × quantity for each stream [1]. Repairs 260 × 12 = 3,120; services 85 × 55 = 4,675; accessories 40 × 22 = 880 [1]. Total revenue = 3,120 + 4,675 + 880 = 8,675 dollars [1]. [3] Examiner insight: Show the working for each stream and state the unit, so that a slip in one line can still be seen and credited for method.

4. The lease is fixed because the monthly charge stays the same however many tubs are made [1]. It is direct because the pasteuriser is used only for yogurt, so the cost can be traced to that product [1]. Fixed describes how the cost behaves with output, and direct describes whether it can be traced, so one cost can carry both labels [1]. [3] Examiner insight: Strong answers keep the two questions apart (behavior, then traceability) and use the detail from the stem.

5. (a) Yogurt: 8,000 × (0.62 + 0.14) = 6,080 [1]. Cheese: 2,000 × (1.85 + 0.30) = 4,300 [1]. Cleaning: (8,000 + 2,000) × 0.05 = 500; total variable costs = 6,080 + 4,300 + 500 = 10,880 [1]. (b) Fixed costs = 960 + 2,600 + 2,100 + 400 = 6,060 [1]. Total costs = 6,060 + 10,880 = 16,940 [1]. (c) Revenue = 8,000 × 1.60 + 2,000 × 4.50 = 12,800 + 9,000 = 21,800 [1]. Profit = 21,800 − 16,940 = 4,860 [1]. [7] Examiner insight: Do not forget the cleaning materials, because costs shared across products still belong in total variable costs.

6. (a) 960 ÷ 8,000 = 0.12 per tub [1]; 960 ÷ 12,000 = 0.08 per tub [1]. (b) Variable cost per tub stays at 0.76 [1]. Total cost per tub falls from 0.88 to 0.84 because the fixed lease is spread over more tubs [1]. [4] Examiner insight: Say that the per-unit variable cost is constant and that the fall comes from spreading the fixed lease, which links the calculation to the concept.

7. Separating direct costs lets the creamery judge each product on its own [1]. The cheese line earns 9,000 against direct costs of 4,300 [1], leaving 4,700 towards the shared overheads [1]. Without the split the creamery could not see whether cheese is worth continuing, or whether a loss comes from the cheese line or from the shared costs [1]. [4] Examiner insight: An analysis answer tends to do better when each link in the chain is developed and the figures from the stem are used, not only stated as a general benefit.

8. (a) Any two of: one-to-one tuition, group classes, exam-preparation packs, summer camp [1][1]. (b) One-to-one 520 × 32 = 16,640; group 1,300 × 8.50 = 11,050; packs 240 × 15 = 3,600; camp 36 × 210 = 7,560 [1]. Sum [1]: total revenue = 38,850 dollars [1]. (c) 16,640 ÷ 38,850 × 100 [1] = 42.8% [1]. [7] Examiner insight: Check that all four streams are in the sum, because leaving one out is the usual slip in revenue-stream questions.

9. Revenue now: 520 × 32 = 16,640 [1]. Revenue after: 450 × 36 = 16,200, a fall of 440 [1]. Tutor costs now: 520 × 20 = 10,400; after: 450 × 20 = 9,000, a saving of 1,400 [1]. With other costs unchanged, profit rises by 1,400 − 440 = 960 [1]. Judgment: the proposal looks worthwhile on these figures, even though total revenue falls, because the saving in variable cost is larger than the lost revenue [1]. But the 450 hours is only a forecast, and if hours fell to a lower level the gain could disappear [1]. Fewer hours may also reduce sales of the other streams, such as exam packs, and a higher price may affect the tutoring center’s reputation [1]. I would recommend a trial of the new price on a group of clients first, since it carries a probable gain and a limited risk [1]. [8] Examiner insight: An evaluation is stronger when the calculated gain is set against the uncertainty of the forecast and the answer ends with a reasoned judgment tied to the figures.

10. (a) Revenue = 80 × 25 = 2,000 [1]. Variable cost = 80 × 3 = 240 [1]. Profit = 2,000 − 240 − 1,100 = 660 [1]. (b) Revenue = 45 × 25 = 1,125 and variable cost = 45 × 3 = 135 [1]. Result = 1,125 − 135 − 1,100 = a loss of 110 [1]. (c) At the expected demand the stream adds 660 a month [1]. The lease is a fixed cost, so it must be paid even in a weak month, and at 45 days the stream makes a loss [1]. The loss (110) is smaller than the expected gain (660), and bike repair customers may already be a ready market [1]. Judgment: go ahead, ideally after checking evidence of demand or negotiating a short lease, because the downside is limited compared with the likely gain [1]. [9] Examiner insight: A justified decision usually states a clear choice, supports it with calculated figures, and shows awareness of the risk created by the fixed cost.

Where marks are usually lost

• Giving a definition with no mention of tracing a cost to a product.
• Labeling a cost fixed or variable on size alone, instead of how it behaves with output.
• Using only one label when the question asks how a cost can be both fixed and direct.
• Summing only some revenue streams.
• Using price instead of price × quantity.
• Leaving shared variable costs, such as cleaning materials, out of the total.
• Quoting fixed cost per unit as unchanged when output changes.
• Judging a price change on revenue alone, without looking at the costs that change with quantity.
• Evaluating without a final judgment tied to the figures.
• Leaving out units such as dollars.

Next steps

• Re-read the 3.3 study guide and the 3.3 revision notes.
• Check progress on the printable checklist and the IB Business Management hub.
• Try the free 10-minute diagnostics: all free 10-minute diagnostics.
• Book a free trial class: trial.

Frequently asked questions

Can a cost be both fixed and direct? Yes. Fixed or variable describes how a cost behaves when output changes, while direct or indirect describes whether it can be traced to one product. A machine lease used only for one product line is fixed and direct, so a full answer gives one label from each pair.

What are common mistakes on IB Business Management costs and revenues questions? Frequent errors are labelling a cost fixed or variable by its size rather than its behaviour with output, using price instead of price × quantity, leaving a revenue stream out of the total, and treating fixed cost per unit as unchanged when output changes. Leaving out the currency unit and ending an evaluation without a judgement also lose marks.

How should you judge whether a price change is worthwhile in a costs and revenues question? Look at the change in total revenue and also at the costs that change with quantity, rather than judging on revenue alone. Then tie your final judgement to the figures in the case.

Which section of the IB Business Management guide covers costs and revenues? Costs and revenues is section 3.3 of Unit 3 (Finance and accounts) in the IB Business management guide, first assessment 2024. It covers fixed, variable, direct and indirect/overhead costs, total revenue and revenue streams.

Official syllabus

International Baccalaureate Organization, Business management guide, first assessment 2024, section 3.3 Costs and revenues.