IGCSE Business: Costs, scale of production and break-even analysis (Cambridge 0264) – 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 – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover section 4.4, Costs, scale of production and break-even analysis, of the Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029. All businesses are invented and money is in pounds. Revise first with the study guide and the revision notes. The course hub and the printable checklist track your progress. Not sure where to start? Try the free diagnostics.

Questions

1. Define variable costs. [2]

2. Cobbleton Bakery has four costs: flour, shop rent, cardboard boxes and the owner’s salary. Identify whether each is a fixed cost or a variable cost. [4]

3. Cobbleton Bakery has fixed costs of £5,400 a month. Variable cost is £0.70 per loaf. In one month it makes 6,000 loaves.

(a) Calculate the total variable cost. [1] (b) Calculate the total cost. [1] (c) Calculate the average cost per loaf. [2]

4. Stainmoor Joinery plans to double the number of chairs it makes each year. Explain two economies of scale it might gain. [4]

5. Outline two causes of diseconomies of scale. [4]

6. Dovesdale Cafe uses 1,800 litres of milk a month. Supplier A charges £0.82 per litre with no other charge. Supplier B charges £0.76 per litre plus a fixed delivery fee of £90 a month.

(a) Calculate the monthly cost of using each supplier. [3] (b) State which supplier is cheaper and by how much. [1] (c) Explain one reason, other than cost, why the café might still choose the dearer supplier. [2]

7. Kettlewick Toys makes three products. Fixed costs of £40,000 a month are shared between them.

Product	Selling price per unit	Variable cost per unit	Units sold a month
A	£15	£9	3,000
B	£24	£17	1,500
C	£40	£31	2,000

(a) Calculate the contribution per unit of each product. [3] (b) Calculate the total contribution Product C earns in a month. [1] (c) Fixed costs would stay at £40,000 if Product C were stopped. Explain whether the cost data supports stopping C. [3]

8. Marshgate Games sells a card game for £24. Variable cost is £14 per game and fixed costs are £35,000 a year.

(a) Calculate the contribution per game. [1] (b) Calculate the break-even output. [2] (c) Sales are expected to be 4,200 games. Calculate the margin of safety. [2] (d) Define margin of safety. [2]

9. Tollgate Tours sells day tickets at £40 each. Variable cost is £15 per ticket and fixed costs are £12,000 for the season. Part of its break-even table is shown.

Tickets sold	0	240	480	720	960
Total revenue (£)	0	9,600	19,200	28,800	38,400
Total cost (£)	12,000	15,600	?	?	?

(a) Calculate the three missing total costs. [3] (b) Explain how you would draw the total cost line on a break-even chart. [2] (c) State the break-even output shown by the table. [1] (d) Calculate the profit when 720 tickets are sold. [2]

10. Stainmoor Joinery sells a chair for £80. Variable cost is £50 per chair and fixed costs are £45,000 a year.

(a) Calculate the break-even output. [2] (b) The owner is thinking of cutting the price to £74. Calculate the new break-even output. [2] (c) Instead, the owner finds a cheaper workshop and fixed costs fall to £39,000, with the price at £80. Calculate the new break-even output. [2] (d) Variable cost rises to £55 per chair. Explain the effect on the total cost line and on break-even output. [2]

11. Explain two limitations of break-even analysis for a business that is planning a new range of products. [4]

12. Pickersgill Printing sells boxes of printed labels at £6 a box. Its one machine can make up to 9,000 boxes a year. Fixed costs are £24,000 a year and variable cost is £2.40 per box. Sales are 8,500 boxes. The owner is thinking of buying a second machine. Fixed costs would rise to £34,800 a year and variable cost would fall to £2.10 per box. The owner forecasts sales of 12,500 boxes, but this depends on one customer who has not yet signed a contract.

(a) Calculate the current break-even output. [2] (b) Calculate the break-even output with the second machine. [2] (c) Calculate the forecast annual profit with the second machine. [2] (d) Justify whether the owner should buy the second machine. [4]

Answers

1. Costs that change [1] directly with the level of output (or number of units produced) [1]. [2] Examiner insight: A definition needs the idea of change linked to output. “Costs that vary” with no link to output repeats the word.

2. Flour: variable [1]. Shop rent: fixed [1]. Cardboard boxes: variable [1]. Owner’s salary: fixed [1]. [4] Examiner insight: A one-word reply for each item is enough. Do not explain at length.

3. (a) 0.70 × 6,000 = £4,200 [1] (b) 5,400 + 4,200 = £9,600 [1] (c) 9,600 ÷ 6,000 [1] = £1.60 per loaf [1] Examiner insight: Show the division in (c): a bare wrong figure gives an examiner nothing to credit. Include the £ sign. [4 in total]

4. Any two types, each identified and explained in context, for example: Purchasing economies [1]: it buys twice as much timber, so the supplier may give a discount, which lowers the timber cost per chair [1]. Technical economies [1]: with double the output, a larger automatic saw becomes affordable and is used fully, which lowers cost per chair [1]. [4] Examiner insight: Naming a type earns little without the link to a lower average cost. Tie each reason to timber, machines or chairs.

5. Any two causes, each named and outlined, for example: Poor communication [1]: messages pass through many layers and arrive late or distorted [1]. Lack of commitment or loyalty from employees [1]: in a large workforce people feel unimportant, so effort falls and more leave [1]. [4] Examiner insight: “Outline” asks for the main points, so one sentence on each cause is enough. A cause named but with no outline is a half answer.

6. (a) Supplier A: 0.82 × 1,800 = £1,476 [1]. Supplier B: 0.76 × 1,800 = 1,368 [1], plus 90 = £1,458 [1]. (b) Supplier B is cheaper, by £18 a month [1]. (c) Supplier A may deliver more reliably [1], so the café is less likely to run out of milk on busy days [1]. (Other valid reasons: quality, payment terms.) Examiner insight: Forgetting the delivery fee is the usual slip in (a). In (c) a bare “quality” is a label; say what difference it makes. [6 in total]

7. (a) A: 15 − 9 = £6 [1]. B: 24 − 17 = £7 [1]. C: 40 − 31 = £9 [1]. (b) 9 × 2,000 = £18,000 [1] (c) The £40,000 of fixed costs continues whether or not C is made [1]. Stopping C would remove £18,000 of contribution [1], so monthly profit would fall by £18,000, and the cost data supports continuing with C unless the resources could be used to earn more [1]. Examiner insight: Compare contribution, not selling price, and link it to the fixed costs that stay. Claiming “C is most profitable” with no figures does not use the data. [7 in total]

8. (a) 24 − 14 = £10 [1] (b) 35,000 ÷ 10 [1] = 3,500 games [1] (c) 4,200 − 3,500 [1] = 700 games [1] (d) The number of units by which actual (or expected) sales are above break-even output [1], showing how far sales could fall before the business makes a loss [1]. Examiner insight: Break-even output and margin of safety are in units, so give units, not pounds. [7 in total]

9. (a) At 480: 12,000 + 15 × 480 = £19,200 [1]. At 720: 12,000 + 10,800 = £22,800 [1]. At 960: 12,000 + 14,400 = £26,400 [1]. (b) Plot points of tickets against total cost, starting at £12,000 on the vertical axis when no tickets are sold [1], then join the points with a straight line [1]. (c) 480 tickets, where total revenue and total cost are both £19,200 [1]. (d) 28,800 − 22,800 [1] = £6,000 profit [1]. Examiner insight: The total cost line begins at the fixed cost level, not the origin. [8 in total]

10. (a) Contribution = 80 − 50 = £30 [1]. 45,000 ÷ 30 = 1,500 chairs [1]. (b) Contribution = 74 − 50 = £24 [1]. 45,000 ÷ 24 = 1,875 chairs [1]. (c) 39,000 ÷ 30 [1] = 1,300 chairs [1]. (d) The total cost line becomes steeper [1]. Contribution falls to £25, so break-even output rises to 1,800 chairs (moves right on the chart) [1]. Examiner insight: Show the new contribution before dividing. If a question went on to ask for a judgement on the price cut, you would also need to comment on whether demand will rise. [8 in total]

11. Any two limitations, each stated and explained for a new range, for example: It assumes all output is sold at a constant price [1]. New products may need discounts to attract customers, so revenue per unit would be lower than forecast [1]. It relies on forecasts of costs and sales [1]. For untested products these estimates may be wrong, so the break-even point may be misleading [1]. [4] Examiner insight: A limitation must be linked to the situation. “It is not accurate” with no reason is too general to earn full credit.

12. (a) Contribution = 6 − 2.40 = £3.60 [1]. 24,000 ÷ 3.60 = 6,666.7, so 6,667 boxes [1]. (b) Contribution = 6 − 2.10 = £3.90 [1]. 34,800 ÷ 3.90 = 8,923.1, so 8,924 boxes [1]. (c) Contribution = 12,500 × 3.90 = £48,750 [1]. Profit = 48,750 − 34,800 = £13,950 [1]. (d) For: forecast profit of £13,950 is well above the £8,400 the old machine earns at its limit of 9,000 boxes (9,000 × 3.60 − 24,000) [1]. Against: break-even output rises from 6,667 to 8,924 boxes, and if sales stay at 8,500 the business would lose £1,650 (8,500 × 3.90 − 34,800), because the forecast depends on an unsigned customer [1]. Judgement: the owner should buy only once the customer’s order is confirmed [1], because that removes the main risk to the large margin of safety (3,576 boxes) the machine would then give [1]. Examiner insight: A justify answer needs a decision and figures to support it. Quoting only the profit, and ignoring the higher break-even point and the risk, gives a one-sided case. [10 in total]

Where marks are usually lost

• Dividing fixed costs by the selling price instead of contribution per unit.
• Giving break-even output or margin of safety without units.
• Subtracting the wrong way round in the margin of safety.
• Starting the total cost line at the origin.
• Naming an economy or diseconomy of scale with no effect on average cost.
• Deciding on break-even output alone, with no comment on demand or risk, or giving only the points in favour of a “justify” answer.

Next steps

• Re-read the study guide or the revision notes.
• Use the checklist and the course page.
• Take the free 10-minute diagnostics.
• Book a free trial class: trial.

Frequently asked questions

How do you calculate break-even output? Break-even output is total fixed costs divided by contribution per unit, where contribution per unit is the selling price minus variable cost per unit. Dividing fixed costs by the selling price instead is a common error.

What are common mistakes on break-even questions in IGCSE Business 0264? Students often give break-even output or margin of safety without units, subtract the wrong way round in the margin of safety, start the total cost line at the origin on a chart, and name an economy of scale with no effect on average cost. Deciding on break-even output alone, with no comment on demand or risk, also loses marks.

How do you calculate the margin of safety? The margin of safety is actual output minus break-even output, measured in units. It shows how far sales could fall before the business makes a loss.

Which syllabus section covers costs and break-even? Costs, scale of production and break-even analysis is section 4.4 of the Cambridge IGCSE Business 0264 syllabus.

Official syllabus

Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029, Cambridge University Press & Assessment, section 4.4 and the Formulas and ratios section.