O Level Business: Costs, scale of production and break-even analysis (Cambridge 7115) – 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 4.2 (costs, scale of production and break-even analysis) of the Cambridge O Level Business Studies 7115 syllabus for examination in 2026. All money is in dollars and every business is invented. Work through the study guide first, or use the revision notes to refresh the formulas. For the rest of the topic see the operations management practice set. Course pages: Cambridge O Level Business hub and the printable checklist. To find weak areas, take a free 10-minute diagnostic.

Questions

1. Define the term fixed costs. [2]

2. Vandrell Bakery has four costs: monthly oven rental, flour, packaging boxes and the manager’s monthly salary. Identify which two are fixed costs and which two are variable costs. [4]

3. Ravenscombe Pottery made 12 000 bowls last month at a total cost of 84 000. This month it made 24 000 bowls at a total cost of 120 000. (a) Calculate the average cost per bowl for each month. [2] (b) Explain why the average cost fell when output doubled. [3]

4. Ledworth Ceramics sells 5 000 mugs a month at 6 each. The variable cost is 4.20 per mug. Fixed costs of 11 000 a month are charged to the mug line, but the business pays them whether or not mugs are made. (a) Calculate the contribution from the mug line. [2] (b) Justify whether Ledworth should stop making mugs. [4]

5. Salthaven Noodles is growing quickly. (a) Identify the type of economy of scale in each case: (i) a supplier gives a lower price per kilo for very large flour orders; (ii) a bank offers the larger firm a lower interest rate; (iii) a high-speed packing line is installed that is only worth buying at high output. [3] (b) Explain how one advertising campaign could lower average cost as sales grow. [2]

6. Salthaven Noodles has grown from 60 to 900 employees across three sites. Managers say that instructions are often misunderstood and that staff turnover has risen. Explain two diseconomies of scale the firm may be suffering from. [4]

7. Vessmoor Pizza sells pizzas at 12 each. Variable cost is 5 per pizza and fixed costs are 28 000 a month. It expects to sell 5 000 pizzas next month. (a) Calculate the break-even output. [3] (b) Work out the margin of safety, first in pizzas and then as a percentage of the expected sales. [2] (c) Explain what the margin of safety tells the owner. [2]

8. Kellsworth Crafts sells one product at 20 each. These figures are for the break-even chart.

Output	0	200	400	600	800
Fixed costs	6 000	6 000	6 000	6 000	6 000
Total costs	6 000	8 000	10 000	12 000	14 000
Total revenue	0	4 000	8 000	12 000	16 000

(a) Identify the break-even output. [1] (b) State the variable cost per unit. [1] (c) The firm now plans to make 750 units. Calculate the margin of safety. [2] (d) Calculate the profit or loss at 400 units and at 800 units. [2]

9. Zelmoor Print sells at 25 per unit. Variable cost is 15 per unit and fixed costs are 9 000. The landlord raises the rent so that fixed costs become 10 500. (a) Complete the revised total costs at outputs of 0, 600 and 1 200 units. [3] (b) Calculate the new break-even output. [2] (c) Explain how the lines on a break-even chart change, and what happens to the break-even point. [2]

10. Oswinne Cycles sells 4 000 bikes a year at 40 each. Variable cost is 24 per bike and fixed costs are 48 000. The owner is considering a price of 44, which she expects to cut sales to 3 600 bikes. (a) Calculate the current break-even output. [2] (b) Calculate the break-even output at the new price. [2] (c) Justify whether she should raise the price. [6]

11. Plimmerton Foods uses a break-even chart for its tomato sauce. Explain two limitations of relying on this chart when planning production. [4]

Answers

1. Costs that do not change [1] when the level of output changes [1]. Examiner insight: A good definition states how the cost behaves when output changes. Rent as an example alone does not define the term.

2. Fixed: oven rental [1] and manager’s salary [1]. Variable: flour [1] and packaging boxes [1]. Examiner insight: Use the words in the stem, and say which group each item belongs to so that every item is clearly matched.

3. (a) Month 1: 84 000 / 12 000 = 7.00 per bowl [1]. Month 2: 120 000 / 24 000 = 5.00 per bowl [1]. (b) Total cost did not double (it rose from 84 000 to 120 000) [1]. Fixed costs such as rent stay the same, so they are spread over more bowls [1], which lowers the cost per bowl [1]. Examiner insight: Write out each division, because the working shows the method. In part (b), say average cost (cost per bowl) fell, not just “costs”, because total cost went up.

4. (a) Revenue = 5 000 x 6 = 30 000 and variable costs = 5 000 x 4.20 = 21 000 [1]. Contribution = 9 000 [1]. (b) Continuing: contribution 9 000 - fixed costs 11 000 = a loss of 2 000 [1]. Stopping: no contribution but the 11 000 is still paid, a loss of 11 000 [1]. So continue making mugs, because the line contributes 9 000 towards fixed costs [1]. This could change if the fixed costs could be avoided, or if the resources could earn more elsewhere [1]. Examiner insight: “Justify” asks for a decision backed by figures. A reason such as “it makes a loss” is weak unless you compare the loss from continuing with the loss from stopping.

5. (a) (i) Purchasing [1]. (ii) Financial [1]. (iii) Technical [1]. (b) The cost of the campaign is a fixed amount [1], so as more units are sold it is shared out over more units, lowering the advertising cost per unit [1]. Examiner insight: Naming the type is enough for part (a). For part (b), link the idea to cost per unit rather than just saying advertising is cheaper.

6. Poor communication: with three sites and many layers, messages are changed or delayed, so instructions are misunderstood [1], causing errors and rework that raise average cost [1]. Lack of commitment from employees: in a large firm workers may feel remote from decisions, so turnover rises [1], and recruiting and training replacements raises average cost [1]. (Weak coordination between the three sites would also be credited.) Examiner insight: Take each cause from the case and then finish by explaining the effect on average cost. A list of diseconomies with no link to the firm gives little to reward.

7. (a) Contribution per pizza = 12 - 5 = 7 [1]. Break-even = 28 000 / 7 [1] = 4 000 pizzas [1]. (b) Margin of safety = 5 000 - 4 000 = 1 000 pizzas [1]. As a percentage: 1 000 / 5 000 x 100 = 20% [1]. (c) Sales can fall by 1 000 pizzas (20%) below the forecast [1] before the restaurant makes a loss, so the business has some protection against falling demand [1]. Examiner insight: Write the formula first. Part (c) asks for meaning, so a sentence that repeats the number without saying what it shows is unlikely to be enough.

8. (a) 600 units, where total costs and total revenue are both 12 000 [1]. (b) (14 000 - 6 000) / 800 = 10 per unit; also, total costs rise by 2 000 for each extra 200 units [1]. (c) 750 - 600 = 150 units [1], so output could fall by 150 units before a loss is made [1]. (d) At 400 units revenue is 8 000 and total costs are 10 000, a loss of 2 000 [1]. At 800 units revenue is 16 000 and total costs are 14 000, a profit of 2 000 [1]. Examiner insight: Read from the table, then quote the figures you used. In part (d), state profit or loss, as a bare number leaves the reader guessing.

9. (a) Total costs = 10 500 + 15 x output. At 0: 10 500 [1]. At 600: 10 500 + 9 000 = 19 500 [1]. At 1 200: 10 500 + 18 000 = 28 500 [1]. (b) Contribution = 25 - 15 = 10 [1]. New break-even = 10 500 / 10 = 1 050 units [1]. (c) The fixed cost line and total cost line both move up by 1 500 and stay parallel to the old lines [1]. The revenue line is unchanged, so break-even moves to the right, from 900 to 1 050 units [1]. Examiner insight: When amending a chart, say which line moves and which stays put. Saying break-even “increases” without the direction on the chart is less clear.

10. (a) Contribution = 40 - 24 = 16 [1]. Break-even = 48 000 / 16 = 3 000 bikes [1]. (b) New contribution = 44 - 24 = 20 [1]. Break-even = 48 000 / 20 = 2 400 bikes [1]. (c) Profit now = 16 x 4 000 - 48 000 = 16 000; at the new price = 20 x 3 600 - 48 000 = 24 000 [1]. Break-even falls from 3 000 to 2 400, and the margin of safety rises from 1 000 to 1 200 bikes [1]. She could even keep the old profit if she sold 3 200 bikes, because (48 000 + 16 000) / 20 = 3 200 [1], so the plan has room for error [1]. However, the fall to 3 600 is only a forecast, and a rival’s reaction or the brand image could make demand fall by more [1]. On balance she should raise the price, because the profit rise is large, but she should test the forecast first [1]. Examiner insight: For a “justify” question, use the figures, give a point against, then make a clear decision. A bare “yes, profit goes up” gives little.

11. Any two, each explained. For example: the chart assumes everything made is sold [1], but if the sauce is unsold the firm still pays for the ingredients and storage, so the break-even point is less reliable [1]. It assumes the price is the same at every level of output [1], but the firm may offer discounts to big retailers, which lowers revenue per unit [1]. (Also acceptable: constant variable cost per unit; fixed costs not changing; one product only; depends on forecasts.) Examiner insight: Each limitation needs a “so what” about the decision. Naming a limitation without showing how it distorts the chart gives only partial credit.

Where marks are usually lost

• Dividing fixed costs by the selling price instead of contribution per unit.
• Saying “costs fall” instead of “average cost falls” when explaining economies of scale.
• Naming an economy or diseconomy without saying what happens to cost per unit.
• Judging a loss-making product on its loss alone, without checking contribution and which costs would remain.
• Giving margin of safety in the wrong units, or as a percentage of break-even rather than of expected sales.
• Drawing the fixed cost or total cost line from the origin.
• Forgetting that “justify” needs a decision supported by evidence from the case.
• Listing limitations of break-even without saying how they affect a decision.

Frequently asked questions

Are these Cambridge O Level Business Studies 7115 past paper questions? No. They are original questions written for Marlbridge on section 4.2, Costs, scale of production and break-even analysis. Use them alongside the official past papers.

What is the most common mistake in break-even calculations? Dividing fixed costs by the selling price instead of by contribution per unit. Write the formula first, then substitute the figures from the question.

How should margin of safety be expressed? Give it in the units the question uses, and if a percentage is asked, divide by actual or expected sales, not by the break-even level.

How do you explain a diseconomy of scale in a case study? Take the cause from the case, such as many layers of management or several sites, and finish by explaining the effect on average cost. A list of diseconomies with no link to the firm gains little.

What does a “justify” question on pricing or dropping a product need? A clear decision backed by figures from the case, with at least one point against. For a loss-making product, compare the loss from continuing with the loss from stopping rather than judging on the loss alone.

Next steps

• Recap the formulas in the revision notes.
• Re-read the worked examples in the study guide.
• Check coverage on the printable checklist and the course hub.
• Find weak spots with the free 10-minute diagnostics.
• Want help from a teacher? Book a free trial class.

Official syllabus

Source: Cambridge O Level Business Studies 7115 syllabus for examination in 2026, published by Cambridge International, section 4.2.