Assessment Objectives (AOs) is key to scoring high marks in Cambridge

IGCSE Business Studies (0986). Here’s a detailed breakdown of what

each AO means and how to show them clearly in your answers.

🔹 (AO1: Knowledge)

What it means:
You must show that you know and understand business terms, concepts,
theories, or processes. This is often tested by defining terms or stating
facts.

How to show it in your answer:

 Use correct business vocabulary

 Give accurate definitions

 List valid points or identify terms

 Example:
“Inflation is the general increase in the prices of goods and services
over time.”

👉 Tip: For 1–2 mark questions (like definitions or identifications), the focus is
mostly on AO1.

🔹 (AO2: Application)

What it means:
You need to relate your answer to the business in the case study or
scenario. The examiner wants to see that you can apply your knowledge to
a real or given situation.

How to show it in your answer:

 Refer to specific details from the case (names, industries, numbers,

decisions, etc.)

 Make your answer specific to the business

 Example:
“This will be important for HCB as it manufactures cars and needs to
maintain high quality.”
👉 Tip: Use names or figures from the case study (like “200 employees”,
“factory”, or “country X”) to score AO2 marks.

🔹 (AO3: Analysis)

What it means:
You must explain how or why something happens. This shows your ability to
develop a point by explaining the effect or consequence of a decision or
situation.

How to show it in your answer:

 Use connectives like “because”, “so that”, “as a result”, “therefore”

 Break down the impact clearly

 Show cause and effect

 Example:
“If interest rates rise, HCB may find it more expensive to borrow
money. As a result, they might delay investment in new technology,
making them less competitive.”

👉 Tip: Always follow up a point with an explanation of what it leads to or

causes.

🔹 (AO4: Evaluation)

What it means:
You are expected to make a judgement. This is usually in part (e)
questions (the last question in each case study). You must weigh both sides
and then justify your conclusion.

How to show it in your answer:

 Consider both advantages and disadvantages (or pros and cons)

 Use phrases like: “It depends on…”, “However…”, “In conclusion…”,

“Overall…”

 End with a decision and explain why that decision is best

 Example:
“While import tariffs can protect local manufacturers like HCB by
 reducing competition, they might also raise the cost of raw materials.
Overall, whether HCB benefits depends on how much it relies on
imports. If most raw materials are imported, it might suffer more from
increased costs.”

📘 Question 1(a): Define ‘inflation’. [2 marks]

✅ Model Answer:

Inflation is the general increase in the price level of goods and

services over a period of time.

🔍 Assessment Objective Breakdown:

 (AO1: Knowledge) – You correctly define the term inflation using

accurate business terminology.

o ✅ “General increase in the price level of goods and services”

shows clear understanding.

 Time element is crucial – Saying “over a period of time” earns the

second mark because it shows understanding that inflation is not a
one-time price rise, but a trend over time.

o ✅ This second part strengthens your AO1 response.

❌ Common mistakes that lose marks:

 “When prices go up” → ❌ Too vague (no mention of time or overall price
level).

 “When one product becomes expensive” → ❌ Incorrect (inflation refers

to general price level, not just one product).

✅ Tip:

For any "Define" question, always aim for a complete definition:

  State the core concept

 Include any key elements (e.g., "general", "over time")

📘 Question 1(b): Identify two ways technology could change

production methods. [2 marks]

This question expects TWO brief points, no explanations needed. Just be

clear and correct.

✅ Model Answer:

1. Technology can automate tasks using machines.

2. It can improve accuracy through computer-aided manufacturing (CAM).

🔍 Assessment Objective Breakdown:

 (AO1: Knowledge) – You're being asked to recall and state business

knowledge, specifically about how technology can influence
production.

o ✅ “Automate tasks” shows understanding of how production can

become more capital-intensive.

o ✅ “Computer-aided manufacturing (CAM)” shows understanding

of a specific method enabled by technology.

🎯 These are both accurate points directly linked to technology and production
methods.

✅ Alternative valid answers (any two of these would score full

marks):

 Use of robotics or automation

 Faster production/output

 Fewer employees needed (labour-saving)

  Better quality with fewer mistakes

 Use of CAD (Computer-Aided Design)

 Use of 3D printing

❌ Common Mistakes:

 Giving explanations when only identification is needed (e.g.,

“Automation is used so that production becomes faster and more
efficient.” → only the first part is needed)

 Giving vague answers like “Use of tech” or “It helps production”

without specifying how.

✅ Tip:

This type of question is AO1 only, so don’t waste time explaining. Just give
clear, specific terms.

📘 Question 1(c): Outline two ways HCB could become more ethical.
[4 marks]

You need to provide two ways HCB could become more ethical, with brief
explanations or relevant references for each.

The meaning of a business being ethical is that the business behaves in

a morally right and fair way in all its activities. This means it considers
what is good or bad, right or wrong—not just what is profitable.

✅ Model Answer:

1. HCB could pay fair wages to its 200 employees.

– This ensures workers are treated fairly and supports a better
standard of living.
(AO1: Knowledge + AO2: Application)
 2. The company could reduce pollution by using environmentally
friendly materials to build its cars.
– This helps protect the environment and shows responsibility to the
local community.
(AO1: Knowledge + AO2: Application)

🔍 Assessment Objective Breakdown:

Each point is marked like this:

 ✅ 1 mark for AO1 (Knowledge): Correct ethical practice identified

 ✅ 1 mark for AO2 (Application): Applied to HCB’s context (cars,

employees, factory, production)

You need to do this twice to earn the full 4 marks.

🧠 How to structure each point:

🔹 Step 1 – Identify an ethical practice (e.g., fair wages, environmental

responsibility)
🔹 Step 2 – Link to HCB’s case
– Think of its 200 employees, car production, factory, or being in
Country X
🔹 Step 3 – Briefly explain how it makes the business more ethical

✅ More Example Answers:

 HCB could ensure safe working conditions in the factory.

→ This protects the health of its 200 workers.
(AO1 + AO2)

 It could pay suppliers on time.

→ This shows fairness and improves HCB’s reputation in the car
manufacturing industry.
(AO1 + AO2)

❌ Common mistakes to avoid:

  ❌ Too vague: “HCB can be good to people.” → No clear ethical action =
no AO1

 ❌ No application: “It can help the environment.” → No link to how HCB

is involved (e.g., car manufacturing, factory, etc.)

✅ Tip:

Always link your answer to the business mentioned. That’s how you show
AO2 — and secure full marks.

📘 Question 1(d):

Explain two ways HCB could be affected by an increase in the

interest rate in country X. [6 marks]

Interest rate is the cost of borrowing money or the reward for saving
money, usually expressed as a percentage of the amount borrowed or
saved.

🔁 Two Simple Meanings:

1. When you borrow money (like a loan from a bank):

The interest rate is what you pay extra for using the bank’s money.
Example: If you borrow Ksh 10,000 at a 10% interest rate, you’ll pay
back Ksh 11,000.

2. When you save money (like in a bank account):

The interest rate is what the bank pays you for keeping your money
with them.
Example: If you save Ksh 10,000 at a 5% interest rate, you’ll earn Ksh
500 over the year.

You need to give:

 Two relevant effects of higher interest rates (AO1)

  Apply each to HCB’s context (AO2)

 Explain the consequence or impact (AO3)

✅ Model Answer:

1. Borrowing becomes more expensive.

– HCB may want to invest in new technology for its car production.
– Higher interest rates mean loans will cost more, which could delay these
investments.
(AO1: Knowledge + AO2: Application + AO3: Analysis)

2. Lower consumer demand for cars.

– Cars are often bought using loans, and with higher interest, fewer people
may afford them.
– This could reduce HCB’s sales and overall revenue.
(AO1: Knowledge + AO2: Application + AO3: Analysis)

🔍 Assessment Objective Breakdown:

Element Explanation

AO1: Identifies the effect (e.g., higher borrowing costs, reduced

Knowledge demand)

AO2: Links to HCB (e.g., technology, car sales, investment,

Application factory)

AO3: Explains the impact (e.g., delayed growth, revenue loss,

Analysis competitiveness)

✅ Alternative Valid Points:

 Increased loan repayments

→ HCB might need to borrow to pay suppliers or wages. Higher
repayments reduce cash available.
(AO1 + AO2 + AO3)

 More difficult to access finance

→ If banks tighten lending due to high interest, HCB might struggle to
 get funds to upgrade equipment.
(AO1 + AO2 + AO3)

❌ Common Mistakes to Avoid:

 ❌ No analysis: “Interest rates increase costs.” → But *how does this

affect HCB’s operations or decisions?

 ❌ No application: “Businesses will lose money.” → Not linked to HCB’s

situation (car manufacturing, technology investment, etc.)

✅ Tip:

Use this structure for each point:

What happens (AO1) ➜ Link it to HCB’s business (AO2) ➜ Explain the

result or consequence (AO3)

📘 Question 1(e):

Do you think manufacturing businesses will always benefit from the

introduction of import tariffs? Justify your answer. [6 marks]

✅ Model Answer (with AO breakdown):

Point 1:
Import tariffs can protect local manufacturers by making foreign goods
more expensive.
– This could increase demand for local products, such as HCB’s cars.
(AO1: Knowledge + AO3: Analysis)

Point 2:
However, if the manufacturing business relies on imported raw materials,
tariffs increase costs.
– HCB might face higher expenses for parts needed to build cars, reducing its
profit margin.
(AO1 + AO3)

Evaluation (Conclusion):
Not all manufacturing businesses benefit equally.
– If a business relies heavily on local inputs, it might gain a competitive
advantage.
– But if it depends on imported materials, tariffs could hurt it more than
help.
Overall, it depends on the business model and supply chain — so
they won’t always benefit.
(AO4: Evaluation)

🔍 Assessment Objective Breakdown:

AO Explanation

AO1: Identifying what import tariffs are and what they do (e.g.,
Knowledge increase import prices).

AO3: Explaining how this affects manufacturing businesses (e.g.,

Analysis more demand OR higher costs).

AO4: Weighing up both sides and giving a clear, reasoned

Evaluation judgement with justification.

🧠 Evaluation Tips (AO4):

Use phrases that help you show AO4:

 “It depends on…”

 “This may benefit some businesses, but not others because…”

 “In conclusion…” or “Overall…”

✅ Alternative Evaluation Points:

 Other countries might retaliate with tariffs, making it harder to export

goods.

 Tariffs could reduce global competition, making local firms less

efficient over time.

 Small manufacturers might still struggle, while large firms with more
local sourcing may benefit.

❌ Common Mistakes to Avoid:

 ❌ Only giving one side → No AO4

 ❌ No final judgement → Answer feels unfinished

 ❌ Repeating the same point in different words

✅ Answer Structure You Can Use:

1. Give a benefit (AO1 + AO3)

2. Give a drawback (AO1 + AO3)
3. Conclude with a balanced judgement (AO4)

📘 Question 2(a):

Identify two possible causes of business failure. [2 marks]

✅ Model Answer:

1. Poor cash flow management

2. Lack of demand due to increased competition

🔍 Assessment Objective Breakdown:

AO Explanation

You are expected to recall two valid reasons that can lead to
AO1:
a business failing. These are direct knowledge points — no
Knowledge
explanation or context required.

✅ More Valid Answers (Any two of these would score full marks):

 Poor planning or no clear objectives

 Poor management / inexperience

 Over-expansion / growing too quickly

 Ineffective marketing strategy

 Sudden changes in the economic environment

 Too much debt / excessive borrowing

 High costs leading to low profit margins

✨ Just ensure the two points are different and clear. Only the first two
answers will be marked — no extra credit for listing more.

❌ Common Mistakes:

 ❌ Giving vague answers like “It just fails” or “Too many problems”

 ❌ Repeating the same point in two ways:

E.g., “Not enough profit” and “Losing money” could be treated as the
same

✅ Tip:

For 2-mark questions like this, just identify – no need for explanation or
application. That comes in later parts.
Question 2(b):

Calculate WFH’s acid test ratio for 2022. Show your working. [2
marks]

✅ Step-by-Step Model Answer:

Step 1: Use the formula for the Acid Test Ratio

Step 2: Plug in the numbers from the table

From the question paper (Table 2.1 for 2022):

 Current assets = $50,000

 Inventory = $30,000
  Current liabilities = $40,000

✅ Full Answer to Write in Exam:

Working:
Acid test ratio = (50,000 – 30,000) ÷ 40,000 = 20,000 ÷ 40,000

Final answer:
0.5:1

🔍 Assessment Objective Breakdown:

AO What You’re Showing

AO1: You know and apply the correct formula for acid
Knowledge test ratio

AO2: You calculate correctly using the given data for

Application 2022

❌ Common Mistakes:

 ❌ Forgetting to subtract inventory

 ❌ Giving the current ratio instead (that includes inventory)

 ❌ Wrong format (answer must be in ratio form, e.g., “0.5:1”)

✅ Tip:
Always show your full working, even if you’re confident — you get 1 mark
just for using the correct formula even if your final answer is wrong.

📘 Question 2(c):

Identify four reasons why businesses hold inventory. [4 marks]

✅ Model Answer:

1. To meet customer demand quickly

2. To take advantage of supplier discounts (bulk buying)

3. To continue production if there's a supply delay

4. To prepare for seasonal demand changes

🔍 Assessment Objective Breakdown:

AO Explanation

AO1: This question is purely about your knowledge of inventory

Knowledg management. You must provide four different valid reasons.
e Each correct point gets 1 mark. No explanation is needed.

✅ More Valid Answers (any 4 count, no extra credit for more):

 To avoid lost sales due to stockouts

  To ensure smooth production without interruptions

 To reduce transport costs by buying in bulk

 To meet sudden or unexpected increases in demand

 To build up stock before a promotion or product launch

 To guard against supplier unreliability

❌ Common Mistakes:

 ❌ Giving reasons that are vague or repetitive:

e.g., “To sell goods” and “To make profit” — these are too broad and
not inventory-specific.

 ❌ Listing the same idea in different words:

e.g., “To meet demand” and “To satisfy customer needs” = might be
treated as one point.

✅ Tip:

Think in terms of why it’s risky to have no stock or what benefits come
from having it. This helps trigger correct answers.

Question 2(d):

Explain why the following two stakeholder groups might be

interested in WFH’s financial statements:

 Employees

 Suppliers
[6 marks]

✅ Model Answer:
Employees:

Employees may want to know if the business is making a profit.

– According to the financial statements, WFH made a loss of $10,000 in
2022.
– This could affect job security, as the business might reduce staff or delay
wages.
(AO1: Knowledge + AO2: Application + AO3: Analysis)

Suppliers:

Suppliers will look at liquidity, especially the acid test ratio of 0.5:1, to
see if WFH can pay its debts.
– Since WFH holds a high level of inventory ($30,000) and has low cash
($10,000), suppliers may be worried about getting paid on time.
– They may reduce or stop offering trade credit.
(AO1 + AO2 + AO3)

🔍 Assessment Objective Breakdown:

AO What It Looks Like in Your Answer

AO1: Identifying why stakeholders use financial statements (e.g. to

Knowledge assess job security or payment reliability)

AO2: Referring to details from WFH’s data (e.g., $10,000 loss,

Application $30,000 inventory, 0.5:1 acid test)

AO3: Explaining how these details affect stakeholder decisions (e.g.,

Analysis employees might leave, suppliers might stop credit)

✅ Structure You Can Use:

For each group:

1. State what they look for

2. Refer to specific data from the table

3. Explain the impact on their decision

✅ Other Valid Points:

For Employees:

 To know if the business can afford pay rises

 To assess job security or risk of redundancy

 To decide whether to look for another job

For Suppliers:

 To decide whether to offer or extend trade credit

 To assess financial risk before making deliveries

 To see if the company is expanding or declining

❌ Common Mistakes:

 ❌ No application: “Employees want to know if the business is doing

well.” → Too vague without referring to profit/loss or cash levels.

 ❌ No analysis: Just listing facts like “The profit is $10,000” without

saying why it matters.

✅ Tip:

Use the actual numbers from Table 2.1 to impress the examiner and secure
AO2 marks.

Question 2(e):

Do you think it is always better for a business to sell to a mass

market? Justify your answer. [6 marks]

✅ Model Answer:
Point 1: Mass market can lead to high sales volume.
– Selling to a larger number of customers increases the chance of higher
total revenue.
– Businesses like WFH (which sells hats) can benefit from economies of scale,
which reduces average costs.
(AO1 + AO3)

Point 2: But mass markets usually have a lot of competition.

– WFH may struggle to stand out, especially if other companies offer cheaper
or better-quality hats.
– The business might have to lower prices, reducing profit margins.
(AO1 + AO3)

✅ Evaluation (Judgement):

It’s not always better.

– If the business can offer something unique or personalized, a niche
market could allow it to charge higher prices and build strong customer
loyalty.
– Overall, it depends on the business’s strengths. For a company like WFH,
with high inventory and liquidity concerns, mass market could bring cash
flow quickly — but only if it can stay competitive.
(AO4: Evaluation)

🔍 Assessment Objective Breakdown:

AO What It Looks Like

AO1: Shows what a mass market is and what it offers (e.g., high
Knowledge sales, economies of scale)

AO3: Explains how it affects the business (e.g., lower costs, higher
Analysis competition, pricing pressure)

AO4: Weighs pros and cons, makes a clear judgement, and explains
Evaluation why it's not “always” better

✅ More Pros and Cons You Can Use:

✅ Benefits of Mass Market:

  More potential customers

 Lower average costs (economies of scale)

 More brand visibility

 Can spread risk across many buyers

❌ Drawbacks of Mass Market:

 High competition

 Requires large marketing budgets

 Product may not meet specific customer needs

 Lower customer loyalty compared to niche marketing

✅ Final Tips:

Use this 3-step structure:

1. One benefit (AO1 + AO3)

2. One drawback (AO1 + AO3)

3. Conclusion (AO4)

Use phrases like:

 “It depends on…”

 “Not always…”

 “In conclusion…”

 “This is better only if…”

📘 Question 3(a):

Identify two responsibilities of supervisors. [2 marks]

✅ Model Answer:
 1. Allocating tasks to employees

2. Monitoring the quality of work done by their team

🔍 Assessment Objective Breakdown:

AO What It Means

You are showing that you know what a supervisor does in a

AO1:
business context. Each correct responsibility gets 1 mark. No
Knowledge
explanation needed.

✅ Other Valid Answers (Choose any 2):

 Providing feedback to managers on progress or issues

 Ensuring employees follow instructions

 Checking workers are meeting deadlines or targets

 Motivating or supporting team members

 Ensuring health and safety procedures are followed

❌ Common Mistakes:

 ❌ Giving vague points like “making decisions” — that’s more a

manager’s role

 ❌ Repeating the same idea in different words (e.g., “checking work”

and “checking quality”) — might be marked as one point

✅ Tip:

Supervisors are the link between management and workers — they guide,
check, and report. Think of them as team leaders on the ground.
Question 3(b):

Identify two methods of written communication. [2 marks]

✅ Model Answer:

1. Email

2. Memo

🔍 Assessment Objective Breakdown:

AO What It Means

You are showing knowledge of communication methods by

AO1:
correctly naming two written formats. Each accurate method =
Knowledge
1 mark.

✅ Other Acceptable Answers (Pick any 2 distinct ones):

 Letter

 Text message

 Notice board

 Newsletter

 Report

 Company website

 Social media post

 WhatsApp message

 Poster / Billboard

 Leaflet / Flyer

 Magazine / Newspaper article

📝 Important: Only the first two responses will be marked. So avoid listing
more.
❌ Common Mistakes:

 ❌ Giving non-written methods like “phone call” or “meeting” → these

are verbal, not written

 ❌ Repeating types (e.g., “WhatsApp” and “Text” may be too similar

unless clearly distinct)

✅ Tip:

When in doubt, ask yourself: “Would this form of communication leave a

written record?” If yes, it’s likely correct.

📘 Question 3(c):

Outline two benefits to AH of taking over a competitor. [4 marks]

You need to:

 Identify two valid benefits (AO1)

 Apply each benefit specifically to AH’s situation (AO2)

✅ Model Answer:

1. Increase in market share

– AH currently has only 5% of the market, so acquiring a competitor could
allow it to attract more customers and grow its presence in the competitive
insurance market.
(AO1 + AO2)

2. Benefit from economies of scale

– By combining operations with the competitor, AH could reduce its average
costs, especially in areas like administration or advertising, which is
important in a competitive market.
(AO1 + AO2)

🔍 Assessment Objective Breakdown:

AO Description

AO1: Identifying valid business benefits of a takeover (e.g., higher

Knowledge market share, lower costs)

AO2: Referring to AH’s context: insurance industry, competitive

Application market, 5% market share, 1000 employees, 50 supervisors

✅ Other Valid Benefits (with AO2 ideas):

 Gain access to new customers or markets

→ Could allow AH to expand beyond its current 5% market share.

 Gain competitor’s resources or expertise

→ Might help AH improve service or efficiency.

 Gain competitor’s brand

→ AH could benefit if the other business is better known or more
trusted in the insurance industry.

 Reduce competition
→ Fewer rivals could give AH more pricing power in a competitive
market.

❌ Common Mistakes:

 ❌ Giving a benefit without applying it to AH (e.g., “It can grow” – too

vague)

 ❌ Repeating the same benefit twice in different words

 ❌ Making application too general (e.g., “in the market” without

mentioning insurance or AH’s 5% share)

✅ Tip:

Use specific words from the case:

 “Insurance”

 “5% market share”

 “Competitive market”
  “1000 employees”

 “50 supervisors”
That’s how you show AO2 and get full marks.

Question 3(d):

Explain one advantage and one disadvantage to AH of its

supervisors using an autocratic leadership style. [6 marks]

✅ Model Answer:

🔹 Advantage:

Decisions are made quickly without consulting employees.

– This is helpful in a competitive insurance market, where fast responses
to customer needs or market changes are essential.
– AH may benefit by taking over a competitor more efficiently with minimal
internal delays.
(AO1 + AO2 + AO3)

🔹 Disadvantage:

Employees may feel demotivated.

– With 1000 workers and only 50 supervisors making decisions, the rest
of the team might feel undervalued since they’re not involved in decision-
making.
– This could lead to low morale, decreased productivity, or even higher staff
turnover.
(AO1 + AO2 + AO3)

🔍 Assessment Objective Breakdown:

AO What You Need to Show

AO1: Identify a valid advantage and a valid disadvantage of

AO What You Need to Show

Knowledge autocratic leadership

AO2: Use AH’s context: insurance, 1000 employees, 50 supervisors,

Application competitive market, takeover

AO3: Explain how the advantage or disadvantage affects AH

Analysis (consequences, results, impact)

✅ Tips for Full Marks:

1. Advantage → Apply → Explain

2. Disadvantage → Apply → Explain

Each one can earn up to 3 marks (1 for AO1, 1 for AO2, 1 for AO3)

✅ More Valid Points:

Other Advantages:

 More consistent decisions from top-level supervisors

 Clear expectations for employees

 Reduces risk of errors due to inexperience

Other Disadvantages:

 Lack of creativity or employee input

 Supervisors may become overwhelmed

 Resentment or resistance from staff

❌ Common Mistakes:

 ❌ Listing without explanation: “Good decisions. Bad motivation.” → No

AO3

 ❌ No application: Failing to mention AH, insurance, or supervisors

 ❌ Repeating the same idea twice (e.g., “Quick decisions” and “Fast
choices”)