Expanding a business study guide

A joint venture is a partnership between two or more businesses that share resources, risks, and profits to pursue a specific project or market.

Organic growth is the increase in a company’s size and revenue that comes from expanding existing operations, such as opening new stores, launching new products, or entering new markets, rather than from mergers or acquisitions.

Outsourcing is the practice of hiring an external organisation to perform a business activity that could otherwise be carried out internally.

Economies of scale are the cost advantages that a business obtains due to expansion, resulting in a lower cost per unit of output.

A purchasing economy is a cost advantage gained when a firm buys larger quantities of inputs or raw materials, often resulting in lower unit prices due to supplier discounts or bulk purchasing.

Diseconomies of scale occur when a business’s average costs rise as it expands, often because of increased complexity, coordination problems or reduced staff motivation.

The total cost of producing a set of goods divided by the number of units produced. It includes both fixed and variable costs.

Exam practice

• Which method of expansion gives a business full control over the new operation but requires the greatest initial capital outlay?
• Evaluate the advantages and disadvantages of using franchising as a growth method for an online service business.
• Which of the following is a form of organic growth for a business?
• Explain how opening new stores can contribute to organic growth for an independent retailer.
• Which of the following best describes outsourcing?
• Analyse the potential impact on a small manufacturer of acquiring a competitor through a takeover.
• Which of the following best explains why a small retailer can lower its unit cost by opening a second store?
• A small manufacturer produces 200 units of a product at a total cost of £30,000. The fixed cost is £10,000 and the variable cost per unit is £50. If the manufacturer doubles output to 400 units, calculate the new unit cost and explain how this demonstrates economies of scale.
• Which of the following best describes a purchasing economy?
• Explain how technical economies of scale can affect the cost structure of a small manufacturer.
• Which of the following is a likely cause of diseconomies of scale when a small retailer expands its operations?
• Explain how communication problems can create diseconomies of scale for a small manufacturing business.
• A small manufacturer produces 200 units of a product. Fixed costs are £4,000 and variable costs per unit are £15. What is the average unit cost?
• A start‑up online service sells 1,200 subscriptions in a month. Fixed costs are £9,600 and variable costs per subscription are £4. Calculate the average unit cost and explain what it tells you about the business’s cost structure.