Business and Marketing
This section covers the Business and Marketing domain, which tests how organizations plan, organize, staff, lead, and control resources, and how they identify, segment, and serve markets profitably. Expect questions on business ownership, management functions, the marketing mix, market research, financial statements, and the legal and ethical environment of business.
Core rules and concepts
- Forms of ownership: sole proprietorship (unlimited liability), partnership (general vs. limited), corporation (limited liability, possible double taxation), LLC, and cooperative. Liability exposure is the most tested distinction.
- Management functions: planning, organizing, leading, and controlling; controlling means comparing performance to standards and correcting deviations.
- Marketing mix: product, price, place, promotion; services add people, process, and physical evidence.
- Segmentation bases: demographic, geographic, psychographic, and behavioral; segmentation precedes targeting and positioning.
- Product life cycle: introduction, growth, maturity, decline, each requiring different pricing and promotion strategies.
- Accounting equation: Assets = Liabilities + Equity; every transaction keeps it balanced.
- Revenue − expenses = net income, which is not the same as cash flow.
- Elasticity: demand is elastic when the percentage change in quantity exceeds the percentage change in price, so a price increase lowers total revenue.
Worked example
A firm has fixed costs of $12,000, a $20 price, and $8 variable cost per unit. Contribution margin per unit = $20 − $8 = $12. Break-even units = fixed costs ÷ contribution margin = $12,000 ÷ $12 = 1,000 units. At that volume, revenue ($20,000) equals total cost ($12,000 fixed + $8,000 variable). If price drops to $18, contribution falls to $10 and break-even rises to 1,200 units, so the price cut needs a 20% volume gain just to hold profit.
Traps that cost marks
- Markup vs. margin: markup is calculated on cost, margin on selling price; a 50% markup is only a 33% margin.
- Confusing a target market with a market segment.
- Treating a shift in demand (income, tastes, substitutes) as a movement along the curve; only price changes cause movement along it.
- Recognizing revenue when cash arrives rather than when it is earned under accrual accounting.
- Assuming corporations always avoid double taxation; dividends are taxed after corporate income tax.