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Business Studies · May / June 2021 · Paper 21 · Question 4

0450

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  • 4(a)(i)[2]

    Using the information in Appendix 2: Calculate the break-even level of output per month (Break-even = fixed costs/contribution per unit) Contribution (Selling price per unit $250 – Variable cost per unit $125) = $125 Fixed cost per month $10 000/ $125 (1)

    Break-even level of sales = 80 (1)

  • 4(a)(ii)[2]

    Calculate the margin of safety per month for tables: (Margin of safety = Actual sales – break-even level of sales) Forecast sales per month 100 – 80 (1)

    = 20 (1)

  • 4(a)(iii)[4]

    Identify four limitations of using break-even analysis. One mark for each limitation (maximum of 4). Responses could include:

    Assumes no inventories
    ‘Straight line’ assumptions about costs and revenue
    Fixed costs are not always constant
    Assumes all products are actually sold / it is only an estimate/forecast
    Only focuses on break-even when there are many other factors to consider when running a business
    Assumes single product
    Hard to split costs between fixed and variable
    May be hard to split fixed costs if produce several products

  • 4(b)[12]

    Refer to Appendix 2 and Appendix 3 and other information. Consider the following three ways FO could use to contribute to sustainable development:

    only use raw materials from sources that replace what they have used
    only use packaging that can be recycled
    only use electric vehicles to deliver products. Which way should FO choose to maximise profit? Justify your answer. Level Description Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of two or more ways. Well-justified conclusion. Candidates discussing all three in detail, in context and with a well-justified conclusion including why the alternative ways were rejected should be rewarded with the top marks in the band. 9–12 Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one way. Judgement with some justification / some evaluation of choices made. Candidates discussing two or more ways in detail and applying them to the case should be rewarded with the top marks in the band. 5–8 Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the ways with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining three ways in context should be rewarded with the top marks in the band. 1–4 No creditable response. Relevant points might include: Advantages Disadvantages Only use raw materials from sources that replace what they have used
    Gives FO a good reputation for selling wooden furniture
    Increase sales from ethically minded consumers
    Able to charge a premium price for the furniture
    Variable costs will increase by 20% – $25 per item of furniture
    At current sales level, profit would be zero so would need to increase the selling price or units sold Only use packaging that can be recycled
    Makes product packaging sustainable and is in line with sustainable objectives of FO
    Reputation increased amongst ethical consumers – more sales
    Selling price may be more 10% expensive which may lower sales
    May not be suitable for large items of furniture
    Selling price may increase by $25 Only use electric vehicles to deliver products
    Cheaper running costs by 5%
    USP for FO
    Variable costs may fall by $6.25
    Costs increase in short run, but cost savings in long run
    Contributes to reduced air pollution – meets FO’s objective of sustainability
    More expensive to purchase initially then cheaper to run
    Higher capital cost for new vehicles than petrol or diesel vehicles which requires higher investment by FO Recommendation
    Using wood from sustainable sources would enhance the image of FO and make it more attractive to ethical consumers leading to much higher sales and revenue leading to maximising profit. However, as furniture are large items then packaging will be less important. Electric vehicles will require too large a capital investment.
    Recycled packaging will have the greatest effect on maximising profit as very little packaging is used for furniture and this packaging can be reused for future customers. The increase in costs is likely to be less than the 20% increase from the use of raw materials from sustainable sources.
    Electric vehicles is the only option which results in a fall in variable costs – by 5% and therefore the reduction in running costs delivering its furniture to all parts of the country would be significant hence reducing total costs and maximising profit.
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