Define the term variable cost.

With reference to Utopia, explain the differences between secondary sector activities and tertiary sector activities.

Using the information above, calculate the payback period and the average rate of return (ARR) for the 3D printing project (show all your working).

Using information from the case study, additional information above and your results from part (c), recommend whether Utopia should proceed with the 3D printing project.

Variable costs are costs that vary in direct proportion to change in output/level of production.

Candidates are not expected to word their definition exactly as above.

Award [1] for a basic definition that conveys partial knowledge and understanding.

Award [2] for a full, clear definition that conveys knowledge and understanding similar to the answer above.

Secondary sector: manufacturing – converting raw materials. Usually capital intensive, often B2B – 3D printing.
Tertiary sector activities – providing services. Usually labour intensive, often B2C. Predominant in developed economies – serving coffee, providing resort facilities.

Award [1] for each difference identified, and [1] for the development of this difference in the context of Utopia.

Award a maximum of [2] if the answer is not about differences but only provides definitions.

The project breaks even after 3 years and 3 months (3 ¼ years).

ARR $=\frac{\left(\text{total returns }-\text{capital cost}\right)/\text{years of use}}{\text{capital cost}}\times 100$

$=\frac{\left(17-10\right)/5}{10}\times 100=$ 14%

Mark as 2+2.

For each calculation:
Award [2] for correct answer with working and correct unit.
Award [1] for correct answer with working but incorrect unit or no unit, or for correct answer with correct unit but no working.

For:
• Paul likes the idea
• Unique souvenirs
• Cost reductions
• $10k is not large in the scale of the operation
• Use of recycled materials fits in with Utopia’s ethos and image
• ARR reasonable (14 %) – allow OFR

Against:
• Payback period quite long (OFR) for such a small project
• Does this market really do souvenirs?
• Liza does not like
• Recruitment difficulties
• Impact on local people – part of the ethos
• Costs of recycling unclear
• Not suited to niche market?
• This is a very small investment (10K) and the returns at 14% actually amount to quite a small sum – if it is a success it actually adds very little to annual revenue streams. For such a small return is the risk that it perhaps cheapens the image of the business worthwhile? Such souvenirs could be regarded as “tacky” and do not fit the profile of the target market.

Decision depends on John and whether other alternatives are better, eg doing nothing, leaving the money in the bank, etc. John believes the technology will bring other benefits, which may swing him that way; however, the impact on local craftsman would weigh heavily.

Marks should be allocated according to the Paper 1 markbands for May 2016 forward, section B.

Award a maximum of [4] for a purely theoretical answer or with no effective use of case material.

Award a maximum of [5] if only one side of argument is considered in context.

Award a maximum of [6] if both sides are considered but there is limited use of data.

Award a maximum of [8] if both sides considered, and there is good use of data.

For full marks two sides of the argument should be considered, data used effectively, and the recommendation supported.

Note – a recommendation that a decision cannot be made due to lack of information (eg market research) can be regarded as a decision provided the arguments are supported.

Candidates were asked to define the term “variable costs”. Many candidates did well, scoring 2 marks with relatively concise answers. Examiners however saw many answers that were too superficial or tautological, such as “variable costs are costs that do not vary” or “variable costs are costs that are not fixed”; this is not enough to fully convey knowledge and understanding.

Candidates were asked to explain the differences between secondary sector activities and tertiary sector activities. Many candidates misread the question as “define secondary sector and then define primary sector”; few candidates duly wrote about the differences and consequently scored top marks.

Candidates were asked for two calculations. Most answers were correct; examiners however noted two “typical” errors: firstly, the absence of units for the ARR (i.e. 14 instead of 14%); secondly, the absence of working (i.e. just the final result, although the instructions explicitly stated “show all your working”).

Candidates were asked to recommend whether Utopia should proceed with the 3D printing project. Many answers were cogent, well-structured and balanced, with a clear recommendation at the end. The best responses referred to information from the case study, from the additional information given and also from the results from 4(c); OFR (Own Figure Rules) was then allowed i.e. candidates could use and interpret their own results (i.e. they were not doubly penalised if their calculations were wrong, for example with a payback period too short or too long). The main weakness in some candidates’ answers is the fact that some were solely one-sided: all the arguments were either “for” or “against”. For the final question of section B, which assesses A03 command terms such as “discuss”, “evaluate” or “recommend”, candidates should be reminded of the importance of covering contrasting viewpoints.