Define the term fixed cost.

Calculate the break-even quantity of meals that CL must sell to pay for the increase in fixed costs of $3000 to provide these meals (show all your working).

Using the information in the table only, prepare a monthly cash flow forecast, for CL, for the first six months of operation.

A fixed cost is a cost that does not change with the level of production/output.

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

Award [1] for a basic definition that conveys partial knowledge and understanding similar to the above answer. The first mark would typically come from awareness that the payment does not change.

Award [2] for a full, clear definition that conveys knowledge and understanding similar to the answer above. Candidates should receive a second mark if they convey the idea that it does not change according to the level of production/output.

Do not credit an example.

Just to pay for the increase in fixed costs of $3000, CL must sell 600 meals per month, calculated as follows:

Average sales price per meal – average variable costs per meal = contribution

$10 – $5 = $5 contribution

$\frac{3000}{5}$ = 600 meals per month/units

For full marks all stages of the calculation – the two stages – are expected.

An alternative method would be:

Total revenue (TR) = total costs (TC), where total revenue = Price x quantity sold and TC = Total fixed cost + total variable costs

10 [price] x Q [quantity sold] = Total fixed cost + ($5 [variable cost per unit] x Q)

10Q = 3000 + 5Q

5Q = 3000

$\frac{3000}{5}$ = 600 meals per month/units

Award [1] for correct working and [1] for the correct answer. Award up to a maximum of [2].

For a correct response that demonstrates understanding and application of the formula, even if no specific headings are presented, award full marks.

All figures in $

N.B. Allow candidate own figure rule (OFR): if a candidate makes an error in one row and carries it through the remainder of the forecast, that is only one error. This provision includes both mathematical errors and conceptual errors (for example, if a candidate has the electricity fee monthly rather than every other month, it is one error) and candidates should only lose [1] for that error.

Candidates who only show net rent payment should be penalised as one error as they have omitted the inflow.

[1] if the candidate has some idea of the structure of a cash flow forecast.

[2] for a cash flow forecast that has more than three mistakes or omissions in layout/ heading/ calculations (apply OFR).

[3] for a largely correct cash flow forecast that has three mistakes or omissions in layout/headings and/or calculation (apply OFR).

[4] for a largely correct cash flow forecast that has some minor mistakes with layout and /or headings and which has one mistake (apply OFR) or the candidate does not produce a mathematically correct cash flow.

[5] for a largely mathematically correct cash flow forecast that has one omission of one category or one mistake in calculations or headings.

[6] for a fully correct cash-flow forecast with a generally accepted format and lines/headings for total inflows/receipts, total outflows/payments (or some other acceptable wording), a line/ headings for net cash flow / inflow, etc and lines/ headings for opening and closing balance.