| Date | November 2018 | Marks available | 2 | Reference code | 18N.2.HL.TZ0.1 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Describe | Question number | 1 | Adapted from | N/A |
Question
Designer Dolls (DD)
Designer Dolls (DD) is a start-up business that will create hand-crafted unique dolls using a job/customized production method. As part of their business plan DD undertook a breakeven analysis.
Table 1: Forecasted figures for DD for the first year of operation
Describe one limitation of a break-even analysis.
Calculate the number of dolls that DD needs to sell to achieve a profit of $4000 (show all your working).
Calculate the capacity utilization rate at the break-even quantity for DD for the first year of operation (show all your working).
Calculate the profit or loss in the first year if DD sells 400 dolls (show all your working).
Assuming that the quantity of dolls to be sold in the second year is 550 and costs remain unchanged, calculate the price per doll that DD would need to charge to make a $6500 profit.
Markscheme
Some of the limitations may include:
- The break-even model assumes that all units produced are sold, therefore total revenue received if not all of the dolls/quantity is sold can be lower, which will have a negative impact on the break-even point.
- The break-even model assumes a linear relationship between output and total variable cost, whereas in reality the costs per unit can go down due to economies of scale. This will have a negative impact on the break-even point.
- The break-even model assumes that the price stays constant at all levels of output. In reality, price can be reduced or increased with direct impact on the break-even quantity.
Accept any relevant description. There is no need for further explanation of the exact impact on the break-even point.
Application is not expected.
Award [1] for each relevant identification / list of one limitation of the model.
Award [1] for a description up to a maximum of [2].
Fixed costs + target profit = 10 000 + 4000 = 14 000 = 700 dolls
Contribution per unit = 50 − 30 = 20 [shows that it’s part of given formula]
OR
Profit = total revenue – total cost
4000 = 50X – (10 000 + 30X)
20X = 14 000
The number of dolls needing to be sold to reach a profit of $4000 = 700
Award [1] for working and [1] for the correct answer.
Award 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.
Working must be shown for full marks. Accept a graphical calculation of BE if drawn and stated accurately ie sufficient to extract correct data (do not penalize labeling errors).
Break-even quantity =
=
= 500 dolls
Capacity utilization rate = = 0.55 × 100 = 55.55 %
Accept 55.5% or 55.56%
An alternative method would be:
Total revenue = total costs, where:
- total revenue = price × quantity sold
- total costs = total fixed cost + total variable costs.
Capacity utilization= × 100 = 55.55 %
Accept 55.5% or 55.6%
Do not credit for using the formula as it is given. Do not fully credit if the figure is not expressed in %.
Award [1] for correct working, which includes the calculations of the breakeven point and [1] for the correct answer in %. Award up to a maximum of [2].
If only the correct breakeven is present, then award [1] only if working is shown.
For a correct response that demonstrates understanding and application of the formula, even is no specific heading are presented, award full marks.
Margin of safety times contribution per unit
400 − 500 = (100) × 20 = [$2000]
Do not credit for the calculation of the break-even point but allow OFR even if correct. It is application of the MOS-BE formula which gets the mark for workings.
Accept any other relevant method:
Total revenue − total costs
Price × quantity − (total fixed costs = total variable costs)
400 × $50 − [$10 000 = (400 × $30)]
$20 000 − [$10 000 + $12 000]
$20 000 − $22 000
$(2000) = a loss
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.
Target profit = total revenue − total costs
$6500 = $550X − [10 000 + ($30 × 550)]
$6500 = $550X − [10 000 + 16 500]
$6500 = $550X − $26 500
$6500 + $26 500 = 550X
$33 000 = 550X
X = $60
Price that DD has to charge is $60.
Accept any other method provided that working is shown.
Award [1] for working and [1] for the correct answer.
Award a maximum of [2].
