Define the term trade credit.

Using the financial data for DuffJD for 2018, calculate the contribution per unit per item laundered (no working required).

Using the financial data for DuffJD for 2018, calculate the margin of safety (no working required).

Draw a fully labelled break-even chart for DuffJD for 2018 using the data provided.

Explain how an increase in competition may affect DuffJD’s margin of safety.

Trade credit is an important source of short-term finance available to businesses. It allows a business to buy goods and/or services on account without making immediate cash or cheque payments.

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

Award [1] for a basic definition conveying the idea that it allows a business to buy goods/services without making immediate cash or cheque payments Award an additional [1] for stating that it is a short-term source of finance [2].

sales price per unit − variable costs per unit = contribution
       $2.00             −            $0.50             = $1.50

contribution = $1.50

Award [1] for the correct response. No working required.

number of units sold − break-even number of units = margin of safety

       200 000            − $\left(\frac{\$75\hspace{0.17em}000}{\$1.50}\right)$ 50 000                   = 150 000

margin of safety = 150 000 units

Award [1] for the correct response. No working required.

Candidates do not need to create the table below – these are the figures for the break-even chart.

Award marks as follows:
[1] for a correctly labelled and accurately drawn total revenue (TR) line – can be TR or revenue (but not “Sales” on its own).
[1] for a correctly labelled and accurately drawn total cost (TC) line.
[1] for identifying the break-even point. Ideally, the candidate will draw an arrow pointing to the break-even point and label the arrow. However, accept as an accurately labelled break-even point a vertical line from the x-axis to the break-even point, provided that the line is labelled “break-even point”.
[1] for correctly labelling BOTH axes – x-axis must have both costs and revenue; y-axis must have some indication of quantity, eg, units/quantity/items laundered.

A break-even chart that is not drawn to scale can be awarded a maximum of [2].

The break-even chart below should be awarded [2]. The candidate has correct TR, TC, both axes, and BEP. However, the chart is not to scale. Therefore, the award is capped at [2] because the x-axis is not to scale.

Be mindful of positive marking. If a candidate mislabeled one axis and the TC line (called it VC), the response would still receive [2] because the candidate had gotten correct the TR line and the BEP.

Also, be mindful that the own figure rule (OFR) applies. If a candidate incorrectly calculates the break-even quantity when determining the margin of safety (question (b)(ii)) and then uses that incorrect break-even quantity when drawing their break-even chart, accept the break-even quantity in the chart. The candidate will have already lost marks for the incorrect calculation in (b)(ii). Do not double penalize.

An increase in competition may have two effects on DuffJD – they may lose a contract with one or more of its current three clients and thus will sell less laundry services. A loss of sales will reduce DuffJD’s margin of safety. The increase in competition may also force down prices. A decrease in price will increase the break-even level of output and thus reduce the margin of safety.

Award [1] for a candidate displaying a sound understanding of the term margin of safety.

Award a further [1] if the candidate identifies that the margin of safety is likely to fall for either of the two reasons indicated above.

A surprising number of candidates did not have an accurate understanding of trade credit. Really succinct and precise responses were rare.

Many candidates could accurately calculate the contribution per unit.

Most candidates, as well, correctly calculated the margin of safety.

Most candidates had at least some idea of what a break-even chart is. Many scored four marks. When they did not, marks were typically lost for the chart not being to scale or an inaccurate label on the y-axis.

Candidates who understood break-even (questions b(i), b(ii), and (c) typically outlined that an increase in competition would decrease DuffJD’s margin of safety.