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Date November 2019 Marks available 2 Reference code 19N.2.SL.TZ0.1
Level Standard level Paper Paper 2 Time zone Time zone 0
Command term Define Question number 1 Adapted from N/A

Question

Small-Scale Hobbies (SSH)

Scale Airplane Modeller is a magazine produced by Small-Scale Hobbies (SSH). The company sells the magazine through independent retail outlets in the US.

The finance director produced a summary of 2018’s financial information. Last year’s break‑even chart showed that SSH had a margin of safety of 20 000 units.

Table 1: Selected financial data for SSH for 2018:

This year, to reduce costs and to increase sales, the company will introduce new production methods, which will reduce:

Define the term margin of safety.

[2]
a.

Using the financial data in Table 1, calculate the break-even level of output (show all your working).

[2]
b.i.

Using the financial data in Table 1, calculate the percentage of total costs that were fixed costs for last year (show all your working).

[2]
b.ii.

Using the financial data in Table 1, calculate the level of profit for SSH at 2018’s level of production (show all your working).

[2]
b.iii.

Explain how the introduction of new production methods will affect the total cost line in SSH’s break-even chart.

[2]
c.

Markscheme

In break-even analysis, margin of safety is how much output or sales level can fall before a business reaches its break-even point.

Award [1] for some understanding.

Award [2] for a clear definition.

a.

Formula = TFC Unit contribution

100 000 4.5 - 2

100 0002.5 = 40 000 units 

[1] can be awarded for the formula on its own OR  100 0002.5

An additional [1] is for the correct answer with working shown.

b.i.

Output = 60 000 (break even = 40 000 and margin of safety = 20 000)
TC = TFC + TVC = 100 000 + (60 000 × 2)
TC = 220 000

TFC percentage = 100 000 220 000 = 45.45 %

N.B. OFR rule applies from (i).

[1] can be awarded for TFC percentage = 100 000 220 000 even if the final answer is incorrect.

If a candidate has the workings shown (100 000/200 000) and has the answer written out as 45.45, 45.4545, etc. award [2].

If a candidate has the workings shown (100 000/200 000) and has the answer written out as 45.5, award [2] award [2].

If a candidate has the workings shown (100 000/200 000) and has the answer written out as 45.4 or has a maths error, award [1].

b.ii.

Output = 60 000
TR = 60 000 × $4.5 = $270 000
TC = $220 000
Profit = $50 000

N.B. OFR rule applies from (i).

b.iii.

The TC line will shift downwards (by $5000) [1].

The slope or gradient of the TC line will become flatter (less steep) [1].

A candidate may draw a sketch to show the impact on TC – this can be awarded [2] if it shows TC line shifting downwards and becoming flatter.

If a candidate says that the total cost line is lower, or something to that affect, award [1].

If a candidate correctly explains the impact on the break-even point, award [1].

c.

Examiners report

[N/A]
a.
[N/A]
b.i.
[N/A]
b.ii.
[N/A]
b.iii.
[N/A]
c.

Syllabus sections

Last exams 2023 » Unit 3: Finance and accounts » 3.3 Break-even analysis » A break-even chart and the following aspects of break-even analysis: break-even quantity/point, profit or loss, margin of safety, target profit output, target profit, target price
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First exams 2024 » Unit 5: Operations management » 5.5 Break-even analysis » 5.5.2 A break-even chart and the following aspects of break-even analysis: Break-even quantity/point, Profit or loss, Margin of safety, Target profit output, Target profit, Target price
Last exams 2023 » Unit 3: Finance and accounts » 3.3 Break-even analysis
First exams 2024 » Unit 5: Operations management » 5.5 Break-even analysis
Last exams 2023 » Unit 3: Finance and accounts
First exams 2024 » Unit 5: Operations management
Last exams 2023
First exams 2024

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