| 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 | Explain | 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:
- unit variable costs by 10 %
- fixed costs by $5000 per year.
Define the term margin of safety.
Using the financial data in Table 1, calculate the break-even level of output (show all your working).
Using the financial data in Table 1, calculate the percentage of total costs that were fixed costs for last year (show all your working).
Using the financial data in Table 1, calculate the level of profit for SSH at 2018’s level of production (show all your working).
Explain how the introduction of new production methods will affect the total cost line in SSH’s break-even chart.
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.
=
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[1] can be awarded for the formula on its own OR
An additional [1] is for the correct answer with working shown.
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 = = 45.45 %
N.B. OFR rule applies from (i).
[1] can be awarded for TFC percentage = 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].
Output = 60 000
TR = 60 000 × $4.5 = $270 000
TC = $220 000
Profit = $50 000
N.B. OFR rule applies from (i).
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].
