| Date | May 2022 | Marks available | 2 | Reference code | 22M.2.SL.TZ0.1 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Calculate | Question number | 1 | Adapted from | N/A |
Question
AXL
AXL has two factories, in which it manufactures aluminium cans for the soft drinks industry.
AXL has a maximum production capacity of 80 million cans per year.
Table 1: AXL’s forecasted sales revenue and costs for 2023
AXL plans to close its two factories and move production to a new, larger factory to obtain economies of scale.
In the first six months of 2022, increased competition led to a fall in AXL’s sales. For the final two months of 2022, AXL plans to increase the trade credit period it offers to customers from 30 to 60 days.
Define the term economies of scale.
Using Table 1, calculate the contribution per unit (show all your working).
Using Table 1, calculate the break-even level of output (no working required).
If AXL produces 75 million cans in 2023, using Table 1, calculate the margin of safety (no working required).
If AXL produces 75 million cans in 2023, using Table 1, calculate the profit (show all your working).
Explain the potential impact on AXL if it implements its planned increase in trade credit period.
Markscheme
Economies of scale are the reductions in unit/average costs that result from an increase in output / increase in scale.
Candidates are not expected to word their definition exactly as above.
Do not reward examples of economies of scale e.g. purchasing economies.
To be awarded [2] candidates must include references to both reductions in costs and the scale of output.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the answer above.
N.B. no application required. Do not credit examples.
Unit contribution = selling price − variable costs.
Selling price = $0.15
Variable costs = $0.05
Answer = $0.10
Award [2] for a correct answer with working.
Award [1] for correct answer without working.
Award [1] for correct method with an error in the calculation.
Correct answer = 50m
Award [1] for correct answer without working.
Candidates that omit the million or m sign award [0].
MOS = current output − break even
= 75m − 50m = 25m
Award [1] for correct answer without working.
Candidates that omit the million or m sign award [0].
If candidates have a dollar sign ($) by the figure, award [0] (for example, the candidate writes $25m).
Allow candidate own figure rule (OFR). A mark can be awarded if an error made in b(ii) is carried through to (c)(i).
Output = 75 million cans
TFC = $5m
TVC = $3.75m (75m x 0.05)
TC = $8.75m
TR = $11.25m
Profit = $2.5m
Award [1] for the correct working and [1] for the correct answer.
Award [1] for the correct answer without working.
Answers that omit the m or millions cannot be awarded full marks – a correct answer without the m or millions can be awarded [1] if the method / working is correct.
Trade credit is an agreement between businesses that allows the buyer of goods or services to pay the seller at a later date.
Candidates need to show an understanding of trade credit for [1] and make use of the stimulus for [2].
For example, this change may reverse the decline in sales that occurred in the first half of 2022, as now customers have longer to pay, which makes the business more competitive in an increasingly competitive market.
However, a comment such as “It may lead to an increase in sales but a reduction in cash inflows as AXL’s existing customers can now delay payment for an additional 30 days” has only nominal application, as the comment applies to almost all non-retail companies. In this instance, award [1].
Award [1] for only a partial/unclear explanation of the impact on AXL.
Award [2] for a clear explanation of the impact on AXL that makes use of the stimulus provided.
Examiners report
Most candidates had at least some understanding of economies of scale.
Many candidates could calculate contribution per unit.
Many candidates could correctly determine the break-even level of output.
Many candidates could correctly determine the margin of safety.
Many candidates could calculate the profit.
Most candidates had some understanding of the implications of increasing the trade credit period, but few correctly applied that knowledge to the stimulus.
