Refer to lines 47–49 and Table 1.1. Calculate the accounting rate of return (ARR).

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2023). The mark or mark type is shown in brackets.

1. [1] (a) Equation for ARR: ARR = Annual profit / Average investment × 100.
2. [1] (a) Calculation of profit: 900 000 – 650 000 = $250 000.
3. [1] (a) Calculation of average investment: 650 000 / 2 = $325 000.
4. [1] (a) Final Answer: 50 000 / 325 000 × 100 = 15.38% OR 15.4% OR 15%.
5. [1] (b) Knowledge of ERP: Definition of ERP is the use of a computer application to plan the purchase and use of resources in an organisation to improve efficiency, part of supply chain management.
6. [1] (b) Knowledge of ERP impacts: Helps with inventory control.
7. [1] (b) Knowledge of ERP impacts: Reduces costs of operations.
8. [1] (b) Knowledge of ERP impacts: Links information between departments.
9. [1] (b) Knowledge of ERP impacts: Choosing best suppliers and most cost-effective suppliers and supporting JIT manufacturing.
10. [1] (b) Knowledge of ERP impacts: Allocating jobs to appropriate production employees.
11. [1] (b) Knowledge of other investment decision factors: Cost.
12. [1] (b) Knowledge of other investment decision factors: Availability of finance.
13. [1] (b) Knowledge of other investment decision factors: Impact on employees.
14. [1] (b) Knowledge of other investment decision factors: ARR and Payback results.
15. [1] (b) Application to FWB: Payback period of 3 years and 9 months (within 5 years before replacement).
16. [1] (b) Application to FWB: Return of $250 000 over 5-year period.
17. [1] (b) Application to FWB: ARR of 15.38% is above ROCE for the business (4.2%).
18. [1] (b) Application to FWB: Profit last year was $2.1465m (40.5m × 5.3%).
19. [1] (b) Application to FWB: Gearing is 45% – quite high.
20. [1] (b) Application to FWB: Cost of ERP is $650 000.
21. [1] (b) Application to FWB: Data is supplied by the ERP company.
22. [1] (b) Application to FWB: ERP aids coordination of multiple suppliers.
23. [1] (b) Application to FWB: ERP reduces waste of discarded food and coffee beans.
24. [1] (b) Application to FWB: FWB has had problems with stock-outs.
25. [1] (b) Application to FWB: Coffee beans are perishable.
26. [1] (b) Analysis: ERP is costly, and FWB's relatively high gearing increases the risk of further borrowing, potentially causing cash flow problems if net cost savings are not realised quickly.
27. [1] (b) Analysis: Employee training for new computer systems will increase costs, though it should be included in net cost savings data.
28. [1] (b) Analysis: ERP provides more effective sharing of information between departments, leading to a more integrated approach, increased efficiency, and higher profits.
29. [1] (b) Analysis: Introducing ERP may cause short-term operational disruption, reducing output during installation.
30. [1] (b) Analysis: ERP will help FWB fulfil customer orders more quickly, resulting in customer satisfaction and increased sales.
31. [1] (b) Analysis: ERP may reduce the number of employees in stock control, reducing operating costs, but leading to redundancy payments.
32. [1] (b) Evaluation: A judgement about whether to invest in ERP.
33. [1] (b) Evaluation: Consideration of whether cost savings are estimates made by the ERP specialist and if these figures can be trusted, as specialists will wish to sell to FWB.
34. [1] (b) Evaluation: Success in reducing inventory holding costs depends on the reliability of coffee bean suppliers to deliver on time.
35. [1] (b) Evaluation: Other factors to consider include NPV, as it accounts for the time value of money.
36. [1] (b) Evaluation: The decision depends on the availability of finance, linked to FWB's relatively high gearing and interest rates.
37. [1] (b) Evaluation: The time required to implement the ERP system should be considered.
38. [1] (b) Evaluation: The need for specialist IT employees and their cost should be evaluated.
39. [1] (b) Evaluation: The opportunity cost of this project, especially if legal changes require significant capital investment for new FWB vans, is important.
40. [1] (b) Evaluation: A weighing up of factors and their relative influence on FWB's decision to invest in ERP.