A-LevelBusiness StudiesOperations management9609/33 · May/June 2019 · Q218 Marks

Refer to the table in [Appendix 1]. Calculate the: current capacity utilisation at Factory S

(a)(i)Refer to the table in [Appendix 1]. Calculate the: current capacity utilisation at Factory S[2]
(a)(ii)contribution from each kg of chocolate powder sold from Factory S.[4]
(b)Refer to your results in 2(a) and other information. Recommend whether AC should close Factory N. Justify your recommendation.[12]

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Mark scheme

Marking points from the official mark scheme (May/June 2019). The mark or mark type is shown in brackets.

[1] Formula for capacity utilisation: Current production / Full capacity × 100 (if no calculation)
[2] Calculation: 3.1 / 4 × 100 = 77.5%
[2] Other accepted answer: 78%
[1] Partial answer: 77%
[1] Partial answer: 77.5 or 78
[1] Formula for contribution: SP – Unit variable cost (if no relevant calculation)
[1] Revenue per kg: 9.3 / 3.1 = $3.00
[1] Raw materials per kg: 2.79 / 3.1 = $0.90
[1] Labour per kg: 1.55 / 3.1 = $0.50
[1] Transport costs per kg: 0.62 / 3.1 = $0.20
[2] Total variable cost (TVC) $1.60 (derived from 0.90 + 0.50 + 0.20 or 4.96 / 3.1)
[4] Therefore contribution per kg: $3.00 – $1.60 = $1.40
[3] (If fixed costs included 2.5 / 3.1 = $0.81 then 3 marks total for contribution)
Knowledge: Definition of centralisation – bringing all functions together in one place.
Knowledge: General points related to factory closures, such as worker redundancy
Knowledge: Lead time that might be needed to make the change and impact
Knowledge: Knowledge of contribution and breakeven
Application: Comparison of figures from Appendix 1
Application: Unit labour costs lower at Factory N ($0.3 per kg compared to $0.5? per kg
Application: Transport cost per kg is higher at Factory N $0.35 compared to $0.20
Application: Fixed costs of marketing etc are allocated roughly in proportion to current production levels
Application: Capacity utilisation comparisons
Application: Factory S: 3.1 / 4 × 100 = 77.5% [1]
Application: Factory N: 2.2 / 2.5 × 100 = 77.5% [1]
Application: Contribution ($ / breakeven units not required)
Application: Factory S contribution: $3 – $1.60 = $1.40
Application: Factory N contribution: $3 – ($0.9 + $0.3 + $0.35) = $3 – $1.55 = $1.45
Application: Break-even comparisons: Factory S; (Break-even output = Fixed costs / contribution per unit = 2 500 000 / 1.4 = 1 785 714 kg)
Application: Break-even comparisons: Factory N; (break-even output = 1 800 000 / 1.45 = 1 241 379 kg)
Application: Will Factory S be able to accommodate all production from Factory N?
Application: Profit comparisons – Factory S $1.84 m Factory N $1.39 m
Analysis: Impact on workers, customers and company as a whole
Analysis: Workers would not easily be able to transfer from Factory N to S due to distance
Analysis: Efficiency gains may lead to lower prices for customers
Analysis: Possible reputational damage due to closing Factory N could lead to reduction in demand. Link to AC's corporate social responsibility – AC believes its 'fair trade' is an important ethical marketing advantage
Analysis: Cost of redundancy payments resulting in short-term strain on AC's cash flow and liquidity
Analysis: Impact on production whilst changes are made could disrupt supplies to customers resulting in reduced demand
Analysis: Implications of loss of contribution from Factory N, which has lower FC and lower break-even
Evaluation: Balance of evidence – for or against?
Evaluation: Most important issue e.g. competitive market so need to make efficiency gains for long-term sustainability
Evaluation: Some of Adam's other directors are against the idea
Evaluation: Future cost rises – faster in Factory S?