Refer to [Appendix 1]. Calculate the impact of a 15% increase in the price of raw materials for Factory S on its operating profit margin in 2019, assuming revenue and all other cost data remains the same.

Mark scheme

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

1. [1] Operating profit margin formula: Operating profit / sales revenue × 100 (if no calculation shown)
2. [1] Increase in raw materials cost: 15% of $2.79m = $0.4185m
3. [2] New raw materials cost: $2.79m + $0.4185m = $3.2085m (rounded to $3.21m)
4. [3] New total cost: $3.21m (raw materials) + $1.55m (labour) + $0.62m (transport) + $2.00m (factory fixed) + $0.50m (allocated fixed) = $7.88m
5. [4] New operating profit: $9.3m (revenue) - $7.88m (total cost) = $1.42m
6. [5] New operating profit margin (OPM): ($1.42m / $9.3m) × 100 = 15.27%
7. [2] Current OPM (from table): 19.78%
8. [5] Change in OPM: 19.78% - 15.27% = 4.51% decrease
9. [1] Gearing formula: non-current liabilities / capital employed × 100 OR NCL / (shareholder equity + NCL) × 100
10. [3] New gearing = ($21m + $7m) / ($54m + $8m) × 100 = 28 / 62 = 45.16% (or 45.2%)
11. [2] New gearing = 45.16 (or 45.2)
12. [3] OR New gearing = 28 / 33 × 100 = 84.8% (using NCL / Shareholder Equity)
13. [2] New gearing = 84.8
14. [2] Other likely answers with errors: 28/53 = 52.8%
15. [2] Other likely answers with errors: 21/62 = 33.9%
16. [1] Current gearing = 21 / 54 × 100 = 38.88% (if no formula stated)
17. [1] Current gearing = 21 / 33 = 63.6% (if no formula stated)
18. Knowledge: Meaning of converting to PLC – shares publicly available on a stock exchange
19. Knowledge: Advantages / disadvantages of Ltd. v PLC legal status
20. Knowledge: Raising finance from shareholders as a PLC
21. Knowledge: Greater divorce between ownership and control of business as a PLC. Dilution of control as PLC.
22. Knowledge: Risk of takeover increased as PLC
23. Knowledge: PLC status and link to long term growth of business
24. Knowledge: Share capital is a permanent form of finance
25. Knowledge: Reference to financial information and ratios e.g. gearing
26. Application: Current gearing classified as low (below 50%). Link to expansion plans.
27. Application: Further borrowing for expansion and predicted increase in interest rates
28. Application: Profits have provided Lukwesa family with good returns
29. Application: Family business for 50 years
30. Application: Potential attractiveness of the business to chocolate manufacturers for backward vertical integration
31. Application: Application of changes to financial performance
32. Analysis: Gearing low but expansion funded by borrowing would potentially increase to over 50% and increase in costs impacting profit
33. Analysis: Risk of takeover increased if plc thus Lukwesa family could lose control of the business
34. Analysis: As a plc increased tension between shareholders wanting dividends and short term profit v the long term success of AC that Lukwesa family may be more concerned about
35. Analysis: Ali Lukwesa ambitious for AC and plc conversion could fund his plans for modernisation.
36. Analysis: Borrowing for expansion can result in greater reward for Lukwesa family
37. Evaluation: Different views of family members. Ali Lukwesa more focused on expansion and modernisation – this may conflict with other family members.
38. Evaluation: Short / long term impact on the family and the business
39. Evaluation: Which is most important factor to family members?
40. Evaluation: Reliability of figures?