Refer to lines 72–74 and Table 2. Calculate the: accounting rate of return (ARR)

Mark scheme

Marking points from the official mark scheme (May/June 2021). The mark or mark type is shown in brackets.

1. [4] (a)(i) Correct answer with or without units: 27.5% OR 28%
2. [4] (a)(i) Working not required: 55% OR 56% (Alternative formula: (annual profit / average investment) × 100)
3. [3] (a)(i) Correct working without answer: ARR = 275 000 / 1 000 000 × 100
4. [3] (a)(i) Annual profit: 1.65 m / 6 = 0.275 m OR 0.28 m OR 275 000
5. [2] (a)(i) Profit: 2.65 m – 1.0 m = 1.65 m
6. [2] (a)(i) OR 2.65 m / 6 = 0.442 m (OFR for annual profit original investment not deducted)
7. [1] (a)(i) Total cash inflows: 2.65 m
8. [1] (a)(i) Correct formula: (annual profit / capital cost) × 100 OR (annual profit / average investment) × 100
9. [3] (a)(i) 0.442 / 1 x 100 = 44.2% OR 0.442 / 0.5 × 100 = 88.4% (OFR based on error in ARR calculation: original investment not deducted)
10. [2] (a)(i) 1.65 / 1.0 x 100 = 165% OR 1.65 / 0.5 x 100 = 330% (profit not divided by 6)
11. [4] (a)(ii) Payback = 2 years 8 months OR 2.67 years OR 2.7 years OR 2 years 232 – 248 days
12. [3] (a)(ii) Payback = 8 months (after 2 years of full cash flow)
13. [2] (a)(ii) Calculation: 300 000 / 450 000 × 12 (for the fraction of the third year)
14. [1] (a)(ii) Accurate cumulative cash flow for first year or more (Year 0: (1,000,000), Year 1: (700,000), Year 2: (300,000), Year 3: 150,000, Year 4: 650,000, Year 5: 1,150,000, Year 6: 1,650,000)
15. [1] (a)(ii) Payback is in the 3rd year.
16. [1] (b) Definition of ERP: the use of a computer application to plan the purchase and use of resources in an organisation to improve efficiency.
17. [1] (b) Part of supply chain management.
18. [1] (b) Benefits of ERP: Helps with inventory control, Reduces costs of operations, Links information between departments, Choosing best suppliers and most cost-effective suppliers and supporting JIT manufacturing, Allocating jobs to appropriate production employees.
19. [1] (b) Other factors in decision: Cost, Availability of finance, Impact on employees, ARR and Payback results.
20. [1] (b) Weakness of Inolla is low inventory turnover.
21. [1] (b) High cost of holding inventory of batteries etc.
22. [1] (b) Payback within 3 years. Relatively quick as the ERP system has a 6 year life.
23. [1] (b) ARR is high at 27.5%.
24. [1] (b) NPV data $1.141m.
25. [1] (b) ERP will support introduction of JIT which will reduce costs of stockholding.
26. [1] (b) May enable increase to capacity as less inventory will be held. This will facilitate meeting increasing demand for scooters.
27. [1] (b) ERP is costly and high gearing of Inolla increases risk of further borrowing. This may result in cash flow problems for Inolla if increased savings take time to be realised.
28. [1] (b) Employee training to deal with computer systems will be a cost (but should be included in the net cost savings data).
29. [1] (b) ERP provides more effective sharing of information between departments which can lead to a more integrated approach to achieving Inolla's objectives.
30. [1] (b) Introducing ERP may cause disruption to production in the short-term reducing output whilst it is installed.
31. [1] (b) Cost savings are estimates made by the ERP specialist. Can these figures be trusted as specialist will wish to sell to Inolla?
32. [1] (b) If ERP used to reduce inventory holding and costs, then success depends in part on the reliability of battery suppliers in country P to deliver on time.
33. [1] (b) Other factors to consider e.g. NPV or IRR as this considers time value of money.
34. [1] (b) Depends on availability of finance linked to high gearing and likely increase in interest rates.
35. [1] (b) How long will it take to implement the ERP system?
36. [1] (b) Resistance to change from employees.
37. [1] (b) Will specialist IT employees be required and how expensive is that?
38. [1] (b) There are other ways to increase efficiency such as Quality Circles and Kaizen.