Refer to Table 1.3. Calculate, for location X, the accounting rate of return (ARR).

Mark scheme

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

1. [4] (a) Correct answer: ARR = 25% OR 25 (Working not required for full marks)
2. [3] (a) Statement of correct calculation OR Average profit AND Average investment: ARR = 2/8 × 100 ($2m & $8m)
3. [3] (a) Profit used in final calculation OR Capital cost used in final calculation OR Capital cost not subtracted: 12/8 x 100 = 150% (incorrect profit)
4. [3] (a) Profit used in final calculation OR Capital cost used in final calculation OR Capital cost not subtracted: 2/10 × 100 = 20% (incorrect capital cost)
5. [3] (a) Capital cost not subtracted OR Not multiplied by 100: 3.67/8 x 100 = 45.9% (error in average profit)
6. [2] (a) Average profit OR Profit and capital cost used in final calculation OR Capital cost not deducted and capital cost used in final calculation OR Profit and average investment calculated: 12/6 = $2m (incorrect profit for average) OR 12/10 × 100 = 120% (incorrect capital cost)
7. [2] (a) Capital cost not deducted and capital cost used in final calculation OR Profit and average investment calculated: 3.67/10 x 100 = 36.7% (error in average profit and capital cost)
8. [1] (a) Profit OR Average investment OR Correct formula: ARR = Average profit / average investment × 100 OR Average investment = (initial capital cost + residual capital value) / 2: 22 – 10 = $12m (for profit) OR (10 + 6) / 2 = $8m (for average investment)
9. [1] (b) Factors influencing choice of location: Costs.
10. [1] (b) Factors influencing choice of location: Nearness to market.
11. [1] (b) Factors influencing choice of location: Preferences of owner.
12. [1] (b) Factors influencing choice of location: Competition.
13. [1] (b) Factors influencing choice of location: Risk.
14. [1] (b) Location X takes 4 months less to build.
15. [1] (b) Capital cost is higher for Y. Link to gearing.
16. [1] (b) Capacity utilisation within three years higher at location X.
17. [1] (b) Lower wages at Location X.
18. [1] (b) Better availability of skilled factory workers at location Y.
19. [1] (b) ARR higher for Location X (OFR).
20. [1] (b) CSR considerations: Environmental impact of each option. X is on agricultural land.
21. [1] (b) CSR considerations: High unemployment in Location X. Greater benefit to society to locate there.
22. [1] (b) CSR considerations: Transport links and impact on pollution.
23. [1] (b) Higher capital cost of location Y (and high gearing) will make this a less attractive location
24. [1] (b) ...due to need to raise more finance.
25. [1] (b) Location X will reach high-capacity utilisation more quickly
26. [1] (b) ...which aids profit making
27. [1] (b) ...but may limit the potential for growth of OV if marketing is successful.
28. [1] (b) Estimated time to build will impact cashflow
29. [1] (b) ...which could be important for OV as it has relatively low liquidity.
30. [1] (b) Quicker time to build could also result in achieving payback more quickly.
31. [1] (b) Location Y is a more sustainable option as it is in an industrial area
32. [1] (b) ...and therefore likely to be less opposition from environmental groups.
33. [1] (b) As Greek Yogurt has been criticised in media, OV may wish to avoid making contentious decisions.
34. [1] (b) Most important factor with justification.
35. [1] (b) Long term growth vs. Profit.
36. [1] (b) Location Y requires a higher capital outlay – are funds available internally or will this have to be borrowed? How significant is the difference in capital cost to the decision?
37. [1] (b) Management attitude to risk.
38. [1] (b) Y is better as it is potentially more profitable, and OV will aim for profitable growth.
39. [1] (b) Short vs. Long term. X may be better in long term because it gives greater room for expansion.
40. [1] (b) Balance of factors to consider.