Refer to Table 1 and the information about Asif's plan on lines 14–25. Calculate the forecast 2018 profit for the washing machine factory.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2017). The mark or mark type is shown in brackets.

1. [1] Units sold: 1.95m (2m less 2.5% using PED calculation -0.5 x 5 = -2.5%; 2.5% of 2m = 0.05m; 2m - 0.05m = 1.95m)
2. [1] Average selling price of washing machines to retailers: $210 (Price increase of 5% $200 + 5%; 200 x 1.05 = $210)
3. [1] Unit cost of sales: $97 (Unit cost was 200m/2m = $100; $100 less 3% = $97)
4. [1] Unit contribution to overheads: $113 ($210 - $97)
5. [1] Contribution to ADP overhead costs: $220.35m (113 × 1.95m = $220.35)
6. [1] Overheads of washing machine division: 135m (150m less 10%; 150 × 0.9 = $135m)
7. [1] Allocation of head office overheads to washing machine division remain same: $25m
8. [8] 2018 profit made by washing machine division: 60.35m (220.35 – 135 – 25 = $60.35m)
9. OFR: Total Revenue = 1.95 × 210 = $409.5m (3) 420m (2)
10. OFR: Cost of sales = 1.95m × 97 = 189.15m (2) 194m (1)
11. OFR: Gross profit = 220.35m (1)
12. OFR: Factory Overheads = 135 (1)
13. OFR: Overheads = 25 (1)
14. OFR: Total cost = 349.15m (4 cumulative cost mark)
15. OFR: Profit = 60.35m (8)
16. OFR: If no rewardable calculation: Profit = TR – TC or Total contribution – Fixed costs (1)
17. OFR: Likely answers: Where method shown award the following marks: $66m (7) $68.5m (5) $55.5m (7)
18. Knowledge: Stakeholder has interest in business activity. Include external and internal stakeholders.
19. Knowledge: Accounting ratios analyse business profitability, liquidity, efficiency, gearing and shareholder measures.
20. Knowledge: Understanding of the selected accounting ratios in Table 2: Gearing ratio. Measure of reliance on debt v equity finance.
21. Knowledge: Understanding of the selected accounting ratios in Table 2: ROCE. Profit generated by capital invested in business.
22. Knowledge: Understanding of the selected accounting ratios in Table 2: Current ratio. Liquidity – ability to pay short term debt.
23. Knowledge: Understanding of the selected accounting ratios in Table 2: Dividend yield; return to shareholders of their investment.
24. Application: Statement that profit margin is low/high is not application. Requires justification.
25. Application: Low gearing.
26. Application: Current ratio; low but adequate liquidity to pay debts.
27. Application: ADP wishes to raise short term profitability (implies 7.8% profit margin is considered to be poor by management/shareholders). Accounting data / ratios needed to assess whether objectives achieved.
28. Analysis: Low gearing suggests that banks could view further lending to ADP as being low risk. This supported by adequate liquidity and profitability. Banks would need to see this accounting data to make decisions about further finance.
29. Analysis: Management use the accounting ratios as a measure of performance and can set targets accordingly. This helps managers to monitor progress and make decisions to improve the performance of the business. Sufficient finance may be available to update Factory Q and therefore deal with its adverse profit variance.
30. Analysis: Business appears liquid with low gearing – scope to use finance to invest in latest equipment and/or lean production?
31. Analysis: Shareholders will use accounting ratios to judge performance of the business and make decisions about whether to support directors at AGM. Shareholders will make judgements about whether it is worth maintain their investment in ADP. I dividend yield is insufficient they may consider selling shares but this will also depend on performance of share price. Will need to consider ratios such as PE Ratio.
32. Analysis: Adequate liquidity – suggest able to meet all short term obligations so suppliers will be willing to supply on credit (current ratio).
33. Analysis: Low gearing - Asif could take more risks with growth/product development and not cut dividends?
34. Evaluation: Need for data over time to identify trends and for inter firm comparison.
35. Evaluation: Has there been any window dressing?
36. Evaluation: Management accounts e.g. for each division much more useful to allow divisions/factories to be compared.
37. Evaluation: Trend analysis essential – gearing might have been much higher and current ratio lower last year.
38. Evaluation: Acid test ratio important too. Current ratio insufficient to judge liquidity.
39. ARA: Other stakeholders e.g. end consumers may have little interest in ratios although customers.