Refer to Table 1 and other information provided. Calculate the likely change in NFP's annual profit if the dairy farm is closed.

Mark scheme

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

1. [6] Variable feed costs per litre = 8 cents
2. [6] Dairy farm labour costs per litre = 6 cents [9000/150000]
3. [6] Overhead costs allocated to farm = 0.05 x £15.6m/52 = $15 000 per week = 10 cents per litre
4. [6] Total full cost per litre = 24 cents
5. [6] Cost of buying in milk = 20 cents
6. [6] Total cost saving per week = 150 000 x $0.04 = $6000
7. [6] Annual cost saving [additional profit] = $6000 x 52 = $312000
8. [6] Cost of buying milk 20 cents.
9. [6] Variable cost of dairy farm = 0.08 + 0.06 = 0.14
10. [6] Thus, extra contribution of dairy relative to buying milk is 0.06 per lit
11. [6] So contribution of milk division is really $9000 per week
12. [6] So profit would fall by $468 000 per year if the farm/milk division was closed.
13. [12] Factors relevant to the decision
14. [12] Contribution costing
15. [12] Full costing
16. [12] Profit
17. [12] Permanence of fixed costs
18. [12] Issue of suppliers
19. [12] Impact on brand
20. [12] Will market price stay at 20 cents for long?
21. [12] Other factors: Quality of milk bought in
22. [12] Positive contribution made of $9000 per week
23. [12] OFR allowed e.g. if full costing was used – but credit could be given also for questioning this method later in the answer
24. [12] Who pays for transport of milk bought in?
25. [12] Can farm be put to alternate use quickly? Do NFP need that much additional factory capacity?
26. [12] Chances of planning permission (in beautiful area)?
27. [12] How much is the land worth?
28. [12] Analysis of marginal costing approach to making the decision. If farm is closed then the contribution will be lost, therefore there will be a reduction in the profit of the business
29. [12] If brand image is damaged this may lead to a loss of sales in the future and therefore lower profit
30. [12] Should not be closed on short term financial grounds as profit would fall (assuming fixed costs still have to be paid)
31. [12] OR Should be closed as profit will increase if the farm is closed (assuming fixed costs are cut).
32. [12] How have fixed costs been allocated? Is 5% appropriate given the proportion of total workforce on the farm?
33. [12] Marginal costing should really be used as there is no certainty that the allocation of fixed costs to the farm is accurate or that these fixed costs will cease once the dairy farm is closed
34. [12] Weighing up the factors / Making a justified final conclusion
35. [12] Depends if any of the fixed costs are clearly specific to the farm
36. [12] Questioning cost data/costing method used/justifying need for other data