Recommend whether PY should close the three cafés in the North East of country S. Justify your answer with reference to Table 1 and other information.

Mark scheme

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

1. [0] Understanding of fixed costs – costs that don't change with output
2. [0] Understanding of contribution concept. The contribution represents an increase in PY's overall profit
3. [0] Understanding of full costing
4. [0] Calculation of contribution: 2.25 – 1.45 = $0.8m
5. [0] Full costing gives a loss of $0.4m
6. [0] Forecast profit $0.4m
7. [0] Reference to specific fixed cost e.g. lease of premises
8. [0] Yoon is worried about the performance of the 3 cafes so could this divert attention away from the other cafes
9. [0] Making a loss on full cost basis
10. [0] NE of country S is relatively poor so sales may not increase in the future
11. [0] Most employees likely to be new so costs of redundancy may be low or even zero depending on employment legislation of country S
12. [0] Only operating one year. Is that sufficient time to make judgement?
13. [0] A positive contribution is being made to paying fixed costs. These costs will continue to be incurred even if the outlets are closed
14. [0] 25 employees depend on the outlets for income – this may be important in light of the criticisms of PY made in the documentary
15. [0] Signed lease contract until 2021
16. [0] Impact on other employee morale if employees made redundant
17. [0] Damage to brand if closures announced
18. [0] Loss of positive contribution may mean that in the short term PY's overall profits will be reduced as fixed costs continue to be paid such as the leasing cost
19. [0] Closure of outlets will negatively impact worker morale elsewhere in the organisation leading to loss of effectiveness
20. [0] Closure of outlets will signal to other workers need to work harder to retain jobs
21. [0] Use of zero hour contracts could mean that redundancy costs are low if closed
22. [0] Impact on brand image could lead to loss of sales
23. [0] Alternatives to closure include cutting prices to boost demand as NE is relatively poor
24. [0] Cutting costs by using local suppliers?
25. [0] Can PY break the terms of the contract without significant penalty?
26. [0] Are sales likely to pick up in the future?
27. [0] What is the overall financial position of PY can they afford to turn the three outlets around
28. [0] Supported identification of most important factor in the decision
29. [0] Only operating one year. Is that sufficient time to make judgement?
30. [0] Overall argument for or against closure