Refer to Appendix 2. Calculate: the promotional elasticity of SU beach umbrellas

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2018). The mark or mark type is shown in brackets.

1. [1] (a)(i) PrED/AED = % change in demand / % change in promotional spending
2. [1] (a)(i) % change in demand = +15%
3. [1] (a)(i) % change in promotional spending = 10%
4. [3] (a)(i) PrED/AED = 15/10 = 1.5
5. [2] (a)(i) If inappropriate unit e.g. % or $ then 2 marks
6. [1] (a)(ii) unit contribution = price - direct cost of production or total contribution = unit contribution × sales (units)
7. [1] (a)(ii) unit contribution = $5 – $3.50 = $1.5
8. [2] (a)(ii) total contribution = 1.5 × 400 000 = $600 000 ($ required correct 000 000 required)
9. [1] (a)(ii) 2 000 000 - 1 400 000 = $600 000
10. [1] (a)(iii) ROCE = Earnings before interest and tax (EBIT) × 100 / Capital employed (total assets – current liabilities)
11. [1] (a)(iii) or EBIT × 100 / Capital employed (equity + LT loans)
12. [1] (a)(iii) Or operating profit/capital employed × 100
13. [1] (a)(iii) 1.89 / (18-2) or 1.89 / (12.50 +3.50)
14. [3] (a)(iii) = 1.89 × 100 / 16 = 11.8%
15. [2] (a)(iii) If candidate has used 1.09/16 = 6.8%
16. [1] (a)(iii) Capital employed = $16m
17. [1] (a)(iii) ROCE = 11.8%
18. [1] (a)(iii) Possible assumptions include: items in statement of financial position remain the same (unlikely)
19. [1] (a)(iii) forecasts of sales revenue, cost of sales, expenses, are accurate
20. [1] (a)(iii) cost of sales per unit is total cost per unit
21. [1] (a)(iii) no change to current total unit cost or price
22. [1] (a)(iii) forecasts of sales increase is accurate
23. [1] (a)(iii) expenses remain the same even though promotional expenditure increased by $40 000
24. [1] (a)(iii) ARA (any reasonable answer)
25. [K] (b) Profit and contribution concepts
26. [K] (b) PrED/AED elasticity concepts (OFR)
27. [K] (b) Product portfolio – Boston Matrix
28. [APP] (b) use of data/concepts from Appendix/case
29. [APP] (b) reference to promotion, beach umbrellas market conditions
30. [APP] (b) New product development – photo-chromatic umbrellas suitable for beach use
31. [APP] (b) reference to marketing manager's lack of financial knowledge
32. [APP] (b) 20% of sales revenue
33. [AN] (b) Points for keeping beach umbrellas: Positive contribution made, therefore adds to profit
34. [AN] (b) As part of product portfolio maintains market presence/spreads risk
35. [AN] (b) Loss of the 20% revenue, significant impact
36. [AN] (b) Elastic PED means positive response to promotion (increase total profit forecast)
37. [AN] (b) Points for stopping production of beach umbrellas: Very competitive market, therefore need to develop products/cost/tight margins
38. [AN] (b) No regular repeat orders, difficult to plan/forecast sales
39. [AN] (b) Price reductions mean costs barely covered
40. [AN] (b) Very likely need to reduce prices further making losses inevitable even with extra promotion
41. [EVAL] (b) Price reductions means costs barely covered
42. [EVAL] (b) Very likely need to reduce prices further making losses inevitable even with extra promotion
43. [EVAL] (b) Comments re accuracy of data and implicit assumptions made
44. [EVAL] (b) Uncertainty re possible competitor actions
45. [EVAL] (b) Money is spent on promotion (certain) before any possible returns making need for speedy reaction a high priority
46. [EVAL] (b) Is no change to unit cost sustainable?
47. [EVAL] (b) Need to stay in beach umbrella market in view of new product development