Refer to Table 1. Calculate for 2018:

Mark scheme

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

1. [a][i][1] Capacity utilisation = (Current output / max output) × 100
2. [a][i][0] In the case of DLR it is (Apartments booked/ Number of apartments) × 100
3. [a][i][2] For 2018 CU = 1300/1800 × 100 = 72.2% or 72%
4. [a][i] % required for full marks i.e. 72.2 (1)
5. [a][ii][1] B/E = Fixed costs/Contribution per unit or TR =TC
6. [a][ii][0] Allow Fixed costs/contribution but not fixed costs/total contribution
7. [a][ii][1] Contribution per unit = Selling price – Unit variable cost (1 mark if CPU not calculated correctly)
8. [a][ii][2] CPU = 84.50 – 11.50 = 73
9. [a][ii][3] B/E = 81 000/73
10. [a][ii][4] B/E = 1109.59 or 1110 per day
11. [a][ii][3] $1110 (If only numerical answer given)
12. [a][ii][Alternative Calculation] If candidate has used revenue per apartment per day instead of price then OFR applies.
13. [a][ii][2] B/E = 81 000/49.53
14. [a][ii][3] 1635.4
15. [b][Examiner note] This is not a question about increasing capacity.
16. [b][Examiner note] If a candidate just explains how to increase CU e.g. by increasing demand, this shows an implied understanding of the CU concept. This can be awarded L1 K (& APP if in context) but not AN / EVAL
17. [b][Examiner note] Statement that increasing CU will increase profit is incorrect. Do not award as K.
18. [b][Knowledge] Capacity utilisation is a measure of the extent to which the productive capacity of a business is being used. It can be defined as: The percentage of total capacity that is actually being achieved in a given period.
19. [b][Knowledge] It is often used as a measure of productive efficiency
20. [b][Knowledge] Average production costs tend to fall as output rises
21. [b][Application] The apartment cost centre has high allocated fixed costs relative to total costs. In 2017 fixed costs were $81 000. At full capacity variable costs would be $20 700. Thus, fixed costs are at least 79.7% of total costs.
22. [b][Application] In 2016 capacity utilisation was just 52.2%. This was just sufficient to break even.
23. [b][Application] This is a competitive market so unit costs are important
24. [b][Analysis] It is important to spread the high allocated fixed costs over as many sales as possible. As long as price is greater than variable cost a contribution will be made to FC.
25. [b][Analysis] Higher utilisation can reduce unit costs, making a business more competitive. So firms usually aim to produce as close to full capacity (100% utilisation) as possible
26. [b][Analysis] Filling the holiday park will also bring complementary sales revenue in the restaurant and other services offered by DLR.
27. [b][Analysis] At high CU there may be a decline in service standards that will impact future sales
28. [b][Analysis] Operating below full capacity can provide the time for room maintenance to be carried out thus increasing customer satisfaction
29. [b][Evaluation] Profit is the bottom line not CU
30. [b][Evaluation] Fixed costs are very high in this market, thus CU has greater significance to profit
31. [b][Evaluation] However, it is not just about CU. The holiday park industry also has to consider the revenue per available apartment. This will be driven up through more bookings but not if rooms are sold too cheaply. Revenue per available apartment will have a big impact on profitability.