Analyse how break-even analysis might be used by a business when making a decision to introduce a new product.

Mark scheme

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

1. Level 4: Good analysis of how break-even analysis might be used by a business when making a decision to introduce a new product. [7-8]
2. Level 3: Some analysis of how break-even analysis might be used by a business. [5-6]
3. Level 2: Some application of how break-even analysis might be used by a business. [3-4]
4. Level 1: Knowledge and understanding of break-even analysis/introducing a new product. [1-2]
5. Level 0: No creditable content. [0]
6. Answers could include:
7. Knowledge and understanding
8. A clear understanding of break-even analysis / point is given or implied.
9. A clear understanding of introducing a new product.
10. Application
11. The use of break-even analysis by a business.
12. Analysis
13. A technique widely used by production management or management accountants.
14. Total variable and fixed costs are compared with sales revenue to determine the level of sales or production where the business makes neither a profit or loss.
15. The technique can be used to determine the point at which the sales volume reaches a pre-set profit level.
16. The technique can be used to help increase the odds of success for a new product.
17. The technique can be used to answer business questions, such as:
18. What is the potential size of the market?
19. How should the product be priced?
20. Where is the break-even point?
21. Can provide vital management information, such as is it worth going ahead with this new product?
22. Break-even charts are relatively easy to construct and interpret.
23. However, there are limitations as to the use of break-even analysis, as:
24. it is a simplistic, static model.
25. Accept any other valid response.
26. Level 4: Effective evaluation of the usefulness of accounting ratios in the context of assessing the performance of a (large) food retailing business [9-12]
27. Level 3: Limited evaluation of the usefulness of accounting ratios in the context of assessing the performance of a (large) food retailing business [7-8]
28. Level 2: Application and analysis of the usefulness of accounting ratios for assessing the performance of a business [3-6]
29. Level 1: Knowledge and understanding of accounting ratios/business performance/retailing. [1-2]
30. Level 0: No creditable content. [0]
31. Answers could include:
32. Knowledge and Understanding
33. Reference could be made to specific accounting ratios such as liquidity, profitability or business performance or to retailing business.
34. Application
35. The general application is using accounting ratios for assessing the performance of a business.
36. Analysis
37. Accounting ratios are calculated and used to provide more informative performance indicators than those provided in the raw data of published accounts.
38. Answers may well outline the benefits and limitations of specific accounting ratios to analyse their value for assessing business performance generally.
39. Allows clearer analysis of company performance (examples of gross and net profit margin and current and acid test ratios – how they provide more explanation).
40. Ratio results can be compared over time to identify trends.
41. Ratio results can be compared with other company results in the same industry.
42. Indicates need for managerial corrective action.
43. A recognition that profitability and liquidity are just as important for a large business as for any other business (and the industry is likely to be very competitive).
44. While these ratios may be useful for detailed investigation of a business's profitability and liquidity, there are limitations:
45. Latest data may already be out of date.
46. Accounts may contain 'window dressing'.
47. Company comparisons may be difficult with different year endings.
48. The external environment may be more important than internal performance.
49. Past may not be a good guide to the future.
50. Problems may be identified – solutions still need to be found.
51. Quantitative information may also require qualitative assessment.
52. Evaluation
53. The context is a (large) food retailing business.
54. How important are accounting ratios for food retailers?
55. Are accounting ratios sufficient for assessing the performance of a large food retailer?
56. Are there other performance indicators that need to be used and might be more important than accounting ratios?
57. Might some indicators be much more important for food retailers than accounting ratios, such as market share, reputation for quality ingredients / products, excellent customer service, reputation for keen/low prices, attractive packaging, Fair Trade food?
58. Which performance indicators are the most important indicators?
59. A judgement may be made.
60. Accept any other valid response.