Refer to Table 1. Calculate for location Y the: break-even number of customers per month

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2020). The mark or mark type is shown in brackets.

1. [1] TR = TC (if no relevant calculation OR Fixed costs/contribution per unit)
2. [1] Contribution per unit = 10 − 2 = ($)8
3. [2] B/E = 24 000/8
4. [3] = 3000 (customers)
5. [2] OFR max 2
6. [2] B/E = $3000 (incorrect unit, accepted for 2 marks if calculation is otherwise correct)
7. [2] B/E (revenue) = $30 000 or 30 000
8. [1] Expected output – break-even output (if no relevant calculation)
9. [1] 5000 - 3000
10. [2] = 2000 (customers)
11. [2] Allow $2000 (if candidates give incorrect unit, but calculation is correct)
12. [full] OFR based on answer from 2(a)(i) can gain full marks
13. [1] (expected average monthly demand × price) – (expected average monthly demand x variable costs + fixed costs)
14. [1] (expected average monthly demand – B/E output) × unit contribution
15. [1] TR - TC
16. [1] Total contribution less fixed costs
17. [1] Total revenue = 10 × 5000 = $50 000
18. [1] Total costs = 2 × 5000 + 24 000 = $34 000
19. [3] Profit = 50 000 – 34 000 = $16000
20. [1] Demand above B/E = 5000 – 3000 = 2000
21. [2] Contribution per unit = 10 – 2 = $8
22. [3] Profit = 2000 × 8 = $16000
23. [full] OFR based on answer from 2(a)(i) can gain full marks
24. [2] Profit = 16 000
25. [1] Total contribution = 8 × 5000 = $40 000
26. [2] 40 000 - 24 000
27. [3] profit = $16000
28. [K] Factors influencing location: Costs
29. [K] Factors influencing location: Nearness to market
30. [K] Factors influencing location: Preferences of owner
31. [K] Factors influencing location: Competition
32. [K] Factors influencing location: Risk
33. [K] Factors influencing location: B/E
34. [APP] Comparison of results: OFR applies
35. [APP] Location X has lower BE (1000 customers fewer); 2000 customers compared to 3000
36. [APP] Location Y has greater profit ($10 000) at expected average demand; $16 000 compared to $6000
37. [APP] Location Y has higher margin of safety; 2000 compared to 1000
38. [APP] Other issues: X is a (near) city centre location and Y is in a tourist resort
39. [APP] Other issues: Y requires higher capital outlay
40. [APP] Other issues: X has margin of safety of 1000
41. [APP] Other issues: Location Y requires higher capital outlay
42. [APP] Other issues: Location Y takes longer to become operational
43. [APP] Other issues: Location Y has higher fixed costs
44. [APP] Other issues: Location Y has a longer lease contract
45. [APP] Other issues: Three competitors in location X. Competition in location Y is not stated.
46. [AN] Location X is less risky – lower BE point which might be best for a new take-away. This can also be linked to fixed costs.
47. [AN] Location Y is potentially more profitable – because of tourist location attracting more customers?
48. [AN] Location Y has greater margin of safety, this reduces risk as allows for greater deviation from expected demand
49. [AN] Time taken to become operational will have an impact on cash flow for GR
50. [AN] Length of lease will reduce ability of GR to leave the market if demand lower than expected. However, a longer lease gives greater certainty for planning for the future.
51. [AN] Competition in location Y is a constraining factor that could result in demand being over estimated
52. [AN] Seasonal demand in location Y as tourism is target market. This may result in cash flow problems for GR.
53. [EVAL] Depends on the level of competition in each location
54. [EVAL] Location Y requires higher capital outlay – are funds available internally or will this have to be borrowed?
55. [EVAL] Market research data essential too: likelihood of reaching beyond BE points in both locations
56. [EVAL] Management attitude to risk
57. [EVAL] Decision can go either way – but must be supported e.g. X is better as it gives earlier feedback on market demand and is less risky at a time of other strategic changes.
58. [EVAL] Y is better as it is potentially more profitable and GR will aim for profitable growth
59. [EVAL] How significant is the difference in capital cost for each option?
60. [EVAL] Tourists likely to be one-off customers whereas location X gives opportunity for GR to build a loyal customer base