(a) Refer to lines 39–44. Calculate, for the new government contract:

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2022). The mark or mark type is shown in brackets.

1. [1] (a)(i) Total contribution = Total Revenue – Total Direct Cost
2. [1] (a)(i) TR = 7000
3. [1] (a)(i) Total Direct Cost = 50 X 100 = 5000
4. [3] (a)(i) Total contribution = ($)2000
5. [2] (a)(i) OR Unit contribution = 70 – 50 = 20
6. [3] (a)(i) Total contribution = 100 X 20 = ($)2000
7. [1] (a)(ii) Profit = TR – TC
8. [1] (a)(ii) TR = 100 X 70 = 7000
9. [1] (a)(ii) TC = 100 X 80 = 8000
10. [3] (a)(ii) Loss = 1000 or profit = -1000 or $(1000)
11. [1] (a)(ii) OR Profit = total contribution – average indirect costs X quantity
12. [1] (a)(ii) Contribution = 20 X 100 = 2000
13. [1] (a)(ii) Indirect cost = 30 X 100 = 3000
14. [3] (a)(ii) Loss = 1000 or profit = -1000 or $(1000)
15. [3] (a)(ii) OR 20 - 30 = -10 × 100 = -1000 or (1000)
16. [K] (b) Quantitative factors: Contribution focuses on the difference between price and average variable cost.
17. [K] (b) Quantitative factors: Profit = TR – TC.
18. [K] (b) Quantitative factors: If contribution is positive, then worth considering accepting the order.
19. [K] (b) Qualitative factors: Possibility of future orders.
20. [K] (b) Qualitative factors: Impact on employees.
21. [K] (b) Qualitative factors: Impact on reputation.
22. [K] (b) Qualitative factors: Impact on other customers.
23. [K] (b) Qualitative factors: CSR.
24. [App] (b) Normal price is $110 per climbing frame, potential order price is $70, $40 less than normal.
25. [App] (b) Direct cost per climbing frame is $50, indirect is $30, total $80.
26. [App] (b) AP has objective of growth.
27. [App] (b) Use of data from 2a: loss of $1000 and positive contribution of $2000.
28. [App] (b) Possible capacity constraint especially as the order is required to be delivered quickly.
29. [An] (b) Loss to be made on order at offered price, assuming same allocation of indirect costs. This will lead to lower profits than if frames sold at full price.
30. [An] (b) Possibility that this order will lead to more orders from government or other customers at the normal price.
31. [An] (b) Turning down this order indicates AP not interested in gaining more business so less orders may follow.
32. [An] (b) This extra order will contribute to growth and achieving this objective.
33. [An] (b) Possibility of negotiating the order price, especially as it is very low compared to normal price. $80 per frame would cover direct and indirect costs.
34. [An] (b) Possible capacity constraint may mean this order means others cannot be taken.
35. [An] (b) If order accepted other potential customers may also demand low prices reducing profit.
36. [Eval] (b) Justified recommendation to accept order or not, to negotiate a better price, to find out if more orders are likely to follow.
37. [Eval] (b) Need to check accuracy of the cost information before making decision.
38. [Eval] (b) Timescale of the order needs to be considered in relation to capacity.
39. [Eval] (b) If AP decides to enter consumer markets, do they need this government contract?
40. [Eval] (b) Or if AP decide on new product development, they really do need this contract to allow for further orders of new products.
41. [Eval] (b) Short term cost of accepting the contract v the long term potential profit of further government contracts.
42. [Eval] (b) Most important factor? Growth or profit on the order?