O-LevelBusiness StudiesFinancial information and decisions7115/21 · Oct/Nov 2019 · Q320 Marks

Identify and explain how the following four departments of MF are likely to be affected by the development of its new product. Marketing: Human Resources (HR): Operations: Finance:

(a)Identify and explain how the following four departments of MF are likely to be affected by the development of its new product. Marketing: Human Resources (HR): Operations: Finance:[8]
(b)Using the information provided in Appendix 3, consider the following two options for MF's new product. Recommend which option MF should choose to ensure the highest profit for the new product. Justify your answer. Option 1 - raise the price per carton from $5 to $7.50: Option 2 - reduce the variable cost per carton from $2.50 to $2.00: Recommendation:[12]

Mark scheme

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

Award one mark for an explanation of a likely way each department will be affected (max 4)
Award one mark for applying an explanation in context of how each department will be affected (max 4)
Answers are likely to include:
Marketing department will have increased workload from carrying out market research/promoting the new product
HR will need to recruit additional workers/training requirements
Operations will need new automated equipment – to produce the new ice-cream
Finance will need to raise the funds necessary for the investment in the new equipment – and working capital for the purchase of new ingredients/produce financial statements, e.g. income statement
Indicative response:
The Marketing department will have an increased workload from carrying out market research (1). This is because the sugar-free ice cream is new and MF will not know if consumers are interested in buying it (1).
Possible application marks:
Sugar free ice-cream; MF has a large market share of the food markets; objectives are growth and increased market share; new automated production line required; new skilled workers need recruiting; waste produced causes pollution if thrown into local landfill; increasing trends of people being overweight in country X.
There may be other examples in context that have not been included here.
Relevant points might include:
Option 1 – raise price from $5.00 to $7.50
May put off potential customers/demand may fall
Revenue at $5 for 5000 units = $25 000
Fixed costs = $10 000
Total cost at 2000 units of output = $15000
Higher price will give impression of higher quality product
May increase profit
B/E identified at 4000 and now fallen to 2000
Profit is $15 000 at maximum capacity (or profit at alternative output)
Margin of safety increases by 2000
Increased price leads to increased gross profit per unit however, revenue might not increase if sales fall
Option 2 – lower VC fall from $2.50 to $2.00
May be lower quality product
Found cheaper raw materials/found cheaper ways to dispose of waste
Total cost will be lower
Fixed costs remain at $10 000
Total cost at 3334 units of output = $16 668 (or $16 500)
B/E identified at 4000 and now 3334 (accept 3200 up to 3500)
Profit is $5000 at maximum capacity (or profit at alternative output)
Margin of safety increases by 666 (accept OFR)
Knowledge/Analysis/Evaluation – award up to 10 marks using the levels-based mark scheme below.
Level 3: Only given if 2 × L2 correct break-even or profit figures. 9-10 marks for well justified recommendation as to the best way to increase profit compared to other option. 7-8 marks for some limited judgement shown in recommendation as to the best way to increase profit.
Level 2: 4-6 marks Explanation of the effects of higher price and/or lower variable cost as a way to increase profit. Calculations of break-even or profit at relevant levels of output
Level 1: 1-3 marks Outline of the effects of higher price and/or lower variable cost as a way to increase profit. Basic statements related to revenue or costs figures
Level 1 - 1 mark for each L1 statement (max of 3 marks), e.g. increasing the price will lead to higher profit.
Level 2 - 1 x L2 explanation can gain 4 marks and a further mark can be awarded for each additional L2 explanation (max 6 marks), e.g. the new break-even output is 2000 whereas the original break-even output was 4000 (L2).
Level 3 - For level 3 to be awarded there must have been 2 × L2 correct break-even or profit figures, then a well justified recommendation as to the best way to increase profit to choose compared to other option.
Award up to 2 additional marks for relevant application
Possible application marks:
Sugar free ice-cream; MF has a large market share of the food markets; objectives are growth and increased market share; new automated production line required; new skilled workers need recruiting; increasing trends of people being overweight in country X.
There may be other examples in context that have not been included here.