PJK makes a range of luxury sports watches. Each watch is handmade by skilled workers. Quality assurance is important. The Operations Director has been looking at costs and prices as he wants to do a break-even analysis. This data is shown in Table 1. He is planning to invest in new technology to automate parts of the production process. The Operations Director thinks this is the best way to improve profitability. Table 1: Costs and revenue ($) Price per watch $100 Variable cost per watch $50 Annual sales 6000 Annual fixed costs $200000

Mark scheme

Marking points from the official mark scheme (May/June 2015). The mark or mark type is shown in brackets.

1. [2] Clear Understanding – checking for quality standards throughout the production process / every stage
2. [1] Some Understanding – e.g. checking work done
3. Do not accept 'checking at end / checking end product' in this instance as this defines quality control
4. [2 x 1] Application – award 1 mark for each relevant way
5. Points could include: Planning / forecasting / decision making / help set prices
6. Help work out level of profit at different levels of output
7. Show margin of safety
8. Shows how much needed to produce to cover costs / avoid loss / breakeven point
9. Help apply for finance
10. Do not accept points such as shows costs / sales / profit on their own as too vague
11. [1] Accurately plotted TR (revenue) line: start at 0, at 4000 units should be at $400000
12. [2] Accurately plotted TC line in total for start at $200000[1] $400000 at 4000 units [1]
13. [1] Labelling: TR and TC [1] only if layout is correct. TR must start at zero and lines must cross
14. Notes: Accurately drawn unlabelled break-even chart [3]
15. For 4 marks TR [revenue] and TC must be clearly labelled
16. Max 1 mark for inaccurately plotted break-even chart with TR and TC correctly labelled
17. [2 x 1] Knowledge – award 1 mark for identification of each relevant advantage [max 2]
18. [2 x 1] Application – award 1 mark if relevant reference made to this business
19. [2 x 1] Analysis – award 1 mark for each relevant explanation
20. Relevant points might include: Work quicker / more efficient / more productive [k] so lower average costs [an]
21. More output [k] so able to meet any increase in customer demand [an] for watches [app]
22. Higher quality / fewer mistakes [k] so less wasted materials [app] so can buy less inventory [an]
23. Brand image / good reputation [k] as it's a luxury product [app] so people trust / buy [an]
24. Less training needed [k] so saves cost [an]
25. Less supervision needed [k] so managers have time to do other jobs [an]
26. More flexible workforce [k] as able to switch between different stages of production [app]
27. Application marks may be awarded for appropriate use of the following: luxury product, watches, quality assurance, handmade, production process, materials / parts
28. [1] Knowledge – award 1 mark for identification of relevant issue(s)
29. Positive or negative points allowed or alternative ways to improve profitability [max 1]
30. [1] Application – award 1 mark if relevant reference made to this business
31. [2] Analysis – award up to 2 marks for relevant development of point(s)
32. [2] Evaluation – justified decision made as to whether new technology is the best way to improve profitability. Candidate's final decision can be either for or against the statement
33. Relevant points might include: Reduce labour costs [k] so lower costs [an]
34. Less wastages or errors [k] so have to order less parts [app]
35. Additional costs e.g. redundancy or training costs [k] initially reduce profitability [an]
36. Impact on employee morale [k]
37. Better quality / accuracy [k] for this luxury product [app] so customers might pay higher price [an] leading to bigger gap between costs and revenue [an]
38. High initial costs of equipment [k]
39. Speed up production [k] so leading to lower average costs [an]
40. Might take away their USP [k] of being handmade [app] so reduce demand [an]
41. Or Introduce more efficient working practices e.g. redesign factory layout [k]
42. Or use cheaper materials [k] so lower variable costs [an] but could mean lower quality of watches [app]
43. Or sell more through increased advertising [k] but could be expensive / may not work [an]
44. Application marks may be awarded for appropriate use of the following: luxury product / watches, skilled workers, quality assurance, handmade, production process, materials / parts