5.4. Costs
A subsection of Business Studies, 9609, through 5. Finance and accounting (AS Level)
Listing 10 of 47 questions
UPlane Components (UC) UC is a private limited company providing engine parts for commercial aircraft. It uses batch production in factory A and flow production in factory B. As part of UC’s commitment to corporate social responsibility (CSR), it provides a training scheme for the long-term unemployed, based in factory A. UC’s products are sold to aircraft engine manufacturers. Demand for aircraft engines has increased by 45% over recent years. The aircraft engine manufacturers want inventory just when needed and are demanding a reduction in prices. In 2017, UC opened factory B which is 5 km away from factory A. Factory B has a high level of automation, resulting in low unit costs for the parts produced there. Production is capital intensive. UC has a plan to automate factory A. The production workers are not happy about this proposal and have asked for more details. The workers’ representatives have asked for a meeting with the human resource manager. In December 2019 a fault was discovered in one of the engine components supplied by UC and produced in factory A. UC had to recall 2000 parts at a cost of $200 000. This has had an impact on part of its triple bottom line and UC is unlikely to meet its targets. Table 1.1 shows some financial data for UC. Table 1.1: Financial data for UC Year ending 30 November 2019 ($m) Year ending 30 November 2020 ($m forecast) Revenue 5.8 6.4 Cost of sales 2.3 3.4 Expenses 1.3 1.6 Cost of recall - 0.2 Amjit, the human resource manager, believes that the fault was caused by the negligence of Jack, one of the production supervisors. Jack claims that he was made to work overtime to try and meet production targets. This caused him to become tired and make a mistake in one batch of parts. Amjit wants to dismiss Jack. Define the term ‘corporate social responsibility (CSR)’ (line 3). Explain the term ‘triple bottom line’ (line 15). Refer to Table 1.1. Calculate the forecast profit margin for the year ending 30 November 2020. Explain one likely effect on UC of a decrease in profit. Analyse two likely effects on the other employees if Jack is dismissed. Recommend whether UC should automate factory A. Justify your recommendation.
9609_w20_qp_21
THEORY
2020
Paper 2, Variant 1
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Gemini Theatre (GT) GT is a private limited company fully owned by the Gemini family. It owns a small theatre. This building is used to show live stage performances. Some of the performances are created by GT and some are created by visiting groups who rent the theatre. Table 2.1 shows the planned performances for January 2021. Table 2.1: Planned performances for January 2021 Name of performance Created by Number of performances Ticket price Percentage of tickets sold A Summer Dream Visiting group $40 100% Wise Owl GT $15 60% La Poeme Ballet GT $20 40% GT gains all the revenue from performances created by GT. Visiting groups must pay 50% of their total ticket revenue to GT. The theatre has a maximum of 250 tickets that can be sold for each performance. GT uses cost-based pricing to set each ticket price for its own performances. Each performance makes a profit but the company often experiences cash flow problems. GT needs to recruit a new Theatre Manager. The person hired will have many duties, including the responsibility for all of GT’s administration as well as some accounting. The Directors are considering two people who were both recently interviewed. Table 2.2 contains information gained from the interview process. Table 2.2: Information gained from the interview process Nick Portia • Three years working for a similar theatre business • A Levels in Business, Art and Chinese • Very organised and efficient • No management experience • Wants to move overseas in the future • Eight years working as a manager for a bank • No formal qualifications • Late for the interview • Good sense of humour • Looking for a long-term career Define the term ‘cost-based pricing’ (line 14). Explain the difference between ‘cash’ (line 15) and ‘profit’ (line 15). Refer to Table 2.1 and any other relevant information. Calculate the revenue GT will receive from all the performances of ‘A Summer Dream’ in January 2021. Explain one possible advantage to GT, other than increased revenue, of renting the theatre to visiting groups. Analyse two factors which might affect the demand for the performances at GT’s theatre. Recommend whether GT should employ Nick or Portia for the position of Theatre Manager. Justify your recommendation.
9609_w20_qp_22
THEORY
2020
Paper 2, Variant 2
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Auto Bike (AB) AB is a private limited company that repairs and maintains motorbikes. AB has nine garages in country J and employs eight highly qualified mechanics in each garage. Two of the most popular motorbike services that AB sells are the standard service and the advanced service. Table 2.1 contains price and cost information for these services. Table 2.1: Price and cost information Price Direct costs per service Allocated indirect costs per service Standard service $250 $50 $60 Advanced service $400 $60 $100 In April, AB sold 1000 standard services and 200 advanced services. The profit margin for an advanced service is higher than the standard service. The directors have decided to promote the advanced service to try and increase sales. Each garage has been given a budget to use for below the line promotion methods with an objective of increasing sales of advanced services in the next six months. The level of motivation of the mechanics is low. Many mechanics believe that they are not paid well and the conditions of work are dirty and noisy. AB uses a time-based payment method which rewards each mechanic at the same hourly rate. In a recent survey, many mechanics complained that the payment method was unfair. They believe it rewards ‘lazy workers’ as much as those who work hard. It also does not take into account the difficulties involved in some jobs and the simplicity of others. The Human Resources Director has been asked to investigate a new payment method. Define the term ‘objective’ (line 13). Explain the term ‘private limited company’ (line 1). Calculate the profit made from selling standard and advanced services in April. Explain one possible problem for AB of trying to allocate indirect costs. Analyse two below the line promotion methods that AB could use to increase the sales of advanced services. Recommend a new payment method for the mechanics at AB. Justify your recommendation.
9609_w21_qp_22
THEORY
2021
Paper 2, Variant 2
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Bob’s Furniture (BF) Bob is a carpenter who uses job production to make furniture using premium materials. Each item of furniture is priced using cost-based pricing with a 50% mark-up. He is a sole trader. Due to poor economic activity in country X, Bob has fewer customers for his designs. To keep his cash flow positive he is considering two different options. Both options have an opportunity cost. Option 1: Make garden benches. Bob is thinking about making garden benches from lower quality materials. Customers will be able to customise some elements of the bench, such as colour. The bench would be delivered to their home. Promotion of the benches would take place at craft fairs and markets. Option 2: Make small wooden ornaments. Bob has noticed other businesses selling lots of low-priced small wooden ornaments. Bob could produce similar ornaments, using the premium wood left over after making his job-produced furniture. Table 1.1: Financial summary of the two options Option 1 Garden benches Option 2 Ornaments Cost of raw materials ($ per unit) Transportation costs ($ per unit) Cost of labour ($ per unit) Forecast sales (units per month) Whichever option Bob chooses, he will continue to use cost-based pricing and make premium furniture when customers demand it. Define the term ‘job production’ (line 1). Explain the term ‘opportunity cost’ (line 4). Refer to Table 1.1. Calculate the forecast profit margin for option 1. Explain one way in which Bob could increase the forecast profitability of option 1. Analyse two benefits to Bob of using cost-based pricing. Refer to Table 1.1 and any other relevant information. Recommend which of the two options Bob should choose. Justify your recommendation.
9609_m20_qp_22
THEORY
2020
Paper 2, Variant 2
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Flora’s Fitness (FF) Flora is a self employed personal trainer and she trades as Flora’s Fitness (FF). She invested $10 000 as start‑up capital. She has seen reports showing that keeping fit is becoming a trend in country P. ABC is a national bank with a focus on corporate social responsibility (CSR). Flora thinks there is an opportunity to provide group fitness sessions to employees at ABC’s head office. These sessions could include exercises and stretching techniques. She could also offer yoga and other fitness related classes. These sessions would allow ABC to promote itself as a ‘healthy employer’. Flora is keen to show the benefits of fitness sessions to ABC. A survey has shown that many employees do not currently visit gyms or fitness centres. High prices and lack of time are given as the most important reasons. She has arranged a meeting with John, the Human Resource Director at ABC. He is interested in offering fitness sessions as a fringe benefit for employees. He has asked Flora to provide a business proposal for the meeting. She plans to provide one session before work and one session at lunchtime five days per week. Flora proposed two pricing strategies (see Table 1.1). Table 1.1 – Proposed pricing strategies Pricing strategy 1 Pricing strategy 2 Price per person $5 Total price per session $75 Maximum 20 people per session Maximum 20 people per session Define the term ‘corporate social responsibility (CSR)’ (line 4). Explain the term ‘start‑up capital’ (line 2). Refer to Table 1.1 and any other relevant information. Calculate the maximum weekly revenue for pricing strategy 1. Explain one advantage to FF of pricing strategy 2. Analyse two sources of secondary information Flora could use to find out more about trends in the fitness market. Evaluate the benefits to ABC of offering employees fitness sessions.
9609_m21_qp_22
THEORY
2021
Paper 2, Variant 2
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Rehana Recycles (RR) Rehana is very environmentally aware. One year ago, Rehana identified a business opportunity to reuse waste products and set up Rehana Recycles (RR) as a sole trader. A local company sells bottled drinks and reuses the empty glass bottles that are returned by customers. It cannot reuse any damaged bottles, so they are dumped as waste. Rehana asked this company if she could have the damaged glass bottles. The company agreed she could have them at no cost. RR melts down the glass and makes unique vases and other glassware products. RR’s mission statement is ‘Make waste beautiful’. Rehana markets her products as ‘Lovely for the planet, lovely for you’. The business has a strong local brand image. Rehana has recently invested in marketing which focuses on her unique selling point of recycling waste. To help satisfy demand, Rehana recently employed two local artists who are also very environmentally aware. They are skilled in making handmade glass jewellery. RR currently makes handmade products using job production. Rehana has a democratic leadership style. Rehana has produced some financial data shown in Table 1.1. Table 1.1 Financial data $ $ Current assets Current liabilities Cash 2 000 Trade payables 3 000 Inventory 12 000 Overdraft 5 000 Total current assets 14 000 Total current liabilities 8 000 As demand has grown, Rehana needs to increase her output. Rehana has identified two ways of increasing output. She could either: • keep using job production and employ more artists to create unique glassware products using the RR brand, or • change to batch production and make a larger number of standardised glassware using the RR brand. Define the term ‘mission statement’ (line 7). Explain the term ‘democratic leadership style’ (line 13). Refer to Table 1.1. Calculate the acid test ratio for RR. Explain one method Rehana may use to improve liquidity. Analyse two benefits for RR of having a unique selling point (USP). Evaluate whether RR should change to batch production.
9609_m22_qp_22
THEORY
2022
Paper 2, Variant 2
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Questions Discovered
47