Question

Evidence

Code

ONE

(a) (i)

SP – VC = 4.00 – 2.40 = 1.60 per coffee

C

(ii)

FC ÷ CM = 40 000 ÷ 1.60 = 25 000 coffees × $4.00

Dollars of sales to break-even = $100 000

Judgement

Award 1 C for answer of 25 000 coffees

Allow follow through from Question 1 (a) (i)

C

C

(b)

(FC + Profit) ÷ CM = (40 000 + 7 000) ÷ (4.00 – 2.40) = 47 000 ÷ 1.60 =

Number of coffees required to achieve profit target: 29 375

Allow follow through from Question 1 (a) (i)

C

(c)

The contribution margin is the amount left over from each sale after variable costs have been accounted for. The larger the contribution margin, the easier it will be for Eat! to pay for its fixed costs and achieve profit targets. For Eat!, coffee has a contribution margin of $4.00 (selling price) less $2.40 (variable costs), which leaves $1.60 available to pay fixed costs and profit targets.

Judgement

Award one e for explaining importance contribution margin, must refer to sales i.e. covers fixed costs then profit once fixed costs have been met

Award a second e for linking the explanation to data for Eat! e.g $1.60

e

e

(d)

The margin of safety shows Eat! Management the difference between the current sales volume and the break-even sales volume. A margin of safety of (25%) shows that current sales are below the break-even level. At this level of sales, Eat! is not making a profit on sale of coffee. Instead of the 25 000 coffees needed to be sold to cover costs, Eat! is selling only 20 000 coffees per annum.

Judgement

Award one e for explaining that coffee sales are below break-even.

Award a second e for linking the explanation to Eat! making a loss.

e

e

Question

Evidence

Code

TWO

(a)

C

C

C

Question

Evidence

Code

TWO

(b)

C correct amount

Cp correct process

C# cash budget is correct

C f

C

C C

Cp

C#

Question

Evidence

Code

TWO
(c)

Gas for cooking is a semi-variable cost because the gas has a fixed cost and a variable cost component. Fixed costs remain constant regardless of the number of customers served. Variable costs change in proportion to a change in volume or output. Gas used to power the cooking stoves will be a variable cost as the stoves will only be on when they are required to cook for customers. The more customers at Eat!, the more gas will be required.

Judgement

• 1^st e for identifying semi-variable costs have a fixed and a variable component AND explaining how either component changes as output / meals / customers changes

• 2^nd e for explaining the second cost component linking to output.

e e

(d)

Below are some examples of matters that could be discussed.

Allow follow-through from any calculations.

Reasons must be supported by figures where applicable for Vf.

Argument must be consistent throughout candidate evidence, ie if the option chosen is to go ahead with upgrade, argument must be FOR upgrade.

Financial

For (for example)

• potential reduction in costs if staff is able to use new equipment to work more efficiently. This will increase profit and return to the owner(s) of Eat!

Against (for example)

• the upgrade may exceed the estimated $100 000 because of unforseen / unexpected costs in completing the renovation. This will be a drain on cash flow if it’s not able to be financed by an additional loan or overdraft.

• growth in sales may not happen immediately, or at all. The new upgrade or interior decoration may put old regulars off and it may take some time before new customers get to hear of the new, trendier place. This will negatively impact on profitability.

Non-financial

For (for example)

• the upgrade may create a new market for Eat! when the cafe becomes trendy / popular for the young professionals working in the city who may be willing to spend more money and eat out more regularly. There would be potential to grow the business.

Against (for example)

• the upgrade will probably still affect current ability of Eat! to trade, even though management doesn’t think it will. Regular customers may go elsewhere in the meantime to avoid any possible delays in the ability of Eat! to satisfy their orders while the upgrade happens.

Vf

Vn

Question

Evidence

Code

THREE

(a)

Examples of possible suggestions include:

• to determine if there is a demand from customers with dogs to bring their dogs with them when they go out to the café

• the management of Eat! could hire a marketing firm to conduct a questionnaire with existing clients and potential locals as to how many of them own small dogs, and would they be likely to bring them to the restaurant? If not, would they be put off by others doing so? This information could be used to determine the likely impact on the market currently served by the restaurant

• the chef would have to research recipes other than the ‘Oaty Dog Treats’ that could be used to serve dogs, and how this food would be stored in the kitchen. This would be important, as management would not want the serving of a K9 Menu to cause problems and interfere with providing a top-rate lunch and dinner menu to the paying customers.

Judgement

For e evidence must include an example of NON-FINANCIAL information.

e

(b)

Examples of possible suggestions include:

• the chef at Eat! would need to include ingredients for the ‘Oaty Dog Treats’ in his raw materials budget

• the chef at Eat! would need to ensure that raw materials were purchased at the correct time and quantities on hand to guarantee meeting the need of the dogs

• the chef at Eat! would need to produce a production schedule in units of product, detailing what would need to be prepared and when. It would seem likely that ‘Oaty Dog Treats’ could be prepared beforehand and stored in air-tight containers until required

• the chef at Eat! would need to provide a detailed schedule of ingredients, quantities, costs and time to create the K9 Menu, to enable management to make pricing decisions, so that the introduction of the K9 Menu could be profitable.

Judgement

For e evidence must include both appropriate production decisions made by the chef AND must clearly link this to the K9 Menu budget the chef would be responsible for preparing (ie production), and not other budget areas, eg Capital expenditure,
Sales, Personnel.

e

Question

Evidence

Code

THREE

(c)

Below are examples of matters that could be discussed.

Allow follow-through from any calculations.

Reasons must be supported by figures where applicable for Vf.

The argument must be consistent throughout candidate evidence, ie if the option chosen is to go ahead with the K9 menu, the argument must be FOR the K9 menu.

Financial

For (for example)

• Eat! currently sells below break-even quantity of coffees based on a negative margin of safety. The introduction of a K9 Menu may encourage new customers for the croissant and coffee option in the café.

• the upgrade is already causing the café to go into overdraft. For possibly little extra cost, new customers could be encouraged to visit, increasing profit margins and helping pay off the bank overdraft and loan.

Against (for example)

• the upgrade is already causing the café to go into overdraft. The additional costs of introducing a K9 Menu may cause Eat! to go further into overdraft, and management may need to increase the amount of the loan borrowed.

• it is actually dinner that brings in the significant cash flow for Eat! The café needs to increase occupancy rates in the evening. It is unlikely that the K9 Menu would encourage people to bring their dogs with them in the evening. It is most probable that customers will bring their dogs with them at lunchtime, as this may be more convenient.

Non-Financial

For (for example)

• introducing the K9 Menu at the same time as the upgrade would allow for more strategic advertising. This would include a description of the new-look café, and include the other new and exciting options of being able to bring your small dog to lunch with you. It would cement in current and potential customers the ‘new and improved’ image of the café.

• Eat! gains access to a new market of dog-owning customers who will bring their canine companions with them to the café (as they do in European countries).

Against (for example)

• some people will not eat in a place where animals are fed (or they are frightened of dogs), causing a change in the clientele for the café – which could reduce their market share.

• it may be difficult to attract the best staff, because they may not want to work in a café where they could be bitten, or have to clean up after dogs.

• there will be additional health and safety requirements for the café to obtain and maintain a current license to supply food to the public. This will require extra work and costs for management.

Vf

Vn

Criterion

Achievement

Achievement with Merit

Achievement with Excellence

One

2 e

4 e

6 E

Two

8 C

9 C

10 C

Three

3 V

Codes

N = no code / grade awarded
d = describe (define or recognise) and apply
a = apply and explain
e = explain conflicts, limitations, interrelationships