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1 AnswersFundamentals Level Skills Module, Paper F5 Performance ManagementMarch/June 2016 Sample AnswersSection B1(a)BatchesUnitsPriceTotal Variable cost Total variable Fixed costsTotal Profitper unitrevenueper unitcostscost$$$$$$$11,0002020,00010 0010,00010,00020,000022,0001836,0008 8017,60010,00027,6008,40033,0001648,0007 8023,40012,00035,40012,60044,0001352,000 6 4025,60012,00037,60014,40055,0001260,000 6 4032,00014,00046,00014,000 Therefore Jewel Co should import and sell four batches (4,000 units) of headphones since at this point it will make thegreatest profit: $14,400 for the month.

2 (b)The algebraic model requires several assumptions to be true. First, there must be a consistent relationship between price (P)and demand (Q), so that a demand equation can be established, usually in the form P = a bQ. Here, although there is aclear relationship between the two, it is not a perfectly linear relationship and so more complicated techniques are requiredto calculate the demand equation. It also cannot be assumed that a linear relationship will hold for all values of P and Q otherthan the five , there must be a clear relationship between demand and marginal cost, usually satisfied by constant variable costper unit and constant fixed costs.

3 The changing variable costs per unit again complicate the issue, but it is the changes infixed costs which make the algebraic method less useful in Jewel s algebraic model is only suitable for companies operating in a monopoly and it is not clear here whether this is the case,but it seems unlikely, so any optimum price might become irrelevant if Jewel s competitors charge significantly lower more general factors not considered by the algebraic model are political factors which might affect imports, social factorswhich may affect customer tastes and economic factors which may affect exchange rates or customer spending power.

4 Thereliability of the estimates themselves for sales prices, variable costs and fixed costs could also be called into (a)The breakeven sales revenue for Swim Co is $90,000. The company s profit, to the nearest $10,000, if 500 athletes attendthe course is $20,000 ($140,000 $120,000). (From the graph, it is clear that the precise amount will be nearer $17,000, $140,000 approximately $123,000.)(b)Cost structureFrom the chart, it is clear that Line C represents fixed costs, Line B represents total costs and Line A represents total terms of line A, from 0 400 athletes the line is straight with a constant gradient, indicating an unchanged selling can be calculated as $300 per athlete (120,000/400).

5 Beyond this point, the slope of the line becomes shallower,indicating that the sales price is reduced for further sales above 400. The reduced selling price can be calculated using thehigh-low method an increase of 100 athletes leads to an increase of $20,000 in revenue, so the reduced price of $200per athlete. This may be to encourage more C is the fixed costs line if no sales are made, then the cost will be $20,000. This remains constant until 100 coursesare sold, at which point the fixed costs increase gradually between 100 and 200 athletes by $20,000 up to $40,000. Theythen remain constant at $40,000 for 200+ behaviour between 100 and 200 athletes is that of a semi-variable cost.

6 The reasons for this behaviour are unclear andmore information would be required. It could be, for example, that freelance trainers or nutritionists are used when the numberof athletes falls between 100 and 200 and they may charge by the hour for each hour of their time which they provide. Then,once 200 athletes is reached, new staff are recruited. Alternatively, the accountant could simply have made a B is a combination of the fixed cost line (C) and the variable costs. As variable costs are zero when no courses are sold,this line starts in the same place as line B. Between 0 and 100 athletes, the gradient of the line is constant, indicating aconstant variable cost/unit.

7 This can be calculated as $200 per athlete, again using the high-low gradient of the line becomes steeper between 100 and 200 units. This indicates an increase in variable cost per , some of this will be due to the behaviour of line C, as previously discussed. The fixed costs have increased by$20,000 in this range and if this had not happened, then the total costs at 200 athletes would be $60,000, which is whatwould be expected if the variable costs had remained at $200 per athlete. Therefore the increase in gradient between 100and 200 athletes is entirely down to the increase in fixed 200 and 300 athletes the gradient of the line reduces again.

8 As the fixed costs are now unchanged, this must bedue to a reduction in variable cost per athlete. An increase of 100 athletes gives an increase of $10,000, $100 per athletewhich is a 50% reduction. This may be due to economies of scale such as cheaper materials or labour 300 athletes the line gets steeper which indicates an increase in variable cost per athlete. It is hard to read exactlyfrom the graph but, assuming that the total cost for 400 athletes is $107,000, then the variable cost per athlete beyond 300has increased to $170. The reasons for this are unclear. It may be extra labour time is required to deal with so many athletesand this outweighs the economies of scale enjoyed between 200 and 300 the selling price is $200 beyond 400 athletes, then each extra course booked makes contribution of about $30, increasingthe profits of Swim sales revenue = (280,000 x $55) + (420,000 x $45) = $15 4m + 18 9m = $34 3m.

9 $ 000 Lesscosts:Development and design costs5,600 Patent application costs (including $20k)500 Patent renewal costs 2 years400 Opportunity cost ignore Total material costs [(280,000 x $16) + (420,000 x $14)]10,360 Total labour costs [(280,000 x $8) + (420,000 x $7)]5,180 Fixed production overheads3,800 Marketing costs (working 1)4,680 Selling and distribution costs1,500 Environmental costs250 Total life cycle costs32,270 Expected profit = $2 03mNoteThe expected profit has been calculated using life cycle costing not relevant costing. Hence, the $20,000 salary cost included inpatent costs should be included in the life cycle cost.

10 Similarly, the opportunity cost of $800,000 is not included using life cyclecosting whereas if relevant costing was being used to decide on a particular course of action, the opportunity cost would 1 Expected marketing cost in year 1: (0 2 x $2 2m) + (0 5 x $2 6m) + (0 3 x $2 9m) = $2 61mExpected marketing cost year 2: (0 3 x $1 8m) + (0 4 x $2 1m) + (0 3 x $2 3m) = $2 07mTotal expected marketing cost = $4 68m4 (a)Maximising group profitDivision L has enough capacity to supply both Division M and its external customers with component L. Therefore, incremental cost of Division M buying externally is as follows:Cost per unit of component L when bought from external supplier: $37 Cost per unit for Division L of making component L: $ incremental cost to group of each unit of component L being bought in by Division M rather than transferredinternally: $17 ($37 20).