DATA RESPONSE

Expected Answers
1 (a) Define the following terms as they are used in the passage:
(i) variable costs, [3]
Costs which change with output; ORD e.g. Labour costs; costs of flour and other materials.
2 marks for appropriate definition
1 mark for example drawn from the passage.
(ii) fixed costs. [3]
Fixed costs are costs which remain constant as output increases, e.g. interest on loans,
administrative costs; rentals and insurance costs.
2 marks for appropriate definition
1 mark for example drawn from the passage.
(b) Using information from the passage, calculate:
(i) Break-even quantity, [4]
¿
Break even quantity = Total ¿ costs Contribution per unit [1]

Total fixed costs = $(1 500 + 1 200 + 1 300) [1]

= $ 4 000
Contribution per unit = Selling price – Variable cost per unit
= $1-[0.2+0.3]
= 0.5 [1]
$ 4 000
 BEQ =
$ 0.50
= 8 000 loves [1]
(ii) Margin of safety at full capacity, [2]
Margin of safety = Current output – Break Even Output
= (15 000 – 8 000) units
= 7 000 units
Correct answer with or without process 2 marks
 Correct process 1 mark [2]

(iii) Profit at full capacity. [3]

Profit = TR - TC = [(Q x P) - (FC + VC)] [1]
= $[15 000 - (7 500 + 4 000)] [1]
= $3 500 [1]
Or
Profit = Margin Of Safety x Contribution per unit [1]
= $(7 000 x 0.5) [1]
= $3 500 [1]

(c) Evaluate the relevance of break-even analysis to Uhuru Limited. [10]

You are expected to evaluate the relevance of break-even analysis. Evaluation means weighing
the advantages and disadvantages of break-even analysis e.g. helps analyse impact of price
changes; level of output that yields certain profit; etc.
However BE analysis assumes that fixed costs remain fixed always yet they may change in the
long run, it also assumes linear relationships yet this is not always the case in real life situations;
assumes that all 15 000 loaves are sold; it is less useful for a multi-product business; assumes
that all loaves are sold at the same price of $1; assumes constant variable costs, but bulk buying
of flour and other materials reduces them; some managers cannot manipulate quantitative data
e.g. some managers felt the information presented by the production manager was difficult to
interpret.
[In your evaluation you need to refer back to the case in question which gives the marker the
impression that one has understood the situation in the case study]

2 (a) Identify
(i) The form of worker participation used by Gentec Power, [1]
Answer: worker director [1]
Reason: the CEO is simply informing members who attended the meeting, he is not
discussing with them. He actually is directing them because he has all information laid
 down on paper and he is just more like informing them. On the last part he now asks
them what the company should do. He is playing the leading role during this meeting.
(ii) The method of communication used by the Chief Executive Officer. [1]
Answer: formal meeting or face-to-face communication [1]
(b) (i) Calculate Gentec Power’s contribution per generator. [3]
(ii) Using your calculations from (b) (i) and any other calculations, advise the Chief
Executive Officer whether or not to close shop. [6]
Total Variable costs = $ 200 000 + $ 500 000
= $ 700 000 [1]
$ 70 000
Variable costs per generator =
10 000
= $70 [1]
Contribution per generator = unit selling price – variable cost per generator
= $ 80 - $ 70
= $ 10 [1]
(ii) Contribution is positive, therefore CEO should not close shop, at least in the short-run.
Contribution helps cover part of the $ 1m fixed costs. If shop closes outright it means that it
would make a loss of $1m which is the value of fixed costs which would be incurred anyway.
(c) Explain any two other factors Gentec Power might consider before making the final
decision. [4]
Other factors to be explained include:
Extent of competition
What to do with equipment and machinery;
Possible benefits of downsizing compared to closing shop
Impact of new government policy; etc.
2 marks for identification of factors
2 marks for explanation
(d) Evaluate the effectiveness of the method of communication used by the Chief Executive
Officer. [10]
One should discuss advantages and disadvantages of face-to-face communication.
Advantages might include
  instant feedback
 encourages cooperation
 allows new ideas to be generated
 can be aided by body language (e.g. facial expression)
 can be accompanied by written minutes for future reference; etc.
Disadvantages might include
 inconsistent non-verbal signals might create a barrier
 status difference
 ineffective if there is no sufficient guidance;
 time-consuming
 may disrupt production; etc.
Up to 5 marks for a one-sided answer
Up to 7 marks for an answer not presented in context.