Break Even Analysis [95 marks]

Dan Electro
Dan Bowen is a sole trader who sells digital cameras directly to consumers. He
owns an online business and all sales are processed electronically under the
business name Dan Electro. The office, storage place and call centre are located
together in an expensive and desirable city centre location.
Dan started the business three years ago by borrowing a considerable amount of
money from a bank. He used his residential property as collateral* for the loan.
The cameras are bought and shipped from a reputable and reliable overseas
supplier who charges a high price for good quality cameras and prompt
transportation. Dan has to pay in advance for the cameras. Dan Electro’s
customers are very loyal and see their purchase as good value for money. Repeat
purchases comprise a large percentage of Dan Electro’s sales. Some customers
have even indicated that they would pay a higher price for the cameras because
of their quality and the good service he provides.
Dan is now worried about the forecasted rise in interest rates, inflation and an
increase in online competition. Dan Electro may face some cash flow difficulties in
the coming years. He is considering various strategies in order to prevent such
possible cash flow difficulties.
Financial information for 2010 (all figures in US$)

Dan is expected to sell 700 cameras in 2010.

* collateral: the borrower’s property is offered to the lender as security if the loan
is not paid back

1a. Define the term variable costs . [2 marks]

 Markscheme
Variable costs are costs that vary in “direct proportion” to change in
output/level of production.
Candidates are not expected to word their definition exactly as above.
Award [1 mark] for a basic definition that conveys partial knowledge and
understanding.
Award [2 marks] for a full, clear definition that conveys knowledge and
understanding similar to the answer above.
For only a relevant: example or application to the stimulus award [1 mark].

1b. Identify two advantages for Dan of operating as a sole trader. [2 marks]

Markscheme
Possible advantages could include:
Dan as a sole trader has complete creative and management freedom
Dan can be more customer focused due to constant interaction and
communication with the customers
Dan does not have to share the profit with anyone else
accept any other relevant advantage.
Award [1 mark] for each relevant and appropriate advantage identified up to
a maximum of [2 marks].

1c. Construct a fully labelled break-even chart for Dan Electro for 2010. [7 marks]
Calculate and indicate the break-even point, the margin of safety and the
projected profit at 700 cameras (show all your working).
Markscheme
The break-even point is:
Fixed cost US$30000
Contribution
= US$250−US$200
= 600 cameras

The margin of safety is:

700 − 600 = 100 units
The projected profit at 700 units is:
Margin of safety × contribution per unit = 100 units × US$50 = US$5000
Or:
Total revenue − total cost = US$175 000 − US$30 000 + (200 × 700) =
US$5000
Do not double penalize candidates.
Award marks as follows:
[1 mark] for appropriately labelled axes.
[1 mark] for an accurately drawn and labelled total revenue curve.
[1 mark] for an accurately drawn and labelled total costs curve.
[1 mark] for identification of the break-even point and [1 mark] for showing
calculation at the correct value of 600.
[1 mark] for identification of the margin of safety.
[1 mark] for correct calculation of the projected profit.
If the candidate produces a table rather than a chart, award [0 marks].
1d. Calculate the number of cameras Dan Electro must sell in order to [2 marks]
double the projected profit (show all your work).

Markscheme
The doubled level of profit is:
Target: US$5000 × 2 = US$10 000
Fixed cost+target profit US$30000+US$10000
Contribution
= US$50
= 800 cameras

Do not double penalize for a mistake carried forward.

Award [1 mark] for the correct workings and [1 mark] for the correct
calculation/figure.

1e. Calculate the price per camera that needs to be charged (at expected [2 marks]
sales of 700 cameras) in order to double the projected profit (show all
your working).

Markscheme
target profit+ total costs US$10000+(US$30000+US$140000)
Price = output
= 700
= US$257.14 (2 d.p.)
Do not double penalize for a mistake carried forward.
Award [1 mark] for the correct workings and [1 mark] for the correct
calculation/figure.

1f. Explain two possible limitations of the break-even model as a decision [4 marks]
tool for Dan Electro.
 Markscheme
The possible limitations/drawbacks of the break-even model are:
The model assumes that all cameras are sold.
Dan Electro might not be able to sell all of its cameras and, therefore, the total
revenue curve might not be as high/accurate as the model assumes:
The model is also used under the assumption of unchanging conditions.
Inflation and interest rates might indeed increase (forecasted) which could
affect the demand for the camera.
Also, the effectiveness of the model depends on the accuracy of the data.
Dan might not have computed all the costs/revenue accurately.
The model assumes a linear relationship, which is quite unlikely in real life.
Dan might decide to reduce the price of the cameras to stimulate sales.
Given the above, the use of the model can become less effective as a decision
tool for Dan.
Accept any other relevant explanation.
Mark as 2+2.
Award [1 mark] for identifying each relevant and correct limitation of the
break-even model and [1 mark] for each explanation of the limitation with
application to the stimulus material.
Award a maximum of [2 marks] overall if there is no application to the
stimulus material.

1g. Examine two possible strategies for Dan Electro to prevent cash flow [6 marks]
difficulties.

Markscheme
Some of the possible strategies that are available for Dan Electro in order to
overcome the forecasted cash flow difficulties are:
Increase inflow of money:
Dan can look for a partner. Forming a partnership can inject cash quickly with
the added benefits of knowledge and expertise. The responsibilities of running
the business can also be shared. However, Dan will lose the benefits of being a
sole trader – benefits such as complete freedom in decision-making and the
retaining of all profit.
Dan could increase the price of the cameras. Dan has very loyal and,
therefore, price inelastic customers. Some customers indicated that they
would be willing to pay a higher price. This enables him to increase the price
and at the same time to increase Dan Electro’s total revenue. However, given
the increase of online competition and the current customers’ perception of
the camera being good value for money, this option is somewhat risky. Dan
Electro might end up with fewer customers and less total revenue.
Dan Electro’s marketing expenses are relatively small. Dan might want to
consider a marketing drive to promote the product so as to increase sales and
then sell more than 700 cameras – which is rather a small amount. However,
care has to be taken that the extra marketing expenditure does not outweigh
the extra revenue. Perhaps it is a risk worth taking given the increased
competition.
Taking another loan from the bank might inject immediate cash, but may not
be seen as a wise move as Dan is still paying back US$1000 in interest on the
previous loan and the interest rate is predicted to rise.
Decrease outflow of money:
The main problem that can be seen from the data is the transportation cost
per camera, which is a significant 22.5 % of the variable costs. Dan could
negotiate a reduction in such costs with the current supplier. Perhaps a bulk
buying deal can be agreed upon. However, Dan will have to take the risk of
being left with unsold stock, which is risky given the fast changing technology
in this market.
Rent is currently extremely expensive. The costs for an “expensive and
desirable” location are unnecessary given the fact that Dan operates an online
business. A move to a cheaper and non-central location could provide a good
solution. The service quality should not be harmed by this change.
Also, Dan should ask for some credit facilities with the current supplier rather
than continue with the current agreement of paying in advance. This will
alleviate the cash flow difficulties. However, the supplier may not agree and
may decide to supply to other retailers given the increase in online
competition.
Another possibility is to look for a cheaper local supplier. However, the quality
of the cameras may be compromised and Dan Electro may lose its competitive
advantage.
Accept any other relevant examination.
To achieve the top markband candidates must give a balanced examination of
two possible strategies.
For one relevant issue that is one-sided, award up to [3 marks]. If the
response is a one-sided relevant approach with no balanced examination,
award a maximum of [4 marks].
Marks should be allocated according to the Paper 2 HL markbands for 2010-
2015 exams section A.
 Raapin Guitars
Raapin Guitars (RG ) manufactures guitars in Finland. Over many decades, it has
built a reputation for producing high quality, handmade guitars. Apprentices* are
recruited when they are 16 or 17 years old. Each apprentice completes a seven-
year training program. They are then considered “professional craftsmen” and can
expect permanent careers at RG . Each craftsman works with two apprentices to
produce high-quality guitars using a batch production method.
Last year, RG sold 4920 guitars at an average price of €1200 each. It employed 42
professional craftsmen earning €50 000 per year and one manager earning €70
000 per year.

Recently, RG has struggled to recruit talented teenagers for the apprentice

program. Most teenagers in Finland complete secondary school and go to
university. Many of them graduate as engineers and design technologists. As a
consequence, Anni Raapin, Chief Executive Officer (CEO) of RG , is considering
changing the overall production process at RG . She wants to change from a
traditional batch production process using professional craftsmen, to an
automated fl ow production process led by two highly trained engineers. These
engineers will manage the new production process operated by low-skilled
workers.
Even if RG changes to this new production process, the professional craftsmen will
not be made redundant. The oldest craftsmen will be offered early retirement.
Others will become managers of the new flow production process; the youngest
ones will become low-skilled workers. As the craftsmen retire, they will be
replaced by workers who have not trained as apprentices and have no knowledge
of the traditional batch production process. These new workers will be paid half
the salary of the previous professional craftsmen.

2a. Describe how one demographic change in Finland affects RG . [2 marks]

 Markscheme
The one demographic change mentioned in the stimulus is the higher level of
education that Finnish youth have in contemporary society compared to some
earlier periods. Thus, “recently, RG has struggled to recruit talented teenagers
for the apprentice program.”
Though it is unlikely that many candidates would know of any
other demographic changes in Finland (that is, a change not mentioned in
the stimulus), accept it if it is correct and appropriate to the situation in
the stimulus.
Award [1 mark] for a response that conveys partial knowledge
and understanding of demographic change.
Award [2 marks] for a full, clear description of a demographic change
in Finland affecting RG .

2b. Identify two features of a flow production process. [2 marks]

Markscheme
Features of flow production include:
• Standardized/similar product
• comparatively easy to expand production
• finished product is completed continuously
• high degree of automation
• workforce can be unskilled or semi-skilled
• workforce can be specialized (even if unskilled)
• large scale of production (accept economies of scale)
• low cost per unit (do not accept just “low cost” or “cheaper”)
• high/higher fixed costs
• all stages of production are interdependent (accept: “if a problem occurs in
one place in the assembly line, the whole production stops”).
Accept any other relevant feature of a flow production process.

Many candidates may struggle with the difference between a feature and an
advantage/disadvantage. If the examiner can reasonably infer a feature from
a stated advantage or disadvantage (such as large scale of operation versus
economies of scale) award [1 mark].
Award [1 mark] for each correct feature of a flow production
process identified. Award up to a maximum of [2 marks].

2c. Calculate for RG for one year manager’s and craftsmens’ salaries (figure [1
X). mark]
 Markscheme
(42 craftsmen × €50000) + €70000 = €2170000
Award [1 mark] for the correct answer (working not required).

2d. Calculate for RG for one year the break-even level of output (show all [2 marks]
your working).

Markscheme
fixed cost
Break-even level of output = contribution

Fixed costs = 120k + 480k + 2170k + 700k + 600k = 4070000

Contribution = 1200 − 275 = 925
Break-even level of output = 4070000
925
= 4400

Which means the break-even level of output is 4400 units.

Apply candidate own figure rule (OFR).
[1 mark]
If a candidate who has shown working provides a correct procedure (thus,
demonstrates an understanding of the underlying concepts) but has made an
error in calculation.
[2 marks]
Candidate provides the correct answer with working.

2e. Calculate for RG for one year the profit or loss last year (show all your [3 marks]
working).
 Markscheme
Profit is calculated by total revenue – total costs, where total costs equal total
fixed costs + total variable costs.
Total revenue: 4920 units × €1200 = €5904000
Total fixed costs: 120000 + 480000 + 2170000 + 700000 + 600000 =
€4070000
Total variable costs: 4920 units × (225 + 35 + 15) = €1353000
Total costs = €4070000 + €1353000 = €5423000
Total revenue – total cost = €5904000 − €5423000
Profit = €481000

Candidates may also use the contribution method, calculated as follows:

Sales in units – break-even quantity = margin of safety
4920 – 4400 = 520 units
Margin of safety × contribution = profit
520 × (1200 – 275)
520 × 925 = €481000

Apply candidate own figure rule (OFR).

Award [1 mark] if the candidate clearly demonstrates an understanding of
how to calculate the profit (candidate shows revenue – expenses = profit, or
an understanding of the contribution method).
Award [2 marks] if the candidate demonstrates that the method properly but
makes an error in the calculation.
Award [3 marks] if the candidate demonstrates the method (show working)
and correctly calculates the answer.
If the candidate produces the correct answer, but does not show
working, award a maximum of [2 marks].

2f. Construct a fully labelled break-even chart for RG . [5 marks]

Markscheme

Award marks as follows:

[1 mark] for each appropriately labelled axis – maximum of [2 marks].
[1 mark] for an accurately drawn and labelled total revenue curve.
[1 mark] for an accurately drawn and labelled total costs curve.
[1 mark] for the identification of the break-even level of output.
Award [0 marks] if a candidate produces a table, and award no more than [3
marks] if the chart is not neat, not drawn with a straight-edge, or is not
to scale.
Ideally, the candidate will draw an arrow pointing to the break-even point
and label the arrow. However, accept as an “appropriately labelled” break-
even point a vertical line from the x-axis to the break-even point provided that
the line is labelled “break-even point”.
If the candidate does not specify the scale by placing numbers periodically
on the axes (1000, 2000, 3000, etc) they have not demonstrated the scale,
and, therefore, award a maximum of [3 marks].
If the candidate labels the x axis as “sales” and the numbering on the
axis corresponds to the unit of output of RG (that is, the number scale is in the
range of 0 to 5000 +/–) accept sales as a correct label.
 DuffJD
DuffJD provides a laundry service for towels and sheets to three hotel chains in a
major city, Hoyluk. It provides each hotel chain with trade credit.
Competition in this market is increasing, as two rivals are planning to offer laundry
services to hotel chains in Hoyluk.
Table 1: Selected financial data for DuffJD for 2018

[Source: © International Baccalaureate Organization 2019]

3a. Define the term trade credit. [2 marks]

Markscheme
Trade credit is an important source of short-term finance available to
businesses. It allows a business to buy goods and/or services on account
without making immediate cash or cheque payments.
Candidates are not expected to word their definition exactly as above.
Award [1] for a basic definition conveying the idea that it allows a business to
buy goods/services without making immediate cash or cheque payments
Award an additional [1] for stating that it is a short-term source of finance [2].

3b. Using the financial data for DuffJD for 2018, calculate the contribution per [1
unit per item laundered (no working required). mark]

Markscheme
sales price per unit − variable costs per unit = contribution
$2.00 − $0.50 = $1.50
contribution = $1.50
Award [1] for the correct response. No working required.

3c. Using the financial data for DuffJD for 2018, calculate the margin of safety [1
(no working required). mark]
 Markscheme
number of units sold − break-even number of units = margin of safety

−( ) 50 000
$75 000
200 000 = 150 000
$1.50

margin of safety = 150 000 units

Award [1] for the correct response. No working required.

3d. Draw a fully labelled break-even chart for DuffJD for 2018 using the data [4 marks]
provided.

Markscheme
Candidates do not need to create the table below – these are the figures for
the break-even chart.
Award marks as follows:
[1] for a correctly labelled and accurately drawn total revenue (TR) line – can
be TR or revenue (but not “Sales” on its own).
[1] for a correctly labelled and accurately drawn total cost (TC) line.
[1] for identifying the break-even point. Ideally, the candidate will draw an
arrow pointing to the break-even point and label the arrow. However, accept
as an accurately labelled break-even point a vertical line from the x-axis to the
break-even point, provided that the line is labelled “break-even point”.
[1] for correctly labelling BOTH axes – x-axis must have both costs and
revenue; y-axis must have some indication of quantity, eg,
units/quantity/items laundered.
A break-even chart that is not drawn to scale can be awarded a maximum of
[2].
The break-even chart below should be awarded [2]. The candidate has correct
TR, TC, both axes, and BEP. However, the chart is not to scale. Therefore, the
award is capped at [2] because the x-axis is not to scale.
 Be mindful of positive marking. If a candidate mislabeled one axis and the TC
line (called it VC), the response would still receive [2] because the candidate
had gotten correct the TR line and the BEP.
Also, be mindful that the own figure rule (OFR) applies. If a candidate
incorrectly calculates the break-even quantity when determining the margin of
safety (question (b)(ii)) and then uses that incorrect break-even quantity when
drawing their break-even chart, accept the break-even quantity in the chart.
The candidate will have already lost marks for the incorrect calculation in (b)
(ii). Do not double penalize.

3e. Explain how an increase in competition may affect DuffJD’s margin of [2 marks]
safety.

Markscheme
An increase in competition may have two effects on DuffJD – they may lose a
contract with one or more of its current three clients and thus will sell less
laundry services. A loss of sales will reduce DuffJD’s margin of safety. The
increase in competition may also force down prices. A decrease in price will
increase the break-even level of output and thus reduce the margin of safety.
Award [1] for a candidate displaying a sound understanding of the term
margin of safety.
Award a further [1] if the candidate identifies that the margin of safety is
likely to fall for either of the two reasons indicated above.
 Matchpoint Tennis Club (MTC)
Matchpoint Tennis Club (MTC) is a famous members-only club. MTC owns tennis
courts, changing rooms and a restaurant. The majority of members are between
30 and 50 years old. Most members have high incomes and successful careers.
However, MTC faces increasing competition from Best Sports, a multinational
provider of sports centres. An economic downturn has also reduced MTC’s profits.
Until recently, the restaurant made a valuable contribution to fixed costs but this
has fallen significantly in the last 12 months.
Last year, Seb, a former successful tennis player, became the new Managing
Director of MTC. With the objective to increase revenue, he wrote a five-year plan
with the following strategies:
double membership of MTC
open the restaurant to the general public
open a sports equipment and clothes shop under the family brand “Matchpoint”
employ professional tennis coaches (teachers).
Tina, the Marketing Director, agreed with Seb about the strategies. In order to
achieve the first strategic objective (double membership), she prepared a
marketing budget and proposed the following tactics:
overall reduction in membership fees of 10 %
discounts for people aged below 18 and over 60 years old
advertisements in local newspapers and on social networking sites
a new range of club branded merchandise such as T-shirts and coffee mugs.
Alex, the Human Resources (HR) Manager is concerned about the impact the five-
year plan will have on employees. Employees already argue that they work too
hard for low pay. An increase in the number of members would increase their
workload and responsibilities further. Alex tried to convince Seb that membership
of MTC was already at saturation point on the product life cycle and that existing
members would not like some of the proposed changes to the club.
Alex also stated that since Seb joined the business last year, the friendly
atmosphere at the tennis club has disappeared. That atmosphere has been
replaced with a focus solely on profit making. Alex would prefer a focus on
providing a good quality service for existing members.

4a. Define the following terms: [2 marks]

family branding
 Markscheme
Family branding can be formed as part of a marketing strategy that involves
selling several related products under one brand name. (Family branding is
also known as umbrella branding).
Candidates are not expected to word their definitions exactly as above.
Award [1 mark] for a basic definition that conveys partial knowledge and
understanding.
Award [2 marks] for a full, clear definition that conveys knowledge and
understanding similar to the answer above.
For only a relevant example or application to the stimulus material award [1
mark].

4b. Define the following terms: [2 marks]

contribution to fixed costs .

Markscheme
Contribution to fixed costs refers to the difference between the sales price of
one unit of production and the variable costs needed to make that unit of
production. The difference between the two is “how much” each sale (per unit)
contributes to the payment of fixed costs.
If a candidate writes the formula for calculating contribution, but does not
define the term, award [1 mark].
Candidates are not expected to word their definitions exactly as above.
Award [1 mark] for a basic definition that conveys partial knowledge and
understanding.
Award [2 marks] for a full, clear definition that conveys knowledge and
understanding similar to the answer above.
For only a relevant example or application to the stimulus material award [1
mark].

4c. With reference to MTC, explain the difference between objectives, [6 marks]
strategies and tactics.
 Markscheme
An objective is where the business wants to be in the future, its goals.
Objectives can be strategic – long term, tactical – medium term and
operational – short term and are often SMART. The objective for MTC is to
increase revenue.
A strategy is how the organization MTC is going to get there. A strategy is a
broad plan of action used by an organization as to how to achieve its aims and
strategic objectives. It usually involves long-term, overall corporate decisions.
Accept any strategy mentioned in the stimulus.
Tactics are concerned with smaller-scale and/or short-term decisions, or
actions, aimed at reaching more limited and measurable goals. Tactics are set
to facilitate strategies.
Accept any tactic mentioned in the stimulus.
Given the nature of the question, please do not penalize information directly
quoted from the stimulus material.
Accept any other relevant explanation.
Mark as 2+2+2.
Award [1 mark] for identifying/defining each element and [1 mark] for an
appropriate explanation with reference to MTC. Award a maximum of [2
marks].

4d. With reference to MTC, examine the dynamic nature of organizations [6 marks]
and the relative importance of driving and restraining forces.
Markscheme
MTC, like any other organization that is facing new challenges, both internally
and externally, suggests the needs for change. Indeed the Managing Director,
Seb and the Marketing Director Tina, identified the need to change and to
respond to the challenges in the external environment. One can therefore say,
given the stimulus, that MTC is operating in a very dynamic environment.
Factors for change (driving forces):
Increasing competition: if nothing is done, it represents a threat to the
business.
Falling contribution from restaurant may have impact on profits.
Overworked / stressed workforce may reduce quality of service and hence
the number of members.
Factors causing resistance to change (restraining forces):
The objection of Alex as well as the employees who are already overworked.
Stressed employees will be unmotivated with further deterioration in service
quality.
• Membership is already at saturation point – MTC’s management should be
worried about the negative impact on the atmosphere of the club. Current
members might leave if more members are to join as the atmosphere of the
club and the exclusivity of the service might be eroded.
Accept any other driving force for change and restraining forces causing
resistance to change with relevant explanation and application.
It is expected that the candidates go beyond the regeneration of the stimulus
material and fully explain each driving and restraining forces.
Candidates are not expected to draw the Lewin model.
For one relevant force (either driving or restraining) explained, award up to a
maximum of [3 marks] . For more than one relevant force with no
examination (either driving or restraining), award up to a maximum of [4
marks].
For full marks, a minimum of two well-explained relevant driving forces and
two well-explained relevant restraining forces are expected.
N.B. This question asks for examination, hence evaluation / substantiation is
not required as perhaps the wording of the question might imply when asking
for the relative importance. Award a maximum of [5 marks] if there is no
reference at all to the importance of the forces.
If only the Lewin model is presented as a list with some arrows and possibly
figures without explanation, award a maximum of [2 marks].
Marks should be allocated according to the Paper 2 HL markbands for 2010-
2015 exams, section B.
4e. Discuss the likely success of Seb’s five-year plan to achieve an increase [9 marks]
in revenue for MTC.

Markscheme
Arguments suggesting that Seb’s five-year plan might be successful:
Five years is quite a long time to make changes. The employees, managers
and possibly members will have time to adjust. The plan could be adapted
throughout the years if needed. Tina’s tactics look achievable over a long
time period.
Some of the changes are relatively easy to make, eg opening the restaurant
to the general public, opening a shop. These changes are unlikely to affect
MTC’s culture and corporate image.
Seb seems to be a person with drive. He has Tina on his side. Management
unity to start with, is likely to result in a smoother implementation of any
strategic plans. Moreover, collaboration and consultation between the two
managers is likely to result in: a better understanding of the situation,
better and possibly more varied strategies and better implementation.
With a clear plan, MTC might be able to raise funds more easily from
investors or financial institutions.
Arguments against:
The competitor, Best Sport, being a MNC with probably better and more
funds, can easily react to the strategies and tactics used by MTC, especially
in terms of promotion and price reduction. A price war with a MNC could
destroy MTC.
Employees and the HR Manager are worried about stress level and low
wages. A lack of motivation can seriously affect the performance of the
employees who are vitally important in this kind of business / service.
How successful will the tactics be? For example would decreasing
membership fees increase revenues? Depends on elasticity.
How effective is social networking and advertising?
Has MTC’s management, researched if there is a market for over 60s and
young people? The market might not be sufficient.
The idea of family branding might not be viable. How effective is the
branding? Could the brand image be negatively affected if any of the new
ventures are a failure.
Given the fall in contribution and higher break-even point before profit is
made, will MTC have sufficient funds? Borrowing might result in further
financial difficulties.
Alex’s resistance to change might impact on the implementation of the
strategies. He is the HR Manager and people/employees hold key roles in
running a tennis club.
Accept any other relevant argument with an appropriate discussion.
Conclusions/ judgment:
It appears that the strategies and tactics suggested, despite some acceptable
objection on behalf of the HR Manager, seem achievable and realistic. They
are not extremely drastic, hence likely to be overall successful especially if
implemented incrementally over the designated 5 years. Tactics especially are
easy to change and the overall objectives of MTC do not seem to be objected
by any. The HR Manager is worried about the employees being overworked,
overstressed and underpaid. These issues can be resolved rather easily with
negotiation, recruitment, flexible working etc. Hence the 5 year plan is likely
to be a success albeit perhaps not brave and risky enough.
Accept any other relevant and substantiated conclusion.
Candidates are not expected to include in their response all of the issues
above.
A balanced response is one that covers at least two relevant issues for and at
least two relevant issues against.
For one relevant issue that is one-sided, award up to a maximum of [3
marks]. For more than one relevant issue that is one-sided, award up to a
maximum of [4 marks].
Award a maximum of [5 marks] if the answer is of a standard that shows
balanced analysis and understanding throughout the response with reference
to the stimulus material but there is no judgment/conclusion.
Candidates cannot reach the [5–7] markband if they give
judgment/conclusions that are not based on analysis/explanation already
given in their answer.
Marks should be allocated according to the Paper 2 HL markbands for 2010-
2015 exams, section B.
 Jill Anderson
Jill Anderson operates a restaurant. Although Jill’s meals are viewed as being
excellent quality, sales are slowing. Jill is considering replacing existing meals with
gluten-free meals. The following financial and forecast information is for the
month of May 2018. Jill’s restaurant can only produce either existing or gluten-
free meals.
Table 1: Existing meals

Table 2: Estimated costs and price if Jill produces the gluten-free meals

A local gluten-free manufacturer, which is not part of Jill’s existing supply chain,
has offered to supply already prepared gluten-free meals at $8 per meal. Jill is
unsure whether to make or buy the gluten-free meals.
[Source: © International Baccalaureate Organization 2018]

5a. Define the term supply chain. [2 marks]

Markscheme
The term supply chain refers to a system, a process of organising people,
activities, information and resources to move a product or service from
supplier to customers/end users.
Award [1] if the definition is only partial or considers supply chain as the same
as distribution channel.
Award [2] for a definition similar to the one above, which looks as supply
chain as the whole mechanism of production from raw material purchase to
final delivery.

5b. Calculate: [2 marks]

the total contribution of existing meals sold per month (show all your working).
 Markscheme
The contribution per unit of existing meals = $8 − $5 = $3
Number of meals sold = 800
Total contribution of existing meals sold per month = 800 × $3 = $2400
Award [2] for a correct final answer of $2400 with full working.
Award [1] for a correct answer without working.
Do not credit when only contribution per unit is presented as a final answer.

5c. Calculate: [1
the total profit or loss on existing meals for May 2018 (show all your mark]
working).

Markscheme
TR − TC = profit
$8 × 800 − [$2400 + $5 × 800]
$6400 − [$2400 + 4000]
$6400 − $6400 = 0
Accept any other method of working.
Candidates are not expected to set out their answer in this manner.
Award [1] for a correct answer with working. Candidates do not need to state
that Jill is breaking even. (As the question asks for working)

5d. Calculate: [2 marks]

the forecast profit or loss if Jill decides to make and sell gluten-free meals (show
all your working).
 Markscheme
Contribution = $14 − $10 = $4 per meal
Total contribution = 1200 × $4 = $4800
Total forecast profit = 4800 − (2400 + 400 extra fixed cost for gluten meals)
Total forecast profit = $2000
OR
Profit = TR − TC
Profit = (14 × 1200) − (2800 + (1200 × 10))
Forecast profit = 16800 − 14 800
Forecast profit = $2000
Award [1] if there is one error in calculation, eg forgetting to add the extra
fixed cost component, or the correct answer is given but there is no working.
Award [2] for both the correct answer and clear and suitable working.

5e. Calculate: [1
the contribution per unit of a gluten-free meal if Jill decides to buy-in the mark]
gluten-free meals (show all your working).

Markscheme
The contribution per meal if Jill decides to buy-in = $14 − $8 = $6
Award [1] for the correct answer only with working shown.

5f. Using your answer from (b) (iii) and (iv), explain whether Jill should buy- [2 marks]
in or make the gluten-free meals herself.
Markscheme
Buys in:
1200 × $14 − [2400 + 1200 × $8]
$16800 − [2400 + 9600]
$16800 − $12000
4800 profit
Which is $2800 higher than in (iii) - the cost to make with profit of $2000
Candidates do not have to repeat all of the working above if presented in the
previous answers especially in (b)(iii).
Or:
Buys in:
12000 × $6 − 2400 (using contribution method)
$16800 − [2400 + 9600] $7200 − $2400= $4800 profit
$16800 − $12000
$4800 profit
Which is $2800 higher than the profit of $2000 if she makes them herself in
part (iii).
Accept any other method.
Given the nature of the question regarding reference to (b)(iii) and (iv) it is
expected that the candidates incorporate references to the change in
contribution and or profit
Award [1] for just using the extra contribution to support but without
reference to/ or calculation of profit before and after.
Award [1] for a response that mentions some relevant qualitative issues with
reference to or comparison with the option to make.
Award [2] for a correct numerical answer with some references to the exact
figures of profit before and after.
Do not credit a response that just says that Jill should accept the offer without
any calculation or reference to profit or contribution when buying.
Please note:
Some candidate just referred to a fall in fixed cost- not to contribution or profit.
Do not award.
Do not credit a response that does not demonstrate some attempt to calculate
the option of buying or refer to profit after buying.
Allow OFR
 Designer Dolls (DD)
Designer Dolls (DD) is a start-up business that will create hand-crafted unique
dolls using a job/customized production method. As part of their business plan DD
undertook a breakeven analysis.
Table 1: Forecasted figures for DD for the first year of operation

6a. Describe one limitation of a break-even analysis. [2 marks]

Markscheme
Some of the limitations may include:
The break-even model assumes that all units produced are sold, therefore
total revenue received if not all of the dolls/quantity is sold can be lower,
which will have a negative impact on the break-even point.
The break-even model assumes a linear relationship between output and
total variable cost, whereas in reality the costs per unit can go down due to
economies of scale. This will have a negative impact on the break-even
point.
The break-even model assumes that the price stays constant at all levels of
output. In reality, price can be reduced or increased with direct impact on
the break-even quantity.
Accept any relevant description. There is no need for further explanation of the
exact impact on the break-even point.
Application is not expected.
Award [1] for each relevant identification / list of one limitation of the model.
Award [1] for a description up to a maximum of [2].

6b. Calculate the number of dolls that DD needs to sell to achieve a profit of [2 marks]
$4000 (show all your working).
 Markscheme
Fixed costs + target profit = 10 000 + 4000 = 14 000 = 700 dolls
Contribution per unit = 50 − 30 = 20 [shows that it’s part of given formula]
OR
Profit = total revenue – total cost
4000 = 50X – (10 000 + 30X)
20X = 14 000
The number of dolls needing to be sold to reach a profit of $4000 = 700
Award [1] for working and [1] for the correct answer.
Award a maximum of [2].
For a correct response that demonstrates understanding and application of the
formula, even if no specific headings are presented, award full marks.
Working must be shown for full marks. Accept a graphical calculation of BE if
drawn and stated accurately ie sufficient to extract correct data (do not
penalize labeling errors).

6c. Calculate the capacity utilization rate at the break-even quantity for DD [2 marks]
for the first year of operation (show all your working).
 Markscheme
Break-even quantity = Fixed costs
Contribution per unit
10 000
=
($ 50−$ 30) 20
= 500 dolls
Capacity utilization rate = 500 dolls = 0.55 × 100 = 55.55 %
900 dolls
Accept 55.5% or 55.56%
An alternative method would be:
Total revenue = total costs, where:
total revenue = price × quantity sold
total costs = total fixed cost + total variable costs.
Capacity utilization= 500
900
× 100 = 55.55 %

Accept 55.5% or 55.6%

Do not credit for using the formula as it is given. Do not fully credit if the figure
is not expressed in %.
Award [1] for correct working, which includes the calculations of the
breakeven point and [1] for the correct answer in %. Award up to a maximum
of [2].
If only the correct breakeven is present, then award [1] only if working is
shown.
For a correct response that demonstrates understanding and application of the
formula, even is no specific heading are presented, award full marks.

6d. Calculate the profit or loss in the first year if DD sells 400 dolls (show all [2 marks]
your working).
 Markscheme
Margin of safety times contribution per unit
400 − 500 = (100) × 20 = [$2000]
Do not credit for the calculation of the break-even point but allow OFR even if
correct. It is application of the MOS-BE formula which gets the mark
for workings.
Accept any other relevant method:
Total revenue − total costs
Price × quantity − (total fixed costs = total variable costs)
400 × $50 − [$10 000 = (400 × $30)]
$20 000 − [$10 000 + $12 000]
$20 000 − $22 000
$(2000) = a loss
Award [1] for correct working and [1] for the correct answer. Award up to a
maximum of [2].
For a correct response that demonstrates understanding and application of the
formula, even if no specific headings are presented, award full marks .

6e. Assuming that the quantity of dolls to be sold in the second year is 550 [2 marks]
and costs remain unchanged, calculate the price per doll that DD would
need to charge to make a $6500 profit.

Markscheme
Target profit = total revenue − total costs
$6500 = $550X − [10 000 + ($30 × 550)]
$6500 = $550X − [10 000 + 16 500]
$6500 = $550X − $26 500
$6500 + $26 500 = 550X
$33 000 = 550X
X = $60
Price that DD has to charge is $60.
Accept any other method provided that working is shown.
Award [1] for working and [1] for the correct answer.
Award a maximum of [2].
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