Exam code: 7132
The data below shows the budgets of a business for a particular year:
Budgeted income: £200m
Budgeted expenditure: £160m
At the end of the year, the actual income was as budgeted but expenditure was 20% higher than the budget.
This means that the actual profit showed:
a favourable variance of £8 million.
a favourable variance of £32 million.
an adverse variance of £8 million.
an adverse variance of £32 million.
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The data below applies to Product X.
Fixed costs = £8000
Selling price = £10
Variable costs per unit = £6
Total contribution from current level of output = £10 000
Calculate the margin of safety for Product X at its current level of output.
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Biggs Ltd
Biggs Ltd operates in the snack food market, selling crisps, nuts and other savoury products. Potatoes are a key ingredient in its snacks. The price of potatoes has risen by 35% over the last two years.
The company is one of six firms who dominate a market that has been growing strongly for ten years. The market growth is largely due to the development of new snacks designed for children. However, Biggs Ltd’s market share has been falling since 2019.
Biggs Ltd plans to launch a completely new range of products in 2024. It will promote this by sponsoring a major televised sporting competition which has children and families as its audience.
Appendix A Extract from Biggs Ltd’s recent financial statements
2023 | 2022 | |
Revenue | 47 569 | 46 994 |
Gross profit | 22 289 | 22 820 |
Operating profit | 4 650 | 4 701 |
Payables | 5 056 | 5 221 |
Appendix B Labour productivity for Biggs Ltd and the snack food industry average (shown as an index number, base year = 2017)
Year | Biggs Ltd | Industry average |
2020 | 104.2 | 104.3 |
2023 | 100.3 | 105.9 |
Appendix C Marketing expenditure as a percentage of revenue, 2020–2024*
* 2024 based on Biggs Ltd’s forecast.
Appendix D Results of market research conducted with families on Biggs Ltd’s new product range and the promotional campaign
Survey question | Average survey score by age group | ||
6 to 16 years | 17 to 35 years | 36 years and over | |
I will definitely try the new products when they are available. | 9.9 | 7.2 | 1.8 |
The promotional campaign improves my view of Biggs Ltd’s brand. | 8.3 | 6.3 | 8.0 |
I frequently consume snack foods at sports events. | 8.9 | 6.9 | 2.7 |
Scale: 10 = strongly agree, 5 = neither agree nor disagree, 0 = strongly disagree | |||
Source: Data from 27 interviews with families, conducted by Biggs Ltd in 2021.
Appendix E Percentage of snack products bought and consumed by different box age groups
Results from a recent survey of 3000 respondents conducted by an independent market research firm.
Using the information provided, explain one reason why Biggs Ltd’s gross profit margin for 2023 fell to 46.9%.
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Figure 1 shows a break-even chart.
Statement 1: ‘At 50 units of output, the distance between c and d shows the level of fixed costs.’
Statement 2: ‘At 50 units of output, the distance between c and e shows the total contribution.’
Read statements 1 and 2 and select the correct option from the following:
Statement 1 is true. Statement 2 is true.
Statement 1 is true. Statement 2 is false.
Statement 1 is false. Statement 2 is true.
Statement 1 is false. Statement 2 is false.
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Statement 1: ‘An increase in rent paid by a business will have no effect on its gross profit.’
Statement 2: ‘An increase in tax on a business’s profit will have no effect on its profit for the year.’
Read statements 1 and 2 and select the correct option from the following:
Statement 1 is true. Statement 2 is true.
Statement 1 is true. Statement 2 is false.
Statement 1 is false. Statement 2 is true.
Statement 1 is false. Statement 2 is false.
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The diagram below shows a breakeven chart.
The business produces and sells 10 million units of output. Price rises from £5 to £9. As a result, profit changes:
from minus £10m to £30m.
from minus £10m to £40m.
from £10m to £30m.
from £10m to £40m.
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Evaluate the extent to which the actions of the finance function of a business can help that business to achieve the lowest cost in its market.
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Statement 1: ‘Total revenue – profit = Total contribution + fixed costs’
Statement 2: ‘(Selling price x quantity) – fixed costs = Profit + variable costs’
Read statements 1 and 2 and select the correct option from the following options.
Statement 1 is true. Statement 2 is true.
Statement 1 is true. Statement 2 is false.
Statement 1 is false. Statement 2 is true.
Statement 1 is false. Statement 2 is false.
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Bell Ltd
Bell Ltd is a UK-based food manufacturer with 27 branded products in three main markets:
sweets
snacks
drinks.
The company has been very successful over many years, increasing its market share in each market. It has responded to market changes by investing in the development of new products such as low-sugar and vegetarian ranges. It monitors the sales and costs associated with each of its brands.
100% of shares in Bell Ltd are owned by four members of the Bell family who also have management roles in the business. The owners feel long-term strategic decision making at the company is more effective than if it was a public limited company.
Bell Ltd actively manages the trade credit offered to retailers who buy its products, such as chasing any overdue payments and minimising the period of credit it offers to them. By building long-term relationships with suppliers, it has secured favourable credit terms from them.
Speckles is produced by Bell Ltd and used to be a leading brand of sweets in the UK. In terms of the Boston Matrix, Speckles is now a ‘dog’. It was recently announced that Speckles would be discontinued. A social media campaign against this decision claimed that Speckles was an iconic brand from people’s childhoods and should be saved.
Table 1 Financial data for the Speckles brand
Year | 2019 | 2020 |
Sales revenue (£’000) | 40 | 20 |
Cost of sales (£’000) | 25 | 16 |
Gross profit (£’000) | 15 | 4 |
Calculate the Gross Profit Margin for Speckles in 2020.
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Bell Ltd
Bell Ltd is a UK-based food manufacturer with 27 branded products in three main markets:
sweets
snacks
drinks.
The company has been very successful over many years, increasing its market share in each market. It has responded to market changes by investing in the development of new products such as low-sugar and vegetarian ranges. It monitors the sales and costs associated with each of its brands.
100% of shares in Bell Ltd are owned by four members of the Bell family who also have management roles in the business. The owners feel long-term strategic decision making at the company is more effective than if it was a public limited company.
Bell Ltd actively manages the trade credit offered to retailers who buy its products, such as chasing any overdue payments and minimising the period of credit it offers to them. By building long-term relationships with suppliers, it has secured favourable credit terms from them.
Speckles is produced by Bell Ltd and used to be a leading brand of sweets in the UK. In terms of the Boston Matrix, Speckles is now a ‘dog’. It was recently announced that Speckles would be discontinued. A social media campaign against this decision claimed that Speckles was an iconic brand from people’s childhoods and should be saved.
Table 1 Financial data for the Speckles brand
Year | 2019 | 2020 |
Sales revenue (£’000) | 40 | 20 |
Cost of sales (£’000) | 25 | 16 |
Gross profit (£’000) | 15 | 4 |
Analyse how Bell Ltd’s cash flow is improved by the way it manages its payables and receivables.
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The table below shows data from a company’s accounts.
Item | £ (million) |
Cost of sales | 4 |
Other expenses | 3 |
Sales revenue | 12 |
Taxation | 2 |
The company’s operating profit is
£3 million.
£5 million.
£6 million.
£8 million.
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The diagram below shows the original breakeven chart for a product.
The product’s fixed costs then decrease and its variable costs per unit increase such that, at its current output of 100 units, the total costs are still the same, as shown by point X.
Which one of these statements is correct?
Its break-even output falls and its margin of safety increases.
Its break-even output increases and its margin of safety falls.
Its break-even output and its margin of safety remain the same.
Its break-even output remains the same and its margin of safety increases.
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The table below shows a company’s budgeted income and expenditure for 2019.
Income | £80 million |
Expenditure | £70 million |
At the end of the year the actual income and expenditure are as follows:
income is 5% below the budgeted figure
expenditure is 10% higher than the budgeted figure.
Calculate the profit variance and state whether it is adverse or favourable.
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Figure 3 shows a break-even chart.
Two changes take place:
there is a fall in the cost of raw materials
the business increases the selling price of the product.
Draw two new lines on Figure 3 to show how these changes might affect the break-even chart.
Label the new total revenue line TR and label the new total cost line TC.
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Read the case study in the Insert.
Analyse two possible reasons why Mike introduced a budgeting system for DWS Ltd in 1991.
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Which one of these changes would lead to an increase in the level of output needed to break-even?
A decrease in
fixed costs.
margin of safety.
unit selling price.
variable costs per unit.
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The table below shows an extract from a business’s annual budget.
Budget information for Company X for year ending 31 March 2018
Budgeted (£m) | Actual (£m) | |
Income | 125 | 114 |
Expenditure | 98 | 85 |
Profit | 27 | 29 |
Based on these data, which of the following statements is true?
Income variance was adverse and profit variance was favourable.
Income variance was favourable and profit variance was adverse.
Expenditure variance was adverse and profit variance was adverse.
Expenditure variance was adverse and profit variance was favourable.
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Global Airways (GA)
Cabin crew are staff on an airplane who look after the passengers. The managers of Global Airways (GA) have recently proposed new pay levels for cabin crew who join the company from January 2019. Their pay would be lower than the cabin crew already employed by the company. This is part of an effort by GA to cut costs to enable the business to be more price competitive in response to aggressive price cuts by rivals. GA managers believe that cutting the price of its tickets can help to increase the airline’s operating profit margins on its flights.
A trade union, called UAS, represents many of the cabin crew staff. UAS has complained about the proposed pay levels. There has been one meeting so far between the UAS and senior management about the proposal. Managers want the pay deal to go ahead, UAS does not.
Since the meeting:
UAS is considering whether to advise GA’s cabin crew that they take strike action
the managers of GA have arranged to lease planes and use crew from another airline if needed. Managers believe that with these contingency plans GA could operate over 99% of its normal flight schedule
the managers have undertaken new research (Appendix G).
Appendix G New research for GA’s management
Income elasticity of demand for GA flights: +1.5
Estimated annual income changes of GA’s target market 2018–2020: –2%
Cabin crew membership of UAS union has increased this year to 65%
GA is considering cutting the price of its tickets. Explain how this might increase its operating profit margin on each ticket sold.
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Figure 2 below contains data on the costs of producing a given product.
Figure 2
Output (units) | Total costs (£) |
0 | 40 |
1 | 80 |
2 | 110 |
3 | 150 |
Calculate the total variable costs of producing 3 units of output.
£30
£40
£100
£110
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Explain how the use of break-even analysis might help an entrepreneur make decisions about the start-up of a new business.
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Read the case study in the Insert.
Most journalists blamed the fall in KMH plc’s profits on either a failure to control costs or a slowdown in the growth of the global economy. Which of these two reasons do you think is the main cause? Justify your answer using information from the case study and Table 2 in Appendix C.
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