Question
Sock Paradise (SP)
After conducting primary market research, Pam opened Sock Paradise (SP), which sells colourful socks. SP operates a retail stall in a large department store and sells online through its own website.
Table 2 shows selected financial data for SP for 2020.
Table 2: Selected financial data for SP for 2020
At the end of 2020, the department store told Pam that it would increase rent by $\$ 14000$ per year starting on 1 January 2021 . Pam forecast total sales for 2021 as 18000 pairs of socks; other costs and prices were forecast to remain unchanged.
a. State two methods of primary market research.[2]
b.i. Using the selected financial data in Table 2, calculate for SP for 2020 :[2]
the break-even level of output (show all your working).
b.ii.Using the selected financial data in Table 2, calculate for SP for 2020 :[2]
the margin of safety (show all your working).
b.iiiUsing the selected financial data in Table 2, calculate for SP for 2020 :[2]
the net profit (show all your working).
c. Explain how the impact of the increase in rent and the forecast increase in sales in 2021 could affect SP’s profitability.[2]
▶️Answer/Explanation
Ans:
a. Methods of primary market research include:
Focus groups
Observations
Interviews
Surveys/questionnaires
Accept any other correct form of market research. Award [1] for each method identified up to a maximum of [2].
b.i.
$9.00 minus $4.00 = $5.00 = contribution
= 12 000 units
12 000 units is the break-even level of output. Do NOT penalize if missing word, units.
Award [1] for correct method and [1] for correct answer, for a maximum award of [2].
If a candidate uses a correct alternate method, accept. If a candidate only lists the answer but shows no workings, award [1].
If candidate calculates contribution but gives wrong break-even level of output award [1].
b.ii.
Labelling of figures is not required.
15 000 [total sales in units] − 12 000 [break-even level of output] = 3 000 units or pairs of socks.
3 000 units or pairs of socks is the margin of safety.
Award [1] for correct method and [1] for correct answer, for a maximum award of [2]. Apply OFR if candidate uses incorrect answer from b(i).
N.B. deduct one mark in b(i) and b(ii) for use of inappropriate units e.g. $
c.
Actual profit (year 2020)
$9.00 × 15 000 = $135 000 in sales revenue
$50 000 + $10 000 = $60 000 in fixed costs (FC)
$4.00 × 15 000 = $60 000 in variable costs (VC)
Net profit = $135 000 − $60 000 − $60 000 = $15 000
Alternative methods
Net profit = total contribution minus FC (15 000 × $5) − $60 000 = $15 000.
or
Net profit = MoS X contribution per unit = (18 000 − 15 000) × ($9 − $4) = 3 000 × $5 = $15 000
Award [1] for correct method and [1] for correct answer, for a maximum award of [2].
N.B. A break-even chart is not required to be drawn and will gain no marks if presented without the above calculations.
b.iii.
SP’s profitability will probably increase. The increase in rent will add $14 000 to fixed costs. However, if the forecast sales are accurate and prices and costs do not change, then Pam can expect an additional 3000 x $5 in sales revenue ($15 000).
N.B. The actual increase in profit is not required.
Award [1] if the candidates has shown some understanding that profitability is likely to increase. Award an additional mark if in their explanation, they demonstrate some application by using figures from the case study.
N.B. Award [1] if the candidate explains increasing profitability without referring to both rent and sales forecast increases.
N.B. If candidates interpret “profitability” to mean ratios then do not penalize. The explanation would be that profitability decreases from 11.1 % to 9.88 %. For full marks some reference to the figures is necessary.