Business

1. 1.

   Explain why contribution per unit is not the same as profit per unit when a firm has fixed costs.

   [2 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Each sale contributes toward fixed overheads. Only contribution beyond those overheads becomes profit, so using contribution as profit overstates the return before break-even.

   Marking points

   • Contribution equals price minus variable cost per unit.
   • Total contribution must cover fixed costs before any profit remains.

   Examiner tip: State what contribution must cover first.

2. 2.

   Fictional case: price is 30, variable cost 18 per unit and fixed costs 24000. Calculate break-even output and the margin of safety at sales of 2600 units.

   [3 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Fixed costs require 2000 contributions of 12. Forecast sales exceed that threshold by 600, the amount sales could fall before reaching break-even under unchanged assumptions.

   Marking points

   • Unit contribution = 30 - 18 = 12.
   • Break-even = 24000/12 = 2000 units.
   • Margin of safety = 2600 - 2000 = 600 units.

   Examiner tip: Margin of safety is actual or forecast sales less break-even, not fixed cost less revenue.

3. 3.

   Fictional case: an investment costs 50000 now and returns net cash of 18000, 20000 and 16000 at the end of years 1, 2 and 3. Assuming uniform receipts within year 3 for payback, calculate payback and NPV using supplied discount factors 0.91, 0.83 and 0.75.

   [4 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Payback uses undiscounted cash and the explicitly allowed within-year interpolation. NPV separately treats the listed annual flows as year-end flows and discounts each before subtracting initial cost.

   Marking points

   • Cumulative cash after year 2 = 38000; unrecovered cost = 12000.
   • Payback = 2 + 12000/16000 = 2.75 years.
   • Present inflows = 16380 + 16600 + 12000 = 44980.
   • NPV = 44980 - 50000 = -5020 currency units.

   Examiner tip: Do not use discounted cash to calculate ordinary payback.

4. 4.

   Fictional case: launch A yields 80000 with probability 0.6 and loses 20000 with probability 0.4; its separate launch cost is 10000. Launch B gives 30000 for certain before a separate 5000 cost. Calculate net expected values and explain one limitation of choosing the higher value.

   [4 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Weight each possible payoff by probability and deduct each separate cost once. The expected value is a probability-weighted average, not a promised outcome from a one-off launch.

   Marking points

   • A before launch cost = 0.6 * 80000 + 0.4 * (-20000) = 40000.
   • A net expected value = 30000.
   • B net expected value = 25000.
   • A's higher expectation does not guarantee its realised outcome or suit a firm unable to absorb losses.

   Examiner tip: Keep negative payoffs negative when weighting them.

5. 5.

   Fictional case: a firm must choose a quick-payback machine with high maintenance or a slower-payback efficient machine with a higher forecast NPV. Evaluate using payback alone.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Payback is a useful liquidity screen rather than a full return measure. A cash-constrained firm may prefer fast recovery, but one with secure finance should also assess whole-life cash flows and maintenance uncertainty.

   Marking points

   • Indicative: quick recovery can reduce liquidity exposure and forecast risk.
   • Payback ignores cash after recovery and usually the time value of money.
   • Maintenance and later savings can favour the higher-NPV option.
   • A justified decision combines cash constraints, NPV assumptions and operational reliability.

   Examiner tip: Explain what the appraisal method excludes.

6. 6.

   Fictional case: an exporter's proposed expansion has positive NPV using one demand forecast and one exchange rate. Evaluate approving it without sensitivity analysis.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Test changes in the variables that drive cash flows and assess combined adverse scenarios. A small positive NPV may be fragile, whereas a robust project may remain attractive; sensitivity cannot itself assign reliable probabilities.

   Marking points

   • Indicative: positive NPV supports approval only under the model's assumptions.
   • Demand or exchange movements can reduce revenues and alter costs.
   • Sensitivity tests identify which assumptions can reverse the decision.
   • A justified judgement includes downside affordability and scenario interaction rather than treating NPV as certainty.

   Examiner tip: Sensitivity analysis tests assumptions; it does not guarantee forecasts.

Original, unofficial practice questions from SubjectScout — not official past-paper questions.