Larch Cycles makes commuter bicycles. Its objective is to raise annual operating profit while keeping delivery within five days. It currently sells 4,000 bicycles a year at £500 each. Variable cost is £300 per bicycle and annual fixed costs are £600,000. The factory can make 5,000 bicycles a year.
Option A is a £50 price reduction. Market research predicts annual sales of 4,800 bicycles. Variable cost and fixed costs would stay unchanged. Option B is a £40,000 annual training programme. Price and sales would stay unchanged, but variable cost would fall to £280 per bicycle. The estimates assume no other changes. Only one option can be chosen.
Larch Cycles: forecast annual figures
Measure
Current
Option A
Option B
Selling price
£500
£450
£500
Sales
4,000
4,800
4,000
Variable cost per bicycle
£300
£300
£280
Annual fixed costs
£600,000
£600,000
£640,000
a Calculate the price elasticity of demand implied by Option A, using the original price and quantity as percentage bases. Give a signed answer and show working.
4 marks
b Explain one way the training programme could improve Larch Cycles’ productivity.
4 marks
c Assess whether Option A would help Larch Cycles achieve its objective.
8 marks
Pearson Edexcel A-level Business 9BS0
A full recommendation, with a reason to choose
Paper 1: 20-mark choice question
Specification
1.2.4 Price elasticity of demand; 1.4.2 Training
Marks
20
Suggested time
25 minutes
Calculator
Allowed
Larch Cycles makes commuter bicycles. Its objective is to raise annual operating profit while keeping delivery within five days. It currently sells 4,000 bicycles a year at £500 each. Variable cost is £300 per bicycle and annual fixed costs are £600,000. The factory can make 5,000 bicycles a year.
Option A is a £50 price reduction. Market research predicts annual sales of 4,800 bicycles. Variable cost and fixed costs would stay unchanged. Option B is a £40,000 annual training programme. Price and sales would stay unchanged, but variable cost would fall to £280 per bicycle. The estimates assume no other changes. Only one option can be chosen.
Larch Cycles: forecast annual figures
Measure
Current
Option A
Option B
Selling price
£500
£450
£500
Sales
4,000
4,800
4,000
Variable cost per bicycle
£300
£300
£280
Annual fixed costs
£600,000
£600,000
£640,000
Question Evaluate the two options and recommend which Larch Cycles should choose to achieve its objective.
20 marks
More questions
9BS0/01 · 1.1.1 · Calculator allowed · 4 marks
Market share
A café’s annual sales are £180,000 and its town market is worth £1.2 million. Calculate its market share. Show your working.
Measure
Annual sales
Café
£180,000
Town market
£1,200,000
9BS0/01 · 1.2.4 · Calculator allowed · 4 marks
Elasticity and revenue
Calculate the gym’s PED using the original fee and membership as bases. Explain the implication for monthly revenue.
Measure
Before
After
Monthly fee
£40
£44
Members
800
600
9BS0/01 · 1.4.4 · 4 marks
Explain motivation in context
A bicycle workshop gives experienced staff responsibility for checking completed bicycles. Explain one way this could increase motivation using Herzberg’s theory.
9BS0/02 · 2.2.3 · Calculator allowed · 4 marks
Read and calculate break-even
A candle maker has £3,000 monthly fixed costs. Each candle sells for £15 and has £9 variable cost. Use the chart and calculate break-even output. Show working.
9BS0/02 · 2.1.4; 2.3.1 · 4 marks
Profit is not cash
A furniture maker records £30,000 credit sales and £20,000 costs this month. Customers will pay next month, but £15,000 supplier bills are due now and opening cash is £3,000. Explain why it can be profitable yet unable to pay suppliers.
Cash-flow item
This month
Opening cash
£3,000
Cash received from those credit sales
£0
Supplier cash payments due
£15,000
9BS0/02 · 3.3.2 · Calculator allowed · 4 marks
Payback with the assumption visible
An oven costs £60,000. Calculate payback in years and months from the net cash inflows. Assume inflows accrue evenly within each year.
Year
Net cash inflow
1
£20,000
2
£25,000
3
£30,000
9BS0/03 · 4.2.1 · 8 marks
Assess a reason for overseas entry
A UK luggage maker’s home sales are flat. Demand in a proposed overseas market is growing by 12%, but distribution adds £15 per suitcase and the firm has little local brand recognition. Assess whether market growth is a sufficient reason to enter.
9BS0/02 · 3.3.2 · Calculator allowed · 4 marks
Average rate of return
A machine costs £40,000 and generates £52,000 total net cash inflows over four years. Assume no residual value. Calculate ARR using average annual profit divided by initial investment.
