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On Your Bike has made the following forecasts for the costs and sales of its bikes for 2021 - Edexcel - GCSE Business - Question 5 - 2020 - Paper 1
Question 5
On Your Bike has made the following forecasts for the costs and sales of its bikes for 2021. Table 2 Forecast Total number of bike sales 2,000 Total revenue £1 100... show full transcript
Worked Solution & Example Answer:On Your Bike has made the following forecasts for the costs and sales of its bikes for 2021 - Edexcel - GCSE Business - Question 5 - 2020 - Paper 1
Step 1
Using the information in Table 2, calculate the selling price per bike.
Answer
To calculate the selling price per bike, we can use the formula:
ext{Selling Price} = rac{ ext{Total Revenue}}{ ext{Total number of bike sales}}Substituting the values:
ext{Selling Price} = rac{£1,100,000}{2,000} = £550Thus, the selling price per bike is £550.
Step 2
Using the information in Table 2, calculate the profit On Your Bike is forecast to make from selling bikes in 2021.
Answer
To calculate the profit, we first need to determine the total variable costs and then subtract the total costs from the total revenue:
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Calculate total variable costs:
- Total variable costs = Variable cost per bike × Total number of bike sales
- Total variable costs = £350 × 2,000 = £700,000
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Calculate total costs:
- Total costs = Total variable costs + Fixed costs
- Total costs = £700,000 + £150,000 = £850,000
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Calculate profit:
- Profit = Total revenue - Total costs
- Profit = £1,100,000 - £850,000 = £250,000
Thus, the profit On Your Bike is forecast to make in 2021 is £250,000.
Step 3
Analyse the impact on On Your Bike of reducing costs in order to lower its break even level of output.
Answer
Reducing costs directly affects the break-even point, which is calculated as:
ext{Break-even point (in units)} = rac{ ext{Fixed Costs}}{ ext{Selling Price} - ext{Variable Cost per unit}}When costs are reduced, there are several potential impacts:
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Lower Variable Costs: If On Your Bike reduces the variable cost per bike, the contribution margin (Selling Price - Variable Cost) will increase, leading to a lower break-even point. This allows the company to sell fewer bikes to cover fixed costs, improving profitability during lower sales periods.
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Lower Fixed Costs: Reducing fixed costs can directly lower the break-even point. This can be achieved through measures like negotiating lower rents or reducing staff overheads. A lower break-even means better financial resilience especially if sales fluctuate.
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Strategic Positioning: Cost reduction can enable On Your Bike to offer competitive pricing while maintaining profitability, which may help capture greater market share.
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Impact on Quality: However, if cost reductions compromise quality or service, customer satisfaction might decline, leading to potential long-term revenue losses.
In summary, while reducing costs can lead to a more favorable break-even situation, it is crucial to balance cost management with maintaining product quality and customer satisfaction.