Margin of Safety | Edexcel A Level Business AS

[Maximum number: 8]

Extract A Arditi Tours Arditi Tours is a bus company offering passengers travel between Pristina, in Kosovo, and Tirana, the capital of Albania. The 250 km journey takes about five hours, including a rest break and the formalities at the border crossing between Kosovo and Albania. The route is popular with students travelling to and from university, families who live across the border from one another and tourists. There are four buses every day, in both directions. The buses leave Pristina and Tirana at 05:00, 08:00, 11:00 and 15:00. A ticket for a one-way journey is €15. The price of the ticket includes two pieces of luggage weighing a maximum of 50 kg. Arditi Tours has a reputation for quality, reliability and clean buses. There are several competitors offering the same routes, at various times each day. Demand for travel varies considerably throughout the year, with services operating at full capacity some weeks but less than quarter capacity at others. The break-even point for Arditi Tours in April 2022 was 17 passengers per journey. The price of diesel that the buses use was €1.58 a litre in April 2022 but this price has been rising, leading to higher costs for Arditi Tours. April is a month of average demand for seats.

Extract B Data showing the average number of passengers travelling per day on Arditi Tours services from Pristina to Tirana in April 2022

Table for Question 2.3.2.3d - Margin of safety question 1 — Edexcel A-Level Business AS

Extract B Data showing the average number of passengers travelling per day on Arditi Tours services from Pristina to Tirana in April 2022

Using the data in Extracts A and B, discuss whether Arditi Tours should have been
concerned about its margin of safety in April 2022.

Quantitative skills assessed:
QS1: Calculate, use and understand ratios, averages and fractions
QS5: Calculate costs, revenue, profit and break-even
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.
Knowledge, Application, Analysis, Evaluation - indicative content
- Margin of safety is the difference between output sold and the break-even level
- The break-even point is 17 passengers, giving a margin of safety of two passengers because the actual average number of passengers travelling from Pristina to Tirana is 19
- Arditi Tours only had 15 passengers on its 05:00 service and 11 on its 15:00 service on the day of the study
- Therefore, the business would have made a loss on both of those
services
- This could be a concern to Arditi Tours because, if this continued, the business may not be able to pay its fixed costs
- However, based on the study, Arditi Tours had a margin of safety of eight passengers when spread over the whole day
- This means that Arditi Tours could afford to have up to eight passengers fewer and still make a profit
- As demand varies throughout the year, Arditi Tours may not need to be
concerned with a low/no margin of safety in some months because it
may be higher in other months

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-2

Isolated elements of knowledge and understanding - recall based.
Weak or no relevant application to business examples.
Generic assertions may be presented.

Level 2

3-5

Accurate knowledge and understanding.
Applied accurately to the business and its context.
Chains of reasoning are presented, showing cause(s) and/or effect(s) but may be assertions or incomplete.
An attempt at an assessment is presented that is unbalanced and unlikely to show the significance of competing arguments.

Level 3

6-8

Accurate and thorough knowledge and understanding, supported throughout by relevant and effective use of the business behaviour/context.
Logical chains of reasoning, showing cause(s) and/or effect(s).
Assessment is balanced, well contextualised, using quantitative and/or qualitative information, and shows an awareness of competing arguments/factors.

Question

Using the data in Extracts A and B, assess whether raising the price of a bus ticket by €1 is likely to be the best way for Arditi Tours to increase sales revenue.

Indicative content

2.3.2.3d - Margin of safety question 1