IB BM HL 3.3.1 Types of cost

[Maximum number: 2]

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.

Explain how the impact of the increase in rent and the forecast increase in sales in 2021 could affect SP's profitability.

SP's profitability will probably increase. The increase in rent will add $14000 to fixed costs. However, if the forecast sales are accurate and prices and costs do not change, then Pam can expect an additional $3000 \times \$ 5$ 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.

IB Business Management HL 3.3.1 Types of Cost Questions

Exam points

IB Business Management HL 3.3.1 Types of Cost Questions question 1