CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded may
be different.

Coursebook answers
Most of the answers are in ‘outline’ form indicating the appropriate points and skills that learners need
to include in their answers. They provide the necessary guidance to allow learners to develop and extend
the points for a fuller answer that contains the relevant skills. In many instances, there may be other valid
approaches to answering the question.

Chapter 31
Business in context
Learners’ discussion might include:
Importance of knowing costs
• For setting prices.
• To calculate if profit is made.
• To monitor performance and means of control.
• To help with decision-making, e.g. which resources to use.
Importance of breaking even
• To set a target.
• To determine if a service or product is viable.
• To identify the point at which profit is made.

Activities
Activity 31.1
1 Costs Direct Indirect Fixed Variable
Rent of factory ✓ ✓
Management salaries ✓ ✓
Electricity ✓ ✓
Piece-rate labour wages of production workers ✓ ✓
Depreciation of equipment ✓ ✓
Lease of company cars ✓ ✓
Wood and other materials used in production ✓ ✓
Maintenance cost of special machine used to ✓ ✓
make one type of wooden chair

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2 Learners’ answers might include:

• Fixed costs do not vary directly with the level of output in the short term. For example, rent will
not change as output changes – even if the output of chairs and tables is zero, rent still has to be
paid in the short term.
• Variable costs vary directly with the level of output. For example, as labour is paid on a piece-rate
system then, as more is produced, the cost will increase.
• Direct costs such as labour, wood and the maintenance cost of the special machine relate directly
to the production of specific chairs and tables.
• Indirect costs are the overheads involved in running a business and are not directly related to
production. For example, management salaries and the lease of company cars cannot be identified
with a unit of production.
• A cost such as electricity can be viewed in a number of different ways. As electricity is used to
run machinery, as production increases the cost will also increase. However, the cost of lighting is
largely independent of output and therefore fixed.

Activity 31.2
1 & 2 a Purchase of a digger: it will be used on many building jobs.
b Cleaning costs: these are not directly linked to the provision of banking services to customers.
c Tools: the cost is not related to any particular repair job.
d Cost of employees’ canteen: it is not possible to identify with one unit of production.
3 a wood b postage c fuel d cost of bank-clerk time e oil.
4 Learners’ answers might include:
• Identification of direct costs may help set prices.
• Price can be set to at least cover the direct costs and contribute to indirect costs.
• Cost data can be used to help set budgets and these will act as targets for the business.
• Calculating the direct costs of different options will help make decisions about what to produce.
• Direct costs need to be identified if they are to be charged to a cost centre.

Activity 31.3
1 a Average direct cost = (direct labour cost + direct material cost) ÷ output
Pump = 300 000 ÷ 50 000 = $6
Fan = 200 000 ÷ 40 000 = $5
b Total direct costs = $500 000, of which pump = $300 000 and fan = $200 000
Pump: allocated overhead cost = 3/5 × 200 000 = $120 000
Fan: allocated overhead cost = 2/5 × 200 000 = $80 000
c Full cost for pump = 420 000 ÷ 50 000 = $8.40
Full cost for the fan = 280 000 ÷ 40 000 = $7.00
2 It will be used to set price and ensure that costs are covered.
Break-even can be calculated and therefore sales targets can be set.
3 Full costing allocates indirect and direct costs to the products of a business. It enables the cost of
producing a product to be calculated so that a price can be set. This can ensure that all costs are
covered and a profit is made. The business can then set targets for different products. This can be used
to motivate employees. Targets can be used to compare with actual performance and help identify
which products are performing well.
However, in evaluation, how indirect costs are apportioned can be arbitrary. Inappropriate methods
of overhead allocation can lead to inconsistencies between departments and products. Setting a price
based on full costs can result in missing opportunities for sales, e.g. contribution pricing may be more
effective for considering one-off orders.

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Activity 31.4
1 Contribution per guest = price − variable cost = 50 − 15 = $35
2 100 × 35 = $3 500
3 Profit = total contribution − indirect costs
3 500 − 1 000 = $2 500
4 If the hotel refuses the offer, assuming that just 30 guests stay at a price of $50,
profit = 1 500 − (1 000 + 450) = $50.
Accepting the offer makes a contribution of $5 per guest and a total contribution of $250. Therefore,
profit = 250 + 50 = $300.
Evaluation could include clear advice such as: the hotel should accept the offer. However, this depends
on whether the hotel could sell more rooms at above $20 per night during the same week because, if it
can, it would earn a higher contribution from selling more room nights at a price above $20.

Activity 31.5
Learners’ own answers.

Activity 31.6
1 Unit contribution = price less unit variable cost
Y = 30 − 19 = $11
Z = 21 − 19 = $2
2 Total contribution = unit contribution × sales
Y = 11 × 1 000 = $11 000
Z = 2 × 400 = $800
3 Y: total contribution = $11 000. Allocated overheads = 50% of $10 000 = $5 000
Total profit on Y = 11 000 – 5 000 = $6 000
Z: total contribution = $800. Allocated overheads = 20% of $10 000 = $2 000
Total profit on Z = 800 – 2 000 = − $1 200
4 Total profit if Z is produced is 2 500 + 6 000 – 1 200 = $7 300
If Z is dropped, the total profit, assuming no change in sales of X and Y, is:
Total contribution of X and Y less total overheads = 5 500 + 11 000 – 10 000 = $6 500
Stopping production of Z causes a drop in profit of $800 as the contribution made by Product Z is lost
but in the short term there will be no change in overheads.

Activity 31.7
1 Unit contribution = selling price – direct costs = 70 − (25 + 30) = $15
Total contribution = unit contribution × sales = 15 × 1 000 = $15 000
Thus, the local authority order will make a total contribution of $15 000. This will add to the $15 000
of profit, assuming that there is no increase in overheads or knock-on effect on other sales.
2 Relevant points to include in a report include:
For accepting the order:
• There is a positive contribution of $15 000. This will increase profits by $15 000, other things
being equal.
• There is spare capacity on the production line.
• Accepting the order will increase capacity utilisation. This will help control average costs
of production.
• There will be more effective use of fixed assets.
• There may be subsequent orders from the local authority.

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• Accepting the order will increase market share.

Against accepting the order:
• It may be possible to gain other, more profitable, orders. Once the local authority order is
accepted, the business may have to reject other orders from new and existing customers.
• If other customers find out that the local authority has secured a low price, they will try to
negotiate lower prices as well.
• Is there sufficient capacity to fulfil the order? If not, it may cause disruption to other customers.
This will depend on the time period given to fulfil the order.
• Does the order increase overheads?
Evaluation: it is important to recognise that an order that makes a positive contribution is worth
considering. However, it does not follow that the order should be accepted. That will depend on the
other factors outlined above. A suitable judgement might observe that, assuming there is no impact on
overheads, sufficient spare capacity exists and no other orders are anticipated, the firm should accept
the order.

Activity 31.8
1 Repairs Petrol Parts Total
Sales revenue ($) 27 000 300 000 68 000 395 000
Direct costs ($) 24 000 215 000 50 000 289 000
Contribution ($) 3 000 85 000 18 000 106 000
Overheads ($) 60 000
Profit ($) 46 000

2 Learners’ answers might include:

• The repairs division makes a ‘loss’ of $15 000 using full costing. This provides a reason for closing
the repairs division.
• However, full costing involves an arbitrary methodology for apportioning the overheads between
the different profit centres. In this case, the overhead has been apportioned in relation to direct
labour costs. The figures would change substantially if overheads were apportioned according
to direct materials or sales revenue. For example, if apportioned relative to direct materials, the
overhead would only be $2 259 (9 000 ÷ 239 000 × 60 000).
• If a contribution costing approach is adopted, this highlights that the repairs division makes a
positive contribution of $3 000. In other words, the revenue generated covers the direct costs of
the division and contributes to fixed costs. The managing director is wrong to assume that profit
would be higher if the repairs division was closed.
• Other things being equal, if the repairs division was closed, profit would be $43 000.
• It is quite likely that customers having a car repaired may purchase petrol, and parts sales may be
directly linked to repairs. In other words, the other two divisions make sales because of repairs and
revenue could fall by more than $27 000 if the repairs division was closed.
• The repairs division may enhance the reputation of the garage, leading to an increase in sales of
other products.
• Employees would have to be made redundant unless other work could be found for them.
As skilled workers, they may not wish to change jobs.
• Evaluation should include an overall decision together with a consideration of the following points
that would influence that decision: is it possible to use the repairs workspace more profitably?
For example, could the garage increase its number of petrol pumps or could it start selling other
products (e.g. food) as well as petrol?
• If the repairs division closed, what would be the impact on the motivation of employees at the garage?
• Can revenues from the repairs division be increased? Is the price appropriate?
• Can costs within the repairs division be decreased? Are wages at an appropriate level?

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Activity 31.9
1&2 Break-even chart, showing the break-even point and the break-even level of output of 20 000 units:
Break-even point

1 500 000

Variable costs
Costs and revenue ($)

1 000 000 Fixed costs

Total costs
Break-even output
Sales revenue
500 000

0
0 5 000 10 000 15 000 20 000 25 000 30 000 35 000
Output
3 Profit = revenue less costs = 1 350 000 – 1 250 000 = $100 000
4 25 000 – 20 000 = 5 000 units

Activity 31.10
1 Site Break-even: Safety margin: Maximum profit:
Fixed cost ÷ unit contribution Current output − break-even Total revenue − total cost
output
A 60 000 ÷ (6 − 3) 40 000 – 20 000 240 000 – 180 000
= 20 000 units = 20 000 = $60 000
B 80 000 ÷ (6 − 2.50) 50 000 – 22 858 300 000 − 205 000
= 22 858 units = 27 142 = $95 000

2 Learners’ answers might include:

• Site A has a lower break-even output and it will therefore be easier to achieve a level of sales at
which a profit can be made.
• Site B’s break-even level of output is over 10% more than Site A’s.
• Site B has a much greater margin of safety, i.e. sales can be up to 27 142 units below expectation
and they will still break even.
• Site A has a much smaller capacity and therefore, if sales are strong, the firm will have to consider
expanding sooner than at Site B.
• The profit at Site B, assuming all output is sold, is $35 000 greater than at Site A.
• At capacity, the average cost of production at Site A is $4.50 whereas at Site B the average cost is
only $4.10.
• If sales are expected to be above 40 000, Site B will be more profitable. The level of sales at which
profits would be the same can be calculated as follows:
Profit Site A = profit Site B
Let Q = output and sales
6Q – 3Q – 60 000 = 6Q – 2.5Q – 80 000
3Q – 60 000 = 3.5Q – 80 000
0.5Q = 20 000
Q = 40 000

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 valuation: answers could focus on the issues of risk associated with reaching the break-even level of
E
sales. Much will depend on the expected level of sales in the market. If it is above 40 000, Site B offers a
more profitable outcome. A final justification should be given for the advice offered to the business.
3 The business should consider: capital required to start production at each site; the availability of
suitable labour; impact on existing employees; room for expansion; planning issues.

Activity 31.11
1 a Break-even chart showing Option 1 break-even point:
450 000

400 000 Revenue

350 000

300 000 Total costs

Costs and revenue ($)

250 000

200 000

150 000 Break-even point

100 000
Fixed costs

50 000

0
0 2 000 4 000 6 000 8 000 10 000 12 000
Output

The break-even level of output = 4 500 units

Break-even chart showing Option 2 break-even point:
The break-even level of output = 3 000 units
b Option 1: $99 000 350 000
Option 2: $90 000
c Option 1: 2 500 300 000 Revenue

Option 2: 4 000
2 The owner should choose Option 2 250 000
Costs and revenue ($)

because it has a significantly lower Total costs

break-even and higher margin 200 000
of safety. Profit at maximum
capacity is only $9 000 less than 150 000
Option 1. Investment in new
machinery might improve quality 100 000 Break-even point
control. The reduction in wasted
materials makes production more Fixed costs
50 000
sustainable. However, as output
has already reached 5 000 units,
0
Option 2 provides less opportunity 0 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000
for growth. Output

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3 Break-even chart showing new Option 1 break-even point:

300 000
Revenue
Break-even point
250 000 Total costs
Costs and revenue ($)

200 000

150 000

100 000 Fixed costs

50 000

0
0 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000
Output

The break-even level of output = 97 200 ÷ (40 − 22) = 5 400 units

4 a Direct costs might fall because the new machinery will reduce the amount of labour required for
each unit of output.
b 62 000 ÷ (40 − 19.50) = 3 180 units

Exam-style questions
Short answer questions
1 Learners’ answers will vary, e.g. it enables wastage costs to be monitored; to compare budget costs of
production to actual costs of production and allow variance analysis to be conducted.
2 Learners’ answers will vary, e.g. to help make pricing decisions to ensure that price covers costs or
determine the decrease in price for a promotional offer; to help inform decisions regarding product
portfolio, e.g. whether to continue a product line if its costs are rising or revenue is falling.
3 Direct costs are attributable to a specific product or service (e.g. raw materials). Indirect costs are not
easily attributable to a specific good or service (e.g. rent on premises).
4 Fixed costs stay the same regardless of output (e.g. managers’ salaries). Variable costs change in
relation to output (e.g. raw material costs).
5 Full costing includes identifying direct costs of producing a product and allocating a share of
the indirect costs to calculate a full cost. Contribution costing focuses only on the direct costs
of production.
6 Learners’ answers will vary, e.g. allocation of indirect costs is arbitrary and may lead to inappropriate
decisions about pricing; the full unit cost will only be accurate if actual output is the same as that used
in the calculation.
7 Learners’ answers will vary, e.g. to make a decision about whether to accept a one-off order, which
might offer a price less than the full cost price; to make a decision about whether to continue
producing a product if its revenue does not cover the full cost.
8 Learners’ answers will vary, e.g. to inform decisions regarding resource allocation and the size of
production runs; to take corrective action, e.g. to reduce capacity to lower break-even level.
9 a Break-even point = 7 500; b safety margin = 7 500; c fixed costs = $15 000

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10 Learners’ answers will vary:

Set sales targets based on already-agreed profit targets, e.g. a break-even graph might show that if the
profit target is $12 000, a sales target of 15 000 units could be set.
To discontinue a product. If, for example, sales were forecast to be 5 000 units, the graph would identify
a loss and the marketing department may decide, based on further analysis of the product portfolio, to
discontinue the product.
11 Learners’ answers will vary, e.g. it assumes straight lines for variable costs whereas economies of scale
may be achieved as output increases, which could reduce average cost per unit; it assumes price levels
stay the same, e.g. no promotions or discounts offered for bulk buying from customers, but sales
revenue may change if discounts are offered to achieve higher sales volumes.
12 Learners’ answers will vary, e.g. to calculate the break-even number of customers required in the café
each week based on an average spend; to help in setting the price charged for a large group to at least
cover the variable costs.
13 Learners’ answers will vary, e.g. lower fixed costs by moving to cheaper premises; increase price to
increase revenue, assuming demand is not very responsive to price.
14 The amount by which the current output level exceeds the break-even level of output.
15 Learners’ answers will vary, e.g. revenue is forecast based on little or no past data and prices may need
to be changed; variable costs may change if suppliers are changed or decide to change prices.

Essay questions
1 a
Pricing decisions require knowledge of costs to know whether the price will enable profit to be
made. Making profit is the overall objective of most private-sector businesses.
Choosing between different options requires cost information for the business to know whether
financing is feasible. Comparing the cost of different options will also increase the chance of
profitable decisions being made.
b Arguments for: the selling price will be influenced by competitors, e.g. it may have to be lower
if a new competitor enters the economic environment, affecting consumers’ sensitivity to prices.
Therefore, the total revenue line can vary significantly from forecast. Variable costs per unit can
change, e.g. if a supplier lowers or raises prices.
Arguments against: it can produce best- and worst-case scenarios. It helps inform decision-making
and changes can be monitored against forecasts.
Evaluation: it depends on the relative severity of changes in market conditions. Break-even
analysis is useful as a guide, as a decision-making tool and as part of business planning.
2 a Define and give examples of direct and indirect costs. Distinguishing between these two types of
costs is very beneficial in business decision-making, e.g. when setting product prices; when deciding
whether to accept a new order at less than full cost; when deciding whether to stop producing or
selling a particular product which is not, at least in the short term, earning enough revenue to
cover full costs.
b Usefulness: break-even graphs are relatively easy to construct and interpret for a new entrepreneur;
analysis provides useful guidelines on break-even points, safety margins and profit-and-loss levels
at different rates of output.
Limitations: not all variable costs change directly or ‘smoothly’ with output; the revenue line could
be influenced by price reductions made necessary to sell all units produced at high output levels.
It may be difficult for a new business to predict this information accurately. It is unlikely that fixed
costs will remain unchanged.
Evaluation: it depends on the knowledge of the entrepreneur, relative accuracy of market research
findings and market conditions.

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3 a Learners’ answers will vary:

Full costing. When using full costing, a firm allocates all direct and indirect costs between its
products. Direct costs can be relatively easy to allocate (e.g. material costs and direct labour costs).
Indirect costs are more difficult to allocate as they do not arise from the production of a specific
product. Therefore, indirect costs have to be apportioned on the basis of one or more methods of
allocation, e.g. in proportion to a product’s share of total direct costs.
Contribution costing. Contribution costing focuses on the direct costs of production. Indirect
costs are not included. Contribution costing is often used as a basis for decision-making such as
setting prices by multi-product firms; when considering additional orders for a product; when
deciding whether to stop making a product.
b Usefulness of contribution costing:
• It informs decisions regarding special orders, e.g. whether to supply products to a customer at
a lower-than-normal cost.
• It can help make decisions on the product portfolio, e.g. whether to discontinue a line.
• It eliminates the random apportionment of overheads such as head-office costs.
Limitations of contribution costing:
• It ignores the importance of covering overheads to the business as a whole.
• Some products may result in much higher indirect costs than others.
• It is not appropriate when making decisions about expansion or R&D decisions about
new products.
• It may result in decisions which are not in the long-term interests of the business, e.g. to
continue producing a product because it has a positive contribution when a better decision
might be to introduce a new product.
Evaluation: it depends on the ease with which overheads can be apportioned and the type of
decision that a business is making. Qualitative factors are also important, such as the impact of a
decision on employees.

Data response questions

1 Midtown Imperial Hotel
a i  Materials.
ii Apportioning indirect costs to the products, services or divisions of a business.
b i  Full cost = variable cost + additional cost of audio-visual equipment + allocated overhead
= 15 × 100 + 200 + 1 000 = $2 700
$2 700 + 50% = 2 700 × 1.5 = $4 050
ii Contribution = revenue − additional cost of providing the conference
= 2 200 – 1 700 = $500
iii  It helps the hotel’s managers set prices (e.g. for conferences), so that at least the price covers
the direct costs.
c Learners’ answers will vary, e.g. purchase audio-visual equipment if this costs less than regularly
hiring it at $200 per day; cut the direct costs, e.g. self-service instead of delegates being served food
at meal times, or cheaper food ingredients; ask delegates to pay for all drinks.
d Learners’ answers might include:
• A positive contribution of $500 will be made. Therefore, accepting the booking would increase
profits, other things being equal, by $500. If the booking is refused, overheads will not change.
• The booking is at the end of February, a slack time for the hotel. Therefore, it is less likely that
the hotel will be able to book out its facilities at the normal rate.
• Accepting the booking will help ensure that staff are kept busy.
• It will provide work for waiting staff and may help retain their services for other functions.
• The organisation will go to other hotels if the Imperial refuses the booking.

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• The Friends are influential. If the hotel provides a good service, it may lead to further
conference bookings.
• The delegates at the AGM may spend money in other parts of the hotel, e.g. drinks from the bar.
• Is it likely that other groups will find out about the preferential price and therefore be reluctant
to pay the hotel’s normal booking fee in the future?
Evaluation of the advice given should be based on a balanced assessment of both qualitative and
quantitative factors. In this case, perhaps the two major factors are the positive contribution,
which helps pay for indirect costs, and the chance of gaining further conference contracts.
2 Cosmic Cases
a i They would fall.
ii  Costs that are not attributable to the production of a specific product or service, e.g. rent of
premises.
b i  Profit = revenue − total costs: vanity case = 75 000 − 45 000 = $30 000; small suitcase =
72 000 – 47 500 = $24 500; medium suitcase = 20 000 – 22 000 = ($2 000); large suitcase =
37 500 − 30 000 = $7 500
ii  The contribution of each case helps to pay for the total indirect costs of the business and, if
the total contribution exceeds total indirect costs, a profit will be made.
c Learners should define contribution and profit. Basing decisions on the profit made by each
product can lead to decisions that, in the long term, reduce the overall profit made by a business.
If a positive contribution can be made (despite a loss being recorded once indirect costs have been
allocated), this is preferable, as at least the product is contributing to the payment of indirect costs,
which have to be paid anyway.
d Learners’ answers might include:
• Profit with the medium case = $60 000
• Profit without the medium case (assuming no change in sales of other cases or overhead
costs) = $52 000. The reduction in profit is equal to the lost contribution made by the
medium suitcases.
• As some cases are sold as part of a set, withdrawing the medium case may lead to a loss of
sales of other sizes of case. Customers may wish to buy a matching set, so may switch to a
competitor’s product.
• If the medium case is withdrawn, will that impact on material costs due to smaller
order quantities?
• It is possible that withdrawing the medium case could lead to an increase in sales of the
other cases.
Evaluation might include clear advice to Jill and a consideration of: the impact on employees if
production is stopped; whether the equipment can be used to make a product which makes an even
higher contribution; the final decision might depend on the recent trend in sales and revenue as the
data might have been from a non-typical period.
3 Gowri’s Pottery
a i Rent.
ii Variable costs change in relation to output.

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b i Break-even graph showing break-even level of output:

25 000
Revenue
Costs and revenue ($) 20 000

15 000 Total costs

10 000

5 0000
Fixed costs

0
0 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000
Output

Break-even level of output is 2 667 units.

Margin of safety = 5 000 – 2 667 = 2 333 units.
ii  It assumes that variable costs per unit do not change as output varies when, in fact, buying
clay in bulk to make pots might lead to lower average costs per unit.
c One advantage is that the margin of safety increases to 2 666, which means that Option 2 is less
risky, in terms of avoiding making a loss, than either the current situation or Option 2.
One disadvantage is that the expected profit will be lower than either the current situation or
Option 1. Only a profit of $3 200 is forecast compared to $4 000 with a new kiln.
d Learners’ answers might include:
• Although cutting price (Option 2) may increase demand significantly, there is a drop in profits
as the price cut applies to all units sold and consequently the unit contribution is reduced to
only $1.20. This does not achieve the manager’s objective.
• If the estimate of demand is correct, the price cut will increase the margin of safety.
• The price cut does increase sales and will increase market share.
• Purchasing the kiln (Option 1) reduces the direct cost of production to the extent that profit is
higher if sales are as estimated.
• The margin of safety is reduced if the kiln is purchased, due to the higher break-even level
of output.
Evaluation: as the objective is to increase profit, the manager will prefer purchasing the kiln.
However, the success of the investment is dependent on estimated sales being accurate. If the sales
are actually above 3 333 units, the investment will generate more profit than making no change.
4 Abbey Restaurant
a i Increase in fixed costs.
ii The forecast or actual sales above the break-even level of output.
b i Profit = total revenue − total cost
Current menu: sales turnover = $12 000; variable cost = 5 × 600 = $3 000; overheads = $7 000;
profit = 12 000 − 10 000 = $2 000
New menu: sales turnover = 14 × 600 × 1.2 = $10 080; variable cost = 4 × 720 = $2 880;
overheads = $6 000; profit = 10 080 – 8 880 = $1 200
ii  It allows the business to identify the range of output and/or number of customers at which a
profit is made and helps in decision-making if output is less than this range.
c The price is lower (by $6), but the variable cost is only reduced by $1. Therefore, with a lower
contribution per meal, the break-even number of customers will increase by 133 per week.
At the expected level of sales (output), the margin of safety will fall even though there will be more
customers paying $14 than $20. The margin of safety falls to 120 customers per week from 133.

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d Learners’ answers might include:

• Profit from the new menu is $800 less than the current situation.
• Break-even output for the new menu is 133 customers per month more than the current
situation.
• This suggests that the new menu is not a good idea, as profits will fall as the target number of
customers to break even will increase.
• The problem for Phil is that the unit contribution from the new menu is much lower than from
the existing menu: $10 compared to $15. There is a significant reduction in the price charged
and a proportionately smaller reduction in unit variable costs.
• The increase in customers is insufficient to make the new menu more profitable; customer
numbers would have to rise to 800 per month to make the same profit as for the current menu.
• The margin of safety for the current menu is 133 customers compared to 120 customers for
the new menu.
• Evaluation should include clear and justified advice such as: if customer numbers for the
current menu continue to fall, there is a case for changing to the new, lower-priced menu.

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