Answer Sheet 17

REVIEW QUESTIONS

Pepper Publishing still produces magazines, despite your attempts to bankrupt it. It is producing a new
title for children called ‘Digger the Dog’. It has fixed costs of £10,000 per issue. The variable costs of
producing ‘Digger the Dog’ are £0.50 per copy. The price that the magazine sells for is £3.

1. Explain what is meant by a fixed cost. Use the words cost and output in your answer. (1 mark)
A fixed cost is a cost which does not change as the output of the business changes. The rent of a factory will be the same
whether Pepper produces 100 or 1,000 magazines. It is a fixed cost.

2. List two costs that would be fixed for Pepper Publishing when it produces ‘Digger the Dog. (2 marks)
The wages of the managing director will be a fixed cost.
The repayments on a bank loan to buy a new machine would be a fixed cost.

3. Explain what is meant by a variable cost. Use the words cost and output in your answer (1 mark)
A variable cost is a cost which increases as output increases and falls as output falls. If ink for
the magazines costs 12p per copy, this cost will rise as Pepper prints more magazines.

4. List two costs that would be variable for Pepper Publishing in producing Digger the Dog. (2 marks)
The paper that Pepper uses for the magazine would be a variable cost.
The staples or glue used to attach the pages together would be a variable cost.

5. Work out the total cost of production if Pepper produces:

a) 1,000 copies of ‘Digger the Dog’ (1 mark)

a Fixed cost = £10,000 Variable cost = (1,000 x £0.50) = £500 Total production cost = £10,500
b b) 5,000 copies (1 mark)
Fixed cost = £10,000 Variable cost = (5,000 x £0.50) = £2,500 Total production cost = £12,500
6. What is the average cost (total cost divided by output) of producing the magazine if Pepper produced:
a) 1,000 copies (1 mark)
Total production cost = £10,500 divided by output of 1,000 gives an average cost of £10.50

b) 5,000 copies (1 mark)

Total production cost = £12,500 divided by output of 5,000 gives an average cost of £2.50

7. Explain what is meant by sales revenue (2 marks)

Sales revenue (sometimes called total revenue or total sales revenue) is the amount of money coming into a business from
the sales of its product. It is calculated by price x sales. If Pepper sold 10,000 magazines at £2.50 each, its sales revenue
would be 10,000 x £2.50 = £25,000

8. What would be Pepper’s total sales revenue if they sold

a) 1,000 copies (1 mark)
1,000 x £3 = £3,000
b) 5,000 copies (1 mark)
5,000 x £3 = £15,000

© Holdsworth Associates
9. Pepper can produce a maximum of 10,000 copies of Digger. Use graph paper to draw a break-even
graph that has costs and revenues on the y-axis going up to £30,000 and output on the x-axis going
up to 10,000. Make sure that the axes are labelled. (3 marks)
10. Plot fixed costs, total cost and total sales revenue on the graph. (3 marks)
11. Identify the break-even output of production. (1 mark)
12. How much profit will Pepper make if it sells all 10,000 magazines? (1 mark)
Total cost of production: Fixed costs of £10,000 + variable costs of £5,0000 = £15,000
Total revenue from sales = £30,000 Profit is £30,000 - £15,000 = £15,000
13. Pepper decides to change the price for the next issue. Its costs are the same, and it produces 10,000
copies. If it wants a profit of £1.70 per issue, what price should it charge? (2 marks)
Average cost of production = £1.50 + unit profit of £1.70 = £3.20.

14. What name is given to this type of pricing policy? (1 mark)

Cost-plus pricing
15. Explain how Pepper could use a:
a) Penetration Price (2 marks)
Pepper would charge a very low price for the first issue of the magazine. This would persuade
many parents to buy a copy. Pepper would then increase the price for issue 2.

b) Market Skimming Price (2 marks)

If Pepper expected Digger the Dog to be a very popular magazine, it could charge a very high
price. Pepper would know that competitors would soon bring out a rival version of their own.

c) Market Orientated Price (2 marks)

Pepper would do a lot of market research, and try and find out what customers would be
prepared to pay, and how much competitors were charging for similar magazines,

16. Explain how Pepper could use direct and indirect advertising in promoting their product. (2 marks)

Pepper could use direct advertising by obtaining a mailing list of parents who have children of
the target age. Promotional material could be sent explaining the educational value of the
magazine and giving some incentive for them to buy the magazine. Pepper could use indirect
advertising by using television, radio or magazine adverts to publicise the magazine. They
would reach more people this way, but it would not be as targeted as using direct mail.

17. Explain two ways in which Pepper could distribute their magazine. (2 marks)
Pepper could distribute Digger the Dog through wholesalers and newsagents. They would send
many copies to the wholesaler who would break bulk, hold stocks, and distribute to small
newsagents. Pepper could also distribute the comic by sending it directly to readers through the
post. People who take magazines in this way often pay for a year’s issues at once. This would be
good for Pepper’s cash flow

18. Identify 4 characteristics of Digger the Dog’s target market. (2 marks)

Pepper’s target market for Digger the Dog would be parents of young children. They would
probably be aged between 20 –35. It would usually be the mother of the children who chooses
which comic they would buy. Children would also be part of the target market, as parents will
often allow the child the choice of a comic. They would probably be in the 3 –5 age group, and
be influenced heavily by what they see on television.

© Holdsworth Associates