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7115 · 4.1

Production of goods and services — practice questions

Practice and worked examples for 7115 Production of goods and services. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Bakery buys flour, sugar, and packaging for $2 per loaf. Sells loaves for $5. Calculate value added per loaf and explain what it must cover.

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Value added = 5−5 − 2 = $3 per loaf.

This $3 must cover:

  • Labour (bakers, shop staff)
  • Overheads (rent, ovens, utilities)
  • Profit

If energy costs rise, value added unchanged but profit squeezed unless price rises — link to 5.4 costing and 5.3 cash flow.

Worked example 2

AutoFix garage charges a customer $300 for a standard car service. The total cost of the parts used (oil, filters, spark plugs) was $90. Calculate the value added by AutoFix for this service and explain its significance.

Show solution outline

Step 1: Identify the formula for value added. Value Added = Selling Price − Cost of Bought-in Materials

Step 2: Substitute the given values into the formula.

  • Selling Price = 300300
  • Cost of Bought-in Materials = 9090

Step 3: Calculate the value added. Value Added = 300−300 - 90 = **210∗∗210**

Significance: The $210 value added is the wealth created by the garage's service. It is not pure profit. This amount is used to cover the business's other costs, such as:

  • Labour costs: The wages of the mechanic who performed the service.
  • Overheads: Rent for the garage, electricity, heating, and depreciation of tools and equipment.
  • Profit: The amount remaining after all other costs have been paid.
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