Impact of a Fat Tax on Financial Performance (Worked Answer to AQA Grade Booster 2019: 9 Mark Question)

Here is a worked answer to the 9-mark question in AQA Grade Booster 2019 on the potential impact of a "fat tax" on the financial performance of Domino's Pizza.

Domino’s may be affected by the introduction of a “fat tax” in the UK. Analyse how such a tax might affect the financial performance of the business (9 marks).

If introduced, a fat tax would increase the selling price of a pizza, assuming that Domino’s decided to pass on the increased cost onto customers in full or in part. Since demand for pizza is said to be price-elastic, a rise in the selling price of pizza as a result of the fat tax might be likely to reduce the quantity demanded by customers, thereby reducing the sales volume of each Domino’s outlet and also the contribution achieved, damaging financial performance. The fat tax increase in the selling price would not be kept by Domino’s as this is a tax which is collected by Domino’s and then paid over to the government, so revenues would not rise even though the selling price is higher. Of course Domino’s might decide not to change its selling prices and, instead, effectively add the fat tax to its variable costs per pizza. Consequently, Domino’s gross profit margin would be likely to fall, however by keeping the selling price the same it might be able to gain market share from competitors who decide to add the fat tax to their selling prices, thereby increasing sales revenue and potentially increasing overall profit (if the higher market share can be maintained).

Note: there is no "plural" in the question, so we have assumed here that one developed argument in context would be sufficient to reach level 3 of a mark scheme.