extra_a - Answers to questions for Chapter 9 Measuring...

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Answers to questions for Chapter 9 Measuring relevant costs and revenues for decision-making Answer to question 9.1 (a) Company gross profit % 5 38% (£3268 / £8600 3 100) Therefore Division 5 gross profit % 5 19% Division 5 sales 5 £860 000 (10% 3 £8.6m) Division 5 gross profit 5 £163 400 (19% 3 £860 000) Division 5 contribution 5 £479 400 (£316 000 1 £163 400) The situation for the year ahead if the division were not sold would be as follows: Contribution 5 £527 340 (£479 400 3 1.1) Less avoidable fixed costs 5 £455 700 [£316 000 1 (£156 000 2 £38 000)] 3 1.05 Add contribution from other divisions 5 £20 000 ––––––– Expected profit £91 640 If Division 5 were sold, the capital sum would yield a return of £75 400. Therefore the decision on the basis of the above information should be not to sell Division 5. (b) Other factors that should influence the decision include: (i) The need to focus on a longer-term time horizon. A decision based solely on the year ahead is too short and ignores the long-term impact from selling Division 5. (ii) The impact on the morale of the staff working in other divisions arising from the contraction of activities and the potential threat of redundancies. (iii) Alternative use of the resources currently deployed in Division 5 instead of their current use. (c) If Division 5 is sold, the capital sum would yield a return of £75 000, but a contribution of £20 000 is lost. Consequently, a profit of £55 000 is required. The required contribution is therefore £510 700 (£55 000 1 £455 700) and the percentage increase required is 6.5% (£510 700 / £479 400 2 100%). Answer to question 9.2 (a) Planned/total contribution and profit for the year ending 31 December Route W X Y Z Total (£) (£) (£) (£) (£) Income: Adult 140 400 187 200 351 000 137 280 Child a 46 800 74 880 35 100 34 320 ––––––– ––––––– ––––––– ––––––– 187 200 262 080 386 100 171 600 Variable costs: Fuel and repairs b 24 570 21 060 25 740 22 230 ––––––– ––––––– ––––––– ––––––– Bus contribution 162 630 241 020 360 360 149 370 Specific fixed costs: Wages c 74 880 74 880 74 880 74 880 Vehicle fixed costs 4 000 4 000 4 000 4 000 ––––––– ––––––– ––––––– ––––––– Route contribution 83 750 162 140 281 480 70 490 597 860 ––––––– ––––––– ––––––– ––––––– General administration 300 000 ––––––– Profit 297 860 ––––––– Notes a 52 weeks × 6 days × 5 journeys per day × number of passengers × return fare × 2 vehicles b 52 weeks × 6 days × 5 journeys per day × return travel distance × £0.1875 × 2 vehicles c 52 weeks × 6 days × £120 × 2 vehicles (b) (i) The relevant (differential) items are the return fares and the average number of passengers per journey: Adult (£) Child (£) Existing revenue per journey 45 (15 × £3.00) 15 (10 × £1.50) Revised revenue per journey 45 (12 × £3.75) 12 (8 × £1.50) –– –– Net gain/(loss) nil (3) –– –– The contribution per return journey will decrease by £3.
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This note was uploaded on 10/20/2009 for the course ACCT 333 taught by Professor Shirin during the Spring '09 term at École Normale Supérieure.

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extra_a - Answers to questions for Chapter 9 Measuring...

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