Contents

• This report is based on the following requirements -
• Case study
• You are the owner of an automobile repair shop that buys and sells second hand cars, as well as offering regular routine maintenance and repair services
• Assignment tasks – All tasks are equally weighted
• Task 1
• You recently bought a number of second-hand cars for £6,000 and you intend to repair them in order to sell them at a higher price. The mechanic in charge of these repairs has asked you and you agreed to purchase a number of spare parts for these repairs. These parts cost a total of £540.
• You have asked the mechanic and his assistant, who are employed on a full-time permanent contract, to spend 6 hours for each car, in order to complete the necessary repairs on them. The garage is currently working under capacity because of the increasing competition from two new repair shops, recently opened nearby.
• The labour cost is £60 per hour, when the mechanics repair second hand cars. When pricing second hand cars, the store’s policy is to add a mark-up of 40% to all the outlay and opportunity cost associated with the car.
• a) Based on the above information, point out which types of costs are relevant and which ones are irrelevant when seeking to identify a minimum re-sale price for the cars.
• b) Taking into account this information, recommend a re-sale price for the cars. You should justify your answer in detail.
• Task 2
• You also plan to launch a new service to collect and repair customers’ cars within a 20 miles radius of the shop. For this service, you plan to charge a flat fee of £72. On average, it is expected that the variable costs of the service will be £24 and the annual fixed costs associated with this service will be £6,000.
• a) Explain in detail what is meant by breakeven analysis and critically analyse its benefits and limitations in informing business decisions. You should use appropriate conceptual terms and diagrams to support your answer.
• b) Calculate the breakeven level of activity for the car collection and repair service.
• Task 3
• As part of the process of identifying the fixed costs of the collection and repair service, the garage’s accountant carries out a full costing exercise in order to allocate an appropriate overhead cost to the new service. Provide a critical discussion of the concepts of absorption costing and activity based costing, evaluating the merits and demerits of each approach to full costing within a multi-product environment.

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