Contribution analysis and an outsourcing decision AZ Transport Group ple comprises three divisions

— AZ Buses; AZ Taxis; and Maintenance.

AZ Buses operates a fleet of eight vehicles on four different routes in Ceetown. Each vehicle has a capacity of 30 passengers. There are two vehicles assigned to each route, and each vehicle completes five return journeys per day, for six days each week, for 52 weeks per year.

AZ Buses is considering its plans for year ending 31 December. Data in respect of each route is as follows:

Requirements:

(a) Prepare a statement showing the planned contribution of each route and the total contribution and profit of the AZ Buses division for the year ending 31 December. (6 marks)

(b) (i) Calculate the effect on the contribution of route W of increasing the adult fare to £3.75 per return journey if this reduces the number of adult passengers using this route by 20%, and assuming that the ratio of adult to child passengers remains the same. (Assume no change in the child fare.)
(11) Recommend -whether or not AZ Buses should amend the adult fare on route W. (4 marks)

(c) The Maintenance division comprises two fitters who are each paid an annual salary of £15808, and a transport supervisor who is paid an annual salary of £24000.
The work of the Maintenance division is to repair and service the buses of the AZ Buses division and the taxis of the AZ Taxis division.
In total there are eight buses and six taxis which need to be maintained. Each vehicle requires routine servicing on a regular basis on completion of 4000 kilometres: every two months each vehicle is fully tested for safety.
The Maintenance division is also responsible for carrying out any breakdown work, though the amount of regular servicing is only 10% of the Maintenance division’s work.
The annual distance travelled by the taxi fleet is 128000 kilometres.
The projected material costs associated with each service and safety check are £100 and £75 respectively, and the directors of AZ Transport Group ple are concerned over the efficiency and cost of its own Maintenance division. The company invited its local garage to tender for the maintenance contract for its fleet and the quotation received was for £90000 per annum including parts and labour.
If the maintenance contract is awarded to the local garage then the Maintenance division will be closed down, and the two fitters made redundant with a redundancy payment being made of 6 months’ salary to each fitter. The transport supervisor will be retained at the same salary and will be redeployed elsewhere in the Group instead of recruiting a new employee at an annual salary cost of £20000.
Requirements:
(i)
(il)
(iii)
Calculate the cost of the existing maintenance function. (6 marks)
Advise the directors of AZ Transport Group ple whether to award the maintenance contract to the local garage on financial grounds.
(4 marks)
State clearly the other factors which need to be considered before making such a decision, commenting on any other solutions which you consider may be appropriate. (5 marks)
(Total 25 marks)
CIMA Stage 2 Operational Cost Accounting

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Return travel distance (km) Average number of passengers: Adults Children Route Route Route Route W X Y Z 42 36 44 38 15 10 25 20 10 8 5 10 Return journey fares: Adults Children 3.00 6.00 4.50 2.20 1.50 3.00 2.25 1.10 The following cost estimates have been made: Fuel and repairs per kilometre 0.1875 Drivers' wages per vehicle 120 per work-day Vehicle fixed cost per annum General fixed cost per annum 2000 300 000