5.5 Towards the end of 20X0 Marcel purchased a plot of land, known as Lake Rise, on which he proposed to build, for sale, a number of houses. His architects drew up the following plan:

The following estimates were made of the revenue and costs for this development:
Revenue £
£
£
Detached houses Bl 380,000 B2 340,000 720,000 Semi-detached houses A1 240,000 A2, A3, A4 - 3 @ £260,000 780,000 A5 200,000 A6, A7, A8 - 3 @ £220,000 660,000 1,880,000 2,600,000 Costs Purchase of land (including legal expenses) Levelling of land Roads and services Construction costs Semi-detached houses 8 @£60,000 Detached houses 480,000 600,000 100,000 300,000 2 @£110,000 220,000 700,000 Selling expenses General promotional expenses Commission to estate agents 40,000 (10 per cent of selling price)
260,000 300,000 2,000,000 Estimated profit on the development £600,000 Marcel has a number of other developments on hand and he employs a small number of ‘head office’ staff including the architects. Marcel’s architects were fairly hard pressed with work on existing projects and so when the Lake Rise development appeared, Marcel was persuaded to engage an additional architect at a salary of £30,000 per annum. Marcel’s chief architect’s argument was that although the Lake Rise development would not, in itself, use up the whole time of the new man, his employment would mean that the quality of the work on the other projects could be improved. In addition, the new man would be very useful when work started on a major new development which was expected to start in 20X2. Accordingly, a new architect was engaged on 1 January 20X1.
The levelling costs referred to above were mainly caused by the need to remove a small hillock on the site of house Bl.
Work started on the Lake Rise development in January 20X1 and by the end of 20X1 the following payments had been made:
£
Purchase of land 600,000 Levelling of land (completed) 120,000 Roads and services (uncompleted) 200,000 Construction costs B1 (completed)
B2 (uncompleted)
A3 (completed)
A4 (completed)
A8 (uncompleted)
General promotional expenses Agents’ commission B1 38,000 A4 26,000 Damaged caused to a neighbour’s property due to a mishap with a bulldozer (not covered by insurance) 5,000 During 20X1 Marcel sold B1 and A4 for the original estimated prices. By the end of 20X1 Marcel was running short of cash and so in order to sell the other completed house, A3, quickly he offered to pay the purchaser’s legal expenses. He sold A3 on these terms at the end of 20X1 and the purchaser’s legal expenses are estimated to amount to £1,000.
Discuss the problems involved in estimating Marcel’s profit and loss for 20X1 on the Lake Rise development. In your answer you should attempt to provide at least one estimate of Marcel’s profit or loss.
£
120,000 40,000 70,000 60,000 20,000 * 30,000 64,000

Transcribed Image Text:

High Street A1 A2 | A3 A4 B1 I A5 A6 A7 A8B2 Railway line Playing fields (not to scale)