Question 1

Happy Jones is the Facilities Manager for a university. She is considering an opportunity that involves renting food vending machines and placing them in various locations throughout the university. This would allow students and staff to conveniently access a quick range of similarly priced food items for snacking "pick-me-up" purposes. (Assume a non-COVID-19 state of affairs on campus.) As a not-forprofit university, the main aim is to cover all costs. If any profits are made, they will be used to boost student support services. For the purposes of analysing this opportunity, Happy has the following estimates:

Per unit (food item) forecasts:

Average selling price of each food item: $2.00

Average variable cost of each food item: $1.60

Annual fixed cost forecasts:

Rental $12,000

Labour $10,000

Other fixed expenses $2,000

Happy has asked you to undertake a cost-volume-profit analysis of the opportunity.

a) Calculate the contribution per unit and the contribution margin ratio.

b) Calculate the break-even point in number of food items and in dollars of revenue.

c) Calculate the sales (in units) needed to earn a target annual profit of $2,000.

d) The vending machine owner initially offered Happy a fixed rental fee option. However, the owner has since provided another rental agreement option: a $9,000 fixed rental plus 2.5% of revenues from the sale of food items. Calculate the break-even point in units under this option and briefly explain from the university's perspective which rental agreement option might be preferred.

Question 2

You need a new roof on your old home. You employ William, the owner of a sole trader roofing business, to do the job. Although William's quote was the lowest you received, you picked him because he was highly recommended by several friends. You were sure the low quote did not suggest a low quality job. As it turned out, you were right.

William works alone so you chatted with him during lunch breaks to keep him company. During one of these chats, you were surprised to hear that his business was struggling financially, even though William had jobs booked 5 days a week for a year ahead, except for 4 weeks in summer when he wants to take a well-earned break. You thought about that low quote. Was he charging enough to cover all his costs?

The answer became clear when you received William's invoice. It included the correct list of materials, all charged at appropriate, going-rate-in-the-market prices (total $10,000). No obvious problems there. It was the other item on the invoice - labour - that suggested a problem. William had charged the correct amount of hours (total 80 hours = 8 hours per day, 5 days per week for 2 weeks) but at only $30 per hour! Clearly such a low rate could only be the direct labour rate. It seemed that no overheads had been incorporated into that rate, as would normally be the case for 'tradies'. You guess William's overheads would be around $50,000 per year.

You pay the invoice but then decide you want to help William out by explaining how he could apply a job costing approach in the future.

In your explanation to William, you will need to include the following:

a) A brief description of job costing and its purpose.

b) A definition of overheads along with 4 examples of overheads applicable to jobs for William's business.

c) A numerical example applied to your roofing job that derives the full cost of your job. The example should correctly use the information above, provide any necessary formulas and justify any choices. The example should be well presented in a logical order that will be easy for William to follow and understand.