Question $4$

Your friend is a classic car enthusiast. He has a warehouse in which he retained a variety of spare parts for his motor cars. He has now sorted out all the contents of the warehouse and finds that he has the components from which he could assemble a distinctive car. He has decided that that once the car is roadworthy, he will sell it and hopes to make a substantial profit. His estimate is that his selling price will be $10,000$ but is unsure of the calculation of his costs. He will carry out all the necessary work himself.

The bases of his estimates are:

$($i$)$ He plans to use a chassis which he bought for $1,000$ and has no scrap value.

$($ii$)$ A reconditioned engine will cost him $3,750.$ However, he has an old engine which he bought for $2,200.$ It can either be sold in its present condition for $2,500$ or additional parts costing $1,800$ could be purchased to bring the engine to an equivalent standard to the reconditioned one.

$($iii$)$ He needs to buy a set of tyres which will cost $320.$

$($iv$)$ He has sufficient paint in the warehouse. It cost him $300$ in various purchases over the years. But he thinks that it may now be unusable, so he will have to replace it by buying different paint of $425.$

$($v$)$ He has two different gearboxes in the warehouse. One, which cost him $450,$ is probably unsuitable and expects to sell it for $300.$ He will use the other one. It cost him $350$ but needs some work costing $500$ before it is useable.

$($vi$)$ He will get an expert mechanic to test its road worthiness on completion at a cost of $250.$

$($vii$)$ Related overheads are $600$

Required:

$($a$)$ Advise your friend of the likely profit or loss for his project by examining each of the bases for his estimates and deciding on the appropriate amount to include in your assessment.

$(20$ marks$)$

$($b$)$ "Past historical costs may be helpful as a basis for making predictions. However, past costs are always irrelevant when making decisions". Explain your calculations and comments with reference to this quotation.

$(10$ marks$)$

Total $30$ marks