Section 1

On-Time Deliveries Limited, is a regional courier business operating in the North West of England, the business was established in 2015 with a fleet of 8 vans, by two sisters, TJ and MJ (the owners).

Over the last 18 months because of the global pandemic, the company has experienced a significant increase in business and has expanded its fleet from 8 vans to 20 vans.

All of the vans are currently on short-term rental agreements and the drivers are employed on a part-time basis on zero-hour contracts. The company also employs 2 full-time members of staff. One supervises the drivers and the other works in the office alongside TJ and MJ.

TJ and MJ are considering whether to continue to rent the vehicles or purchase them outright, and also whether to move to a model where drivers are employed on a full- time permanent basis.

TJ and MJ have produced two financial projections for 2022. The projection for scenario 1 assumes that the company continues to hire the new vehicles and continues to employ drivers on the current model of zero-hour contracts. The projection for scenario 2 assumes the new vehicles are purchased outright and 22 drivers are employed on full-time permanent contracts.

The projections (included in appendix one) show a significant difference in profitability depending on which model the company operates.

You have been asked by the owners to prepare a report covering the following:- A critical review of their financial projections with advice as to which model should be

adopted. In the report, for each scenario as a minimum you should comment on:-

a) The operational gearing of each scenario b) Break even sales and the margin of safety c) The sensitivity of the projects to changes in the level of sales and also any of

the cost assumptions

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Section 2

The owners have been approached a number of times over the last 12 months by companies asking them to tender for large one off contracts all of which the company has failed to win. The contracts would be over and above the activities reflected in the plans in scenarios 1 and 2 below, the plans are based on the assumption that vans operate at 75% capacity and therefore there is scope to undertake these contracts. The owners believe that the issue is the way that they are pricing the contracts.

The contracts are currently costed using full costing and prices are based on a cost- plus model. The owners are thinking of moving to marginal costing but they are unsure of exactly what this would entail.

The owners have asked for your advice as to the advantages and disadvantages of using a marginal costing model for pricing these contracts when compared to their current approach.

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Section 3

The owners are considering further expansion and have identified an opportunity to buy an established courier business in the South of England. MJ and TJ are unsure about how to evaluate the opportunity from a financial perspective. They have asked you to provide a critical analysis of three investment appraisal techniques that they could consider before actually committing to the investment.

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Appendix one: On Time Deliveries Ltd, Financial Projection for 2022
		Profit per Van				Full Year Forecast
		Scenario 1		Scenario 2		Scenario 1		Scenario 2		Assumptions
						20 Vans are on short term rent, drivers are on zero rate contracts		Assumes 20 Vans are purchased and 22 drivers on permanent full time contracts
Sales		52,260		52,260		1,045,200		1,045,200		Each van operates 52 weeks a year, 5 days a week and makes 30 deliveries a day. This assumes that the vans are running at 75% of their capacity.
Less costs
Fuel		15,600		15,600		312,000		312,000
Driver		22,750		20,000		455,000		440,000
Van Costs		5,000		4,000		100,000		80,000		Includes insurance, depreciation or rental costs and maintenance
		8,910		12,660		178,200		213,200
Other Costs
Office staff						40,000		40,000
Owners salary						80,000		80,000
Insurance						3,000		3,000
Office Rent						15,000		15,000
Other						3,000		3,000
Profit						37,200 Page 6 of 11		72,200