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.

END OF ASSESSMENT QUESTIONS

APPENDIX ONE ON NEXT PAGE

Page 5 of 11

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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