Tony has recently qualified as an Approved Driving Instructor (ADI), and can now choose to work in one of a number of different ways. The two options that have initially attracted him are to take out a franchise with an existing driving school, or alternatively start up his own business. He has done some research in terms of the costs and revenues of each option and these are presented below: Option 1: Take out a franchise with an existing driving school. In order to pursue this option, Tony would have to pay a weekly franchise fee to the driving school of RM314. This is a flat fee and does not change regardless of how many lessons Tony gives in any one week. The lesson price charged would be RM19.50 per hour and this is set by the driving school. Weekly fuel costs vary according to the number of lessons provided but Tony estimates them to be RM50 per week based on 40 hourly lessons. In addition to the fuel costs, Tony will need to take out personal accident and sickness insurance and this is expected to be around RM390 per year. Tony would be classed as self employed and would therefore require an accountant. This would cost RM260 per year. He would also have to buy an 'Approved Driving Instructor' licence costing RM104 per year. The driving school would provide the car and the related insurance, tax and maintenance costs. Option 2: Start up on his own. In this option, Tony would not be able to charge as high a fee as a well known company and has established that the current average price charged is RM16.75. He would need to buy a car and the cost of this would be RM17,056 including interest. He would finance this by a loan repayable over 12 months. The car insurance would be RM364 a year. Car tax would be RM104 per year, and maintenance is expected to cost RM156 per year. The fuel costs would be the same as in option 1 based on a 40 hour week. In addition to these costs, Tony would also require the personal accident and sickness insurance cover, the licence and the services of an accountant. It would be necessary for Tony to advertise his business, and this would cost RM780 per year. Before his training, Tony earned RM17,368 per year and is anxious that he maintains this level of income, and has asked you for advice. You should assume a 52 week year. Ignore the effect of taxation. Dikehendaki/Required: Tony has asked for your help in making his decision and has asked you to consider the following questions: (a) (0) For each option, what would be the required number of lessons per week for him to break even? (3 markah/marks) (ii) How many lessons must he give each week under each option to achieve the level of his previous salary? (3 markah/marks) (iii) Tony has decided that due to family commitments he is unable to work more than 40 hours a week. For option 2, what price must Tony charge in order to maintain this income? (3 markah/marks) (iv) Assuming Tony decides to take out a franchise, by what percentage would fixed costs have to rise by in order for it to become necessary to do one additional lesson per week, but still maintain existing income levels? (3 markah/marks) (b) With reference to the options above, illustrate and explain the term 'margin of safety (3 markah/marks) CIA 1004 (c) Tony is aware that in cost-value-profit analysis all costs are assumed to be linear, but he would like to know more. Outline a further four assumptions inherent in the technique you have used. (5 markah/marks) (d) Outline the key differences between the accountant's treatment of cost behaviour and that of the economist (5 markah/marks) (Jumlah/Total: 25 markah/marks) Tony has recently qualified as an Approved Driving Instructor (ADI), and can now choose to work in one of a number of different ways. The two options that have initially attracted him are to take out a franchise with an existing driving school, or alternatively start up his own business. He has done some research in terms of the costs and revenues of each option and these are presented below: Option 1: Take out a franchise with an existing driving school. In order to pursue this option, Tony would have to pay a weekly franchise fee to the driving school of RM314. This is a flat fee and does not change regardless of how many lessons Tony gives in any one week. The lesson price charged would be RM19.50 per hour and this is set by the driving school. Weekly fuel costs vary according to the number of lessons provided but Tony estimates them to be RM50 per week based on 40 hourly lessons. In addition to the fuel costs, Tony will need to take out personal accident and sickness insurance and this is expected to be around RM390 per year. Tony would be classed as self employed and would therefore require an accountant. This would cost RM260 per year. He would also have to buy an 'Approved Driving Instructor' licence costing RM104 per year. The driving school would provide the car and the related insurance, tax and maintenance costs. Option 2: Start up on his own. In this option, Tony would not be able to charge as high a fee as a well known company and has established that the current average price charged is RM16.75. He would need to buy a car and the cost of this would be RM17,056 including interest. He would finance this by a loan repayable over 12 months. The car insurance would be RM364 a year. Car tax would be RM104 per year, and maintenance is expected to cost RM156 per year. The fuel costs would be the same as in option 1 based on a 40 hour week. In addition to these costs, Tony would also require the personal accident and sickness insurance cover, the licence and the services of an accountant. It would be necessary for Tony to advertise his business, and this would cost RM780 per year. Before his training, Tony earned RM17,368 per year and is anxious that he maintains this level of income, and has asked you for advice. You should assume a 52 week year. Ignore the effect of taxation. Dikehendaki/Required: Tony has asked for your help in making his decision and has asked you to consider the following questions: (a) (0) For each option, what would be the required number of lessons per week for him to break even? (3 markah/marks) (ii) How many lessons must he give each week under each option to achieve the level of his previous salary? (3 markah/marks) (iii) Tony has decided that due to family commitments he is unable to work more than 40 hours a week. For option 2, what price must Tony charge in order to maintain this income? (3 markah/marks) (iv) Assuming Tony decides to take out a franchise, by what percentage would fixed costs have to rise by in order for it to become necessary to do one additional lesson per week, but still maintain existing income levels? (3 markah/marks) (b) With reference to the options above, illustrate and explain the term 'margin of safety (3 markah/marks) CIA 1004 (c) Tony is aware that in cost-value-profit analysis all costs are assumed to be linear, but he would like to know more. Outline a further four assumptions inherent in the technique you have used. (5 markah/marks) (d) Outline the key differences between the accountant's treatment of cost behaviour and that of the economist (5 markah/marks) (Jumlah/Total: 25 markah/marks)