19. Summary Assessment 5 Mark: /22
Robert is the owner of a local garage, situated in a small town in Manchester. The garage sells petrol and a small selection of car
accessories; they also undertake MOTs, services and repair work. Robert’s Repairs average 500 customer visits per month,
spending £45 each visit (average). Robert’s son, Wayne, is due to leave university, with a degree in marketing, and join the family
business. Wayne has an interest in sales. Fortunately, Robert’s Repairs occupy enough land for them to stock a small range of
second hand vehicles. Wayne will purchase vehicles from auctions which would be prepared for resale at the garage by Robert,
although a new part-time mechanic would also be needed. The finances of the vehicle sales will be separate from the current
business.
Following market research Wayne produced a forecast of financial data for the vehicle sales:
Item Forecast Revenue / Cost Robert’s annual fixed costs are currently £120 000,
and the variable costs average £15 per customer
Fixed costs Would add £30 000 pa visit. Wayne has forecast that he would attract 60
Average variable costs per sale £6 500 customers in the first year
Average spend (revenue) per sale £8 000
1 Calculate the profit (loss) currently made each month by Robert’s Repairs. Assume the fixed
costs are spread evenly over each month of the year [5]
£120,000/12 = £10,000 (FC per month)
£17,500 (Costs per month)
500 x 45 = £22,500 (REV per month)
500 x 15 = £7,500 (VC per month)
Revenue – Costs = Profit
£22,500 - £17,500 = £5,000 + (profit)
2 Calculate the current annual break-even quantity for Robert’s Repairs. [5]
£7,500 x 12 = £90,000 (VC per year)
£90,000 + £120,000 = £210,000 (TC per year)
£210,000/£45 (per visit) = 4,666.67
= 4,667 units
3 Calculate the current annual margin of safety for Robert’s Repairs. [3]
500 x 12 = 6,000 (units sold per year)
6,000 – 4,667 = 1,333 units
4 It is decided that the total fixed costs for the two parts of the business would be split 75% to
the existing business and 25% to the vehicle sales. For the vehicle sales calculate the forecast:
(a) Annual break-even quantity [5]
£120,000 + £30,000 = £150,000 (Total FC)
60 x £6,500 = £390,000 (Total VC)
£150,000/4 = £37,500 (Vehicle Sales FC)
£37,500 + £390,000 = £427,500 (TC)
= £427,500/£8,000 = 53.4 units
(b) Annual total contribution [2]
£8,000 - £6,500 = £1,500 (CPU)
£1,500 x 60 = £90,000 (TC per year)
(c) The annual profit (loss) [2]
£427,500 (TC) £8,000 x 60 = £480,000 (Rev per year) £480,000 - £427,500 = £52,500 + (profit)
What are the advantages to a start-up business of calculating the break-even level of output?
It will give an idea of how long it will take before it will reach profitability
Will show that risks will need to be taken
It will remind the start-up business to keep fixed costs down to a minimum
Robert is the owner of a local garage, situated in a small town in Manchester. The garage sells petrol and a small selection of car
accessories; they also undertake MOTs, services and repair work. Robert’s Repairs average 500 customer visits per month,
spending £45 each visit (average). Robert’s son, Wayne, is due to leave university, with a degree in marketing, and join the family
business. Wayne has an interest in sales. Fortunately, Robert’s Repairs occupy enough land for them to stock a small range of
second hand vehicles. Wayne will purchase vehicles from auctions which would be prepared for resale at the garage by Robert,
although a new part-time mechanic would also be needed. The finances of the vehicle sales will be separate from the current
business.
Following market research Wayne produced a forecast of financial data for the vehicle sales:
Item Forecast Revenue / Cost Robert’s annual fixed costs are currently £120 000,
and the variable costs average £15 per customer
Fixed costs Would add £30 000 pa visit. Wayne has forecast that he would attract 60
Average variable costs per sale £6 500 customers in the first year
Average spend (revenue) per sale £8 000
1 Calculate the profit (loss) currently made each month by Robert’s Repairs. Assume the fixed
costs are spread evenly over each month of the year [5]
£120,000/12 = £10,000 (FC per month)
£17,500 (Costs per month)
500 x 45 = £22,500 (REV per month)
500 x 15 = £7,500 (VC per month)
Revenue – Costs = Profit
£22,500 - £17,500 = £5,000 + (profit)
2 Calculate the current annual break-even quantity for Robert’s Repairs. [5]
£7,500 x 12 = £90,000 (VC per year)
£90,000 + £120,000 = £210,000 (TC per year)
£210,000/£45 (per visit) = 4,666.67
= 4,667 units
3 Calculate the current annual margin of safety for Robert’s Repairs. [3]
500 x 12 = 6,000 (units sold per year)
6,000 – 4,667 = 1,333 units
4 It is decided that the total fixed costs for the two parts of the business would be split 75% to
the existing business and 25% to the vehicle sales. For the vehicle sales calculate the forecast:
(a) Annual break-even quantity [5]
£120,000 + £30,000 = £150,000 (Total FC)
60 x £6,500 = £390,000 (Total VC)
£150,000/4 = £37,500 (Vehicle Sales FC)
£37,500 + £390,000 = £427,500 (TC)
= £427,500/£8,000 = 53.4 units
(b) Annual total contribution [2]
£8,000 - £6,500 = £1,500 (CPU)
£1,500 x 60 = £90,000 (TC per year)
(c) The annual profit (loss) [2]
£427,500 (TC) £8,000 x 60 = £480,000 (Rev per year) £480,000 - £427,500 = £52,500 + (profit)
What are the advantages to a start-up business of calculating the break-even level of output?
It will give an idea of how long it will take before it will reach profitability
Will show that risks will need to be taken
It will remind the start-up business to keep fixed costs down to a minimum
