.2 COSTS AND REVENUES: ACTIVITY D

Read the case study information below and answer the questions that follow.

MODY & MILLAR GARAGES

The managing director of Mody & Millar Garages Ltd is concerned about the profitability of the business. She asked for cost details of the three divisions of the business repairs, petrol sales and spare parts together with a breakdown of sales revenue. Unaware of the differences between costing approaches, she asked for overheads to be apportioned on full-cost principles according to the labour cost. The following data were provided:

When the managing director saw these details, she said, "If we close down our repair division, the total annual profits will rise they would have been $15 000 higher last year if we had shut down in 2014."

Overall profit made by the business in 2014

= (55 000 + 6000) 15 000 = $46 000 As a trainee accountant working with this company, you have been asked for your opinion on the figures above.

Source: www.Business ManagementIB.com

QUESTIONS:

1. Use the contribution costing method and prepare a new costing statement. [10 marks]

2. Discuss whether the repairs division should be closed in order to increase overall garage profits (ensure your justification is based on both quantitative and qualitative factors).

[10 marks]

the following data were provided

2014 ($000s)	Repairs	Petrol	Parts
Sales revenue (A)	27	300	68
Direct labour cost	15	25	10
Direct materials	5	180	35
Other direct costs	4	10	5
Apportioned overheads (total $60,000)	18	30	12