Answers

1. Costs activity

1. The accountant should know better than to mix up fixed and variable costs in this way - unless it is a deliberate attempt to confuse the issue! When taking a decision on whether to use a service or not, or which level of service to use, any costs which are not affected by the decision (fixed costs) should be ignored; only those costs which change as a result of the decision (variable costs) are relevant. This an important principle, which is easy to see in this simple example but less easy to spot in more complex, real life decisions.
   
2. Licences and insurance are the same whatever the mileage and are fixed costs; petrol and oil and repairs vary directly with the mileage and are variable costs; depreciation does vary with mileage but not proportionately - doubling the mileage does not double the depreciation - hence depreciation may be classified as semi-fixed or semi-variable.
   
3. Once costs have been classified it becomes easy to budget costs at a new mileage:

2. Break - even activity

The old selling price will not give sufficient contribution to allow the canteen to break-even, even at full capacity utilisation. At the costs given it would be necessary to increase the capacity (unlikely in the short term) or to increase prices. Just as we can calculate a break-even from fixed costs, variable costs per meal and selling price per meal, we can also calculate a required selling price from an assumed break-even volume. In the revised budget below we assume a wish to break-even at 700,000 meals; this implies a contribution of (63000/700000 = ) .09, which with variable costs of .66 implies a selling price of £.75 or 75p per meal:

Try another revised budget with a more prudent break-even assumption of 500,000 meals.