JustAnswer
Step 1
First, using Tables 3–5, note the pattern of operating profits
(or losses) over the five-year period. Then focus only on the
semi-fixed expenses contained in Table 3. Do any amounts
appear to be odd? Next, briefly comment on the five-year
pattern or trend for operating profit/loss measures. You
should be able to respond to this step in a few wellwritten
sentences.
|Year |1984 |1985 |1986 |1987 |1988 |
|Trend of Operating Profit |100% |43% |-37% |-36% |-196% |
|Trend of SF Expense |100% |142% |161% |159% |184% |
|Trend in Net Variable Revenues |100% |133% |142% |137% |149% |
|Trend in Total Fixed Expense |100% |141% |158% |149% |183% |
The operating profit is showing a declining patter, it was around 43% in 1985 and declined to -196% in 1988 in five years time period. In 1988 the operating loss was very huge. The semi fixed expenses are showing an increasing trend, it was due to increase in net variable revenues pattern which is increasing but the incresein total fixed expenses is at faster pace as compared to increase in net variable revenues, which shows that the fixed cost has the higher portion in semi fixed expense, otherwise the pace of increase in SF expenses would be lower or equal to increase in net variable revenues.
Step 2
Focus only on the detailed semi-fixed expense contained in
Table 4. Are there any unusual or odd patterns you might
note in this detailed financial data? There are eight expense
items. About five of the eight should immediately catch your
attention. You should be able to respond to this requirement
in a few well-written sentences. Briefly comment on only
the most obvious or apparent measures or patterns, by
expense item.
|Semi-Fixed (S-F) Expenses: |1984 |1985 |1986 |1987 |1988 |
|Salaries |613006 |968789 |1211464 |1289758 |1360489 |
|Vacation |600 |26705 |19468 |19058 |18268 |
|Advertising |210226 |288347 |281219 |309608 |371314 |
|Supplies/Tools/Laundry |31473 |46141 |75468 |65935 |81252 |
|Freight |5719 |5987 |6528 |5731 |4663 |
|Vehicle |22913 |23718 |23664 |20370 |19483 |
|Demonstrators |10465 |4969 |-1513 |4192 |707 |
|Floor-Planning |278531 |301113 |276201 |156129 |305044 |
|Total SF Expense |1172933 |1665769 |1892499 |1870781 |2161220 |
The semi fixed expenses should have been increased with the increase in net variable revenues but some of them have not increased but they have declined or showing the mixed trend. The vacation was increased only in 1985 but declined in other three years despite of increase in net variable revenues. The demonstrators’ expense not only declined but also in negative in 1986.
Step 3
Identify the high and low measures in each column, just as
you would in preparation for application of the high-low method
or technique. For example, in Table 4 the high measure for
the cost driver (NRVS) is 280 NRVS in month 13 and the low
measure is 31 NRVS in month 12. Repeat this process for
each of the eight separate semi-fixed expense columns and
also for the total expense column. (You could transfer the
figures to Excel to use the maximum and minimum functions
After the high and low measures have been identified in each
column, try to match each expense column’s high and low
measure, separately, to the highs and lows identified in the
NRVS column. They won’t match. Don’t try to correct the
data, but comment on the potential for application of the
high-low technique. What happens when the high and
low activity level doesn’t match the high and low expense
measure? Does this prevent you from correctly applying
the high-low technique?
Don’t overanalyze this data, because there’s a problem with it
and you don’t have sufficient information to correct it. Merely
summarize your observations and unsuccessful attempts to
match the high and low NRVS months (identified above),
separately, with each of the high and low expense measure
months. You should be able to do this in a very few wellwritten
sentences.
Finally, summarize your findings with respect to the application
of the high-low method to separate mixed costs into
their fixed and variable components or the development
of a cost equation.
When the high and low points method of each element of semi fixed expense is found with considering the high and low points of the relevant activity which is NRV, because the high low points of semi fixed expenses will not be the representative of activity for that period. If we synchronize the high and low points method of each fixed expense with the period of high and low points of NRV, then the separation into fixed and variable element would not bee justifiable, as follows:
| | | |
|NRV |280 |31 |
|Salaries |49049 |57479 |
|Vacation |-19992 |-22223 |
|Advertising |1999 |7043 |
|Supplies/Tools/Laundry |582 |560 |
|Freight |1927 |2183 |
|Vehicle |-477 |1014 |
|Demonstrators |-30104 |66745 |
|Floor-Planning |42968 |157247 |
Another option to determine fixed and variable element of SF expenses is to take into account total of the SF expenses. The 1988 figures will be used as high point and 1984 will be used as low pint. The equation of y = a + bx will be used, the b will be the variable cost and the a will be the fixed cost, but when we use the high low point method the variable cost is around 70% of net variable revenues and the fixed cost comes in negative, as follows:
| |NVR |SF |
|High |4298748 |2161220 |
|Low |2885969 |1172933 |
|Difference |1412779 |988287 |
Variable cost = 988287/1412779 = 70% and the fixed cost will be 1172933- 2885969*.7 = -847245. Therefore it may be concluded that the fixed and variable element of cost may not be found by using the high low method, it should be found by using the statistical method.
Step 4
Use Table 6 to compute the cost equations and R-squared
measures for each of the remaining eight expenses and total
expenses. Notice that there’s a computed total requirement
in the table. This just means that you must total these two
columns and compare the computed totals to the Excelgenerated
measures in the row below. In effect, you’re being
asked to comment on whether the separate cost formulas
are “additive.”
Table 6
|Expense |FC |VC |R SQ |
|1 Salaries |106866 |-110 |4.1% |
|2 Vacation |-3022.07 |-1 |0.0% |
|3 Advertising and training |21653 |-8 |0.1% |
|4 Supplies/tools/laundry |6848.64 |-16 |4.2% |
|5 Freight |709.142 |1 |0.1% |
|6 Vehicles |1575.81 |0 |0.0% |
|7 Demonstrators |23181.6 |-128 |10.4% |
|8 Floor planning |105247 |-428 |15.5% |
|9 Total |263059 |-692 |31.3% |
Complete the cost equations for the table. Use the R-squared
as the single measure of “goodness of fit.” Don’t attempt to
improve your results with the elimination of “outliers” or
“influential outliers.” As you complete Table 6, answer the
following questions:
1. What problems did you encounter?
There were too many data and the variable cost is in minus which is practically seems to be impossible. The NRV is used as base which is not true representative of the activity; some other base such as units of output should have been used.
2. Are the R-squared measures high or low?
They are very low in total and some times it is zero which justifies that the NRV is not the appropriate base for the purpose.
2. Are the slopes negative or positive?
Almost all slopes are negative.
4. Are your conclusions consistent with those from the
high-low effort?
No as the high low is showing fixed cost in negative while using the regression technique the variable cost is negative.
Step 5
Summarize your findings on a single page (250 words or less,
double-spaced). Can the Motomart data be used to prepare
a reliable financial forecast? Why or why not? If Motomart
is included in the very large database used to prepare the
financial forecast that supports the relocation of Motomart
closer to Existing Dealer, what concerns might present themselves
with respect to the remainder of the database used for
this forecast? Would you rely on this forecast?
It’s common for businesses to keep poor financial records most
of the year, because many are trying to reduce the cost of
financial record keeping (e.g., the salary of a CPA is higher
than that of a bookkeeper). Then, at the year’s end, these
businesses employ a CPA or accounting firm to make adjusting
journal entries to correct data for the twelfth months of
the year, only to reverse the adjusting journal entries
immediately after the annual financials are prepared.
Examine your graphics to identify any seasonal (12-month)
patterns. Do any exist? Is there evidence to suggest that the
process described above was being employed by Motomart?
It is very important to understand the concept of variable and fixed cost before conclusion. The variable cost is a cost which changes in total with the increase or decrease in activity, while the fixed cost is a cost which remains constant in total up to a relevant range and it is not affected by the change in volume of activity. In this case the change in cost of semi fixed expenses is not only for the change in activity rather for its nature. For example, if the rent is increased every year due to agreement between tenant and landlord and the company produces the same quantity in the next year, the fixed cost will increase, it means that the change in fixed cost is not due to change in number of units produced, therefore when the cost is presented for next year it gives the impression that the cost is variable as it has increased from the last year, but this is not the case. Another factor which is very important to determine the fixed and variable element of semi fixed expenses is the use of base. In this case the NRV has been used which is not the appropriate base. Due to this two factors it was not possible to determine the fixed and variable elements of the semi fixed expense, regardless of which method is used, either high low or regression analysis. It would be better to use some other base such as the number of units produced or labor hours or machine hours for this purpose, then it would have given the true picture of use of the two methods.
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