Question

United States Motors Inc. (USMI) manufactures automobiles and light trucks and distributes them for sale to consumers through franchised retail outlets. As part of the franchise agreement, dealerships must provide monthly financial statements following the USMI accounting procedures manual. USMI has developed the following financial profile of an average dealership that sells 3,200 new vehicles annually: AVERAGE DEALERSHIP FINANCIAL PROFILE Composite Income Statement Sales $64,000,000 Cost of goods sold 52,800,000 Gross profit $11,200,000 Operating costs Variable 1,840,000 Mixed 4,928,000 Fixed 3,955,200 Operating income $ 476,800 USMI is considering a major expansion of its dealership network. The vice president of marketing has asked Jack Snyder, corporate controller, to develop some measure of the risk associated with the addition of these franchises. Jack estimates that 90% of the mixed costs shown are variable for purposes of this analysis. He also suggests performing regression analyses on the various components of the mixed costs to more definitively determine their variability. Required: 1. Calculate the composite dealership profit if 4,550 units are sold. 3. The regression equation that Jack Snyder developed to project annual sales of a dealership has an R-squared of 60% and a standard error of the estimate of $9,600,000. If the projected annual sales for a dealership total $60,800,000, determine the approximate 95% confidence interval for Jack's prediction of sales. (Hint: The 95% confidence interval uses 2 standard errors in determining the interval.) Complete this question by entering your answers in the tabs below. Required 1 Required 3 Calculate the composite dealership profit if 4,550 units are sold. Profit Required 1 Required 3 >

Answer 1

Answer:

1.)
Assume that all purchases for resale represents variable cost price.
=64,000,000 / 3200
=20,000 (Variable cost price)

Variable cost per unit = (1840000+90/100*4928000+52800000)/3200
=18461

Fixed cost = 3955200+10/100*4928000
=4448000

Sales = 4550 x 20000 = 91000000
less variable cost = 4550 x 18461 = 83997550
contribution margin = sales - less variable cost
=91,000,000 - 83,997,550
=7,002,450
less fixed cost = 4448000
Profit = 2,554,450

3.)
Using regression equation that jack synder developed to project annual sales that could occur during the year
Range of sales $\pm$ (standard error x 2)
=9,600,000 $\pm$ (60,800,000 x 2)
=9,600,000 $\pm$ (121,600,000)
=131,200,000 (or) 112,000,000

Therefore it is relating wide range for the product ratio of standard error to the amount to be predected = 60800000/9600000 = 6.33%

It is an indication of and a relatively progression. The R-square of 60% in a furture indication of model and a lock of procession of predicition from the model.