Question

Problem 3.52 Elina Siljander owns Elina's Stained Glass in Helsinki, Finland. The business produces and sells three different types of stained glass windows: small, medium, and large. Elina has two full-time employees who work regular schedules to cut glass and assemble the windows. She borrowed money from the bank to start the business and pay living expenses. She is concerned that her cash flows might not be high enough either to pay herself or to repay the bank loan. She would like to generate approximately €10,000 in pretax earnings each month to cover her living expenses and repay the loan. The following revenue and cost information covers the past four months: July €9,050 €10,531 €12,946 August September €16,116 June Revenues Raw materials and supplies 1,745 3,880 2,000 2,433 4,041 2,000 701 3,074 4,246 2,000 747 4,029 4,282 2,200 793 Labour Rent 525 Miscellaneous €4,812 €900 €1,356 €2,879 Profit Your answer is incorrect. Try again. Develop a cost function for Elina's Stained Glass. (Round answers to 0 decimal places, e.g. 15 or 15%.) 2000 68 % of revenues Cost function: Total Cost

Answer 1

Part 1

cost function: total cost = €6771 + 28% of total revenue

raw materials are variable = 4029/16116 = 25%

labor and rent are fixed

Miscellaneous using regression analysis comes to 289 fixed and 3% variable

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.873015
R Square	0.762156
Adjusted R Square	0.643234
Standard Error	69.9928
Observations	4
ANOVA
	df	SS	MS	F	Significance F
Regression	1	31397.01	31397.01	6.408871	0.126985
Residual	2	9797.985	4898.993
Total	3	41195
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	288.5315	162.9787	1.770363	0.218684	-412.709	989.7724	-412.709	989.7724
X Variable 1	0.033137	0.013089	2.531575	0.126985	-0.02318	0.089456	-0.02318	0.089456

Part 2

Revenue = fixed expense + profit / contribution margin ratio = (6771+10000)/(1-0.28) = $23293

Part 3

Degree of operating leverage = contribution margin / profit = (16116*(1-0.28))/4812 = 2.41