Question

Caiman Distribution Partners is the Brazilian distribution company of a U.S. consumer products firm. Inflation in Brazil has made bidding and budgeting difficult for marketing managers trying to penetrate some of the country's rural regions. The company expects to distribute 450,000 cases of products in Brazil next month. The controller has classified operating costs (excluding costs of the distributed product) as follows: AccountOperating Cost Behavior Supplies$370,000 All variable Supervision 200,000 $ 140,000 Fixed Truck expense 1,302,500 $190,000 Fixed Building leases 845,000 $540,000 Fixed Utilities 205,000 $120,000 Fixed Warehouse labor 855,000 $135,000 Fixed Equipment leases 770,000 $610,000 Fixed Data processing equipment 895,000 All fixed Other 850,000 $400,000 Fixed Total$6,292,500

Although overhead costs were related to revenues throughout the company, the experience in Brazil suggested to the managers that they should incorporate information from a published index of Brazilian prices in the distribution sector to forecast overhead in a manner more likely to capture the economics of the business.

Following instructions from the corporate offices, the controller's office in Brazil collected the following information for monthly operations from last year:

  

Month	Cases			Price Index			Operating Costs
1		351,000			118		$	5,759,139
2		368,000			120			5,866,638
3		364,000			121			5,909,905
4		386,000			125			5,987,617
5		380,000			127			5,999,135
6		401,000			128			6,103,364
7		373,000			131			5,978,495
8		418,000			136			6,193,868
9		404,000			136			6,186,130
10		427,000			135			6,246,625
11		423,000			139			6,268,799
12		438,000			142			6,422,255

  

These data are considered representative for both past and future operations in Brazil. Required: (a) Compute an estimate of operating costs assuming that 450,000 cases will be shipped next month based on the controller's analysis of accounts. (b) Use the high-low method to compute an estimate of operating costs assuming that 450,000 cases will be shipped next month. (Round variable costs to five decimal places. Round your other intermediate calculations and final answer to nearest whole dollar value.) (c) Compute an estimate of operating costs assuming that 450,000 cases will be shipped next month by using the results of a simple regression of operating costs on cases shipped. (Round variable costs to five decimal places. Round your other intermediate calculations and final answer to nearest whole dollar value.) (d) Compute an estimate of operating costs assuming that 450,000 cases will be shipped next month by using the results of a multiple regression of operating costs on cases shipped and the price level. Assume a price level of 142 for next month. (Round variable costs to five decimal places. Round your other intermediate calculations and final answer to nearest whole dollar value.)

Answer 1

ANSWER:
A.	ESTIMATING EQUATION BASED ON ACCOUNT ANALYSIS :
	COST ITEM	OPERATING COST	FIXED COST	VARIABLE COST
	SUPPLIES	350,000.00	-	350,000.00
	SUPERVISION	215,000.00	150,000.00	65,000.00
	TRUCK EXPENSE	1,200,000.00	190,000.00	1,010,000.00
	BUILDING LEASES	855,000.00	550,000.00	305,000.00
	UTILITIES	215,000.00	125,000.00	90,000.00
	WAREHOUSE LABOR	860,000.00	140,000.00	720,000.00
	EQUIPMENT LEASES	760,000.00	600,000.00	160,000.00
	DATA PROCESSING EQUIPMENT	945,000.00	945,000.00	-
	OTHER	850,000.00	400,000.00	450,000.00
	TOTAL	6,250,000.00	3,100,000.00	3,150,000.00
	VARIABLE COST PER CASE    =	TOTAL VARIABLE COST / CASES PRODUCED
	=	$ 3150000 / 450000 CASES
	=	$ 7.00 PER CASE
	ESTIMATED OVERHEAD     =	FIXED OVERHEAD + VARIABLE OVERHEAD PER CASE
		x NUMBER OF CASES
	=	$ 3100000 + $ 7.00 X NUMBER OF CASES
	=	$ 3100000 + $ 7.00 X 450000
	=	$6,250,000
B.	COST ESTIMATE USING HIGH- LOW ANALYSIS
			CASES	OPERATING COSTS
	HIGHEST ACTIVITY (MONTH 12)		432000	$   6,362,255.00
	LOWEST ACTIVITY (MONTH 1)		345000	$   5,699,139.00
	VARIABLE COST                                       =	COST AT HIGHEST ACTIVITY - COST AT LOWEST ACTIVITY
		HIGHEST ACTIVITY - LOWEST ACTIVITY
	=	$ 6362255- 5699139
		432000-345000
	=	$ 7.62202 PER CASE
	FIXED COSTS                                                 =	Total Costs- Variable Costs
	=	$ 6362255- $ 7.62202 x 432000
	=	$3,069,542
	THE COST EQUATION THEN IS:
	OVERHEAD COSTS =	$ 3069542 + ($ 7.622 PER CASE * CASES )
	For 450000 CASES =
	OPERATING COST                                    =	$ 3069542 + $ 7.622 X 450000
	=	$6,499,442
C.	SIMPLE REGRESSION BASED ON CASES :
	REGRESSION STATISTICS :
	MULTIPLE R	0.98034501
	R SQUARE	0.96107634
	STANDARD ERROR	39850.1391
	OBSERVATIONS	12
	COEFFICIENTS
	INTERCEPT	$3,411,468
	CASES	$670,765
D.	RECOMMENDATION:
	THE MULTIPLE REGRESSION APPEARS TO IMPROVE THE "FIT" (COMPARE THE ADJUSTED R2'S, BUT
	THE RATIONALE FOR THE INCLUSION OF THE PRICE LEVEL AS A COST DRIVER IS UNCLEAR. THERE
	IS SOME POSSIBLITY THAT THE PRICE INDEX VARIABLE IS A SURROGATE FOR SOME OTHER FACTOR
	CORRELATED WITH THE GROWTH OF BUSINESS . IT MIGHT BE BETTER TO ADJUST THE COST FIGURES
	TO REAL (PRICE LEVEL ADJUSTED) AND FORECAST THE ADJUSTING COSTS.
	ONCE THE SIMPLE REGRESSION IS COMPLETE , AND IT IS RELATIVELY EAST TO DO, THERE IS NO REASON FOR THE
	HIGH -LOW ESTIMATE , BECAUSE IT IGNORES MOST OF THE INFORMATION.
	THEREFORE, SOME COMBINATION OF THE CONTROLLER'S ACCOUNT ANALYSIS ESTIMATE AND THE
	ESTIMATE FROM THE SIMPLE REGESSION SEEMS MOST APPROPRIATE.