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 3,400 new vehicles annually:

AVERAGE DEALERSHIP FINANCIAL PROFILE
Composite Income Statement
Sales	$	68,000,000
Cost of goods sold		56,100,000
Gross profit	$	11,900,000
Operating costs
Variable		1,955,000
Mixed		5,236,000
Fixed		4,202,400
Operating income	$	506,600

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 4,850 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 $10,200,000. If the projected annual sales for a dealership total $64,600,000, 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.)

PART TWO:

Maintenance expenses of a company are to be analyzed for purposes of constructing a flexible budget. Examination of past records disclosed the following costs and volume measures:

	Highest			Lowest
Cost per month	$	42,000		$	34,000
Machine hours		46,000			30,000

Using the high-low technique, estimate the annual fixed cost for maintenance expenditures:

• $228,000.

• $240,000.

• $230,000.

• $384,000.

• $447,000.

Answer 1