Question

Winfield Company operates a retail store
a)	Below is a table containing monthly sales and sales staff compensation, in dollars for the previous year. Use the high-low method to create an equation in the form Y = a+ bX to describe
	the behavior of sales staff compensation.
	Month	Comp	Sales
	1	412,700	1,808,000
	2	386,000	1,659,000
	3	359,700	1,512,000
	4	346,500	1,138,000
	5	359,400	1,218,900
	6	341,000	1,233,000
	7	366,500	1,409,300
	8	364,200	1,437,000
	9	400,100	1,616,600
	10	443,000	1,833,000
	11	432,900	1,858,000
	12	409,600	1,735,000
b)	Other information:
	Store rent expense is $70,000 / month
	Utilites on average amount to 5% of sales staff compensation
	Management staff, in aggregate, are paid $10,000 / month plus 2% of sales
	Cost of goods sold is typically 58% of sales
	Miscellaneous expenses are $1,000 / month
	Given these data, determine the forecast net profit of the store at sales of $2,000,000 for the month
c)	Identify at least two potential weaknesses in your profit forecast. (Limit 100 words)

Answer 1

a)

	Sales	Comp
High level of Activity	1858000	432900
Low level of Activity	1138000	346500
Change	720000	86400
Variable cost per dollar	0.12
(86400/720000)
Fixed cost per year	209940
= 432900-(0.12*1858000)
Equation = Y =$209,940+$0.12X

b)

Particulars	Amount
a) Sales	$       2,000,000
b) Cost of Goods Sold(a*58%)	$       1,160,000
c) Store Rent	$             70,000
d) Utilities(5% of sales)	$          100,000
e) Management Staff(10000+2% of sales)= 10000+40000	$             50,000
f) Misc Expenses	$               1,000
g) Profit Forecast(a-b-c-d-e-f)	$          619,000

c) Two potential weaknesses

1.Utilities which is calculated on average amount to 5% of sales staff compensation might be inaccurate as it is kind of fixed expenses.

2.Management staff expenses should not be based on % of sales.