Question

Assignment 1: LASA 2: Executive Presentation

The management team was so impressed with the report you submitted a couple of weeks ago, that they have asked you to prepare another report in the form of a Microsoft PowerPoint presentation which addresses additional questions they have about some of their products. They would like to use this information at the next Board meeting so they have asked you to prepare a PowerPoint presentation using the information below. They want to make sure they have talking points available when they deliver the presentation so they have asked you to use the notes section of PowerPoint to clearly explain the information presented on each of the slides. They would like for you to design a title slide which captures the audience’s attention, an introduction slide(s) which contains executive summary information, slides which support each of the four sections below including talking points, and a solid conclusion. They have asked that you contain your presentation to approximately 15 slides. The management team may be asked to justify the information you present so it is imperative that you show your calculations. You may want to compute your calculations in Excel and copy that information into your PowerPoint.

PART 1: The following information is available for GFI’s maintenance cost over the last seven months. Use the high low method to estimate the fixed and variable components of its maintenance cost. Would this be an effective way to estimate these costs? Justify your answer by explaining why this is an effective way or why it is not.

Month	Operating Hours	Maintenance cost
February	27	11,000
March	54	13,800
April	36	10,200
May	45	12,000
June	63	13,800
July	72	18,000
August	19	7,400

PART 2: In 2001, Ms. Kelle, the head of aerobic equipment sales, started a fitness magazine called the Dancing Elephant. The magazine sells 50,000 copies a month. The total variable costs at that volume are $40,000 and fixed costs are $20,000. An additional storage cost of $2,000 will be incurred if production exceeds 55,000 units.

You have been asked to forecast the following costs for two possible production runs of (a) 52,000 units and (b) 57,000 units:

Total variable costs

Variable cost per unit

Total fixed cost

Fixed cost per unit

	Budget	Forecast A	Forecast B
Production	50,000	52,000	57,000
Total variable costs
Variable cost per unit
Total fixed cost
Fixed cost per unit

PART 3: GFI manufacturers ping pong tables and has a JIT policy that ending inventory must equal 10 percent of the next month’s sales. It is estimated that April’s actual ending inventory will consist of 40,000 ping pong tables. May and June sales are estimated to be 400,000 and 350,000 tables respectively. Compute the number of tables to be produced that would appear on GFI’s production budget for the month of May.

Good management includes good budgeting. Explain why the bottom-up approach to budgeting is considered a more successful management technique then a top down approach. Provide an example of implementation of the bottom-up approach to budgeting.

PART 4: Computer A has a book value of $1,500 and a current resale value of $800. The computer is needed to fulfill a client order, but if it's used on this project then its resale value will be zero. The project contract is valued at $5,000. $2,000 has already been spent on specialized software, which will be used on the project and which has no value for any other use. A printer costing $400 is needed for a separate project.

Comment on and determine the costs which are relevant to the decision regarding whether or not to commit to complete the project. Based upon the information at hand, determine whether this project is profitable. Show your calculations.

Submission:

The presentation must be submitted as a Microsoft Power Point presentation adhering to the instructions provided in the opening paragraph.

Answer 1

Since, there are multiple questions and each question is independant of another, I have answered the first two parts.

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Part 1)

The variable component can be calculated with the use of following formula:

Variable Component = (Total Cost at Highest Level of Activity - Total Cost at Lowest Level of Activity)/(Highest Level of Activity - Lowest Level of Activity)

Here, Total Cost at Highest Level of Activity = $18,000, Total Cost at Lowest Level of Activity = $7,400, Highest Level of Activity = 72 and Lowest Level of Activity = 19

Substituting values in the above formula, we get,

Variable Component = (18,000 - 7,400)/(72 - 19) = $200 per operating hour

Now, we can calculate the fixed component as below:

Fixed Component = Total Cost at Highest Level of Activity - Operating Hours at Highest Level of Activity*Variable Component Per Operating Hour = 18,000 - 72*200 = $3,600 (the same value can be derived with the use of information for lowest activity level)

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The high low method relies on only two sets of information (total cost and level of activity) which may not be sufficient to provide correct estimation of costs. Further, it uses historical data to estimate costs. It cannot be considered as a reliable measure for calculating cost components because it provides only an estimate of the variable and fixed costs (on the basis of costs incurred in the past). In other words, information obtained with the use of this method cannot be treated as an exact/absolute representative of the costs that may be incurred by the company in the future.

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Part 2)

The completed table is provided as below:

	Budget	Forecast A	Forecast B
Production	50,000	52,000	57,000
Total variable costs	40,000	41,600 (52,000*.80)	45,600 (57,000*.80)
Variable cost per unit	0.80 (50,000/40,000)	0.80 (remains constant)	0.80 (remains constant)
Total fixed cost	20,000	20,000	22,000 (20,000 + 2,000)
Fixed cost per unit	0.40 (20,000/50,000)	0.38 (20,000/52,000)	0.39 (22,000/57,000)