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The Motomart case is designed to supplement your Managerial/ Cost Accounting textbook coverage of cost behavior and variable costing using real-world c Senior Capstone: Business : Motomart Lesson 3 Overview The Motomart case is designed to supplement your Managerial/ Cost Accounting textbook coverage of cost behavior and variable costing using real-world cost data and an auto-industry accepted cost driver. Unlike textbook problems, this data is real. It won’t necessarily produce a clear solution when you attempt to analyze cost behavior and apply scatter-plot, high-low, and regression methods to separate mixed costs into their fixed and variable components. This case also illustrates that Financial Accounting decisions and methods can have an influence on Cost Accounting and Managerial applications and decisions. 3.1 Summarize your findings in the motomart case Case Background READING ASSIGNMENT Your project must be submitted as a Word document (.docx, .doc)*. Your project will be individually graded by your instructor and therefore will take up to a few weeks to grade. Be sure that each of your files contains the following information: Your name Your student ID number Page 1Copyright Penn Foster, Inc. 2019 Course Version: 1 The exam number Your email address To submit your graded project, follow these steps: Log in to your student portal. Click on Take Exam next to the lesson you’re working on. Find the exam number for your project at the top of the Project Upload page. Follow the instructions provided to complete your exam. Be sure to keep a backup copy of any files you submit to the school! This case is based on real financial data provided by a retail automobile dealership (Motomart) seeking to relocate closer to an existing retail dealership. You’ll examine the mixed cost data from Motomart and apply both high-low and regression to attempt to separate mixed costs into their fixed and variable components for break-even and contribution margin computations. You’ll find that the data is flawed because Motomart was a single observation in a larger database. Don’t attempt to correct the data (e.g., remove outliers or influential outliers). You’ll be producing a scatterplot and apply high- low and regression methods to the extent practicable and writing a summary report of the findings. Motomart operates a retail automobile dealership. The manufacturer of Motomart products, like all automobile manufacturers, produces forecasts. It has long been an industry practice to use variable costing-based/break-even analyses as the foundation for these forecasts, to examine their cost behavior as it relates to the new retail Page 2Copyright Penn Foster, Inc. 2019 Course Version: 1 vehicles sold (NRVS) cost driver. In preparing this financial information, a common financial statement format and accounting procedures manual are provided to each retail auto dealership. The dealership is required to produce monthly financial statements using the guidelines provided by this common accounting procedures manual, and then furnish these financial statements to the manufacturer. General Motors, Ford, Nissan, and all other automobile manufacturers employ similar procedures manuals. The use of a common format facilitates the development of composite financial statements that can be used to estimate costs and produce financial forecasts for future or proposed retail dealership sites (Cataldo and Kruck 1998). Zimmerman (2003) suggests that as many as 77 percents of manufacturers divide costs into variable and fixed components and that managers arrive at these estimates by classifying individual accounts as being primarily fixed or primarily variable (67). For this case, you’ll examine mixed costs as defined by the manufacturer. Using the scatterplot, high-low, and regression methods, separate these mixed costs into their fixed and variable components. The data is problematic, and a clear solution won’t exist. Don’t attempt to correct the data by removing outliers, but make observations based on any patterns you observe. The case will expose you to actual data and require you to summarize your findings, including any conclusions you’re able to reach and why the financial data makes it impossible to separate the mixed costs into their fixed Page 3Copyright Penn Foster, Inc. 2019 Course Version: 1 and variable components. Motomart: A Litigation Support Engagement The Motomart case evolved from a litigation support engagement. The lead author of this case was hired to analyze the data and provide expert testimony. His report and testimony was made available to the public (for a fee to cover reproduction costs). A broad description of the relevant points for the Motomart case follows. Motomart wanted to move their retail automobile dealership, blaming their location for declining profits and increasing losses. They provided financial projections, using variable costing, to show that after the relocation both Motomart and the existing dealership would be profitable. They created these financial projections using a database provided by the manufacturer, which included all North American retail automobile dealerships. Motomart was one of the observations or retail automobile dealerships included in the database used to create these financial projections. You’ll be examining portions of Motomart’s historical financial data. The relocation site was quite close to the existing dealership (which we’ll refer to as Existing Dealer), and Existing Dealer felt that, if the relocation was permitted, one or both of the dealerships would fail to break even and eventually go bankrupt, leading to poor service, or what the industry refers to as “orphaned” owners of these automobiles. Page 4Copyright Penn Foster, Inc. 2019 Course Version: 1 Antitrust laws provided Existing Dealer with the means to block the relocation requested by Motomart, but only if it could prove that the relocation wasn’t in the best interest of the consuming public. Generally, the only way to prove this is to prove that there’s simply not enough business for both retail automobile dealerships to break even (or generate a reasonable return on investment, given the risks associated with the industry). Again, the manufacturer, in support of the proposed Motomart relocation, supplied financial projections showing that both retail automobile dealerships would be profitable after the relocation. The expert witness hired to investigate the merits of the relocation was given the Motomart data, but not the entire database that included the Motomart data. The Motomart data was in such poor form that it wasn’t possible to produce a financial forecast. An alternative forecast, not included in this case, was produced. This alternative forecast did not support the relocation of Motomart to a site closer to Existing Dealer. The alternative forecast showed that the market simply couldn’t support two retail automobile dealerships. The implication was that, as the weaker of the two dealerships, Motomart was losing business to Existing Dealer. In conclusion, the relocation request by Motomart was denied. Income and Expense Data The following tables give you information such as income statements, semi-fixed expenses, and salaries for Motomart. Look for unusual Page 5Copyright Penn Foster, Inc. 2019 Course Version: 1 entries or discrepancies in their records and, where you can, note the cause of the problems. Table 3 summarizes financial and cost driver information produced by Motomart, where new retail vehicles sold (NRVS) is the cost driver. The account classification method has resulted in three cost behavior classifications: variable, semi-fixed, and fixed costs. Semi-fixed is the automobile industry-specific term used for mixed costs. We’ll assume that Motomart’s classifications of variable costs (VCs) and fixed costs (FCs) are correct, and focus our analysis on Motomart’s semi-fixed or mixed costs. Table 2 SElECTED HISTORICAl INCOME STATEMENT AND RElATED MEASURES 1984 1985 1986 1987 1988 Net Variable Revenues* 2,885,969 3,828,255 4,086,667 3,940,799 4,298,748 Semi-Fixed (S-F) Expenses: Salaries 613,006 968,789 1,211,464 1,289,758 1,360,489 Vacation 600 26,705 19,468 19,059 18,268 Advertising & Training 210,226 288,347 281,219 309,608 371,314 Supplies/Tools/Laundry 31,473 46,141 75,468 65,935 81,252 Freight 5,719 5,987 6,528 5,731 4,663 Vehicle 22,913 23,718 23,664 20,370 19,483 Demonstrators 10,465 4,969 -1,513 4,192 707 Page 6Copyright Penn Foster, Inc. 2019 Course Version: 1 Floor-Planning 278,531 301,113 276,201 156,129 305,044 Total S-F Expenses 1,172,933 1,665,769 1,892,499 1,870,782 2,161,220 Fixed Expenses: Total Fixed Expenses 1,449,208 2,050,172 2,290,867 2,164,362 2,653,620 Operating Profit/(Loss)** 263,828 112,314 -96,699 -94,345 -516,092 New Retail Vehicles Sold 1,798 1,977 1,674 1,450 1,897 Notes: * Revenues less variable costs equal Net Variable Revenues (or Contribution Margin, in aggregate). ** Net Variable Revenue less Total S-F Expenses less Total Fixed Expenses equals Operating Profit/(Loss). Table 3 provides five years of monthly data (N=60) for NRVS and the related semi-fixed or mixed cost measures. Semifixed costs were significant. Recall that they ranged from nearly $1.2 million for calendar and fiscal year (FY) 1984 to almost $2.2 million for FY 1988 (see Table 2). Table 3 SEMI-FIXED (MIXED) EXPENSES FOR THE 60-MONTH PERIOD (FY 1984 THROUGH 1988) Mo NRVS Salary Vacation Adv/Trng SplyTls/Lndry 1 197 $ 52,951 $ - $ 22,561 $ 1,118 2 133 $ 47,054 $ - $ 19,040 $ 3,573 3 132 $ 55,372 $ - $ 14,373 $ 1,388 4 141 $ 46,114 $ - $ 15,022 $ 2,894 Page 7Copyright Penn Foster, Inc. 2019 Course Version: 1 5 182 $ 48,309 $ - $ 19,966 $ 1,896 6 156 $ 49,643 $ - $ 12,019 $ 1,188 7 196 $ 55,784 $ 300 $ 13,217 $ 3,912 8 178 $ 47,957 $ - $ 17,303 $ 2,012 9 159 $ 53,743 $ - $ 16,535 $ 2,717 10 141 $ 53,109 $ - $ 23,821 $ 1,102 11 152 $ 45,491 $ 300 $ 14,146 $ 2,630 12 31 $ 57,479 $ - $ 22,223 $ 7,043 13 280 $ 49,049 $ - $ 19,992 $ 1,999 14 136 $ 46,698 $ 300 $ 20,251 $ 1,192 15 174 $ 59,790 $ 200 $ 20,082 $ 1,336 16 171 $ 80,773 $ 600 $ 26,716 $ 3,873 17 167 $ 71,130 $ 9,212 $ 25,223 $ 5,560 18 161 $ 82,490 $ 6,007 $ 21,106 $ 1,737 19 173 $ 98,172 $ 500 $ 17,799 $ 1,847 20 161 $ 90,685 $ 2,690 $ 28,038 $ 4,415 21 167 $ 97,771 $ 600 $ 37,284 $ 2,827 22 153 $ 87,129 $ 1,740 $ 24,236 $ 5,836 23 201 $ 95,910 $ 2,074 $ 27,244 $ 3,387 24 33 $ 09,192 $ 2,782 $ 20,376 $ 12,132 25 227 $ 89,041 $ 1,880 $ 26,719 $ 4,383 Page 8Copyright Penn Foster, Inc. 2019 Course Version: 1 26 150 $ 92,165 $ 3,602 $ 14,727 $ 10,231 27 142 $ 88,981 $ 744 $ 27,880 $ 7,734 28 104 $ 95,898 $ 960 $ 21,872 $ (684) 29 121 $ 96,245 $ - $ 18,705 $ 8,329 30 99 $ 106,364 $ - $ 23,835 $ 2,540 31 150 $ 90,564 $ 1,950 $ 25,605 $ 5,862 32 144 $ 98,418 $ 1,540 $ 17,763 $ 6,998 33 154 $ 110,436 $ 2,693 32,379 $ 8,131 34 130 $ 102,042 $ 1,060 $ 19,324 $ 6,026 35 202 $ 124,413 $ 3,519 $ 22,412 $ 9,120 36 51 $ 116,897 $ 1,520 $ 29,998 $ 6,798 37 148 $ 97,083 $ 1,080 $ 9,112 $ 6,627 38 153 $ 104,727 $ 3,230 $ 38,616 $ 5,892 39 83 $ 95,622 $ 953 $ 22,690 $ 3,450 40 101 $ 96,438 $ 1,244 $ 14,703 $ 5,259 41 140 $ 114,995 $ - $ 28,764 $ 2,294 42 132 $ 105,337 $ 160 $ 27,253 $ 8,155 43 112 $ 98,989 $ 2,480 $ 24,419 $ 1,621 44 127 $ 124,352 $ 1,800 $ 26,011 $ 902 45 139 $ 115,875 $ 1,417 $ 24,492 $ 5,158 46 156 $ 113,035 $ 1,820 $ 31,158 $ 2,901 Page 9Copyright Penn Foster, Inc. 2019 Course Version: 1 47 126 $ 119,106 $ 3,338 $ 32,213 $ 14,426 48 33 $ 104,199 $ 1,537 $ 30,177 $ 9,250 49 209 $ 98,938 $ 1,866 $ 26,737 $ 1,694 50 124 $ 108,606 $ 3,676 $ 31,084 $ 9,040 51 131 $ 106,396 $ 1,197 $ 33,278 $ 2,099 52 144 $ 106,778 $ 241 $ 32,657 $ 9,328 53 93 $ 124,805 $ 500 $ 29,794 $ 4,268 54 199 $ 110,153 $ 1,910 $ 38,431 $ 5,407 55 170 $ 117,276 $ 800 $ 27,640 $ 9,305 56 186 $ 112,055 $ 980 $ 28,657 $ 1,803 57 200 $ 114,765 $ 1,695 $ 36,425 $ 8,839 58 146 $ 128,007 $ 1,560 $ 27,720 $ 10,944 59 222 $ 116,811 $ 2,249 $ 27,941 $ 5,775 60 73 $ 115,899 $ 1,594 $ 30,950 $ 30,950 Table 3 Continued SEMI-FIXED (MIXED) EXPENSES FOR THE 60-MONTH PERIOD (FY 1984 THROUGH 1988) Mo Freight Vehicles Demo's Floor-Plan Total 1 $ 382 $ 2,052 $ 1,881 $ (78,173) $ 2,772 2 $ 409 $ 1,405 $ 695 $ 28,456 $ 100,632 3 $ 742 $ 1,380 $ 469 $ 34,423 $ 108,147 Page 10Copyright Penn Foster, Inc. 2019 Course Version: 1 4 $ 675 $ 2,057 $ 125 $ 5,697 $ 72,584 5 $ 572 $ 1,603 $ 131 $ 34,599 $ 107,076 6 $ 407 $ 2,524 $ 1,229 $ 53,737 $ 120,747 7 $ 643 $ 2,348 $ 1,206 $ 5,507 $ 82,917 8 $ 605 $ 1,208 $ 436 $ 32,436 $ 101,957 9 $ 209 $ 2,400 $ 1,476 $ 28,950 $ 106,030 10 $ 184 $ 2,076 $ 1,168 $ 20,876 $ 102,336 11 $ 331 $ 1,677 $ 635 $ 45,278 $ 110,488 12 $ 560 $ 2,183 $ 1,014 $ 66,745 $ 157,247 13 $ 582 $ 1,927 $ (477) $ (30,104) $ 42,968 14 $ 603 $ 1,156 $ 1,839 $ 50,583 $ 122,622 15 $ 492 $ 1,898 $ 1,260 $ 18,803 $ 103,861 16 $ 559 $ 1,808 $ 510 $ 23,080 $ 137,919 17 $ 356 $ 1,816 $ 2,350 $ 18,774 $ 134,421 18 $ 439 $ 1,384 $ (288) $ 23,802 $ 136,677 19 $ 1,628 $ 1,962 $ 1,591 $ 33,848 $ 157,347 20 $ (12) $ 2,446 $ (3,308) $ 13,480 $ 138,434 21 $ 480 $ 2,296 $ 1,709 $ 22,965 $ 165,932 22 $ 79 $ 3,175 $ 798 $ 18,898 $ 141,891 23 $ 188 $ 1,287 $ (2,025) $ 38,699 $ 166,764 24 $ 593 $ 2,563 $ 1,010 $ 68,285 $ 216,933 Page 11Copyright Penn Foster, Inc. 2019 Course Version: 1 25 $ 769 $ 2,205 $ 2,493 $ (44,140) $ 83,350 26 $ 593 $ 2,289 $ (2,051) $ 36,311 $ 157,867 27 $ 414 $ 1,891 $ 386 $ 19,865 $ 147,895 28 $ 425 $ 2,288 $ 178 $ 19,013 $ 139,950 29 $ 483 $ 2,223 $ (262) $ 16,228 $ 141,951 30 $ 417 $ 1,683 $ (1,356) $ 37,637 $ 171,120 31 $ 222 $ 1,586 $ 486 $ (1,121) $ 125,154 32 $ 49 $ 1,751 $ (1,924) $ 34,757 $ 159,352 33 $ 818 $ 2,082 $ 1,547 $ 26,419 $ 184,505 34 $ 1,015 $ 1,714 $ 132 $ 21,134 $ 52,447 35 $ 1,255 $ 2,173 $ (2,337) $ 18,578 $ 179,133 36 $ 68 $ 1,779 $ 1,195 $ 91,520 $ 249,775 37 $ 565 $ 1,324 $ 1,164 $ (73,753) $ 43,202 38 $ 369 $ 1,523 $ (1,839) $ 30,443 $ 182,961 39 $ (182) $ 2,087 $ 454 $ 17,725 $ 142,799 40 $ 709 $ 2,095 $ 868 $ 26,402 $ 147,718 41 $ 1,006 $ 1,304 $ (1,990) $ (3,789 $ 142,584 42 $ 521 $ 1,667 $ 1,869 $ 15,090 $ 160,052 43 $ 514 $ 1,040 $ 329 $ (945) $ 128,447 44 $ 917 $ 2,880 $ (1,897) $ 30,405 $ 185,370 45 $ (77 $ 1,281 $ 2,959 $ 14,781 $ 165,886 Page 12Copyright Penn Foster, Inc. 2019 Course Version: 1 46 $ 450 $ 2,259 $ 417 $ 15,613 $ 167,653 47 $ 120 $ 1,394 $ (2,659) $ 40,968 $ 208,906 48 $ 819 $ 1,516 $ 4,517 $ 43,189 $ 195,204 49 $ 853 $ 1,657 $ 601 $ (20,127) $ 112,219 50 $ 498 $ 2,266 $ (284) $ 18,236 $ 173,122 51 $ 605 $ 1,952 $ 668 $ 15,176 $ 161,371 52 $ 483 $ 1,852 $ 1,409 $ 25,245 $ 177,993 53 $ 788 $ 1,704 $ (1,771) $ 6,493 $ 166,581 54 $ 529 $ 1,882 $ 453 $ 21,851 $ 180,616 55 $ (180) $ 977 $ 1,310 $ 7 $ 157,135 56 $ 242) $ 846 $ (2,844) $ 17,192 $ 158,447 57 $ 859 $ 2,856 $ 1,532 $ 14,864 $ 181,835 58 $ (492) $ 1,864 $ 1,400 $ 10,121 $ 181,124 59 $ 245 $ 1,141 $ (3,513) $ 7,946 $ 158,595 60 $ 717 $ 486 $ 1,746 $ 188,040 $ 352,182 Recall the cost function applying to the high-low and regression methods, which are provided in a variety of forms, depending on the texts you used in your previous math, economics, or accounting courses. Below is a brief outline of the high-low and regression methods. An image of a chart demonstrating a brief outline of the high-low and Page 13Copyright Penn Foster, Inc. 2019 Course Version: 1 regression methods. For the high-low method to work, the $H and #H and the $L and #L measures must be from the same accounting period. Preparing Graphs The single cost driver and nonfinancial measure in Table 3 is new retail vehicles sold (NRVS or X in the above cost function). There are eight financial measures (salary; vacation; advertising and training; supplies, tools, and laundry; freight; vehicles; demonstrators; and floor-planning [also known in the automobile retail industry as interest expense relating to new car inventory]), as well as a total (aggregate measure) provided for all eight financial measures (or the Y in the Page 14Copyright Penn Foster, Inc. 2019 Course Version: 1 above cost function). Using NRVS, the only available cost-driver, use Excel to prepare nine separate scatter plots and cost function-based trend lines and nine separate line graphs for each of the financial measures provided in Table 3. The images below are an example of completed graphs for salaries. An image of a scatterplot graph depicting scatterplot-salaries for Motomart salaries. A Scatterplot Graph for Motomart Salaries An image of a line graph depicting salaries—60 months from 1984 through 1988 for Motomart salaries. Page 15Copyright Penn Foster, Inc. 2019 Course Version: 1 A Line Graph for Motomart Salaries Now examine, on a preliminary basis, the pattern or trend (or lack thereof) for each of the “X” (NRVS) and “Y” (financial measure) data pairs and consider the following questions: You’re observing these data pairs for a 60-month period (i.e., five years); are any annual or other seasonal patterns or trends immediately apparent? Do the slopes of the trend lines (i.e., variable costs) make sense? In the case of salaries (see the graphs above), there’s no apparent trend or pattern. It’s odd that salaries decrease as NRVS increases— in fact, this doesn’t make any sense. However, it’s consistent with the high-low results, which also didn’t make sense. But remember, since this data came from Motomart, the firm attempting to relocate, it’s real and from an actual litigation support engagement (not a textbook problem), so it won’t necessarily work out perfectly. Page 16Copyright Penn Foster, Inc. 2019 Course Version: 1 The cost equation in Table 4 shows fixed costs (FC) at $106,866.00 and variable costs to be used to “reduce” total costs (TC) by $110.10 per NRVS. Compare the salary figures and coefficients (in bold type) to the scatterplot graph for Motomart Salaries. Notice that if you extended the trend line in Figure 4, it would hit the y-axis intercept at $106,866.00 (the fixed cost). Also, notice that the R-squared (R-sq) measure in Table 4 equals 4.1 percent. Table 4 SALARY = $106,866.00 – $110.10 NRVS Predictor Coefficient Std Deviation t-statistic p-value Constant 106,866.00 10,793.00 9.90 0.000 NRVS 110.10 70.17 –1.57 0.122 s = 25300 r-sq = 4.1% Analysis of Variance SOURCE DF SS MS F-statistic p-value Regression 1 261,795 261,795 0.10 0.754 Error 58 152,801,120 2,634,502 Total 59 153,062,912 Your math and statistics courses probably reviewed the use of the t- statistic, overall F-statistic, and related p-values, as well as some of the other measures presented here. Our application is a very simple Page 17Copyright Penn Foster, Inc. 2019 Course Version: 1 one, so we’ll focus on only the R-squared measure. The other measures are provided in this example only for completeness. Because the high-low technique didn’t work, it makes sense that the regression technique wouldn’t work well, either. Therefore, the results for high-low and regression are consistent. The advantage of the regression technique is that it mathematically quantifies the level of the problem or difficulty with the data. In this case, one of simple regression, the R-squared measure tells the story. Still focusing on the salaries example in Figure 5, the R-squared measure tells us that only 4.1 percent of the total or mixed or semi-fixed cost is explained by NRVS. This means that that cost equation developed from this historical data isn’t helpful in predicting future costs, as nearly 96 percent of the cost behavior, through use of this equation, remains unexplained. Requirements The project requires five steps to be presented. Step 1 – Provide comments on a 5-year Income Statement. Step 2 – Discuss patterns in expense items. Step 3 – Identify High/Low activity levels. Step 4 – Compute cost equations. Step 5 – Summarize your findings. Page 18Copyright Penn Foster, Inc. 2019 Course Version: 1 In one Word document, provide individual sections for each Step. This Word document along with the Excel file (described below) will be uploaded when you click on the Take Exam button on your Student Portal to submit your project (described under “Submitting Your Assignment” later in the instructions). This Senior Capstone project highlights your knowledge and the skills you have developed over the course of your education. There is nothing “new” to be learned here. The knowledge and skills required for this project include English Composition, Financial Accounting, Managerial Accounting, Business Statistics and the abilities to think critically and to present your work in a professional manner. If you are unsure or don’t understand something about the project, then go back to your previous subjects to review. For example, if you don’t remember how to use the High/Low Method, the revisit your Managerial Accounting to refresh your memory on how to use the High/Low Method Remember, there is nothing “new” here. Everything about this project you should already know how to do. At the beginning of the assignment, on the right-hand side under "Optional Study Materials" select the "PPMC Excel Spreadsheet" menu item to download the required Excel spreadsheet. The Excel file provides a detailed example of what needs to be Page 19Copyright Penn Foster, Inc. 2019 Course Version: 1 done for one of the expenses in order to fill out the figures required in Steps 3 & 4. You will include this Excel file as part of your project submission along with the Word document you create to present this project. There is a “60 Months” worksheet that has the 60 months of data already entered. There is also a “Sample” worksheet that an example of how to calculate the R-sq. There is a “PLOT – SALARY” worksheet that shows how the FC, VC and R-sq figures are calculated for Salary. There is also a “high&low” worksheet for help with the high/low method in Step 3. Complete and include the Excel spreadsheet. You will need to create new worksheets for each of the other expenses following the example to calculate the figures needed for Table 5. Operating Profits and Semi-Fixed Expenses Step 1 First, using Tables 2–4, note the pattern of operating profits (or losses) over the five-year period. Then focus only on the semi-fixed expenses contained in Table 2. Do any amounts appear to be odd? (Think about whether the figures are right or wrong. What is it about the individual numbers that is not “right”?) Next, briefly comment on the five-year pattern or trend for operating profit/loss measures. You should be able to respond to this step in a few well-written sentences. Page 20Copyright Penn Foster, Inc. 2019 Course Version: 1 Step 2 Focus only on the detailed semi-fixed expense contained in Table 3. Are there any unusual or odd patterns you might note in this detailed financial data? There are 5 expenses that have an oddity about them which doesn’t make sense. Similar to Step 1, what is it about the individual numbers that are not “right”? There are 4 expenses that “stick out” as not being correct and one that has an unusual pattern. attention. You should be able to respond to this requirement in a few well-written sentences. Briefly comment on only the most obvious or apparent measures or patterns, by expense item. Step 3 Identify the high and low measures in each column, just as you would in preparation for the application of the high-low method or technique. For example, in Table 3 the high measure for the cost driver (NRVS) is 280 NRVS in month 13 and the low measure is 31 NRVS in month 12. Repeat this process for each of the eight separate semi-fixed expense columns and also for the total expense column. Insert a table for Step 3 to present your findings. The table should have three columns; 1. Expense 2. High Figure 3. Low Figure After the high and low measures have been identified in each column, Page 21Copyright Penn Foster, Inc. 2019 Course Version: 1 try to match each expense column’s high and low measure, separately, to the highs and lows identified in the NRVS column. They won’t match. Don’t try to correct the data, but comment on the potential for application of the high-low technique. What happens when the high and low activity level doesn’t match the high and low expense measure? Does this prevent you from correctly applying the high-low technique? Don’t overanalyze this data, because there’s a problem with it and you don’t have sufficient information to correct it. Merely summarize your observations and unsuccessful attempts to match the high and low NRVS months (identified above), separately, with each of the high and low expense measure months. You should be able to do this in a very few well-written sentences. Step 4 Using the Excel file "Exam 500896 - Motomart Excel Spreadsheet" as per the instructions found above under the "Project Requirements", reproduce and complete the following Table 5 and answer the four questions. The Excel file provides an example of how to arrive at the figures that need to be entered into the Table. You will create new worksheets for each of the remaining expenses. Do the work to arrive at the figures for each expense. Be sure to include the Excel file as part of your submission to "backup" the data presented in the Table in the Word document being submitted. The Excel spreadsheet, while it will be included in your submission for Page 22Copyright Penn Foster, Inc. 2019 Course Version: 1 the project, will not be graded. It is supporting documentation for what is being presented in the Word document. Only the information that is in the Word document will be graded. The FC and VC should be rounded to the nearest dollar. The R-sq is a percentage figure carried out to 2 decimal places. Table 5 Column Expense FC VC R-sq 1 Salaries $106,866 –$110 4.10% 2 Vacation 3 Advertising and training 4 Supplies/tools/laundry 5 Freight 6 Vehicles 7 Demonstrators 8 Floor planning Computed total 9 Total Complete the cost equations for the table. Use the R-squared as the single measure of “goodness of fit.” Don’t attempt to improve your results with the elimination of “outliers” or “influential outliers.” As you complete Table 5, answer the following questions: Page 23Copyright Penn Foster, Inc. 2019 Course Version: 1 1. What problems did you encounter? 2. Are the R-squared measures high or low? 3. Are the slopes negative or positive? 4. Are your conclusions consistent with those from the high-low effort? Step 5 Summarize your findings by answering the following questions: 1. Can the Motomart data be used to prepare a reliable financial forecast? Why or why not? 2. If Motomart is included in the very large database used to prepare the financial forecast that supports the relocation of Motomart closer to Existing Dealer, what concerns might present themselves with respect to the remainder of the database used for this forecast? 3. Would you rely on this forecast? Writing Guidelines Refer to the “Submitting Your Work” section at the end of this book for details on submission requirements for the Motomart Case assignment. … ACCOUNTING 4 Your Motomart Project #500896 is being returned for the following reasons as a combination of these results in a failing grade: It is not unusual to have the project returned as not graded. It is evident that you have done a lot of work, which is good. The feedback is being provided to help you “tweak” what you have done in order to help meet the requirements for the project. If you are don’t understand something about what needs to be done, then do not hesitate to telephone and speak with me. Students who do call, find it much easier to complete the project because they get a better understanding for what needs to be done as opposed to reading the written word and being unsure due to “interpretation”. For Step 1: You are to focus on the semi-fixed expenses and provide and explanation as to the “patterns” they present. Also, you are to provide what is incorrect with the figures, not only their pattern. Think about whether the figures are right or wrong. What is it about the individual numbers that is not “right”? While you don’t have the “detail” as to how the numbers are arrived at, you are not speculating as to what the numbers should be. You are looking for what “does not make sense” with the numbers. What is “not right” with the figures? This has nothing to do with an analysis or falling within statistical parameters. Take a close look at what is “different” and then explain why it should not be different. This step is not about the ups and downs of the data. There are really no “outliers”. But, in looking at each individual expense and thinking about how a business incurs the expense, there is one expense that does have an unusual pattern. For Step 2: There are 4 expenses that “stick out” as not being correct (there is something wrong with the figures). Again, while you don’t have the “detail” as to how the numbers are arrived at, you are not speculating as to what the numbers should be. You are looking for what “does not make sense” with the numbers. This is the same thing that you are looking for in Step 1, except there are 4 expenses. Which ones and why? There is one expense that has an unusual pattern. Every accounting period has expenses. For example, if rent is to be paid, then rent expense should have an amount. A hotel should have maintenance expenses every month. The amounts should also be reasonable. If expenses are within a certain range and all of a sudden there is an amount that is well outside of that range, then that is unusual. However, that is not the case with this data. Expenses can go up and down. You are not reporting this up and down. You are looking for the unusual pattern that also does not make sense. For Step 3: Overall looks good just double check to ensure your answers are accurate before resubmitting. For Step 4: Your figures are incorrect for this step. You are missing the required work in the Excel file. How did you arrive at the figures that you presented? The worksheet has been provided for you to do the work for this step. · There is a “60 Months” worksheet that has the 60 months of data already entered. There is a “Sample” worksheet that an example of how to calculate the R-sq. · There is a “PLOT – SALARY” worksheet that shows how the FC, VC and R-sq figures are calculated for Salary. · You need to copy the “PLOT-SALARY” worksheet and show your calculations and work just like is presented in the worksheet. It should look identical to this worksheet except for the unique figures. What needs to be done is: · Create new spreadsheets for each of the expenses. Use the PLOT-SALARY spreadsheet as a “template” for what needs to be done for each of the additional expenses. · The calculated figures in the spreadsheet should be the same as those shown when you present Table 5. This is the supporting “work” for the figures. If they are not the same, no credit will be given. · If the formulas in the cells are not provided or correct in the spreadsheets, no credit will be given. (Typing numbers into cells will not be given credit for. Formulas in cells for the figures must be provided.) · The graphs on the spreadsheets also need to be included in order to be able to answer the four questions for this step. For Step 5: Rework this step based upon the corrected steps for the project. Answer the questions being asked for the step as it pertains to your findings in the project. Please rework and resubmit the project for grading. If you have any questions, feel free to telephone me toll free at 1.888.427.1000, Monday thru Friday from 9am-4pm EST. Step one The semi-fixed expenses of demonstrators appear odd in its trend in the five years reflected in the table. The semi-fixed expense is odd since it has decreased in the second year and the fifth year as the number of new retail vehicles sold increase. The semi-fixed expense of demonstrators in the two years should increases as the sales increase. In addition, it increased in the fourth year as the NRVS reduced instead of decreasing. The operating profits of the firm in the five years under analysis depict to be on a declining trend even as the sales revenues have been improving. The operating profit in 1984 stands at $2,885,969 while in 1985 is $3,828,255. Thus, one would expect the operating profit from 1984 to 1985 to improve. In contrast, the operating profit in 1985 declined from $263,828 to $112,314. Similarly, the same trend is reflected in 1987 to 1988 where the sales revenues have expanded while the net operating loss by the firm worsened. The undue trend of the operating profit is attributed to the trend of the semi-fixed expenses. The semi-fixed expenses are increasing at a higher rate compared to the change in net revenue generated. Consequently, the firm has been facing undue trend of operating profit since the increasing revenue is not able to match the expanding amount of the semi-fixed expenses. Step 2 One of the semi-fixed expenses an odd pattern is the vacation semi-fixed expense due to its inconsistent amount in different months compared to the number of NVRS. Similarly, the supply/tool/laundry expenses reflect an odd pattern due to some periods experiencing huge costs while the NVRS are low. Furthermore, the freight semi-fixed expense has an odd pattern due to high costs as NVRS are low, while low once NVRS are high. The demonstrator’s semi-fixed expense also, has odd pattern due to inconsistent movement depending on the NVRS in the different months. Similarly, the Floorplan has an unusual pattern as it indicates the cost is high when few during time of few NVRS. Step 3 Salary high measure = $124,805 in month 53 Salary low measure = $45,491 in month 11 Vacation high measure = $9,212 in month 17 Vacation low measure = $160 in month 42 Adv/Trn high measure = $38,616 in month 38 Adv/Trn low measure = $9,112 in month 37 SplyTls/Lndry high measure = $14,426 in month 47 SplyTls/Lndry low measure = $(684) in month 28 Freight high measure = $1,628 in month 19 Freight low measure = $(492) in month 58 Vehicles high measure = $3,175 in month 22 Vehicles low measure = $486 in month 60 Demo’s high measure = $4,517 in month 48 Demo’s low measure = $(3,513) in month 59 Floor-plan high measure = $188,040 in month 60 Floor-plan low measure = $(78,173) in month 1 Total high measure = $352,182 in month 60 Total low measure = $2,772 in month 1 Step 4 Column Expense Fixed Cost Variable Cost R-squared 1 Salaries $106,866 -$110 4.10% 2 Vacation $1415 $2.817 0.6% 3 Advertising and training $24,348 $0.015 0% 4 Supplies/tools/laundry $8,269 $22.27 9.2% 5 Freight $430.3 $0.319 0.1% 6 Vehicles $1809 $0.179 0% 7 Demonstrators $1,305 -$6.763 3.8% 8 Floor planning $80,537 -$399.6 28.3% Computed total $224,979 -$491 46.10% 9 Total $22,475 -$536.8x 24.6% 1. In determining the fixed cost, variable cost, and the R-squared value of the various expenses, the problem encountered was determining the values to reflect under the Y-axis and the X-axis. 2. The R-squared measures reflected for the various expenses are relatively low. 3. The slopes of the various expenses contain both negative and positive slopes. 4. The conclusion reflected in the completed table is not consistent to the high-low effort. Step 5 The analysis undertaken on the semi-fixed expenses the Motomart Company demonstrates how such data can be applied in preparing financial report. However, the financial data derived from Motomart Company reflects reflect they cannot be used to generate reliable financial report. The inconsistencies on the pattern of the semi-fixed expenses in different months reflect the data have potential of misleading an analyst in preparing the financial statement of the company. Furthermore, the R-squared coefficients of the various expenses are highly above zero, which implies vary from the mean expense. Thus, if the Motomart is included in a large database employed in preparing its forecasted financial statement, it will highly be concerned on the accuracy of the expense amounts due to numerous inconsistencies. Thus, the forecasted financial statements cannot be relied upon. The semi-fixed expenses demonstrated under table reflect a number of seasonal expenses incurred by the firm. One of the seasonal expenses experiences is the salary cost, which is higher on the 12th month of each year compared to other months. Similarly, the floor-planning component depicts an instance of seasonal expenses since it is higher at the end of each financial year compared to other months. Furthermore, the supply/tools/laundry expenses of the company are higher at the end of each financial year implying it is a seasonal expense. Consequently, Motomart employed the process of reducing costs by minimizing expenses within a given financial year.