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Krogs MetalFab

Group -4

CASE FACTS
Two Plants One at Chicago and other at Moline
Fire destroyed Chicago plant
Production affected , expenses incurred due to shifting of
work force
Insurance coverage : To compensate for lost profit

CASE FACTS Accountant


Calculation
Sales in 2003

$5,079,094

Predicted Sales (7% Growth)

$5,434,630

Actual sales in 2004

$3,845,499

(A) Lost Sales


(B)Profit in 2003 as a apercent of 2003
sales($111,928/5,079,094)

$1,589,131

Lost profit(A*B)

$34,961

$0.0220

500000
450000
400000
350000
300000
250000
200000
150000
100000
50000
0

30000

Sales Expense

25000
20000
15000

10000
5000

200000

400000
Sales $

600000

800000

0
0

Administrative Expense

COGS $

Analysis of 2003 Income


Statement

40000
35000
30000
25000
20000
15000
10000
5000
0
0

100000 200000 300000 400000 500000 600000 700000


Sales $

100000 200000 300000 400000 500000 600000 700000


Sales $

Estimating Profit -Account


Analysis Method
COGS and Sales Expense treated as variable cost.
Administrative Expense treated as fixed cost.
Calculations
COGS/$ Sale
S. Expense/$ Sale
Variable Cost
Fixed Cost / Month
Fixed Cost / Year

$0.89
$0.04
$0.93
$20,250.00
$243,000.00

Estimated Sales-2004
Estimated Cost
Estimated Profit
Actual Profit

$5,434,630.58
$5,297,857.62
$136,772.96
($724,210.00)

Lost Profit

$860,982

Estimating Profit- High


Low Method
Time
Period
Highest Sales
Lowest Sales

Aug-03
Apr-03

Sales

Cost

$602,210 $485,120

Variable Cost/ $
Sales

$0.44

Fixed Cost /Month

$220,660.00

Estimated Profit

$400,096.00

Lost Profit

$1,124,306.00

$302,685 $353,584

Estimating Profit
Regression Method
Scatter Plot of Sales and Cost
600000

500000

Total Cost

400000

300000
y = 0.3651x + 259418
R = 0.6036

200000

100000

Estimating Profit Using Least


Squares Regression -Without
Removing Outlier
Total Cost = 259,418+0.3651xSales
Fixed Component
$259,418.00
Variable Component
2003 Sales
Predicted 2004 Sales
Estimated Cost
Estimated Profit
Actual Profit

$0.37
$5,079,094.00
$5,434,630.58
$5,097,199.62
$337,430.96
($724,210.00)

Lost Profit

$1,061,640.96

0
0

100000 200000 300000 400000 500000 600000 700000


Sales

Estimating ProfitRegression Method -II


Scatter Plot of Sales and Cost (Removing Outlier)
600000

Total Cost

500000

Estimating Profit Using Least


Squares Regression -After
Removing Outlier
Total Cost = 220338+0.437xSales

400000

Fixed Component $220,338.00

300000
y = 0.437x + 220338
R = 0.9915

200000
100000
0

100000 200000 300000 400000 500000 600000 700000


Sales

Variable
Component
2003 Sales
Predicted 2004
Sales
Estimated Cost
Estimated Profit
Actual Profit
Loss Profit

$0.44
$5,079,094.00
$5,434,630.58
$5,018,989.56
$415,641.02
($724,210.00)
$1,139,851.02

Recommendation
Accountants analysis incorrect because of large
proportion of fixed cost
Use regression method to estimate costs as it is more
accurate.
Data check is necessary before applying regression