You are on page 1of 9

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

Calculation
Sales in 2003

\$5,079,094

\$5,434,630

\$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

COGS \$

Statement

40000
35000
30000
25000
20000
15000
10000
5000
0
0

Sales \$

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

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