Krog’s MetalFab

Group -4

CASE FACTS

Two Plants – One at Chicago and other at MolineFire destroyed Chicago plantProduction 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 $1,589,131 (B)Profit in 2003 as a apercent of 2003

sales($111,928/5,079,094) $0.0220

Lost profit(A*B) $34,961

Analysis of 2003 Income Statement

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Estimating Profit -Account Analysis Method

• COGS and Sales Expense treated as variable cost.• Administrative Expense treated as fixed cost.

CalculationsCOGS/$ Sale $0.89

S. Expense/$ Sale $0.04 Variable Cost $0.93

Fixed Cost / Month $20,250.00 Fixed Cost / Year $243,000.00

Estimated Sales-2004 $5,434,630.58 Estimated Cost $5,297,857.62 Estimated Profit $136,772.96

Actual Profit ($724,210.00)

Lost Profit $860,982

Estimating Profit- High Low Method

  Time Period Sales Cost

Highest Sales Aug-03 $602,210 $485,120

Lowest Sales Apr-03 $302,685 $353,584

Variable Cost/ $ Sales $0.44

Fixed Cost /Month $220,660.00

Estimated Profit $400,096.00

Lost Profit $1,124,306.00

Estimating Profit – Regression Method

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f(x) = 0.365054092641811 x + 259418.495698961R² = 0.603574666830169

Scatter Plot of Sales and Cost

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Estimating Profit Using Least Squares Regression -Without

Removing Outlier Total Cost = 259,418+0.3651xSales

Fixed Component $259,418.00

Variable Component $0.37 2003 Sales $5,079,094.00 Predicted 2004 Sales $5,434,630.58 Estimated Cost $5,097,199.62 Estimated Profit $337,430.96 Actual Profit ($724,210.00)

Lost Profit $1,061,640.96

Estimating Profit- Regression Method -II

Estimating Profit Using Least Squares Regression -After

Removing Outlier

Total Cost = 220338+0.437xSales

Fixed Component $220,338.00

Variable Component

$0.44

2003 Sales $5,079,094.00 Predicted 2004

Sales$5,434,630.58

Estimated Cost $5,018,989.56

Estimated Profit $415,641.02

Actual Profit ($724,210.00)

Loss Profit $1,139,851.02

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f(x) = 0.436967215532063 x + 220338.421806872R² = 0.991499909317905

Scatter Plot of Sales and Cost (Removing Outlier)

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Recommendation

• Accountant’s 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