MBA 620 Week 1 Homework ANSWER

a. The income statement from Ford’s annual report appears as follows in summary form. (This
information was obtained from the company’s Web site, http://www.ford.com.) (1.1, 1.2)

a. The financial information in the company’s annual report was prepared primarily for
shareholders and creditors in accordance with U.S. Generally Accepted Accounting
Principles (U.S. GAAP). Does the income statement provide enough detailed information
for managers at Ford? Explain. ANSWER: No. The report does not provide sufficient
information or specific details for the managers from the company’s historical data or
future projection from different department or divisions.

b. Provide at least three additional detailed pieces of financial information that would help
managers evaluate performance at Ford. ANSWER: 1. Commission 2. Product line
profitability 3. Historical data.
c. Provide at least two nonfinancial measures that would help managers evaluate
performance at Ford. ANSWER: Percentage of return and defective products, hours of
employee training and market share.
2. Identify on which of the four basic financial statements could the following information be
obtained (1.2): ANSWER ON THE RIGHT SIDE:
ANSWER
The balance due on company loans Balance Sheet
The total sales dollars for the period Income Statement
Taxes paid for the year Income Statement
The amount paid out to stockholders as Statement of Retained Earnings
dividends
The value of inventory at the end of the year Balance Sheet
Cash balance at the end of the year Cash Flow
3. High Tech, Inc., is a public company that produces laser and ink jet printers. Jorge is an
accounting staff member who works for the company’s controller and is involved in
preparing the annual report. One of High Tech’s competitors developed a superior color laser
jet printer using a less costly production process. Jorge realizes that High Tech’s substantial
inventory of color laser jet printers is effectively obsolete and will have to be written down to
its net realizable value in accordance with U.S. GAAP. This means higher expenses and
lower profits.
Jorge’s boss, the controller, is aware of the situation but the chief financial officer is not. In
fact, the controller told the CFO that High Tech does not have any obsolete inventory. Both
Jorge’s boss and the CFO receive bonuses tied to the company’s profits. The outside auditors
are completing the audit and are unaware of the obsolete inventory.
How should Jorge handle this situation? Use the IMA’s Statement of Ethical Professional
Practice shown in Figure 1.2 "IMA Statement of Ethical Professional Practice" as your guide.
(1.4)
ANSWER: Jorge should follow the organizations' policies with regard to resolving involving
ethical conflicts. However, if he does not find a resolution such as no written policies guiding the
employees and or if following organizations policies do not resolve the conflict, he could go
straight to the next level of management or superior to his boss. It is clear in the situation that the
controller is involved in unethical conduct by hiding the truth from the CFO or the company
about the obsolete inventory. The CFO may be benefiting from the profit as well, however,
she/he does not know the problem with the obsolete inventory; therefore, Jorge cannot assume
and bypass the authority of the CFO by going straight to the “acceptable reviewing committee”.

4. Vasquez Incorporated is trying to identify the cost behavior of the three costs that follow.
Cost information is provided for three months. Calculate the cost per unit, and then identify
how the cost behaves for each of the three costs (fixed, variable, or mixed). Explain the
reasoning for your answers. (2.1) ANSWER: In BOLD text/number.
Cost A Cost B Cost C
Mon Units Total Cost per Total Cost per Total Cost per
th Produc Costs Unit Costs Unit Costs Unit
ed
1 1,500 $1,500 $1 $4,500 $3 $3,000 $2
2 3,000 1,500 0.5 5,250 1.75 6,000 2
3 750 1,500 2 3,750 5 1,500 2
Cost Behavior
(Fixed,
Fixed Variable Mixed
Variable,
Mixed):
5. Woodworks, Inc., produces cabinet doors. Manufacturing overhead costs tend to fluctuate
from one month to the next, and management would like to accurately estimate these costs
for planning and decision-making purposes.
The accounting staff at Woodworks recommends that costs be broken down into fixed and
variable components. Because the production process is highly automated, most of the
manufacturing overhead costs are related to machinery and equipment. The accounting staff
believes the best starting point is to review historical data for costs and machine hours:
Reporting Period Total Costs Machine
(Month) ($) Hours
January 278,000 1,550
February 280,000 1,570
March 266,000 1,115
April 290,000 1,700
May 262,000 1,110
June 269,000 1,225
July 275,000 1,335
August 286,000 1,660
September 250,000 1,000
October 253,000 1,020
November 260,000 1,025
December 281,000 1,600

A. Use the four steps of the high-low method to estimate total fixed costs per month
and the variable cost per machine hour. State your results in the cost equation
form Y = f + vX by filling in the dollar amounts for f and v. (2.2)
ANSWER:
Step 1: Identify the high low activity levels from the data set.
The highest level of activity (cost of machine hours) occurred in the month of April
($290,000 total cost;1700 machine hours), and the lowest level of activity occurred in
the month of September ($250,000 total cost; 1,000 machine hours).

Step 2: Calculate the variable cost per unit (v).

Cost at highest level – Cost at lowest level

Unit variable cost (v) = --------------------------------------------------------------
Highest activity level – Lowest activity level

$290,000 - $250,000
= -------------------------------------
1700 hours – 1000 hours

$40,000
= ----------------
 700 hours
ANSWER: v = $57.14

Step 3: Calculate the total fixed cost (f). Using the low activity level of 1,000 hours
and $250,000 total cost.

Y=f+vX
$250,000 = f + ($57.14 x 1,000 hours)
f = $250,000 - $57,140
ANSWER: f = $192,860

Step 4: State the result in equation form Y = f + v X.

(Assume X is 1,000 hours).

Equation: Y =$192,860 + $57.14X

Y = $192,860 + ($57.14 X 1000hours)
Y = $192,860 + $57,140

ANSWER: Y = $250,000

B. Use the five steps of the scattergraph method to estimate total fixed costs per month, and
the variable cost per machine hour. State your results in the cost equation form Y = f +
vX by filling in the dollar amounts for f and v. (2.2)
ANSWER:
Step 1. Plot the data points of each period on a graph.

295,000
290,000
285,000
280,000
Total cost $

275,000
270,000
265,000
260,000
255,000
250,000
245,000
- 200 400 600 800 1,000 1,200 1,400 1,600 1,800
Machine Hours

Step 2. Visually fit a line to the data points and be sure the line touches one data point.
 295,000
290,000
285,000
280,000
Total cost $

275,000
270,000
265,000
260,000
255,000
250,000
245,000
- 200 400 600 800 1,000 1,200 1,400 1,600 1,800
Machine Hours

Step 3. Estimate the total fixed costs (f).

ANSWER: Total fixed cost appears to be approximately $200,000.

Step 4. Calculate the variable cost per unit (v).

Y = $200,000 + Vx. I will use the data point line for December ($281,000 total cost; 1600
hours).
Y = f + Vx
$480,000 = $200,000 + (v x 1600)
$480,000 - $200,000 = v x 1600
$280,000 = v x 1600
v = $280,000/ 1600
ANSWER: v = $175

Step 5. State the results in equation form Y = f + v X.

Fixed cost $200,000
Variable cost $175
 Y = $200,000 + $175X
Y =$200,000 + (175 X 1000 hours)
Y = $200,000 + $175,000
ANSWER: Y = $375,000

C. Use regression analysis in Excel (or other spreadsheet software program) to estimate total
fixed costs per month, and the variable cost per machine hour. State your results in the
cost equation form Y = f + vX by filling in the dollar amounts for f and v. Hint: either
follow the four steps in Section 2.3, or use the Excel functions =INTERCEPT(),
=SLOPE(). (2.2-2.3)
ANSWER:

Regression Analysis
295,000
290,000 y = 45.306x + 210766
285,000 R² = 0.9301
280,000
Total Costs $

275,000
270,000
265,000
260,000
255,000
250,000
245,000
- 200 400 600 800 1,000 1,200 1,400 1,600 1,800
Machine Hours

Coefficients
y-intercepts 210,766
x-variable 45.31

Cost Equation: Y = f + vX
Y = $210,766 + 45.31X
(Using the equation, X =1000) Y = $210,766 + $45,310
ANSWER Y = $256,076
 D. Use the results of the high-low method (a), scattergraph method (b), and regression
analysis (c), to estimate manufacturing overhead costs for 1,500 machine hours. (You
will have three different answers—one for each method.) (2.2)

High-Low Method

Y = $192,860 + 57.14X

Y = $192,860 + (57.14 x 1500hours)

Y = 192,860 + $85,710

Y = $278,570

Scattergraph Method
Y = $200,000 + $175X
Y = $200,000 + ($175 x 1500 hours)
Y = $200,000 + 262,500
Y = $462,500
Regression Method
Y = $210,766 + $45.31X
Y = $210,766 + ($45.31 x 1500hours)
Y = $210,766 + $67,965
Y = $278,731

E. Which approach do you think is most accurate and why? (2.2)

ANSWER: Of the three-estimation cost analysis used in the same given set of
information, I can say that regression analysis is the most accurate. The regression
analysis method uses a series of mathematical equations to estimate fixed and variable
cost using software compare to low and high which uses estimation and scattergraph
using estimates and guesswork on the y and x intercepts.

6. The city of Rockville would like to estimate maintenance costs, and believes the number of
miles driven by maintenance employees would be an accurate predictor of maintenance
costs. They collected annual cost data for maintenance work performed on its fleet of trucks,
including the total maintenance cost and the number of miles driven, and performed
regression analysis on the data. The output is shown here:
y-intercept 441,013
Number of Miles 1.53
R-squared 0.985
a. Use the regression output to develop the cost equation Y = f + vX by filling in the
dollar amounts for f and v. (2.3)
Y = f + Vx
ANSWER: Y = $441,013 + 1.53X

b. What would the city of Rockville’s estimated costs be if its trucks drove 500,000
miles in year 7? (2.2)
Y = f + Vx
Y = $441,013 + 1.53X
Y = $441,013 + (1.53 x 50,000 miles)
Y = $441,014 + 76,500
ANSWER: Y = $517,514

c. How confident are you of your prediction in part (b)? (Hint: use the R-squared from
the regression output in your explanation) (2.3)
ANSWER: The R-squared output, which is (0.985) 98.5% is a good predictor of the
estimate that the city of Rockville needed to accurately determine the maintenance
cost for its fleet of trucks annually.