RE: NEW-IMPROV AUTO-TOASTER ATTN: FINANCE LEAD Congratulations on your new posit
ID: 2716565 • Letter: R
Question
RE: NEW-IMPROV AUTO-TOASTER
ATTN: FINANCE LEAD
Congratulations on your new position as Finance Lead! With that out of the way, let’s get down to your first project. Don’t mess this up; your new boss does not take failure well!
Based on the equipment and facilities required for effective production, teams in logistics and requisitions have great confidence that annual fixed costs over 10 years will total $15 million (15,000,000), resulting in a fixed cost of $1.5 million (1,500,000) per year. However, due to irregularities in component and raw material acquisition, we do not have a fixed marginal cost. The data in the attached file are estimates sent to our team by the team in the logistics department.
The attached data for projected revenue per year are based on our market research and production limitations communicated to us by the logistics department here and the lead of production in the Abilene facility.
Since this is your first project as the finance lead, our team has compiled a list of elements we think are necessary to your final report.
1.Use Excel or some other software to generate a function from the data to model cost. We think it should be linear and you should probably call it (x). (2 points)
2.Similarly, you need a revenue function, likely called (x). A cubic function should provide a balance between accuracy and simplicity. However, Excel probably won’t be precise enough. You’ll need to use some other tool for this one. (2 points)
3.Of course, we need a profit function. (2 points)
4.On projects in the past, several items were considered. Find functions for marginal cost (’(x)), marginal revenue (’(x)), and marginal profit (’(x)), as well as for marginal average cost (’(x)), marginal average revenue (’(x)), and marginal average profit (’(x)). (4 points each, 24 total)
5.A few production levels are needed by management to make commitments on the project. They’ll want to know which levels achieve: maximum average revenue, maximum average profit, and maximum profit. (5 points each, 15 total) You should also report the profit at each of those levels. (2 points each, 6 total)
6.Based on these findings, what production level do you recommend? Why? (5 points)
(in hundreds of thousands) (in millions of USD) (in millions of USD) items produced cost revenue 0 1.5 0 20 1.945 1.586 40 2.487 2.528 60 2.951 3.415 80 3.631 4.455 100 3.877 4.963 120 4.253 5.242 140 4.927 5.364 160 5.413 5.302 180 5.949 5.352 200 6.558 5.457Explanation / Answer
We would use Excel regression tool to get Cost & Revenue models.
(1) Cost model
Therefore,
Cost, C = 1.47 + 0.02 x Quantity (Q)
(2) Revenue Model
So,
Revenue, R = 1.45 + 0.03 x Q
(3) Profit model
Profit = R - C.
So,
Profit = - 0.016 + 0.0003 x Q
NOTE: Out of 6 questions, the first 3 are answered.
SUMMARY OUTPUT Regression Statistics Multiple R 0.998289669 R Square 0.996582263 Adjusted R Square 0.996202514 Standard Error 0.101729965 Observations 11 ANOVA df SS MS F Significance F Regression 1 27.15906331 27.15906 2624.321 2.06639E-12 Residual 9 0.093140873 0.010349 Total 10 27.25220418 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 1.469272727 0.05738344 25.60447 1.02E-09 1.339462369 1.599083086 1.339462369 1.599083086 Q 0.024844545 0.000484979 51.22813 2.07E-12 0.023747448 0.025941643 0.023747448 0.025941643Related Questions
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