# Regression Analysis: Sales and Total Variable Costs

Over the past 12 months the Four Winds Novelty Company firm has recorded its internet sales (equals monthly output levels) and its monthly total variable costs (TVC) for a particular novelty item as shown in the following table. Sales have grown over this period with relatively few shocks due to uncontrollable weather, political and sporting events. This online retailer carries no inventories; when it receives a pre-paid on-line order from a customer, it simply buys the product from a supplier and ships it out to the customer.

Sales = Output TVC ($)

102,813

176,163

196,121

222,885

226,356

296,416

378,446

450,666

579,696

607,082

624,680

636,133

TVC

201,953

340,608

377,940

432,863

441,714

629,267

867,596

1,103,807

1,701,125

1,917,861

2,195,352

2,479,195

a) Using regression analysis, find an equation that best fits the data to represent the TVC function. (I was able to duplicate the example in the book for the cubic equation, but not the quadratic or linear equations -- I must be doing something wrong in the excel regression analysis, but I don't know what). I also do not completely understand how to interpret the output of the analysis to determine best fit.

b) At what sales/output level will marginal costs (MC) reach a minimum?

c) Estimate the value of TVC for sales/output level 250,000 units, and calculate the 95% confidence interval for your estimate

https://brainmass.com/economics/regression/regression-analysis-sales-and-total-variable-costs-525583

#### Solution Preview

Dear Student:

Please open the attached Excel file and then follow the explanations below:

a)

Data in worksheet Data and regression in worksheet Regression. The attached regression was run using the Data Analysis add-in in the Data tab. (If you are using some other tool, you would have to adjust accordingly.) Choose regression, then variables and the confidence level. Then input the range of cells where the data is located. Make sure that ...

#### Solution Summary

This solution shows a regression output on sales and variable costs for Four Winds Novelty Company. The problem includes data analysis based on the monthly internet sales and total variable costs. The regression analysis has been done with the Excel Data Analysis tool, with explanations on how to interpret the output data. The solution also shows how to find the minimum level of marginal cost (MC) and to predict a 95% confidence level of sales on a particular level of variable costs using the regression equation.

Cost Estimation, CVP analysis

25. Cost Estimation and regression Analysis:

Dali financial services prepares tax returns for small businesses. Data on the company's total costs and output for the past six months appear in the table that follows. The result of the regression analysis are also provided.

a. Plot the data and regression line on a graph.

b. Estimate total monthly costs for a month when 330 tax returns are prepared, using estimates from regression output.

Month Taxreturns prepared Total costs

January 200 $160,000

February 280 192,000

March 300 198,000

April 260 180,000

May 260 186,000

June 240 170,000

6.19

Cost- volume- profit; volume defined in sales dollars. An excerpt from the income statement of the Donelean Company follows. Estimated fixed costs in year 1 are $660,000.

Donelean Company

Income Statement

Year Ended December 31, Year 1

Sales 3,000,000

Operating Expenses:

Cost of goods sold 1,425,000

Selling Costs 450,000

Administrative costs 225,000

Total operating Costs 2,100,000

Profit 900,000

a. What percentage of sales revenue is variable cost?

b. What is the break-even point in sales dollars for Donelean Company?

c. Prepare a cost-volume-profit graph for Donelean Company.

d. If sales revenue falls to $2,500,000, what will be estimated amount of profit?

e. What amount of sales dollars produces a profit of $1,000.000?

6.29

CVP analysis and financial modeling( adapted from CMA exam). Storage devices Incorporated is a retailer for high tech recording disks. The projected operating profit for the current year is $200,000 based ona sales volume of 200,000 units. The company has been selling the disks for $16 each; variable costs consist of the $10 purchase price and $2 handling cost. The companys annual fixed costs are $600,000.

Management is planning for the coming year, when it expects that the unit purchase price of the disks will increase by 30 percent.

a. Calculate the companys breakeven point for the current year in units.

b. What will be the companys operating profit for the current year if there is a 20 percent increase in projected unit sales volume?

c. What volume of dollar sales must be achieved in the coming year to maintain the current year's operating profit if the selling price remains at $16?

d. Would the use of a financial model be helpful to the firm in addressing issues such as those raised in requirements b. and c.? Explain.

6.31

CVP analysis. A company is decideing which of two new thermostat systems to produce and sell. The Basic system has variable costs of $8 per unit, excluding sales commissions, and annual fixed costs of $520,000; the Deluxe system has variable costs of $6.40, excluding sales commissions, and fixed costs of $672,000. The company's selling price is $32 per unit for the Basic model and $38 for the deluxe model. The company pays a 10 percent sales commission.

a. Which of the two systems will be more profitable for the firm if sales are expected tp average 150,000 units per year?

b. How many units must the company sell to break even if it selects the deluxe system?

c. Suppose the Basic system requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $224,000 and will be depreciated over a 10 year life by the straight-line method. How many units must the company sell to earn 400,000 of income, after considering depreciation, if the Basic system is selected?

d. Ignoring the information presented in part c., at what volume level will management be indifferent between the Basic system and the Deluxe system?