Solved: United States Motors Inc USMI manufactures

automobiles and li

United States Motors Inc. (USMI) manufactures automobiles and light trucks and distributes
them for sale to consumers through franchised retail outlets. As part of the franchise agreement,
dealerships must provide monthly financial statements following the USMI accounting
procedures manual. USMI has developed the following financial profile of an average dealership
that sells 1,500 new vehicles annually.
AVERAGE DEALERSHIP FINANCIAL PROFILE
Composite Income Statement
Sales ................ $30,000,000
Cost of goods sold ............ 24,750,000
Gross profit .............. $ 5,250,000
Operating costs
Variable expenses ........... 862,500
Mixed expenses ............ 2,300,000
Fixed expenses ............. 1,854,000
Operating income ............ $ 233,500
USMI is considering a major expansion of its dealership network. The vice president of
marketing has asked Jack Snyder, corporate controller, to develop some measure of the risk
associated with the addition of these franchises. Jack estimates that 90 percent of the mixed
expenses shown are variable for purposes of this analysis. He also suggested performing
regression analyses on the various components of the mixed expenses to more definitively
determine their variability.

Required
1. Calculate the composite dealership profit if 2,000 units are sold.
2. Assume that regression analyses were performed on the separate components of the mixed
expenses and that a coefficient of determination value of .60 was determined as applicable to
aggregate mixed expenses over the relevant range.
a. Define the term relevant range.
b. Explain the significance of an R - squared value of .60 to USMI’s analysis.
c. Describe the limitations that may exist in applying the composite-based relationships to
specific new dealerships that have been proposed.
d. Define the standard error of the estimate.
3. The regression equation that Jack Snyder developed to project annual sales of a dealership
has an R - squared of 60 percent and a standard error of the estimate of $4,500,000. If the
projected annual sales for a dealership total $28,500,000, determine the approximate 95
percent confidence range for Jack’s prediction of sales.
4. What is the strategic role of regression analysis for USMI?
(CMA Adapted)

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