Question

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 1,900 new vehicles annually:

AVERAGE DEALERSHIP FINANCIAL PROFILE
Composite Income Statement
Sales	$	38,000,000
Cost of goods sold		31,350,000
Gross profit	$	6,650,000
Operating costs
Variable		1,092,500
Mixed		2,926,000
Fixed		2,348,400
Operating income	$	283,100

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% of the mixed costs shown are variable for purposes of this analysis. He also suggests performing regression analyses on the various components of the mixed costs to more definitively determine their variability.

Required:

1. Calculate the composite dealership profit if 2,600 units are sold.

3. The regression equation that Jack Snyder developed to project annual sales of a dealership has an R-squared of 60% and a standard error of the estimate of $5,700,000. If the projected annual sales for a dealership total $36,100,000, determine the approximate 95% confidence interval for Jack’s prediction of sales. (Hint: The 95% confidence interval uses 2 standard errors in determining the interval.)

Answer 1