Question 1

Anna Martinez, the financial manager at the Casa Real restaurant, is checking to see if there is any relationship between newspaper advertising and sales revenues at the restaurant. She obtained the following data for the past 10 months:

Month Revenues Advertising costs

R R March 50 000 2 000 April 70 000 3 000 May 55 000 1 500 June 65 000 3 500 July 55 000 1 000 August 65 000 2 000 September 45 000 1 500 October 80 000 4 000 November 55 000 2 500 December 60 000 2 500

Required:

1.1 Use the High-Low method to derive the cost function relating to advertising costs and revenues.

1.2 Run the regression on excel and derive the cost function relating to advertising costs and revenues. (Submit your excel book via email to a_dich@sun.ac.za).

1.3 Using the cost functions derived in 1.1 and 1.2 above, calculate the increase in revenues for each R1 000 spent on advertising.

1.4 Which method should Martinez use to predict the effect of advertising costs on revenues? Support your answer.

Question 2

Foreman Fork, Inc.s income statement for 2005 on production and sales of 200 000 units is as follows:

Revenues R2 600 000 Cost of goods sold 1 600 000 Gross margin 1 000 000 Marketing & Distribution costs (1 150 000) Operating income (loss) R (150 000)

Foremans fixed manufacturing costs are R500 000 and variable marketing and distribution costs are R4 per unit.

Foremans gross margin per unit is R5. Sam Hogan, Foremans president believes that if production and sales had been 230 000 units, the company would have covered the R1 150 000 of marketing and distribution costs and enabled Foreman to breakeven for the year.

Required:

2.1 Calculate Foremans operating income if production and sales equal 230 000 units.

2.2 Was Sam Hogan was right or wrong? Briefly explain.

2.3. Calculate the breakeven point for 2005 in units and in revenues