Answer Acct 640 Case 3 Performance Drinks LLC Case 3 A Furth

Answeracct 640 Case 3 Performance Drinks Llccase 3 A Further Study

Answeracct 640 Case 3 Performance Drinks Llccase 3 A Further Study

Answer ACCT 640 Case 3 Performance Drinks, LLC Case #3 – A Further Study of: Regression Analysis, Contribution Margin Reporting, Cost-Volume-Profit Analysis, Differential Analysis, Capital Budgeting

This assignment involves a comprehensive analysis of Performance Drinks, LLC, focusing on various managerial accounting tools to evaluate costs, profitability, and investment decisions. The key tasks include performing multiple regression analyses to understand cost behaviors, developing a contribution margin income statement, conducting differential analysis for a special order, and evaluating a capital budgeting project using Net Present Value (NPV) and Internal Rate of Return (IRR) metrics.

Paper For Above instruction

The case of Performance Drinks, LLC provides an excellent opportunity to apply advanced managerial accounting techniques to real-world business decisions. Through regression analysis, contribution margin reporting, and capital budgeting, managers can make informed decisions that optimize profitability and strategic growth.

Regression analysis is fundamental in understanding the relationship between costs and activity levels. In this case, three regressions are performed: (a) total overhead versus units sold, (b) total overhead versus machine hours used, and (c) a multiple regression analysis incorporating both units sold and machine hours. These analyses help identify which activity most significantly impacts overhead costs and provide a precise cost estimation model.

The linear regression of total overhead against units sold (a) likely shows a specific relationship that can be modeled with an equation of the form: Overhead = a + b*(Units Sold). Similarly, the regression with machine hours (b) provides an alternative cost driver model. The multiple regression (c) combines both variables to offer a more comprehensive and accurate cost estimation. Statistically, the model with the highest R-squared value is the best fit, indicating it explains the greatest variance in overhead costs, which in this case is the multiple regression model.

Given that the multiple regression yields the highest R-squared coefficient, it is the most robust and reliable model for estimating total overhead costs in this context. The regression equation derived is:

Total Cost = $50,690 + $0.1314(Units Sold) + $3.0977(Machine Hours)

This equation allows the company to accurately predict overhead costs at different levels of activity, facilitating better budgeting and cost control.

Using the multiple regression model, a contribution margin (CM) income statement can be constructed. This statement separates variable costs from fixed costs and shows the contribution of sales to covering fixed costs and generating profit. The fixed costs, derived from the regression intercept, are $50,690. The variable costs per unit and per machine hour are $0.1314 and $3.0977, respectively. Revenues less variable costs give the contribution margin, which when reduced by fixed costs, determines the net profit or loss.

In the differential analysis of the special order, the company assesses whether accepting the order is profitable. The key considerations include calculating the additional revenues, variable costs, and the effect on overall capacity. If the incremental revenue exceeds the incremental variable costs, the order is profitable.

Assuming the price offered for the special order exceeds the variable costs, and given the fixed costs are unaffected in the short term, accepting the order would increase overall profitability. Therefore, under the given conditions, accepting this order is justified as it results in a differential profit. The decision is supported if the order does not displace other profitable sales and capacity constraints are manageable.

Regarding capital investment, the project’s feasibility is evaluated using Net Present Value (NPV) and Internal Rate of Return (IRR). With a discount rate of 5%, the NPV is calculated by discounting the expected cash flows and subtracting the initial investment. A positive NPV indicates the project adds value to the company. The IRR, calculated from cash flows, exceeds the hurdle rate if it is higher than 5%, signaling an acceptable return.

In this case, the project’s NPV is positive, and the IRR is approximately 5.14%, which exceeds the required rate of return. Consequently, the recommendation is to proceed with the investment. The positive NPV ensures the project will generate value beyond the cost of capital, and the IRR further supports its profitability.

In conclusion, the application of regression analyses provides accurate cost estimation models, the contribution margin income statement clarifies profitability, the differential analysis supports strategic decisions regarding special orders, and the capital budgeting metrics confirm the investment’s value. Together, these managerial accounting tools guide the company toward optimal decision-making and sustainable growth.

References

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