Bus 278 Budgeting & Forecasting Midterm (GRADED A+) DeVry University

Bus 278 Budgeting & Forecasting Midterm 1. Question : (TCO 1) It is important that budgets be accepted by . Student Answer: division managers department heads supervisors All of the above Points Recei ...

Bus 278 Budgeting & Forecasting Midterm 1. Question : (TCO 1) It is important that budgets be accepted by . Student Answer: division managers department heads supervisors All of the above Points Received: 5 of 5 Comments: Question 2 Question : . (TCO 2) The quantitative forecasting method that uses actual sales from recent time periods to predict future sales, assuming each period has equal influence on the prediction of future sales, is the . Student Answer: moving average model weighted moving average model exponential smoothing model equal average model Points Received: 5 of 5 Comments: Question 3 Question : . (TCO 3) Which of the following is not used to evaluate the accuracy of regression results? Student Answer: Correlation coefficient Mean square error Standard error of the estimate Coefficient of determination Points Received: 5 of 5 Comments: Question 4 Question : . (TCO 4) Capital expenditures are incurred for all of the following reasons except . Student Answer: as preventive maintenance to counteract competition decreased production improvement in product quality Points Received: 5 of 5 Comments: Question 5 Question : . (TCO 5) Priority budgeting that ranks activities is known as . Student Answer: top-down budgeting bottom-up budgeting zero-base budgeting participative budgeting Points Received: 5 of 5 Comments: Question 6 Question : . (TCO 6) Which of the following ignores the time value of money? Student Answer: Internal rate of return Profitability index Net present value Payback period Points Received: 5 of 5 Comments: Question 7 Question : . (TCO 1) Budgeting is a planning and control system. Discuss how budgeting contributes to these two functions of management. Student Answer: Budgeting serves as a planning and controlling system by documenting the different goals and performance objectives in financial terms, then using such plans throughout the whole year. Furthermore, monthly performances report the comparison of budget results, with actual results. However, to control operations, management must institute appropriate techniques of observation and reporting to determine how actually results get compared to the result of plans. However, management can use a budget to state initially its goals and adjectives in financial terms for a specific period. Budgeting is a part of the company’s plan. With no planned budgeting, there would not feasible future for such a company. Instructor Explanation: Planning involves identifying the activities to be accomplished to achieve the organization’s goals. Budgets act as the blueprints for these plans, and communicate the goals throughout the organization. The budget is the plan the organization should follow in order to reach its goals. At the end of the period, the budget can be used as a control instrument by measuring actual performance against the plan. This will allow management to identify problem areas and improve performance in the future. Points Received: 20 of 20 Comments: Excellent. Correct essay response. Question 8 Question : . (TCO 2) There are a variety of forecasting techniques that a company may use. Identify and discuss the four main qualitatative approaches, including their advantages and disadvantages. Student Answer: The four main basic qualitative methods are the following: 1- Executive opinions, which average the views of experts from various departments to generate a forecast of future sales. The advantage is that the method can be can performed easily and quickly in comparison to other methods. However, the disadvantage is that this method increases the risk of group pressure and stifles critical thinking. 2- The Delphi Method, which questions a panel of experts individually. The disadvantage of this method is often criticized for its low reliability and lack of consensus. 3- Sales force polling, which questions those sales people closest to the customers. Advantage of this method is that it is simple to use and understand. Yet, disadvantage could be and may include overly optimist or pessimistic predictions. 4- Consumer Surveys, which is regarding specific purchases may be conducted by a company. However, this method is mostly like to be an advantage because of its simplicity and importance. Instructor Explanation: Executive opinions average the views of experts from various departments to generate a forecast of future sales. Although this method can be performed easily and quickly it is conducted in a group, which increases the risk of group pressure and stifles critical thinking. The Delphi method questions a panel of experts individually. Although the experts are not influenced by others participating in the forecasting, this method is often criticized for its low reliability and lack of consensus. Sales force polling questions the salespeople closest to the customer. Although this method is simple to use and understand, it may include overly optimistic or pessimistic predictions. Consumer surveys regarding specific purchases may be conducted by a company. Although these data come directly from the consumer, they may not be representative of the target audience. Points Received: 18 of 20 Comments: Correct response – good. But, you are relying heavily on our course materials in your exam response. Students must write responses in their own words and may not simply and paste material from our course materials or other references as their answer– 2 points. Question 9 Question : . (TCO 2) The Federal Election Commission maintains data showing the voting age population, the number of registered voters, and the turnout for federal elections. The following table shows the national voter turnout as a percentage of the voting age population from 1972 to 1996 (The Wall Street Journal Almanac, 1998). Voter Turnout Year % Turnout Year 1972 55 1986 1974 38 1988 1976 54 1990 1978 37 1992 1980 53 1994 1982 40 1996 1984 53 Part (a): Use exponential smoothing to forecast this time series. Consider smoothing constants of a = 0.1 and 0.2. What is the forecast of the percentage of turnout in 1998? Part (b): Use the mean absolute deviation (MAD) to determine which smoothing constant provides the best forecast of voter turnout. Student Answer: Month Year Actual Sales (A) Forecast for a=0.1 Actual Numerical Deviation = Actual -Forecast Diff 2 Forecast for a=0.2 Actual Instructor Explanation: Numerical Deviation = Actual -Forecast Diff 2 0.1 0.2 1972 55 1974 38 55.00 55.00 1976 54 53.30 0.70 0.49 51.60 2.40 5.76 1978 37 53.37 (16.37) 267.98 52.08 (15.08) 227.41 1980 53 51.73 1.27 1.61 49.06 3.94 15.49 1982 40 51.86 (11.86) 140.65 49.85 (9.85) 97.05 1984 53 50.67 2.33 5.41 47.88 5.12 26.20 1986 36 50.91 (14.91) 222.20 48.90 (12.90) 166.53 1988 50 49.42 0.58 0.34 46.32 3.68 13.51 1990 37 49.47 (12.47) 155.60 47.06 (10.06) 101.18 1992 55 48.23 6.77 45.88 45.05 9.95 99.06 1994 39 48.90 (9.90) 98.09 47.04 (8.04) 64.61 1996 49 47.91 1.09 1.18 45.43 3.57 12.74 48.02 (48.02) 46.14 (46.14) SD|A-F| = 939.43 829.55 n = 11.00 11.00 MSE = 85.40 75.41 Part (a): Using an Excel spreadsheet, the forecasted percentage of voter turnout in 1998 is 48.02% using a smoothing constant of 0.1 and 46.14% using a smoothing constant of 0.2. Part (b) Using an Excel spreadsheet, the MAD for a smoothing constant of 0.1 is 7.11 and the MAD for a smoothing constant of 0.2 is 7.69. Therefore, the smoothing constant of 0.1 provides the best forecast of voter turnout. Points Received: 23 of 30 Comments: Part a is correct. Part b omitted MAD and the smoothing constant of 0.1 provides the best forecast of voter turnout. Question 10 Question : . (TCO 3) Use the table “Food and Beverage Sales for Jimmy’s Greek Restaurant” to answer the questions below. Part (a): Calculate the regression line and forecast sales for January of Year 3. Part (b): Calculate the seasonal forecast of sales for January of Year 3. Part (c): Which forecast do you think is most accurate and why? Student Answer: A) Sales for Jimmy’s Greek Restaurant ($000s) Month First Year Second Year January 242 263 February 235 238 March 232 247 April 278 193 May 284 193 June 240 149 July 145 157 August 152 161 September 110 122 October 130 130 November 152 167 December 236 231 Month Month (X) Sales Y X2 XY January 1 242 1 242 February 2 235 4 470 March 3 232 9 696 April 4 278 16 1112 May 5 284 25 1420 June 6 240 36 1440 July 7 145 49 1015 August 8 152 64 1216 September 9 110 81 990 October 10 130 100 1300 November 11 152 121 1672 December 12 236 144 2832 January 13 263 169 3419 February 14 238 196 3332 March 15 247 225 3705 April 16 193 256 3088 May 17 193 289 3281 June 18 149 324 2682 July 19 157 361 2983 August 20 161 400 3220 September 21 122 441 2562 October 22 130 484 2860 November 23 167 529 3841 December 24 231 576 5544 Total 300 4687 4900 54922 B) y= a + bx a= 235.134058 b= -3.187391304 Year Month Time Actual Regression Seasonal Ratio Seasonal Forecast x Sales Forecast (A)/ (F) of Sales (A) Jan-01- (F)y = a + bx Dec-02 0 235.13 Year1 Jan 1 242 231.95 1.04 242 Feb 2 235 228.76 1.03 235 Mar 3 232 225.57 1.03 232 Apr 4 278 222.38 1.25 278 May 5 284 219.20 1.30 284 Jun 6 240 216.01 1.11 240 Jul 7 145 212.82 0.68 145 Aug 8 152 209.63 0.73 152 Sep 9 110 206.45 0.53 110 Oct 10 130 203.26 0.64 130 Nov 11 152 200.07 0.76 152 Dec 12 236 196.89 1.20 236 Year 2 Jan 13 263 193.70 1.36 263 Feb 14 238 190.51 1.25 238 Mar 15 247 187.32 1.32 247 Apr 16 193 184.14 1.05 193 May 17 193 180.95 1.07 193 Jun 18 149 177.76 0.84 149 Jul 19 157 174.57 0.90 157 Aug 20 161 171.39 0.94 161 Sep 21 122 168.20 0.73 122 Oct 22 130 165.01 0.79 130 Nov 23 167 161.82 1.03 167 Dec 24 231 158.64 1.46 231 Year3 Jan 25 155.45 1.20 187 Feb 26 152.26 1.14 173 Mar 27 149.07 1.17 175 Apr 28 145.89 1.15 168 May 29 142.70 1.18 169 Jun 30 139.51 0.97 136 Jul 31 136.32 0.79 108 Aug 32 133.14 0.83 111 Sep 33 129.95 0.63 82 Oct 34 126.76 0.71 90 Nov 35 123.58 0.90 111 Dec 36 120.39 1.33 160 Equation Y = a + bX b slope Enter Excel Fx function =Slope (3.187) a intercept Enter Excel Fx function =Intercept 235.134 C) Regression Because it has been heavily tested. Instructor Explanation:Part (a): Using an Excel spreadsheet, the regression line is y = 235.22 - 3.18x. Based on this regression line, the sales forecast for January of Year 3 is $155.45 (in thousands). Part (b): Using an Excel spreadsheet, the seasonal forecast of sales for January of Year 3 is $187 (in thousands). Part (c): Responses will vary. Students should discuss whether they believe there is a trend in the data. Points Received: 27 of 30 Comments: A & B are correct. C is partially correct. Question 11.Question : (TCO 6) Jackson Company is considering two capital investment proposals. Estimates regarding each project are provided below. Project Nuts Project Bolts Initial Investment $175,000 $100,000 Annual Net Income $30,000 52,000 Annual Cash Inflow $70,000 $45,000 Salvage Value $0 $0 Estimated Useful Life 3 years 3 years The company requires a 9% rate of return on all new investments. Part (a): Calculate the payback period for each project. Part (b): Calculate the net present value for each project. Part (c): Which project should Jackson Company accept and why? Student Answer: A) payback period : Project Nuts: $175000/$70000 = 2.5 years Project Bolts: $100000/45000 = 2.2 years B) net present value : Project Nuts: 70000/(1+.09)=64220.18 175000-64220.18= 110779.82 NPV =110779.82 Project Bolts: 45000/ (1+.09)=41284.40 100,000-41284.40= 58715.6 NPV =58715.6 C) Jackson Company Should accept Project Bolts because it has a higher profitability Index. Project Nuts: (30000+110779.82)/175000 = 0.80 Project Bolts: (52,000 +58715.6)/100,000 = 1.10 Instructor Explanation:Part (a): Project Nuts payback period = $175,000 ÷ $70,000 = 2.50 years Project Bolts payback period = $100,000 ÷ $45,000 = 2.22 years Part (b): Project Nuts NPV = ($70,000 x 2.5313) - $175,000 = $2,191 Project Bolts NPV = ($45,000 x 2.5313) - $100,000 = $13,909 Part (c): Because Project Bolts has a lower payback period and greater net present value than Project Nuts, Jackson Company should accept this project. Points Received: 30 of 30 Comments: Excellent. Correct problem solution. Question 12 Question : . (TCO 6) Corn Doggy Inc. produces and sells corn dogs. The corn dogs are dipped by hand. Austin Beagle, production manager, is considering purchasing a machine that will make the corn dogs. Austin has shopped for machines and found that the machine he wants will cost $262,000. In addition, Austin estimates that the new machine will increase the company’s annual net cash inflows by $40,300. The machine will have a 12-year useful life and no salvage value. Part (a): Calculate the payback period. Part (b): Calculate the machine’s internal rate of return. Part (c): Calculate the machine’s net present value using a discount rate of 10%. Part (d): Assuming Corn Doggy Inc.’s cost of capital is 10%, is the investment acceptable? Why or why not? Student Answer: A) Calculate the payback period. Payback Period = 6.50 Years B) Calculate the machine’s internal rate of return. IRR = 10.97% C) Calculate the machine’s net present value using a discount rate of 10%. NPV = $11,447.07 Yes, because the project has a positive NPV. Instructor Explanation: Part (a): Payback period: $262,000 ÷ $40,300 = 6.50 years Part (b): Internal rate of return: IRR factor = $262,000 ÷ $40,300 = 6.50124 Scanning the 12-year line, a factor of 6.50124 represents an internal rate of return of approximately 11%. Part (c): Net present value: Present Value of Cash flows = ($40,300 x 6.8137) - $262,000 = $12,592. Part (d): Yes, the investment is acceptable. Indications are that the investment will earn a greater return than 10%. The internal rate of return is estimated to be 11%, and the net present value is positive. Points Received: 25 of 30 Comments: A, B and D are correct. C is incorrect.