Case 2 is quantitative and involves the analysis of selectedfinancial data for a firm we’ll call “Motomart.” Motomart wasa retail automobile dealership seeking permission to relocatein an area already served by a similar automobile dealership.The existing dealership brought a lawsuit to block the relocation.Although the data provided by the company is flawed,you’ll prepare a summary of your observations and answerseveral questions about problems with the case.

Case 2: Motomart

INTRODUCTIONThe Motomart case is designed to supplement your Managerial/Cost Accounting textbook coverage of cost behavior and variablecosting using real-world cost data and an auto-industryacceptedcost driver. Unlike textbook problems, this data isreal. It won’t necessarily produce a clear solution when youattempt to analyze cost behavior and apply scatter-plot,high-low, and regression methods to separate mixed costsinto their fixed and variable components. This case alsoillustrates that Financial Accounting decisions and methodscan have an influence on Cost Accounting and Managerialapplications and decisions.

OBJECTIVESWhen you complete this case, you’ll be able to• Explain the importance of accrual accounting and properapplication of the matching principle for the computationof contribution margins and break-even points• Apply knowledge of generally accepted accountingprinciples (GAAP) to a specific real-world example• Integrate statistical analyses and scatter plots, linegraphs, and regression to determine the reliability offinancial information prepared for external use• Use analytical review procedures to examine a firm’sfinancial statements• Apply critical-thinking skills to real-worldbusiness circumstances

CASE BACKGROUNDThis case is based on real financial data provided by a retailautomobile dealership (Motomart) seeking to relocate closerto an existing retail dealership. You’ll examine the mixed costdata from Motomart and apply both high-low and regressionto attempt to separate mixed costs into their fixed and variablecomponents for break-even and contribution margin computations.You’ll find that the data is flawed because Motomartwas a single observation in a larger database. Don’t attemptto correct the data (e.g., remove outliers or influential outliers).You’ll be producing a scatterplot and apply high-low andregression methods to the extent practicable and writing asummary report of the findings.

Motomart operates a retail automobile dealership. Themanufacturer of Motomart products, like all automobilemanufacturers, produces forecasts. It has long been anindustry practice to use variable costing-based/break-evenanalyses as the foundation for these forecasts, to examinetheir cost behavior as it relates to the new retail vehiclessold (NRVS) cost driver. In preparing this financial information,a common financial statement format and accounting proceduresmanual is provided to each retail auto dealership.The dealership is required to produce monthly financialstatements using the guidelines provided by this commonaccounting procedures manual, and then furnish thesefinancial statements to the manufacturer. General Motors,Ford, Nissan, and all other automobile manufacturersemploy similar procedures manuals.The use of a common format facilitates the development ofcomposite financial statements that can be used to estimatecosts and produce financial forecasts for future or proposedretail dealership sites (Cataldo and Kruck 1998). Zimmerman(2003) suggests that as many as 77 percent of manufacturersdivide costs into variable and fixed components, and thatmanagers arrive at these estimates by classifying individualaccounts as being primarily fixed or primarily variable (67).

For this case, you’ll examine mixed costs as defined by themanufacturer. Using the scatterplot, high-low, and regressionmethods, separate these mixed costs into their fixed and variable components. The data is problematic, and a clear solution won’t exist. Don’t attempt to correct the data byremoving outliers, but make observations based on any patternsyou observe. The case will expose you to actual data

and require you to summarize your findings, including anyconclusions you’re able to reach and why the financial datamakes it impossible to separate the mixed costs into theirfixed and variable components.

Motomart: A LitigationSupport EngagementThe Motomart case evolved from a litigation support engagement.The lead author of this case was hired to analyze thedata and provide expert testimony. His report and testimonywas made available to the public (for a fee to cover reproductioncosts). A broad description of the relevant points for theMotomart case follows.Motomart wanted to move their retail automobile dealership,blaming their location for declining profits and increasinglosses. They provided financial projections, using variablecosting, to show that after relocation both Motomart and theexisting dealership would be profitable. They created thesefinancial projections using a database provided by the manufacturer,which included all North American retail automobiledealerships. Motomart was one of the observations or retailautomobile dealerships included in the database used to createthese financial projections. You’ll be examining portions ofMotomart’s historical financial data.The relocation site was quite close to the existing dealership(which we’ll refer to as Existing Dealer), and Existing Dealerfelt that, if the relocation was permitted, one or both of thedealerships would fail to break even and eventually go bankrupt,leading to poor service, or what the industry refers to as“orphaned” owners of these automobiles.Antitrust laws provided Existing Dealer with the means toblock the relocation requested by Motomart, but only if itcould prove that the relocation wasn’t in the best interest ofthe consuming public.Generally, the only way to prove this is to prove that there’s simply not enough business for bothretail automobile dealerships to break even (or generate areasonable return on investment, given the risks associatedwith the industry). Again, the manufacturer, in support of theproposed Motomart relocation, supplied financial projectionsshowing that both retail automobile dealerships would beprofitable after the relocation.

The expert witness hired to investigate the merits of therelocation was given the Motomart data, but not the entiredatabase that included the Motomart data. The Motomartdata was in such poor form that it wasn’t possible to produce afinancial forecast. An alternative forecast, not included in thiscase, was produced. This alternative forecast did not supportthe relocation of Motomart to a site closer to Existing Dealer.The alternative forecast showed that the market simplycouldn’t support two retail automobile dealerships. The implicationwas that, as the weaker of the two dealerships, Motomartwas losing business to Existing Dealer. In conclusion, therelocation request by Motomart was denied.

Income and Expense DataThe following tables give you information such as incomestatements, semi-fixed expenses, and salaries for Motomart.Look for unusual entries or discrepancies in their recordsand, where you can, note the cause of the problems.Table 3 summarizes financial and cost driver informationproduced by Motomart, where new retail vehicles sold (NRVS)is the cost driver. The account classification method hasresulted in three cost behavior classifications: variable,semi-fixed, and fixed costs. Semi-fixed is the automobileindustry-specific term used for mixed costs. We’ll assumethat Motomart’s classifications of variable costs (VCs) andfixed costs (FCs) are correct, and focus our analysis onMotomart’s semi-fixed or mixed costs.

Table 2

SELECTED HISTORICAL INCOME STATEMENT AND RELATED MEASURES

1984 1985 1986 1987 1988Net Variable 2,885,969 3,828,255 4,086,667 3,940,799 4,298,748

Revenues*Semi-Fixed (S-F) Expenses:Salaries 613,006 968,789 1,211,464 1,289,758 1,360,489Vacation 600 26,705 19,468 19,059 18,268Advertising & Training 210,226 288,347 281,219 309,608 371,314Supplies/Tools/Laundry 31,473 46,141 75,468 65,935 81,252Freight 5,719 5,987 6,528 5,731 4,663Vehicle 22,913 23,718 23,664 20,370 19,483Demonstrators 10,465 4,969 –1,513 4,192 707Floor-Planning 278,531 301,113 276,201 156,129 305,044Total S-F Expenses 1,172,933 1,665,769 1,892,499 1,870,782 2,161,220

Fixed Expenses:Total Fixed Expenses 1,449,208 2,050,172 2,290,867 2,164,362 2,653,620Operating Profit/(Loss)**

263,828 112,314 -96,699 -94,345 -516,092

New Retail Vehicles Sold

1,798 1,977 1,674 1,450 1,897

Notes:* Revenues less variable costs equal Net Variable Revenues (or Contribution Margin, inaggregate).** Net Variable Revenue less Total S-F Expenses less Total Fixed Expenses equals OperatingProfit/(Loss).

Table 3 provides five years of monthly data (N=60) for NRVSand the related semi-fixed or mixed cost measures. Semifixedcosts were significant. Recall that they ranged fromnearly $1.2 million for calendar and fiscal year (FY) 1984to almost $2.2 million for FY 1988 (see Table 2).Recall the cost function applying to the high-low and regressionmethods, which are provided in a variety of forms, dependingon the texts you used in your previous math, economics, oraccounting courses. Figure 3 is a brief outline of the high-lowand regression methods.

FIGURE 3—For the high-low method to work, the $H and #H and the $L and #L measures must befrom the same accounting period

Preparing GraphsThe single cost driver and nonfinancial measure in Table 3 isnew retail vehicles sold (NRVS or X in the above cost function).There are eight financial measures (salary; vacation; advertisingand training; supplies, tools, and laundry; freight; vehicles;demonstrators; and floor-planning [also known in the automobileretail industry as interest expense relating to new carinventory]), as well as a total (aggregate measure) provided forall eight financial measures (or the Y in the above cost function).Using NRVS, the only available cost-driver, use Excel toprepare nine separate scatter plots and cost function-basedtrend lines and nine separate line graphs for each of thefinancial measures provided in Table 3. See Figure 4 andFigure 5 for a examples of completed graphs for salaries.

FIGURE 4—A Scatterplot Graph for Motomart Salaries

Now examine, on a preliminary basis, the pattern or trend(or lack thereof) for each of the “X” (NRVS) and “Y” (financialmeasure) data pairs and consider the following questions:• You’re observing these data pairs for a 60-month period(i.e., five years); are any annual or other seasonalpatterns or trends immediately apparent?• Do the slopes of the trend lines (i.e., variable costs)make sense?

FIGURE 5—A Line Graph for Motomart Salaries

In the case of salaries (see Figures 4 and 5), there’s no apparenttrend or pattern. It’s odd that salaries decrease as NRVSincreases—in fact, this doesn’t make any sense. However, it’sconsistent with the high-low results, which also didn’t makesense. But remember, since this data came from Motomart,the firm attempting to relocate, it’s real and from an actuallitigation support engagement (not a textbook problem), so itwon’t necessarily work out perfectly.The cost equation in Table 4 shows fixed costs (FC) at$106,866.00 and variable costs to be used to “reduce” totalcosts (TC) by $110.10 per NRVS. Compare the salary figuresand coefficients (in bold type) to Figure 4. Notice that if youextended the trend line in Figure 4, it would hit the y-axisintercept at $106,866.00 (the fixed cost). Also notice that theR-squared (R-sq) measure in Table 4 equals 4.1 percent.

Table 4

SALARY = $106,866.00 – $110.10 NRVSPredictor Coefficient Std Deviation t-statistic p-valueConstant 106,866.00 10,793.00 9.90 0.000NRVS 110.10 70.17 –1.57 0.122s = 25300 R-sq = 4.1%

Analysis of Variance

SOURCE DF SS MS F-statistic p-valueRegression 1 261,795 261,795 0.10 0.754Error 58 152,801,120 2,634,502Total 59 153,062,912

Your math and statistics courses probably reviewed the useof the t-statistic, overall F-statistic, and related p-values, aswell as some of the other measures presented here. Ourapplication is a very simple one, so we’ll focus on only theR-squared measure. The other measures are provided inthis example only for completeness.Because the high-low technique didn’t work, it makes sensethat the regression technique wouldn’t work well, either.Therefore, the results for high-low and regression are consistent.The advantage of the regression technique is that itmathematically quantifies the level of the problem or difficultywith the data. In this case, one of simple regression, theR-squared measure tells the story. Still focusing on thesalaries example in Figure 5, the R-squared measure tells usthat only 4.1 percent of the total or mixed or semi-fixed costis explained by NRVS. This means that that cost equationdeveloped from this historical data isn’t helpful in predictingfuture costs, as nearly 96 percent of the cost behavior,through use of this equation, remains unexplained.

REQUIREMENTSThe project requires five steps to be presented.

Step 1 – Provide comments on a 5 year Income Statement.Step 2 – Discuss patterns in expense items.Step 3 – Identify High/Low activity levels.Step 4 – Compute cost equations.Step 5 – Summarize your findings.

In one Word document, provide individual sections for eachStep. This Word document along with the Excel file(described below) will be uploaded when you click on theTake Exam button on your Student Portal to submit yourproject (described under “Submitting Your Assignment” laterin the instructions).This Senior Capstone project highlights your knowledge andthe skills you have developed over the course of your education.There is nothing “new” to be learned here.The knowledge and skills required for this project includeEnglish Composition, Financial Accounting, ManagerialAccounting, Business Statistics and the abilities to think criticallyand to present your work in a professional manner.If you are unsure or don’t understand something about theproject, then go back to your previous subjects to review. Forexample, if you don’t remember how to use the High/LowMethod, the revisit your Managerial Accounting to refreshyour memory on how to use the High/Low Method

Remember, there is nothing “new” here. Everything aboutthis project you should already know how to do.On your Student Portal, under the Supplements section ofthe Senior Capstone subject is a downloadable Excel filetitled “Exam 500896 - Motomart Excel Spreadsheet”.• The Excel file provides a detailed example of what needsto be done for one of the expenses in order to fill out thefigures required in Steps 3 & 4. You will include thisExcel file as part of your project submission along withthe Word document you create to present this project.o There is a “60 Months” worksheet that has the 60months of data already entered. There is also a“Sample” worksheet that an example of how to calculatethe R-sq.o There is a “PLOT – SALARY” worksheet that showshow the FC, VC and R-sq figures are calculatedfor Salary.o There is also a “high&low” worksheet for help withthe high/low method in Step 3.

o Complete and include the Excel spreadsheet. Youwill need to create new worksheets for each of theother expenses following the example to calculatethe figures needed for Table 5.

Operating Profits andSemi-Fixed Expenses

Step 1First, using Tables 2–4, note the pattern of operating profits(or losses) over the five-year period. Then focus only on thesemi-fixed expenses contained in Table 2. Do any amountsappear to be odd? (Think about whether the figures are rightor wrong. What is it about the individual numbers that is not“right”?) Next, briefly comment on the five-year pattern ortrend for operating profit/loss measures. You should be ableto respond to this step in a few well-written sentences.

Step 2Focus only on the detailed semi-fixed expense contained inTable 3. Are there any unusual or odd patterns you mightnote in this detailed financial data? There are 5 expenses thathave an oddity about them which doesn’t make sense. Similarto Step 1, what is it about the individual numbers that is not“right”? There are 4 expenses that “stick out” as not being correctand one that has an unusual pattern. attention. Youshould be able to respond to this requirement in a few wellwrittensentences. Briefly comment on only the most obviousor apparent measures or patterns, by expense item.

Step 3Identify the high and low measures in each column, just asyou would in preparation for application of the high-low methodor technique. For example, in Table 3 the high measure forthe cost driver (NRVS) is 280 NRVS in month 13 and the lowmeasure is 31 NRVS in month 12. Repeat this process foreach of the eight separate semi-fixed expense columns and

also for the total expense column. Insert a table for Step 3 topresent your findings. The table should have three columns;1. Expense2. High Figure3. Low FigureAfter the high and low measures have been identified in eachcolumn, try to match each expense column’s high and lowmeasure, separately, to the highs and lows identified in theNRVS column. They won’t match. Don’t try to correct the data,but comment on the potential for application of the high-lowtechnique. What happens when the high and low activity leveldoesn’t match the high and low expense measure? Does thisprevent you from correctly applying the high-low technique?

Don’t overanalyze this data, because there’s a problem with itand you don’t have sufficient information to correct it. Merelysummarize your observations and unsuccessful attempts tomatch the high and low NRVS months (identified above),separately, with each of the high and low expense measuremonths. You should be able to do this in a very few wellwritten sentences.

Step 4Using the Excel file "Exam 500896 - Motomart ExcelSpreadsheet" as per the instructions found above under the"Project Requirements", reproduce and complete the followingTable 5 and answer the four questions. The Excel file providesan example of how to arrive at the figures that need tobe entered into the Table. You will create new worksheets foreach of the remaining expenses. Do the work to arrive at thefigures for each expense. Be sure to include the Excel file aspart of your submission to "backup" the data presented inthe Table in the Word document being submitted.

The Excel spread sheet, while it will be included in your submissionfor the project, will not be graded. It is supportingdocumentation for what is being presented in the Word document.Only the information that is in the Word document willbe graded.

The FC and VC should be rounded to the nearest dollar. TheR-sq is a percentage figure carried out to 2 decimal places.

Table 5

Column Expense FC VC R-sq1. Salaries $106,866 –$110 4.10%2. Vacation3. Advertising and

training4. Supplies/tools/laundry5. Freight6. Vehicles7. Demonstrators8. Floor planning

Computed total9.

Complete the cost equations for the table. Use the R-squaredas the single measure of “goodness of fit.” Don’t attempt toimprove your results with the elimination of “outliers” or“influential outliers.” As you complete Table 5, answer thefollowing questions:

1. What problems did you encounter?2. Are the R-squared measures high or low?3. Are the slopes negative or positive?4. Are your conclusions consistent with those from thehigh-low effort?

Step 5Summarize your findings by answering the following questions:1. Can the Motomart data be used to prepare a reliablefinancial forecast? Why or why not?2. If Motomart is included in the very large database usedto prepare the financial forecast that supports the relocationof Motomart closer to Existing Dealer, whatconcerns might present themselves with respect to theremainder of the database used for this forecast?3. Would you rely on this forecast?

Writing GuidelinesRefer to the “Submitting Your Work” section at the end ofthis book for details on submission requirements for theMotomart Case assignment.

Grading CriteriaYour assignment will be evaluated according to the followingcriteria:Content 80 percentWritten Communication 10 percent

Format 10 percent

CriteriaContent 80 pts• Step 1 – Provides comments on 5 year income statement(worth 10 points)• Step 2 – Discuss patterns in expense items (worth 10 points)• Step 3 – Identify high and low activity levels (worth 10 points)• Step 4 – Compute cost equations (worth 30 points)• Step 5 - Summarize your findings (worth 20 points)

Written Communication 10 pts• Answers each question in complete sentences leading to well-structuredresponses to each Step listed above.• Uses correct grammar, spelling, punctuation, and sentence structure• Provides clear organization by using words like first, however, on theother hand, and so on, consequently, since, next, and when• Makes sure the paper contains no typographical errors

Format 10 ptsThe paper is double-spaced, typed in font size 12. It includes the student’s• Name and address• Student number, Course title and number, and project number

SUBMITTING YOUR WORKWriting Guidelines1. Type your submission, double-spaced, in a standardprint font, size 12. Use a standard document format with1-inch margins. (Do not use any fancy or cursive fonts.)2. Include the following information at the top ofyour paper:a. Name and complete mailing addressb. Student numberc. Course title and number (Senior Capstone: Business,BUS 450)d. Project number (see Format instructions)e. Project title (Professional Development Activity,Case 1, etc.)3. Read the assignments carefully and complete each one inthe order given.4. Be specific. Limit your submission to the questionsasked and issues mentioned.5. If you include quotes or ideas from textbooks or othersources, provide a reference page in either APA or MLAstyle. On this page, list books, Web sites, journals, orany other references used in preparing the paper.6. Proofread your work carefully. Check for correct spelling,grammar, punctuation, and capitalization.