# Julie Chang is Analyzing Customer Service Costs for Zeller Electrical Limited: Financial Management Assignment, CC, Canada

## Part 1: Zeller Electric

Julie Chang is analyzing customer service costs for Zeller Electrical Limited. Zeller Electrical sells and installs electric vehicle chargers in homes and commercial locations across the country. Customer requests for service of Zeller Electrical vehicle chargers are handled by a central service center. When a service request is received, the service center contracts with one of over 500 independent electricians to do the work. When the electrician completes the job, and Zeller Electric approves their invoice for services, the parts and labour costs of the service calls are recorded in a centralized database. Management wants to determine the cost per service in order to predict future costs.

Management provided Julie with weekly customer service department costs and requests data for the past year. Julie analyzed the data and has produced a chart to help management understand the data, together with regression analysis output and descriptive statistics. This information is shown below, in addition to the data used by Julie in her analyses. Notice that there are no service requests in week 17 as there was a shutdown for audit purposes.

### Image Description

 Descriptive Statistics Service Requests Department Costs Mean 255.87 22144.10 Standard Error 9.85 971.14 Median 265 21232.00 Mode 274 #N/A Standard Deviation 71.01 7002.98 Sample Variance 5041.73 49041667.70 Kurtosis 2.75 4.02 Skewness -0.57 1.30 Range 450 43730 Minimum 0 6270 Maximum 450 50000 Sum 13305 1151493 Count 52 52

 Data Used in Analyses & Chart Week Customer Service Requests Customer Service Department Costs (\$) 1 201 17,246 2 276 27,324 3 122 17,043 4 386 24,202 5 274 19,591 6 450 34,650 7 321 22,245 8 328 28,142 9 243 50,000 10 161 26,565 11 185 16,891 12 300 21,450 13 250 18,700 14 300 21,120 15 315 22,176 16 203 13,398 17 0 6,270 18 220 20,086 19 274 15,673 20 202 15,998 21 322 33,295 22 201 18,130 23 183 14,091 24 269 25,152 25 242 24,490 26 198 21,344 27 296 29,630 28 190 13,376 29 190 16,511 30 246 17,048 31 289 24,796 32 195 18,876 33 259 18,234 34 276 28,538 35 275 19,360 36 190 20,273 37 299 28,614 38 334 22,779 39 335 15,000 40 328 36,080 41 261 26,413 42 184 17,609 43 250 21,725 44 274 21,701 45 254 27,102 46 208 16,245 47 311 20,868 48 271 20,271 49 291 21,767 50 330 24,321 51 236 18,691 52 307 30,393 Total 13305 \$1,151,493

## Required Questions:

1. Compute Zeller Electric’s fixed and variable costs using the high-low method. Predict the customer service department costs for a week in which 300 requests are made, based on your high-low analysis. Better answers will show all computations.
2. Compute Zeller Electric’s fixed and variable costs using the regression output. Predict the customer service department costs for a week in which 300 requests are made based on your regression analysis.
3. Zeller Electric’s prediction of future customer service department costs depends not only on the sophistication of its prediction model (e.g. high-low vs. linear regression) but also on the quality of the data used to make the prediction. Identify any “outlier(s)” in the weekly data provided (i.e., datapoint(s) that differ significantly from other data points). Discuss how excluding any outlier(s)is likely to change the prediction of customer service department costs. Better answers will state what information provided by Julia was used to determine which observations were outlier(s). Discuss the advantages and disadvantages of excluding the outliers. [Note: the is no one “correct” way to identify outliers.]
4. How much confidence do you have in making future projections based on the analyses provided by Julia? What additional data would you suggest Julie request to refine her prediction of future service department costs?

## Part 2: In a time before Netflix, Prime, Crave, etc.

In the 1990s movies were distributed one-way only: through theatres. The accounting would certainly be simpler with one outlet than it is today! So for this case, let’s imagine we are studying one particular Oscar-winning film, “the Movie”, that was projected to generate cash flow of as much as \$350 million for Viacom, Inc., Paramount Pictures’ parent company. Such success would insure the film a place among the top-grossing films of all time! Times have most certainly changed!

But would the Movie be a moneymaker for Paramount? Films were typically distributed to theaters under an agreement that splits the gross box office receipts approximately 50/50 between the theater and the movie studio. Under such an agreement, Paramount had received \$191 million in gross box office receipts from theaters as of December 31, 1994. Paramount reports that the film cost \$112 million to produce, including approximately \$15.3 million each paid to the main star and the director, and that ‘production overhead’ of \$14.6 million. This production overhead is charged to the movie at a rate equal to 15% of other production costs.

Not included in the \$112 million production costs were the following other expenses associated with the film. Promotion expenses incurred to advertise, premiere, screen, transport, and store the film totaled \$67 million at the end of 1994. An additional \$6.7 million ‘advertising overhead charge’ (equal to 10% of the \$67 million promotion expenses) was charged to the film by Paramount. These charges represent the film’s allocation of the studio’s cost of maintaining an in-house advertising department. Paramount also charged the film a ‘distribution fee’ of 32% of its share of gross box office receipts. This fee is the film’s allocation of the costs incurred by Paramount to maintaining its studio-wide distribution services. Finally, \$6 million in interest on the \$112 million in production costs were charged to the film by Paramount.

## Required Questions

1. Was the Movie ‘accounting’ hit in terms of net income, as computed by Paramount?
2. In their original contracts, the main actor and director were to receive \$7 million and \$5 million, respectively, for their work on the Movie. However, after the studio asked the producers for budget cuts, both the main actor and director agreed to forego their standard fee for a percentage of the film’s gross box office receipts. Sources estimate that the new agreement guaranteed each of the two 8% of the studio’s share of gross box office receipts from the film. Using the information available about the costs of making the film, did the Moviehave a positive contribution margin? Assume that all costs not specifically identified as variables are fixed.
3. If the main actor and director had demanded their original fees up front instead of taking a percentage of gross box office receipts, would the Moviehave make money in 1994?
4. Other individuals associated with the film signed contracts based on a percentage of ‘net profits’ rather than gross box office receipts, net profits being the film’s profit after the recouping of all the studio’s expenses. For example, the writer who wrote the novel on which the movie was based, received \$350,000 plus 3% of the film’s net profits. The screenwriter signed a similar contract with a fixed fee plus 5% of the film’s net profits. Based on your calculations above, how much did these two individuals receive from their share of the film’s net profits? How much in gross box office receipts will the studio have to receive from theaters before the novel writer and screenwriter receive any money under their net profit participation contract?
5. Will accounting systems automatically produce reports that provide comparative information to answer questions such as those asked in (3) and (4) above? If not, as a manager, do you expect to make computations such as required for (3) and (4) above yourself? Would you be able to ask an accountant for the information you need to make the type of contracting choices described in this case without understanding the terminology studied in this course?

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