Case Study Chris Winn Bellevue University Case Study
Case Study Chris Winn Bellevue University
Case Study • The following problems exist ▫ ▫ ▫ Quarterly profits (1986 -88) have been questioned Baseline (trend line) of profits is unknown Number of gas accounts in 1990 unknown Wage discrimination problem Gas account movement to hedge fund was unsuccessful to restore cash flows to the company
Number of Gas Accounts • 32 gas and 64 oil accounts in 1988 • A direct variance means that the proportion of two values remains the same when one of the values changes • The ratio of gas to oil accounts in 1988 was 1: 2 • 86 oil accounts are projected in 1990 • To keep the same ratio, 43 gas accounts would be projected in 1990 • If accounts have grown from 64 to 86 (about +34%), revenue should follow this growth if margins remain the same
Profitability Analysis • Quarterly profits (1986 -88) in millions were: 342, 267, 321, 157, 33, 349, 132, and 289 • Statistical results: ▫ Count: 8 ▫ Mean (Average): 236. 25 ▫ Population Standard Deviation: ~107. 97 • The trend line equation is: y = -12. 92 x + 294. 4, but the R² = 0. 075, so this is not a very good fit but it does tell us the slope of the trend line for reported profits is negative when it should be positive from account growth (+34%) • 2 standard deviations from the mean gives a range of about: 20. 31 to 452. 19 for profitability (“reasonably certain”) • Expected trend from 34% account growth is 134% of the mean at the end period, which is also projected into the future 2 years
Profitability Baseline (Trend line) 450 400 350 Revenue (millions) 300 250 Reported Profits Actual Trend 200 Expected Trend 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Quarter 11 12 13 14 15 16
Gas account discrepancy • When the trends are extrapolated another 2 years, one expects the company to be making 408. 375 million per quarter • The actual trend in 2 years indicates a decline to 87. 68 million per quarter • Resources Unlimited entered into bankruptcy June of 1994 which proves the actual trend was downward toward greater losses (probably more than was predicted here) • Cash flow data may have been a better measure to predict future insolvency
Gas account discrepancy (cont. ) • Gas accounts were moved to a shell company to hide cash flow problems • The actual gas accounts may have been lower than the expected 43, creating a reluctance to report or project the actual • The expected growth rate projection (from gas account increase) was 11. 47 million/quarter while the actual projection was -12. 92 million/quarter from the quarterly data ▫ This means the gas accounts were moved out at approximately twice the rate they were expected to grow at ▫ (43 – 32) * 2 = about 22 accounts would have been moved over the period into the shell company
Discrimination in Wages • Three male employees were being paid $50, 000, $55, 000, and $52, 000 • A female accountant was salaried at $32, 000 for the same position • Population statistics on the males’ wages: ▫ ▫ Mean (Average): 52333 Population Standard Deviation: 2054. 8 2 deviations lower from the mean: 48, 223 Raise needed to be within 2 deviations: $16000 (to $48000 salary) • The female’s salary was significantly lower, indicating a discriminatory wage practice
Wage Discrimination Visual Wages 60000 55000 2 Deviations 50000 45000 Wages 40000 35000 30000 Male 1 Male 2 Male 3 Female 1
Conclusions • Resources Unlimited was operating at increasing losses over time • The growth pattern of the accounts did not match up with the reported revenues • Moving gas accounts to a hedge fund did not increase the company’s cash flows / solvency • Resources Unlimited practiced wage discrimination to females in at least one instance
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