Abstract
The study has sought to analyze the data of Apple Inc. and realize the relationship between sales revenues and sales, general and administrative expenses and research and development expenses. It has employed regression and correlation analyses. Results indicate that both sales, general and administrative expenses and research and development expenses relate positively with sales revenues.
Introduction
S G& A is the initialism used in accounting and business to refer to sales, general and administrative expenses, which are major components of non-production costs in a company’s income statement (Warusawitharana, 2015). Selling expenses are direct and indirect expenses incurred in selling, including advertisements and salaries and wages paid to selling staffs. General expenses are general operating expenses and taxes that are directly related to the general running of the company; they do not belong to either selling or administration expenses. Administration expenses are incurred in terms of salaries and other supporting expenses directly related to the administration of the company. Research and development (R & D) are expenses incurred in the research and innovation of the company’s production processes and products. Research and development expenses are considered the core part of the modern business world. As the level of competition becomes dynamic, a business organization has to be innovative in its production processes and products (Schudson, 2013). Despite the need to stay ahead of others in business due to dynamic competition, the business has to remain permanently innovative to meet the need, desires and demands of customers. As global competition increases, multi-national corporations have begun giving non-production costs much scrutiny (Mithas et al., 2012). There have been debates on whether S G & A and R & D expenses increases the firm’s sales revenues and profitability or not. This study seeks to analyze the data of Apple Inc. and realize the relationship between sales revenues and sales, general and administrative expenses and research and development expenses.
Literature Review
Authors such as Kama and Weiss (2012) have indicated that the importance of S G &A expenses in influencing sales revenues cannot just be regarded by a wave of hand. Sales promotions inform of advertising and creating awareness about the firm’s business and services have to be taken into consideration. If all advertisements and product awareness campaigns are carried out in honest and ethical standards, customers become able to make best choices among varieties of products, influencing sales revenues (Barge-Gil & Lopez, 2014). Products that would have been given a lot of considerations due to honest and ethical advertisements will always enjoy high demands and sales revenues. The other important component of SGA is salaries of sales staff. Studies have indicated that when sales people are motivated, they will always be looking for ingenious ways of selling products (Mithas et al., 2012). Despite promises of promotions in leadership, sales target with monetary prizes can be set for sales executive and other sales staffs to knock them down. Commissions are usually given to motivate highly achieving members of the sales executive team (George, 2015). It has also been evident that if representatives earn salaries together with sales commissions, they put more efforts in innovating ways to boost sales so that their salaries can increase. In fact, some researchers have indicated that caps on sales commissions decrease employee motivation. Through the effects of sales caps, the company’s revenues can be prone to declines (Barge-Gil & Lopez, 2014).
Studies have indicated that business managers usually find it hard to spend on product and service research and development. However, there have been strong correlations between sales growth and research and development expenses. Companies with stronger R&D spending have seen stronger gains in sales revenue and stock returns (George, 2015). Although R & D is an expense, when money that implies R & D is well spent, the company can stay ahead of others in product superiority. The company will always identify customers’ needs and translate them into innovative ways for products and services that suite them (Barge-Gil & Lopez, 2014).
Methodology:
The study has employed regression and correlation analyses in estimating the relationship between sales revenues and, sales, general and administrative expenses (S G &A) and research and development (R & D). The analyses are expected to help researchers understand the form of relationship between sales, general and administrative expenses and research and development expenses. Regression analysis can also be used in forecasting effects of the sales, general and administrative expenses and research and development expenses in future. The study has used data derived from Apple Inc. The data are about selling, general and administrative expenses and research and development expenses and selling revenues.
Regression Analysis:
Data
If SR = sales revenues; SGA= sales, general and administration expenses; RD= research and development expenses, linear regression analyses can be done on the given data set {SRi, SGAi, RDi}i=1n , where n= statistical units: n=24; SR= dependent variable; SGA, RD= independent variables. The regression model relates the dependent variable to independent variables such that SR≈f(SGA, RD, β). The simple regression models will be presented as SR=β0+β1SGA and SR=β0+β2RD, whilst the overall linear regression model will be represented as SR=β0+β1SGA+β2RD
Results
SR=β0+β1SGA ( between SR and SGA)
SR=β0+β2RD ( between SR and RD)
Scatter Graphs
Overall Model
SR=2.208 + 5.898*SGA + 2.136*RD
Summary
In the results, regression vectors,β0, β1 and β2, indicate that the relationship between an independent variable and dependent variable when another independent variable is kept constant are positive. In the equation SR=2.208 + 5.898*SGA + 2.136*RD, when research and development expenses are kept constant, selling, general and administrative expenses relate to selling revenues by the vector β1=5.898. Keeping other factors constant, a 1 billion increment in sales revenue requires a 5.898 × 1 billion increment of selling, general and administrative expenses. Likewise, when the regression vector β2=2.136 in R & D, a 1 billion increment in sales revenue will require a 2.136 × 1 billion of research and administrative expenses. Therefore, simultaneous increases in selling, general and administrative expenses and research and development expenses will lead to increases in sales revenues, and vice versa. The component β0 in this regard represents the amount of sales revenues the company will gain without involving any selling, general and administrative expenses and research and development expenses. In the overall model and the model that involves SR and SGA, it can be noted that the firm may still earn some sales revenues without involving and SG & A and RD, and AG & A respectively. However, in the model that involves SR and RD alone (SR= -3.27764 + 32.99285*RD), it can be noted that the company cannot do away with R & D expenses, as it will always incur losses (see negative intercept). The graphical realizations indicate that the sales revenues relate positively to selling, general and administrative expenses and research and development expenses. Sales revenue tends to increase when selling, general and administrative expenses and research and development expenses increase at the same time, and vice versa. The correlation coefficient between general and administrative expenses and research and development is positive and very strong, at 0.975. R square values are strong, over 94% in each case: they indicate that the regression lines represent nearly all (over 94%) of the observed variables.
Discussions
The results indicate that the firm needs both selling, general and administrative expenses and research and development expenses for the company to increase its sales revenue. When they increase at the same time, sales revenues increase too, and vice versa. However, since selling, general and administrative expenses and research and development expenses have a positive and very strong correlation, they should be increasing simultaneously for the increment in sales to be stronger. Much consideration should be put on R & D expenses, as without them the firm would incur losses. This study supports views of other researchers that selling, general and administrative expenses and research and development expenses increase sales revenues. In S G & A expenses, increments of commissions given to sales staff would lead to increased motivation (Schudson, 2013). Sales staffs will always innovate ingenious ways of boosting sales so that they can get higher commissions and job promotions (Mithas et al., 2012). Advertisements and other promotional expenses boots sells by creating awareness about products and inducing buyers into its actual buying. Research and development enables the company to stay ahead of other companies in product superiority. Such a company always identify customer needs and translate them into new innovative ways for products and services that suite them (George, 2015).
Conclusion
References
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on American Society. New York: Routledge.
Warusawitharana, M. (2015).Research and development, profits, and firm value: A structural
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