Serious Reader Company Variable Cost Concept Investigation

This memorandum serves a purpose in helping to recognize fixed costs and variable costs from the viewpoint of the effect they have on net income. This will also help in understanding the effect of changes in variable factors and help to improve the profitability of The Serious Reader Company, a small online retailer conducting business in selling used books from garage sales, thrift shops, library sales, etc. Using the fixed and variable costs of the company, the company evaluates the income statement using potential changes in the market price and the rise in the units sold in terms of understanding the effect of these different price levels.

Contribution Margin

The first segmented financial statements reveal that three of the five groups of books are for-profit Categories C and D are not. The margin of contribution for C was at a loss of $750 and a $2,600 loss for D. C and D has become an expense due to the significant amount of books that were bought.

Books from Category C had an overall cost of $10,000 to buy 1,000 books at $10. Just 500 books have been sold at $20 for $10,000.

However, for 500 books sold, the total cost of shipping each book is $750. Books from Category D had a total cost of $20,000 to buy 1,000 units for $20. Four hundred books sold at $45, coming to $18,000. But the total shipping cost for each book is $600, which is a profit loss of $2,600. These other three categories, as well as making a profit, was able to make a substantial amount towards the fixed costs.

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Effect of changes in sales

The company is eager to learn how it can increase the impact of the sales of the units in each book category by 90 percent. Every category’s total amount of sales rise by 90% leading to increased revenues per category, resulting in revenues of $147,060. Without the adjustment in the 90% increase in sales, the total income was $80,000. In this scenario, this company sees revenue increases of $67,060 when they have more sales. The category’s highest performance was E and the lowest was B.

Influence of changes in the selling price

The company has been suggesting a 50% increase in selling prices. A B, C, D, and E categories rates will adjust to $6, $18, $30, $67.50, and $90, respectively. Its total revenue will be down to $120,000. For categories A, B, C, D and E, the total contribution margin from the sales is $18,000, $16,500, $14,250, $26,400 and $35,400. The total margin is $110,550 to cover the $20,000 fixed cost. It offers a $90,550 net income, which would help the owner’s decision to leave the job and then go full-time with Serious Reader Business.

Recommendation

The owner should leave their job to be fully committed to this business as there is a great possibility to increase net profits by changing a 50% increase in the selling price. One thing that should also be taken into consideration is buying fewer books from categories C, D, and E as these are the weaker units sold compared to the other categories. If less money is spent buying books in these categories, the revenue will be less.

Overview

One of the three financial statements that the stakeholders are using to familiarize themselves with is income statements Depending on their purpose, various versions of income statements can be used for public and private use. Public use of income statements (Loth, 2017) is being used by investors for the expected future growth of the company, examining profitability, and using these strategies will establish whether the company is worthy of investing in or not.

Income statements outline the costs and revenues of a company for the fiscal year on a quarterly and annual basis. In addition to trying to draw additional buyers, the other purpose of creating income statements is to clarify the company’s cash flow internally, which is primarily looked at by corporation managers and owners.

Managerial Accounting

Organizations are making an effort to develop various types of income statements for internal purposes since they help the managers and the owners to budget better, plan and make business decisions. Managerial Bookkeeping is unique to financial accounting, for example, balance sheets and cash flow statements since that data are fundamental for stock investors when certain income statements, for example, segmented income are utilized by the managers.

Such reports used among organizations ‘ internal staff help (Walther, 2017) make comparisons to actual performances with planned performances and provide accurate information on product costs such as production costs, cost of raw materials, as well as other types of variable and fixed costs. The key thing that is used in these statements is to budget and plan the future profitability of the company without following the GAAP guidelines or by using historical data to calculate what is next.

How Cost Behavior is Useful

Learning the types of costs involved in financial statements essentially sets up a person and the organization for success as it enables them to make the best decisions. The effect of costs on profits must always be recognized by the management. To understand and measure key business activities, three different types of costs are analyzed.

The first variable costs are costs that fluctuate and at the same time as inactivity changes. For instance, for a company that uses fuel to deliver items in different states or across state lines using delivery drivers would be a variable cost.

The 2nd cost is fixed costs (Brynes, 2014) these are expenses that stay the same overall regardless of the activity. Rent that is used for a building where the business is an example of a fixed cost.

The final type of cost is mixed costs, which are costs that encompass both the fixed and variable aspects. As an example, leasing a truck to transport items is a mixed cost as while there is a set price to lease a truck, there is often a price per mile as well. Controlling costs (Brynes, 2014) is one of the duties of the manager because it also aids in making choices on setting sales prices, optimizing the use of the production, and planning and budgeting.

Resources:

1. Loth, R. (2017, October 25). Understanding the Income Statement. Retrieved from https://www.investopedia.com/articles/04/022504.asp
2. Walther, L. (2017). Chapter 17: Introduction to Managerial Accounting https://www.principlesofaccounting.com/chapter-17/
3. Byrnes, K. (2014, July 11). Managerial Accounting- Overview of Cost Behavior. Retrieved from https://www.teachucomp.com/managerial-accounting-overview-of-cost-behavior/