essay

Running head: memo 1

memo 4

Memo

Student’s Name

Institutional Affiliation

Memo

To:

From:

Date: 12th May 2018.

Re: Accounting systems and Cost Behavior

There is a need to look at how the costs Serious Reader Company incurs are structured and how varying costs affects the economic gains. In essence, evaluating the company’s income statement through the changes in selling price and variable costs will aid to comprehend the impact of various level of costs on the net earnings. The description of different format of income statement used by the organization can make an improvement in their operating profitability.

According to our computation, the contribution margin under three scenarios are different. For the segmented variable costing income statement, the total contribution margin is $43,550, and $81,270 when 90 percent of all the books in each category purchased were actually sold. Also, the total contribution margin is $83,550 if the price of each category was increased by fifty percent. The contribution margin is computed by deducting the total variable costs from the total sales revenues (Weygandt et al., 2018). It offers an indication of profit potential of a certain product provided by a company and also indicates the portion of sales that assist to cover the company’s fixed costs. In addition, any remaining revenue left after covering fixed costs becomes the profit generated. It is used to show the profit levels that can be expected from sales and determine the selling price range of a product.

On the hand, variable costs and fixed costs are the broad category of costs that Serious Reader Company incurs in carrying out its business of selling books. Variable costs vary with the number of books bought and shipped while fixed costs remain the same regardless of how much the company sells (Wiley,2018). In each of the three scenarios, the fixed costs amounted to $20,000 while the variable costs varied with the number of units. As a matter of fact, the relative change in the variable expenses with respect to the change in sales have tremendous impact on net earnings of Serious Reader Company since fixed assets remain the same. This is because if contribution margin significant increases, the net profit also increases. In a nutshell, Serious Reader Company can control the variable costs and fixed costs so as to maximize its profits.

The contribution margin is therefore critical for Serious Reader Company for deciding whether to sell at a price which is lower in special pricing situations. If contribution margin at certain price point excessively low or negative, it would not advisable to contribute selling a product at that price. It is important in determining the profits that will emerge from different sales levels (Weygandt et al., 2018). Furthermore, contribution margin can be used in deciding which of many products to sell if they use a common bottleneck resource, in order the product to give preferences to the product with highest contribution margin.

References

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Managerial accounting: Tools for

business decision making. John Wiley & Sons.

Wiley. (2018). Wiley CPAexcel exam review 2018 study guide: Business environment and

concepts. John Wiley & Sons.