Financial Statement

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TO: Owner Serious Reader Company

FROM: Dorothy Warner, Marketing Research

DATE: 9/13/2016

SUBJECT: Full-Time Business Venture

College Books

Adding a line of additional books, such as college books, will optimize profit potential. College books are

expensive for college students. Many students look elsewhere for a cheaper alternative for purchasing

the necessary books for college learning. Thus the need for affordable college text books.

Purchasing and Selling College books

The purchase of college text books can be done online. College text books can be purchased for a

fraction of the price. When purchased these text books can then be sold for a lesser price then new text

books, but at a higher yield than when purchased. College students want to recoup some of their money

that was spent on college text books, and when finished using these books, are willing to make a few

bucks selling them to purchase new books for their next class. Thus creating a selling and purchasing

arrangement.

Advantages

The advantages of purchasing used but in good condition college text books, is that this will allow college

students to make some money of selling these now useless books, and allow the Serious Reader

Company to purchase these college text books for a much lesser price than the same college text books

new. By doing so, the Serious Reader Company can then sell the good quality college text books for a

fraction of the cost of new. By purchasing and selling good but used college text books, the Serious

Reader Company will expand their book inventory, and will now have college text books to sell to college

students for a fraction of the cost of new text books. This will generate a new source of revenue for the

company.

More Advantages

The more advantages is this, the Serious Reader Company will generate some serious income. By

generating this new income potential, Serious Reader Company will become a successful business. Even

in scenario 1, the company lost 5450.00. By selling even half the inventory of college text books, the

company now has made a profit of 44,725.00.

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Trident University International

Module 1 Case Assignment

ACC501 Accounting for Decision Making

Dr. Tara Murphy

22 Mar 17

Memorandum

From:

To: To the Owner of The Serious Reader Company

Date:

Subject: Contribution Margin and Variable Cost Concept

Introduction

This memo serves to advise the owner of an effective course of action that will ensure

The Serious Reader Company remains profitable. The memo contains an analysis of the

information provided by the company and the preparation of a segmented variable costing

statement, a variable costing statement which assumes 90% of all the books sold in each

category were purchased and a variable costing statement that assumes a 50% price increase

for all five categories (Trident, 2017). This memo also includes an analysis and

recommendation that will allow the owner to successfully make The Serious Reader

Company a full time business venture.

Segmented Variable Costing Income Statement

The segmented income statement shows $8,000, $15,000, $18,000, and $16,000 that results

in a total revenue of $69,500. The contribution margin is $36,050 which would cover the

$11,000 in total fixed costs. The net income is $25,050. These calculations show that the

business is profitable, however, more calculations and analysis should be pursued in order to

make the business more profitable.

Variable Costing Statement at 90%

The contribution margin of The Serious Reader Company improves when 90% of all

the books in each category purchased are actually sold. Although the variable costs are

increased for each category, the revenue generated is also increased. The revenue for

A, B, C,

D, & E is $10,800, $16,200, $22,500, $40,500 and $36,000 which increases

the total revenue

from $69,500 to $126,000. The contribution margin of $64,530 will allow The Serious

Reader Company to cover the $11,000 in total fixed costs and ultimately yields a net income

of $53,530.

The increase in units sold, improves the company’s profit.

Variable Costing Statement at 50% Price Increase

The impact of a 50% price increase for The Serious Reader Company results in

revenues of $12,000, $22,000, $18,750, $27,000, and $24,000 for categories A, B, C, and D.

The contribution margin of each categories A, B, C and D are $ $8,000, $16,000, $13,000,

$18,400, and $15,400 which produces a total of $70,800. The total revenue at the 50% price

increase is $104,250, a decrease of $21,750 from the previous total revenue referenced in the

segmented variable costing statement. The net income increased from $53,530 to $59,800 at

50% price increase which also increased the contribution margin (Walther, 2014). The

contribution margin total of $70,800 is enough to cover the total fixed costs of $11,000.

Recommendation

In order to turn this company into a full time business venture, another income

statement was prepared using the information previously provided. Referencing the

segmented costing statement, the units purchased in each category at resale prices of $4, $15,

$25, $45 and $40, to include the shipping cost of $1.50 per book, would result in a total

revenue of $210,000. The contribution margin is $141,700 which is higher than the previous

income statements. The contribution margin of $141,700 is more than enough to cover the

total fixed costs of $11,000 and leaves a net income of $130,700. Based on these calculations,

the

solution to increasing profits appears to be to raise prices while maintaining the existing

cost structure (Walther, 2014). The net income of $130,700 supports the owner’s decision to

make this company a full time business venture.

Short Essay

An internal income statement is a financial document used to gauge a company's

ability to generate revenue and profit. Internal income statements remain within the company

and are not released to the public. The preparation of the internal income statement requires a

great deal of attention to detail to ensure financial accounting remains accurate. A company

or organization cannot maintain a clear financial picture or accurately identify which areas of

its infrastructure requires improvement. The internal income statement allows an organization

to take inventory of changes in operating income, costs, assets and profit levels before

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making the information available to shareholders and government reporting agencies. This

also allows the organization to fix any issues that may affect its potential profitability and

result in an encouraging income statement when the business formally makes it available to

the public at the end of the year (Lister, n.d.).

he understanding of cost behavior is key to management's efforts to plan and control

an organization's costs.

Budgets

and variance reports are more effective when they reflect

cost behavior patterns (Averkamp, n.d.). Variable costs vary with changes in an organization’s

activity. An example is direct materials cost associated with each product sold. Fixed costs do

not change regardless of the organization’s activity. Rent will remain a fixed cost whether the

sales level of the tenant changes or not. There are also mixed costs. Mixed costs encompass

some variable costs and fixed costs. Monthly internet access fees are standard (fixed costs)

and a broadband usage fees fluctuate (variable costs) based on usage (Accounting Tools,

2017). The understanding of cost behavior is also necessary for calculating a company's

break-even point

and for any other cost-volume-profit analysis (Averkamp, n.d.).

References

Accounting Tools (2017). Cost Behavior. Retrieved 22 Mar 17 from

http://www.accountingtools.com/cost-behavior

Averkamp, H. (n.d.). What is Cost Behavior? Retrieved 21 Mar 17 from

https://www.accountingcoach.com/blog/what-is-cost-behavior

Lister, J. (n.d.). What is an internal income statement? Retrieved 22 Mar 17 from

http://smallbusiness.chron.com/internal-income-statement-35447.html

Trident University International (2017). Module 1 Case Assignment. Retrieved 21 Mar 17

from:

https://tlc.trident.edu/d2l/le/content/84093/viewContent/2075531/View?ou=84093

Walther, l. (2014). Principles of Accounting. Chapter Seventeen. Introduction to

Managerial accounting; and Chapter Nineteen. Job Costing and Modern Cost

Management Systems. Retrieved

from

http://www.principlesofaccounting.com/

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Running head: ACCOUNTING COST SYSTEMS AND COST BEHAVIOR

Trident University International

Aaron P. Brumfield

Module 1SLP

ACC501 Accounting for Decision Making

Mr.Sunil Dixit

July 24, 2016

ACCOUNTING COST SYSTEMS AND COST BEHAVIOR

Idea and Description of the New Product

The “Good Bread” company specializes in the production and delivery of baked products

such as fresh bread, buns, rolls, tortillas and other baked product

(Kurz & Co, 2016)

. With the

increased calls to eat healthily to stay healthy, consumption of wheat products has dropped

significantly

(United States Department of Agriculture Economic Research Service, 2016)

Natural sugars have also been preferred over artificial sugars. “Healthy bites” will be the name

behind a new product made of sorghum and sugar cane juice. The bites are gluten free and with no

artificial sugars.

Cost Estimates

The average cost of sorghum flour in U.S. is at $4.8 per kilogram

(Index Mundi, n.d)

. It

will be cheaper for the bakery to buy raw sugarcane and squeeze the juice whenever they need it.

The average price of a ton of sugar cane in U.S. is $23.4

(The Statistics Portal, 2016)

, therefore,

the cost of a kilogram of sugarcane is approximately $0.026. A kilogram of sugar produces

approximately 700ml juice which translates into one thousand eight hundred cups of juice.

(SGK

Industries, n.d)

The amount of juice produced depends on the technical specifications of the cane

crushing machine. To produce the above capacity of sugarcane juice, I recommend the L100A3

roller automatic sugarcane juice extractor machine at a cost of $1,095.

Selling Price Computations

Assuming that the new product will not have significant effects on the fixed costs of the

operations of the company and, that approximately five packets of healthy bites are produced from

one kilogram of sorghum; the following computations indicate the basic costs of producing the

first batch of healthy bites.

ACCOUNTING COST SYSTEMS AND COST BEHAVIOR

Cost of Sorghum (1Kg)

Cost Sugarcane(1

kg)

Total

Variable

costs

Variable costs

$4.8

$0.026

$4.826

4.8*20=

$96

20Kgs will be required to produce

100 bites

$0.026

$96.026

Healthy Bites

produced

Selling price per unit

Gross Profit

Contribution Margin

$10

$5.174

100

$200

$103.974

Expectation for Growth and Potential Profit

The variable costs for the sugarcane juice only change over a relevant range. As

aforementioned, one kilogram of sugarcane produces approximately twenty cups of sugarcane

juice which can be used with the twenty kilograms of sorghum. To cover for the cost of the

sugarcane juice extractor, the company will have to sell approximately five hundred and fifty units

of healthy bites. (Break-Even point in sales = Total Fixed Cost/ Contribution Margin Ratio)

(Walther, 2013)

Rationale for the Pricing Approach

From the computations, the set selling price per unit of healthy bites is at $2, the price is

within the market price of other healthy edibles. The selling price also accommodates the variable

costs incurred in the production process. If the selling price is reduced to may be $1, the

contribution margin will be affected and probably introducing the new product may not be a

viable business opportunity.

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ACCOUNTING COST SYSTEMS AND COST BEHAVIOR

References

Index Mundi. (n.d).

Sorghum Monthly Price - US Dollars per Metric Ton

. Retrieved July 20,

2016, from http://www.indexmundi.com/commodities/?commodity=sorghum

Kurz & Co. (2016). Welcome to Kurz & Co. The "Good Bread" Company. Retrieved July 20,

2016, from http://www.kurzco.com/

SGK Industries. (n.d). Sugarcane Juice Machines. Retrieved July 20, 2016, from Food and

Beverage Machines: http://www.foodandbeveragemachines.com/sugarcane-juice-

machines.html

The Statistics Portal. (2016). Price per ton of sugar cane in the U.S. from 2007 to 2013, by state

(in U.S. dollars)*. Retrieved July 20, 2016, from

http://www.statista.com/statistics/191995/price-per-ton-of-sugarcane-in-the-us-by-state/

United States Department of Agriculture Economic Research Service. (2016, May 11). Wheat's

Role in the U.S. Diet Has Changed Over the Decades. Retrieved July 20, 2016, from

United States Department of Agriculture Economic Research Service:

http://www.ers.usda.gov/topics/crops/wheat/wheats-role-in-the-us-diet.aspx

Walther, L. (2013). Chapter Eighteen: Cost-Volume-Profit and Business Scalability. Retrieved July

20, 2016, from Principles of Accounting:

http://www.principlesofaccounting.com/chapter18/chapter18.html