Different but Related Accounting Scenarios Essay

Total Length: 1188 words ( 4 double-spaced pages)

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Accounting Memo



Feasibility of Bookstore Business



Dear Sir or Madam,



You had asked me to study and pore over the feasibility of taking your book store project into a self-sustaining career that would allow you to dedicate your full efforts to. To that end, I have prepared a data sheet and this brief memo to explain what challenges you face, what you have going for you and the overall feasibility of moving forward with this business endeavor.



Fixed Costs



As people in the accounting sphere know, fixed costs are the costs that are present in revenue/cost of revenue situation no matter what the sales figures and prices are. In general, the higher the overhead, the more money that has to be made just to break even. In the case of the bookstore business, there is $11,000 in overhead that must be absorbed by the revenue that comes from producing sales volume (Business Terms & Decisions, n.d.; Slideshare, n.d.).



Variable Cost



Variable costs are those that ebb and flow with the sales or production volume. In the instance of the bookstore, the shipping cost would be an example of a variable cost. While the size and scope of the variable cost is not nearly as expansive as it is with fixed costs, the margin between the variable costs the revenue garnered from the volume is important because that is what will eat into the overhead mentioned above. Only when the revenue after variable costs is aggregately more than the overhead is a profit possible.

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If overhead amounts are high, then volume will generally have to be high to compensate. The same is true if variable costs eat up a lot of the sales price for an item. If both are high, then the struggle can be very difficult (Business Terms & Decisions, n.d.; Slideshare, n.d.).



Recommendations



It is clear from the income statements and common sense that the owner will have to commit to raising volume before he can quit his job and do the book sales full-time. Indeed, there is a wide margin between the original scenario and the two projections. Both of the projections yield a profit, albeit not enough to live off of. The need to raise volume stems from the fact that the amount of overhead in question is rather high. Unless it is reasonable and practical to lower the amount of overhead without sacrificing quality and other metrics, then volume or raising prices would be the way to go and the latter may or may not be palatable for the market. Indeed, many businesses are able to thrive and survive based on their sheer enormity. Their size gives them the ability to take slimmer margins since the aggregate profit is rather large. Walmart would be an example of this in practice. Indeed, Walmart only has a three percent profit margin but the sheer size of their revenues puts this figure in the billions (Perry, 2015).
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References


Alerte, M. (2013). Low Overhead, High Demand: Small Businesses You Can Start In Your Home. Madamenoire. Retrieved 13 September 2016, from http://madamenoire.com/315011/low-overhead-high-demand-small-businesses-you-can-start-in-your-home/

Business Terms and Decisions. (2014). Pearson Learning Solutions, New York, NY. Retrieved from http://www.pearsoncustom.com/mct-comprehensive/asset.php?isbn=1269879944&id=11613

Investopedia. (2003). Loss Leader Strategy. Investopedia. Retrieved 13 September 2016, from http://www.investopedia.com/terms/l/lossleader.asp

Investopedia. (2014). What are the differences between income statements from merchandising companies vs. service companies?. Investopedia. Retrieved 21 September 2016, from http://www.investopedia.com/ask/answers/102714/what-are-differences-between-income-statements-merchandising-companies-vs.-service-companies.asp

Kuschnik, B. (2015). The Huffington Post. Retrieved 13 September 2016, from http://www.huffingtonpost.com/bruce-kushnick/time-warner-cables-97-pro_b_6591916.html

Perry, M. (2015). Why do progressives hate Walmart for low prices and its 3% profit margin but love high-priced Apple and its 24% profit margin? - AEI. AEI. Retrieved 21 September

2016, from https://www.aei.org/publication/every-month-Walmart-gets-one-profit-day-from-its-sales-while-apple-gets-7-5/

Slideshare. (2016). Determining How Costs Behave. Retrieved from http://www.slideshare.net/mingxinlu/cost-accounting-determining-how-cost-behaves

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