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Accounting: Partner, Let Me Upgrade U 2 Views
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Transcript
- 00:00
Accounting Allah shmoop partner Let me upgrade yet more pillow
- 00:06
talk Our little startup acquisition that Eminem bought from Farmer
- 00:10
Kenny has grown swimmingly from ten million in revenues when
- 00:13
it was bought to some one hundred fifty million plus
- 00:16
and growing But the company is buy for Kating is
Full Transcript
- 00:19
the low tech pillow business and well yawns and the
- 00:23
apse business Well it never sleeps you know like a
- 00:25
Wall Street so we're going to fill in some blanks
- 00:27
Here is the structure of the company clearly divides itself
- 00:30
into two components Old world pillows and new Note that
- 00:34
we have one product in an old world pillow that
- 00:37
lives in a highly competitive industry has nothing whiz bang
- 00:41
about it but has amazing technology behind it and is
- 00:44
likely a low margin business overtime once it hits growth
- 00:47
Maturity Well the analog in real life to this pillow
- 00:50
company is the automobile A basic car with no added
- 00:54
features is almost profitless on its own for Ford GM
- 00:58
and the others such that a twenty five thousand dollars
- 01:00
stripped down Ford truck only makes about a grand or
- 01:03
so in profit for the company that made it But
- 01:06
then if you add in air conditioning really nice speakers
- 01:09
advanced Bluetooth phone connectivity a whole bunch of cool shiny
- 01:12
bumper everything's on the back there And of course a
- 01:15
heated vibrating seat called Cougar Independence for an additional ten
- 01:19
thousand dollars Well yeah then the prophet contribution on those
- 01:22
upgrades is like five grand like five times the profitability
- 01:26
of the whole truck itself At least the raw basic
- 01:28
truck said another way The upgrades even though they were
- 01:31
away less revenue than the main entity that was sold
- 01:34
I either truck well they were five times more profitable
- 01:37
than that strip down car truck got it Well this
- 01:40
notion applies in tons of businesses You've heard razors and
- 01:43
razor blades before right You might have your own jewelry
- 01:46
making business where you sell cheap twenty dollar pairs of
- 01:48
earrings called lobe leaders which you hope will attract customers
- 01:52
into the store so that then they buy the hundred
- 01:55
dollars pair which does not in fact make your lobes
- 01:58
bleed Profit margin on the former twenty dollars sale might
- 02:01
only be five bucks while in the latter hundred dollars
- 02:04
sale that prophet might be eighty dollars The lobe leaders
- 02:08
will they cost you fifteen dollars to make twenty months
- 02:11
Fifteen gets you five there but I kind of don't
- 02:13
Well the only costing extra five bucks to make meaning
- 02:15
They cost you twenty dollars You sell them for one
- 02:17
hundred All right well the pillow making industry is highly
- 02:19
competitive and the products in it are pretty much entirely
- 02:22
commoditized that his feathers can be grown anywhere from Azerbaijan
- 02:27
Teo Zanzibar Same deal with cotton because things are so
- 02:31
competitive and so relatively easy to assemble and distribute One
- 02:34
of the profit margins on the pillow industry are pretty
- 02:36
low but profit margins on things that are rare or
- 02:39
difficult to produce or exist under little monopolies Things like
- 02:44
beetles rights licensing well They generally offer much higher profit
- 02:47
margins Then they're highly rivalrous and Camp Pettitte of commodity
- 02:51
brethren So it should come as no surprise that the
- 02:53
apse part of pillow talk is much higher margin albeit
- 02:57
on lower revenues than the pillows business Consider the company's
- 03:00
offerings Yeah check out Pillow talks app upgrade menu right
- 03:04
here So for you people over fourteen who still think
- 03:07
that APS are just things like potato skins and mozzarella
- 03:10
sticks Here's how I APS work from a financial perspective
- 03:13
almost all the absolute in America are sold through the
- 03:15
iTunes payment system Think of iTunes is a giant shopping
- 03:19
mall where basically every piece of APS related software is
- 03:22
sold Apple performs two functions in running iTunes First they
- 03:26
provide the shopping in search experience so that you can
- 03:29
actually find the app that you're looking for and not
- 03:31
end up downloading a Russo Chinese political hacking app that
- 03:35
robs every cent you've ever saved So the first activity
- 03:38
is filtration and security On the second function Apple contributes
- 03:42
is billing and for this pleasure Apple charges a relatively
- 03:46
hefty processing fee But people who upload and sell APS
- 03:50
through the iTunes system actually get paid in cash U
- 03:53
S Dollars and not like in aero flat frequent flier
- 03:57
miles or quite lose if you're a Star Trek fan
- 04:00
So let's walk through a very rough view of the
- 04:02
math of APS You spend five thousand of fifty thousand
- 04:06
dollars applying to the iTune system getting approved and making
- 04:09
software patches to your existing library which is housed on
- 04:12
servers you either control or rent from a Ws Amazon
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Web services you get approved and then you begin selling
- 04:18
your app Well you have to make people aware that
- 04:20
the APP exists and what keyword to type in so
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that consumers can actually find that app on iTunes Well
- 04:27
once they've done that and clicked by various confirming prompts
- 04:31
guarantee security and voila you have just spent five bucks
- 04:35
for the mildly irritated Birds game app for those not
- 04:38
quite ready for the high stress world of angry birds
- 04:41
So from that five bucks Apple will keep a quarter
- 04:44
for payment processing in about two bucks for distributing your
- 04:47
app After the sales made on a monthly basis Apple
- 04:49
will aggregate all the revenues attributable to you and wire
- 04:52
that money into your bank account from the original five
- 04:55
bucks that the customer spent on your app Apple will
- 04:58
then keep about two dollars and twenty five cents and
- 05:00
you the publisher will keep two Seventy five And yes
- 05:03
these air very rough numbers So there's a naturalist stunning
- 05:06
question that arises here Do you report the five dollars
- 05:09
sale as revenues and then subtract apple fees Or do
- 05:13
you just report that two seventy five remitted Teo you
- 05:17
a number much less than the grossed up five dollars
- 05:20
But where the two seventy five is almost one hundred
- 05:22
percent profit contribution which do your report well While there
- 05:25
isn't a set Gap attribution for how to account for
- 05:28
this transaction least not yet The more detailed set of
- 05:31
numbers is most likely the way to go So yes
- 05:33
you do include the five dollars is revenues and then
- 05:35
you subtract in a separate line the payment processing fee
- 05:39
and then the iTunes distribution fee And you could put
- 05:41
little angry faces next to it because Apple takes so
- 05:44
much money out of your hard earned dough So let's
- 05:46
review the table that outlines the income statement their revenues
- 05:50
performance for two thousand eighteen nineteen twenty We note that
- 05:53
unit sales of pillows went from a million eight to
- 05:55
two point five to four point two million because yeah
- 05:57
remember those units in the table there are shown in
- 06:00
thousands Yet unit sales of AP upgrades only grew into
- 06:03
well eight hundred thousand in a million two in a
- 06:05
million six well in two thousand eighteen Roughly forty four
- 06:07
percent of customers who bought pillows paid to upgrade for
- 06:10
ABS But by two thousand twenty instead of that number
- 06:13
increasing which is what the company hoped for and expected
- 06:17
the percentage actually declined with only one point six million
- 06:20
pillow app upgrades being ordered out of total pillow sales
- 06:23
of four point two million Clearly something is wrong in
- 06:27
either the product offering for the APP itself or with
- 06:30
the comfort level of customers Toe pay for upgraded apse
- 06:34
for pillow talk As a managerial accountant you would be
- 06:37
asking a lot of tough questions of your product and
- 06:39
marketing people as to why this is happening And it's
- 06:42
a big problem because in the highly competitive world of
- 06:44
pillow sales your margins air going down not up Your
- 06:48
investors have been relying on the very high profit unit
- 06:51
sales of ABS to keep the profit margins of the
- 06:53
overall company Hi what to do what to dio You're
- 06:56
losing sleep and it doesn't have anything to do with 00:06:59.194 --> [endTime] your pillow
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