ShmoopTube

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Accounting Allah shmoop partner Let me upgrade yet more pillow

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talk Our little startup acquisition that Eminem bought from Farmer

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Kenny has grown swimmingly from ten million in revenues when

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it was bought to some one hundred fifty million plus

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and growing But the company is buy for Kating is

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the low tech pillow business and well yawns and the

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apse business Well it never sleeps you know like a

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Wall Street so we're going to fill in some blanks

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Here is the structure of the company clearly divides itself

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into two components Old world pillows and new Note that

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we have one product in an old world pillow that

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lives in a highly competitive industry has nothing whiz bang

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about it but has amazing technology behind it and is

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likely a low margin business overtime once it hits growth

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Maturity Well the analog in real life to this pillow

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company is the automobile A basic car with no added

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features is almost profitless on its own for Ford GM

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and the others such that a twenty five thousand dollars

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stripped down Ford truck only makes about a grand or

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so in profit for the company that made it But

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then if you add in air conditioning really nice speakers

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advanced Bluetooth phone connectivity a whole bunch of cool shiny

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bumper everything's on the back there And of course a

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heated vibrating seat called Cougar Independence for an additional ten

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thousand dollars Well yeah then the prophet contribution on those

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upgrades is like five grand like five times the profitability

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of the whole truck itself At least the raw basic

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truck said another way The upgrades even though they were

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away less revenue than the main entity that was sold

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I either truck well they were five times more profitable

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than that strip down car truck got it Well this

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notion applies in tons of businesses You've heard razors and

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razor blades before right You might have your own jewelry

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making business where you sell cheap twenty dollar pairs of

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earrings called lobe leaders which you hope will attract customers

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into the store so that then they buy the hundred

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dollars pair which does not in fact make your lobes

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bleed Profit margin on the former twenty dollars sale might

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only be five bucks while in the latter hundred dollars

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sale that prophet might be eighty dollars The lobe leaders

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will they cost you fifteen dollars to make twenty months

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Fifteen gets you five there but I kind of don't

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Well the only costing extra five bucks to make meaning

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They cost you twenty dollars You sell them for one

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hundred All right well the pillow making industry is highly

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competitive and the products in it are pretty much entirely

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commoditized that his feathers can be grown anywhere from Azerbaijan

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Teo Zanzibar Same deal with cotton because things are so

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competitive and so relatively easy to assemble and distribute One

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of the profit margins on the pillow industry are pretty

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low but profit margins on things that are rare or

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difficult to produce or exist under little monopolies Things like

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beetles rights licensing well They generally offer much higher profit

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margins Then they're highly rivalrous and Camp Pettitte of commodity

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brethren So it should come as no surprise that the

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apse part of pillow talk is much higher margin albeit

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on lower revenues than the pillows business Consider the company's

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offerings Yeah check out Pillow talks app upgrade menu right

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here So for you people over fourteen who still think

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that APS are just things like potato skins and mozzarella

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sticks Here's how I APS work from a financial perspective

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almost all the absolute in America are sold through the

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iTunes payment system Think of iTunes is a giant shopping

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mall where basically every piece of APS related software is

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sold Apple performs two functions in running iTunes First they

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provide the shopping in search experience so that you can

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actually find the app that you're looking for and not

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end up downloading a Russo Chinese political hacking app that

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robs every cent you've ever saved So the first activity

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is filtration and security On the second function Apple contributes

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is billing and for this pleasure Apple charges a relatively

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hefty processing fee But people who upload and sell APS

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through the iTunes system actually get paid in cash U

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S Dollars and not like in aero flat frequent flier

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miles or quite lose if you're a Star Trek fan

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So let's walk through a very rough view of the

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math of APS You spend five thousand of fifty thousand

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dollars applying to the iTune system getting approved and making

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software patches to your existing library which is housed on

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servers you either control or rent from a Ws Amazon

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Web services you get approved and then you begin selling

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your app Well you have to make people aware that

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the APP exists and what keyword to type in so

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that consumers can actually find that app on iTunes Well

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once they've done that and clicked by various confirming prompts

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guarantee security and voila you have just spent five bucks

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for the mildly irritated Birds game app for those not

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quite ready for the high stress world of angry birds

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So from that five bucks Apple will keep a quarter

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for payment processing in about two bucks for distributing your

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app After the sales made on a monthly basis Apple

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will aggregate all the revenues attributable to you and wire

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that money into your bank account from the original five

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bucks that the customer spent on your app Apple will

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then keep about two dollars and twenty five cents and

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you the publisher will keep two Seventy five And yes

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these air very rough numbers So there's a naturalist stunning

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question that arises here Do you report the five dollars

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sale as revenues and then subtract apple fees Or do

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you just report that two seventy five remitted Teo you

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a number much less than the grossed up five dollars

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But where the two seventy five is almost one hundred

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percent profit contribution which do your report well While there

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isn't a set Gap attribution for how to account for

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this transaction least not yet The more detailed set of

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numbers is most likely the way to go So yes

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you do include the five dollars is revenues and then

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you subtract in a separate line the payment processing fee

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and then the iTunes distribution fee And you could put

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little angry faces next to it because Apple takes so

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much money out of your hard earned dough So let's

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review the table that outlines the income statement their revenues

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performance for two thousand eighteen nineteen twenty We note that

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unit sales of pillows went from a million eight to

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two point five to four point two million because yeah

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remember those units in the table there are shown in

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thousands Yet unit sales of AP upgrades only grew into

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well eight hundred thousand in a million two in a

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million six well in two thousand eighteen Roughly forty four

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percent of customers who bought pillows paid to upgrade for

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ABS But by two thousand twenty instead of that number

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increasing which is what the company hoped for and expected

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the percentage actually declined with only one point six million

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pillow app upgrades being ordered out of total pillow sales

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of four point two million Clearly something is wrong in

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either the product offering for the APP itself or with

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the comfort level of customers Toe pay for upgraded apse

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for pillow talk As a managerial accountant you would be

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asking a lot of tough questions of your product and

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marketing people as to why this is happening And it's

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a big problem because in the highly competitive world of

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pillow sales your margins air going down not up Your

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investors have been relying on the very high profit unit

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sales of ABS to keep the profit margins of the

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overall company Hi what to do what to dio You're

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losing sleep and it doesn't have anything to do with 00:06:59.194 --> [endTime] your pillow

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