Accounting: Partner, Let Me Upgrade U

the low tech pillow business and well yawns and the

apse business Well it never sleeps you know like a

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

Here is the structure of the company clearly divides itself

into two components Old world pillows and new Note that

we have one product in an old world pillow that

lives in a highly competitive industry has nothing whiz bang

about it but has amazing technology behind it and is

likely a low margin business overtime once it hits growth

Maturity Well the analog in real life to this pillow

company is the automobile A basic car with no added

features is almost profitless on its own for Ford GM

and the others such that a twenty five thousand dollars

stripped down Ford truck only makes about a grand or

so in profit for the company that made it But

then if you add in air conditioning really nice speakers

advanced Bluetooth phone connectivity a whole bunch of cool shiny

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

heated vibrating seat called Cougar Independence for an additional ten

thousand dollars Well yeah then the prophet contribution on those

upgrades is like five grand like five times the profitability

of the whole truck itself At least the raw basic

truck said another way The upgrades even though they were

away less revenue than the main entity that was sold

I either truck well they were five times more profitable

than that strip down car truck got it Well this

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

razor blades before right You might have your own jewelry

making business where you sell cheap twenty dollar pairs of

earrings called lobe leaders which you hope will attract customers

into the store so that then they buy the hundred

dollars pair which does not in fact make your lobes

bleed Profit margin on the former twenty dollars sale might

only be five bucks while in the latter hundred dollars

sale that prophet might be eighty dollars The lobe leaders

will they cost you fifteen dollars to make twenty months

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

Well the only costing extra five bucks to make meaning

They cost you twenty dollars You sell them for one

hundred All right well the pillow making industry is highly

competitive and the products in it are pretty much entirely

commoditized that his feathers can be grown anywhere from Azerbaijan

Teo Zanzibar Same deal with cotton because things are so

competitive and so relatively easy to assemble and distribute One

of the profit margins on the pillow industry are pretty

low but profit margins on things that are rare or

difficult to produce or exist under little monopolies Things like

beetles rights licensing well They generally offer much higher profit

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

brethren So it should come as no surprise that the

apse part of pillow talk is much higher margin albeit

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

offerings Yeah check out Pillow talks app upgrade menu right

here So for you people over fourteen who still think

that APS are just things like potato skins and mozzarella

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

almost all the absolute in America are sold through the

iTunes payment system Think of iTunes is a giant shopping

mall where basically every piece of APS related software is

sold Apple performs two functions in running iTunes First they

provide the shopping in search experience so that you can

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

end up downloading a Russo Chinese political hacking app that

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

is filtration and security On the second function Apple contributes

is billing and for this pleasure Apple charges a relatively

hefty processing fee But people who upload and sell APS

through the iTunes system actually get paid in cash U

S Dollars and not like in aero flat frequent flier

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

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

math of APS You spend five thousand of fifty thousand

dollars applying to the iTune system getting approved and making

software patches to your existing library which is housed on

servers you either control or rent from a Ws Amazon

Web services you get approved and then you begin selling

your app Well you have to make people aware that

the APP exists and what keyword to type in so

that consumers can actually find that app on iTunes Well

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

guarantee security and voila you have just spent five bucks

for the mildly irritated Birds game app for those not

quite ready for the high stress world of angry birds

So from that five bucks Apple will keep a quarter

for payment processing in about two bucks for distributing your

app After the sales made on a monthly basis Apple

will aggregate all the revenues attributable to you and wire

that money into your bank account from the original five

bucks that the customer spent on your app Apple will

then keep about two dollars and twenty five cents and

you the publisher will keep two Seventy five And yes

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

question that arises here Do you report the five dollars

sale as revenues and then subtract apple fees Or do

you just report that two seventy five remitted Teo you

a number much less than the grossed up five dollars

But where the two seventy five is almost one hundred

percent profit contribution which do your report well While there

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

this transaction least not yet The more detailed set of

numbers is most likely the way to go So yes

you do include the five dollars is revenues and then

you subtract in a separate line the payment processing fee

and then the iTunes distribution fee And you could put

little angry faces next to it because Apple takes so

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

review the table that outlines the income statement their revenues

performance for two thousand eighteen nineteen twenty We note that

unit sales of pillows went from a million eight to

two point five to four point two million because yeah

remember those units in the table there are shown in

thousands Yet unit sales of AP upgrades only grew into

well eight hundred thousand in a million two in a

million six well in two thousand eighteen Roughly forty four

percent of customers who bought pillows paid to upgrade for

ABS But by two thousand twenty instead of that number

increasing which is what the company hoped for and expected

the percentage actually declined with only one point six million

pillow app upgrades being ordered out of total pillow sales

of four point two million Clearly something is wrong in

either the product offering for the APP itself or with

the comfort level of customers Toe pay for upgraded apse

for pillow talk As a managerial accountant you would be

asking a lot of tough questions of your product and

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

a big problem because in the highly competitive world of

pillow sales your margins air going down not up Your

investors have been relying on the very high profit unit

sales of ABS to keep the profit margins of the

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

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