Accounting: Partner, Let Me Upgrade U
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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