Your discussion may include both internal and external factors that could influence this decision. There are various factors suggesting that Mystery segment should be discontinued, including both internal and external factors. Internally, the paramount issue with Mystery segment is that it accounts for the largest amount of loss for the company, with the figure stands at -$96, 791. Furthermore, the proportion of sales of this segment generating for only 1 1. 87% of total sales is the second lowest among all segments.
In fact, as shown in the table 1, profit margin of this segment is -15. 91%. This means that $15. 91 of loss is being produced for each $100 of sales in Mystery Books. The higher the sales revenue, the greater the loss will be made. The main reason is that the total expense of the segment is much higher than its earnings. The total expense of the segment accounts for 74. 07% of the net sales, which is the highest proportion, compared to other segments. The higher the expense ratio, the lower is the profitability.
Externally, although there has been a significant increase in the number of books being published, book sales in the US have declined from its peak in 2007 (appendix 5). Furthermore, due to the digital revolution, e-books are becoming more popular and more and more readers are switching to other digital media forms. Therefore, traditional book revenues are being replaced by these digital revenues (appendix 5). Eventually, another important external factor is that larger publishing houses are dominating the US book market through acquiring smaller publishing houses.
With such internal and external factors, it is recommended that Walker Books should drop the Mystery segment in order to concentrate on other segments that are more likely to generate profit for the company. C) Explain what happens to the fixed costs associated with the dropped product segment(s) [category (sees). As the Mystery segment is discontinued, all variable costs belonging to the segments will be eliminated. Moreover, it may be possible to avoid some its axed costs such as traceable cost. Nevertheless, not all fixed costs are avoidable.
These costs, as a consequence, will be reallocated to other segments depends on the percentage of each segments in 2013 total net sales after dropping the Mystery segment. The unavoidable fixed costs of the Mystery segments include editorial, marketing/ sales overhead – common expense, cost of free copies, ship/ warehouse and general & administrative. Similarly, a total amount of $152,502 is divided into each category in Children’s books segment as the percentage of each category in the total sales revenue of the Children segment in 2013. See more detail statistics in Table 1 and 2).
Table 2: Cost allocation (based on percentage of sales) % of total net sales (excluded Mystery) Editorial Marketing/ sales overhead – common expense Cost of free copies Ship/ warehouse General and administrative Total TOTAL COST ALLOCATED 14. 64% 37. 37% 4540% 2. 59% $7,857 $20,061 $24,373 $1,389 $53,681 $16,628 $42,453 $51,578 $2,940 $113,599 $1,818 $10,912 $4,641 $27,860 $5,638 $33,849 $321 $1,929 $12,418 $74,550 $19,806 $50,567 $61,436 $3,501 $135,311 $57,021 $145,583 $176,875 $10,081 Table 3: percentage of sales) % of total sales overhead common expense General & PICTURE MOTTO FICTION BASILISK 18. 0% $9,875 $9,488 10. 54% $5,658 $5,436 6. 54% $3,510 $3,373 9. 40% $5,046 $4,848 3. 15% $1,693 $1,627 51. 97% $27,899 $26,806 $1,037 $6,227 $11,301 $594 $3,568 $6,476 $369 $2,213 $4,017 $530 $3, 182 $5, 775 $178 $1,067 $1,937 $2,930 $17,592 $31,930 $37,928 $21,732 $13,483 $19,380 $6,502 $107,157 d) Discuss the implications of your decision on the financial performance of Walker Books. Use relevant calculations to support your discussion. As a result of the allocation of the Mystery segment’s unavoidable fixed costs, new fixed costs of the remaining segments in 2014 will increase.
For illustration, neural and administrative cost of Western segment in 2013 is $28,487. It will rise to $31 ,988 in 2014, including $3,501 divided from the Mystery segment. In addition, the total net profit of Walker Books may not suffer the loss of $96,791 from the Mystery segment. Consequently, the net profit of Walker Books is predicted to increase in the next period. Question 3: Using the Children’s Book Profit plan spread sheet for 2014: a) Choose THREE line items from the Income Statement and discuss the significance of each item, assumptions taken, changes in the items and their impact on other line items and net income.
The definition of sales revenue (price per unit x number of units sold) is the amount of money that the company receives from its business activities. Consequently, changing sales revenue will change the company’s profits. To illustrate, Picture and Photo are the two most profitable categories in the Children’s Books segment, as well as Walker Books. The sales revenue of these two categories is assumed to increase by 25% each in 2014. Additionally, the other categories also contribute to the increase in sales in 2014. In 2014, the sales revenue of Picture increases by $97,030, from $388,121 in 2013 to $485,151 in 2014.
Photo category also rises from $222,389 in 2013 to $277,986 in 2014. As a result, the total net income in Children’s Books segment in 2014 is forecasted to be about 3 times higher than in 2013, from -$59,963 in 2013 to $109,915 in 2014. These increases could be explained by the increase in growth rate of Picture (25%), Photo (25%), B+W (1 5%), Nonfiction (10%) and Fiction (5%); and new titles are being introduced in 2014. Walker Books can invest more in the quality of book and spend more on its marketing plans to generate more profits. 2. Operating expenses: Operating expenses have a certain impact on the profit wheel.
In case of dropping the Mystery segment there will be two changes in operating expenses. Firstly, traceable costs will be zero since a segment/category has been eliminated. Secondly, the common fixed costs will stay the same and be reallocated to other segments base on each category percentage in sales revenue in order to ensure the profits at the end (see Table 2 & 3 above). As a result, dropping the Mystery segment leads to the new costs allocation and it will increase the total costs in each segment/category. 3. Cost of goods sold The third item that needs to be mentioned is cost of goods sold (COGS).
