Accounting Holledazzle Case

Muhammad Asad Zahid (ERP ID 05065)

Hollydazzle is a new startup e-tailing company and its projected income statement poses various problems due to the presence of site maintenance variable cost component that varies directly with the volume of transaction. This can be illustrated as follows in the projected income statement of 1999 with two different transaction volumes:

Following assumptions are made:

* Merchandise cost is the same as that of Fundays ($8.5 / transaction)

* Advertising and marketing expense is a combination of three components: 1. $60,000 each year for publication/activities. 2. Cost of $1 for each new subscriber who purchases merchandise (1200 customers each month). 3. 3% of sales revenue for image building phase only. Assumption is made that this cost exists for first year only and this will change if the volume changes. Total advertising/marketing expenses = 60,000 + 1200*12*1 + 3% of revenues.

* One time site development cost occurs in first year.

* Shipping expense and income cancel out each other and has not been considered in analysis.

Income statement when sales volume= 4000 transactions / month | Income statement when sales volume= 5000 transactions / month |

As evident from the above income statements, if sales volume is increased the operating income is further declining even though gross profit margin (as % of sales) is improved. This could lead to a catastrophe for the company in terms of future profitability. It is also expected that the sales will increase by 50-55%. So by 2013, the sales volume of the company should be 20,250 per month (if 50% increment per year) and 23,089 (if 55% increment per year). Thus constructing the projected income statement for 2013 as follows (removing site development cost and image building marketing expense):

50 % sales volume increase / year | 55% sales volume increase / year |

As we can see the operating income is still negative and same in the both the cases. This is...