This memo will be sent to the President of the company.
You have been studying 'fixed' costs. You learned that a number of 'fixed' costs are actually mixed costs (variable and fixed). Write a memo to your manager to explain various cost estimation techniques that can help determine the fixed and variable portion of each mixed cost (such as utility costs, maintenance costs) and why it is relevant to more accurately understand the types of costs.
Claire’s Antiques, headquartered in Sarasota, Florida, builds reproductions of certain antique furniture. Claire’s Antiques is beginning its 11th year of business. It continues to grow its product line and target customer market and it recently became a public company by issuing shares of its common stock with the NASDAQ exchange.
Claire’s Antiques reproduces just three types of antiques. Those products are clocks, dinette sets, and bedroom suites. The bedroom suites have a higher profit margin when compared to the other products, but it also has a lower sales volume. The clocks have a lower profit margin when compared to the other products, but it also has a greater sales volume. Its antiques are sold directly by Claire’s Antiques and through independent distributors (typically antique shops and mail-order companies).
Each antique is made of solid oak wood. A clock contains a glass door, clock mechanism, and a pendulum. The dinette sets include a table with four legs, one table extension, and six chairs. The bedroom suite contains one bed frame, two night stands, and a dresser with a mirror. Variable costs commonly include:
• Various component parts, packaging, etc.
• Production labor
• Sales commissions (percentage or per unit basis)
• Other costs allocated on a per unit basis
Claire’s Antiques tries to produce approximately the same number of antiques it expects to sell in a given period of time. However, Claire’s Antiques can not always accurately predict the market. If it manufactures too few antiques, the company loses sales. However, if Claire’s Antiques manufactures too many antiques, it may not be saleable because of the changes in consumer preferences. Claire’s Antiques may have to sell its products at a discount or even at a loss to liquidate its inventory. To reduce inventory costs, management is considering implementing a "Just In Time" (JIT) inventory management system.
Goals for the next year are to grow the business to other regions, increase profit margin, and expand its product distribution centers.