Assignment 3 - Business Letter

Assignment 3 - Business Letter - worth of expenses and ZERO...

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June 8, 2011 Jacob McMillen Monstar Accounting Services 1760 Hartsford Drive Athens, GA 30605 404-849-9209 Barbara Castricone Video Avenue 301 Lexington Avenue Athens, GA 30604 Dear Ms. Castricone: Your husband has asked me to pass along to you the revenues and expenses analysis which I reviewed with him the other day. On the positive side, the revenues of both the DVD and VCR lines easily cover their variable and marginal costs. In other words, the extra amount it requires to make another DVD and VCR is covered by the revenue earned from selling them. The downside is that Video Avenue has extensive fixed costs associated with both the DVD and VCR lines. For the VCR line, these fixed costs outweigh the revenues Video Avenue is earning at the current sales level by $30,000. Your husband suggested cutting the VCR line. Unfortunately, the fixed costs of the VCR line would not be eliminated with its removal; cutting the line would instead leave you with $70,000
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Unformatted text preview: worth of expenses and ZERO revenue to offset that expense, increasing the total loss associated with the VCR line by an additional $40,000. As previously stated, the VCR’s revenues do outweigh its variable costs, so in the short run it would be possible to eliminate further loss through a significant increase in VCR sales. However, due to decreasing VCR demand I would recommend, in the long run, that Video Avenue look into restructuring its manufacturing process in a way which would eliminate the fixed costs attached to the VCR line, allowing for a more profitable product line to replace it. If you have any questions or would like to discuss any aspect of my analysis, feel free to give me a call. Sincerely, Jacob McMillen Jacob McMillen Senior Accountant JM...
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