Question

Question: Compare Apple’s and Google’s income statements and answer the following.

Required

1. Which company has a higher ratio of costs, defined as cost of goods sold plus total operating expenses, to revenues? Use the two most recent years’ income statements from Appendix A. Show your analysis.

2. How might the use of activity-based costing help the less competitive company becomemorecompetitive?

3. Assume Apple is considering opening a new retail store. What are the activities associated with opening a new retail store?

Short answer

Google has a higher cost-to-revenue ratio. ABC costing helps inadequate overhead allocation making it competitive in cost advantage.

Step-by-step solution

Calculation of ratio of costs

Based on the appendix, the following data has been withdrawn –

	September 2015
	Apple	Google
Cost of goods sold	$140,089	$28,164
Total Operating Expenses	22,396	27,465
Revenues	233,715	74,989

$\begin{array}{rcl}\mathbf{\text{RatioofcosttorevenueforApple}}& \mathbf{=}& \frac{\mathbf{\text{Costofgoodssold}}\mathbf{+}\mathbf{\text{OperatingExpenses}}}{\mathbf{\text{TotalRevenue}}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{140}\mathbf{,}\mathbf{089}\mathbf{+}\mathbf{\$}\mathbf{22}\mathbf{,}\mathbf{396}}{\mathbf{\$}\mathbf{233}\mathbf{,}\mathbf{715}}\\ & \mathbf{=}& \mathbf{0}\mathbf{.}\mathbf{69}\end{array}$

$\begin{array}{rcl}\mathbf{\text{CosttorevenueforGoogle}}& \mathbf{=}& \frac{\mathbf{\text{Costofgoodssold}}\mathbf{+}\mathbf{\text{OperatingExpenses}}}{\mathbf{\text{TotalRevenue}}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{28}\mathbf{,}\mathbf{164}\mathbf{+}\mathbf{\$}\mathbf{27}\mathbf{,}\mathbf{465}}{\mathbf{\$}\mathbf{74}\mathbf{,}\mathbf{989}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{55}\mathbf{,}\mathbf{629}}{\mathbf{\$}\mathbf{74}\mathbf{,}\mathbf{989}}\\ & \mathbf{=}& \mathbf{0}\mathbf{.}\mathbf{74}\end{array}$

Google has the highest ratio of cost to revenue.

Use of activity based costing in competition

Activity-based costing is based on allocating the overheads to the different product lines or different departments. Overhead constitute a greater portion of the cost. Further overhead is practically inseparable for different products or departments.

So in such a case if overhead is allocated based on the traditional method, there is a chance of over-allocating or under-allocating the overhead to any particular product line.

So traditional method makes it less competitive for optimizing cost. On the other hand, the activity-based method can optimize cost competitively and can make them less competitive company more competitive.

Required activity to open new store

Following are the activities associated with opening a new retail store –

1) Deciding on product or services: The first step to opening a retail store is to decide what specific product or services need to be sold in the retail store.

2) Target market and marketing strategies: The target market is the specific customers that must be targeted and captured from the competitors. Marketing strategies are the creative plans to stand out from the competitors. After deciding on the product or services, the target market and relevant strategies must be decided.