Being an antique shop, it would contain quite a few fixed assets such as furniture, cars, equipment and fixtures. Apart from that the antique items that are up for sold are also assets for the shop. On all these items Claire’s antique hop would have to cater for fixed costs like depreciation, rent or lease, utilities, maintenance, interest, amongst others.
Depreciation is calculated using different methods like straight line or reducing balance method. However calculating it at an approximate percentage is commonly used (Williams et al., 2001). Maintenance may although be done in a variable sense however some organizations keep a reserve for maintenance at a certain percentage each period. Utilities most of the times are semi-variable with one part of it being fixed like line rent for a phone etc. Rent is totally fixed with the landlord fixing an amount to be paid every period. Interest on loans is fixed by the creditor as a percentage of the principal amount.
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I would recommend that the fixed assets should not be converted into variable assets at this time; the reasons being that most fixed assets are hard to convert into variable and there is no real benefit of doing it. Maintenance can be converted easily due to its nature however depreciation, rent, interest etc. are fixed in nature and there is no point in converting them. Since a business requires some stability and hence it makes budgets, any fixed cost to be incurred is already known thus there can be no shocks for the company in terms of a higher cost (Anthony & Breitner, 2006).
The reason for not following this strategy is that no business can run without having a certain amount of fixed cost and there are many costs in those assets which can increase our expenses. Another reason why the company should not go for this strategy is because antiques are already quite high priced.
Once the fixed costs are converted, the variable costs will be added to each piece of antique thus forcing the company to increase the price of each piece to meet the target (Kieso, Weygandt, & Warfield, 2006). This can lead to lower sales too. However if the costs are kept fixed, the costs are spread between all the items thus the affect is minimal.
Converting the fixed costs to variable can only be okay if the useful life of the assets is close to its end. During this time the depreciation will be none, the interest will be covered, and thus the opportunity cost will be lowest to convert the fixed cost in variable.
1. Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield (2006). Intermediate Accounting 12th edition. Wiley
2. Jan Williams, Sue Haka, Mark Bettner, and Robert Meigs (2001). Financial and Managerial Accounting: A Basis for Business Decisions. 12th Ed edition. McGraw-Hill Education
3. Robert N. Anthony and Leslie K. Breitner (2006). Essentials of Accounting (9th Edition). Prentice Hall
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