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Shellfish Company is a small company. It owns an icehouse and processing building, a refrigerated...

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Accounting

Shellfish Company is a small company. It owns an icehouse and processing building, a refrigerated van and three shrimp boats. Asquod Smith inherited the company from his father three months ago. The company employs three boat crews of four people each and five processing workers. Telford Danket of St. George Accountants, a local accounting firm, has kept the companys financial records for many years. In his last analysis of operations, Mr. Danket stated that the companys fixed cost base of $100,000 is satisfactory for its type and size of business. However, variable costs have averaged 70 percent of sales over the last two years, which is too high for the volume of business. Last year, only 30 percent of the sales revenue of $300,000 contributed to covering fixed costs. As a result, the company reported a $10,000 operating loss. Mr. Smith wants to improve the companys net income, but he is confused by Mr. Dankets explanation of the fixed and variable costs.

Required: Prepare a response to Mr. Smith from Mr. Danket in which you explain the concept of cost behavior as it relates to Shellfish Companys operations. Include ideas for improving the companys net income based on changes in fixed and variable costs.

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