Early versions of cellular phones could do one thing—make and receive voice phone calls. Later versions were developed that could send and receive text messages, but due to their typing inter- face, performing this task was cumbersome. Then a company named Research in Motion (RIM) brought its BlackBerry phone to the market with an integrated keyboard that made typing text much easier. The BlackBerry became the phone of choice for users who wanted to send and receive e-mail messages via their cell phone, and its success soared. Unfortunately for RIM, Apple Inc. began selling the iPhone to the world in June of 2007. The iPhone was not only capable of dealing with e-mail messages efficiently, but it also allowed users to search the Internet using a popular touchscreen interface. The popularity of RIM’s BlackBerry began to decline. RIM’s sales declined 14 percent in its 2012 fiscal year compared to its sales in 2011, but its operating earnings declined 32 percent.
Required Write a memorandum that explains how a 14 percent decline in sales could cause a 32 percent decline in profits.
Your memo should address the following: a. An identification of the accounting concept involved. b. A discussion of how various major types of costs incurred by RIM were likely affected by the decline in its sales. c. The effect of the decline in sales on RIM’s margin of safety.