Each week Starcups serves 55,000 customers, who purchase an average of 2.50 cups of coffee per week (137,500 cups total). Starcups's contribution margin income statement for a typical week is shown below: Total $ 962,500 412,500 $ 550,000 115,000 Fixed Costs Net Operating Income. $ 435,000 Assume the new cup promotion is expected to impact sales volume, revenue, fixed, and variable costs as follows: • Starcups estimates that 25 percent of its current customers (13,750) will participate in the promotion. The remainder of its existing customer base (41,250) will continue to buy an average of 2.50 cups of coffee per week. • Starcups expects to attract 6,500 new customers to participate in the promotion. • Customers who participate in the promotion will pay an additional $1.00 for the reusable cup. They will then receive a 25 percent discount on repeat visits when they bring back their reusable cup. The additional variable cost of purchasing the reusable cup is $3.50. The variable cost savings of the paper cup is $0.20. • Starcups expects that customers who participate in the reusable cup promotion will visit an average of 5 times per week, including the first purchase of the reusable cup. • Starcups will spend a total of $25,000 per week advertising the reusable cup promotion. Sales Revenue Variable Costs Contribution Margin Units 137,500 137,500 137,500 Per Unit $7.00 3.00 $4.00
Each week Starcups serves 55,000 customers, who purchase an average of 2.50 cups of coffee per week (137,500 cups total). Starcups's contribution margin income statement for a typical week is shown below: Total $ 962,500 412,500 $ 550,000 115,000 Fixed Costs Net Operating Income. $ 435,000 Assume the new cup promotion is expected to impact sales volume, revenue, fixed, and variable costs as follows: • Starcups estimates that 25 percent of its current customers (13,750) will participate in the promotion. The remainder of its existing customer base (41,250) will continue to buy an average of 2.50 cups of coffee per week. • Starcups expects to attract 6,500 new customers to participate in the promotion. • Customers who participate in the promotion will pay an additional $1.00 for the reusable cup. They will then receive a 25 percent discount on repeat visits when they bring back their reusable cup. The additional variable cost of purchasing the reusable cup is $3.50. The variable cost savings of the paper cup is $0.20. • Starcups expects that customers who participate in the reusable cup promotion will visit an average of 5 times per week, including the first purchase of the reusable cup. • Starcups will spend a total of $25,000 per week advertising the reusable cup promotion. Sales Revenue Variable Costs Contribution Margin Units 137,500 137,500 137,500 Per Unit $7.00 3.00 $4.00
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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5
Each week Starcups serves 55,000 customers, who purchase an average of 2.50 cups of coffee per week (137,500 cups total).
Starcups's contribution margin income statement for a typical week is shown below:
Sales Revenue
Variable Costs
Contribution Margin
.
Units
137,500
137,500
137,500
•
Per Unit
$7.00
3.00
$ 4.00
Fixed Costs
Net Operating Income
Assume the new cup promotion is expected to impact sales volume, revenue, fixed, and variable costs as follows:
Starcups estimates that 25 percent of its current customers (13,750) will participate in the promotion. The remainder of its
existing customer base (41,250) will continue to buy an average of 2.50 cups of coffee per week.
●
Starcups expects to attract 6,500 new customers to participate in the promotion.
• Customers who participate in the promotion will pay an additional $1.00 for the reusable cup. They will then receive a
25 percent discount on repeat visits when they bring back their reusable cup.
●
• The additional variable cost of purchasing the reusable cup is $3.50. The variable cost savings of the paper cup is $0.20.
Starcups expects that customers who participate in the reusable cup promotion will visit an average of 5 times per week,
including the first purchase of the reusable cup.
Starcups will spend a total of $25,000 per week advertising the reusable cup promotion.
Total
$ 962,500
412,500
$ 550,000
115,000
$ 435,000
Required:
1. Prepare a contribution margin income statement to predict how the reusable cup promotion will impact weekly net operating
income.
2. Compute the difference in total revenue, total variable costs, total contribution margin, total fixed costs, and total operating income
before and after the promotion.
3. How will this sustainability initiative impact the company's triple bottom line?
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