Purple Cow operates a chain of drive-ins selling primarily ice cream products. The following information is taken from the records of a typical drive-in now operated by the company Average selling price of ice cream per gallon……………………………………………………… $14.80 Number of gallons sold per month ……………………………………………………………………. $3000 Variable costs per gallon: Ice cream………………………………………………………………………………………………. $4.60 Supplies (cups, cones, toppings, etc.)……………………………………………………. $2.20 Total variable expenses per gallon ……………………………………………………………………. $6.80 Fixed costs per month: Rent on building …………………………………………………………………………………... $2200 Utilities and upkeep ……………………………………………………………………………… $760 Wages, including payroll taxes ……………………………………………………………… $4840 Manager’s salary, including payroll taxes but excluding any bonus ………. $2500 Other fixed expenses ……………………………………………………………………………. $1700 Total fixed costs per month ………………………………………………………………………………. $12000 Based on these data, the monthly break-even sales volume is determined as follows $12000 (fixed costs) = 1500 gallons or ($22200) $8.00 (contribution margin per unit) Questions a. Currently, all store managers have contracts calling for a bonus of 20 cents per gallon for each gallon sold beyond the break-even point. Compute the number of gallons of ice cream that must be sold per month in order to earn a monthly operating income of $10000 (round to the nearest gallon) b. To increase operating income, the company is considering the following two alternatives: 1. Reduce the selling price by an average of $2.00 per gallon. This action is expected to increase the number of gallons sold by 20 percent. (Under this plan, the manager would be paid a salary of $2500 per month without bonus.) 2. Spend $3000 per month on advertising without any change in selling price. This action is expected to increase the number of gallons sold by 10 percent. (Under this plan, the manager would be paid salary of $2500 per month without bonus.) Which of these two alternatives would result in the higher monthly operating income? How many gallons must be sold per month under each alternative for a typical outlet to break even? Provide schedules in support of your answer. c. Draft a memo to management indicating your recommendations with respect to these alternative marketing strategies
Purple Cow operates a chain of drive-ins selling primarily ice cream products. The following information is taken from the records of a typical drive-in now operated by the company
Average selling price of ice cream per gallon……………………………………………………… $14.80
Number of gallons sold per month ……………………………………………………………………. $3000
Variable costs per gallon:
Ice cream………………………………………………………………………………………………. $4.60
Supplies (cups, cones, toppings, etc.)……………………………………………………. $2.20
Total variable expenses per gallon ……………………………………………………………………. $6.80
Fixed costs per month:
Rent on building …………………………………………………………………………………... $2200
Utilities and upkeep ……………………………………………………………………………… $760
Wages, including payroll taxes ……………………………………………………………… $4840
Manager’s salary, including payroll taxes but excluding any bonus ………. $2500
Other fixed expenses ……………………………………………………………………………. $1700
Total fixed costs per month ………………………………………………………………………………. $12000
Based on these data, the monthly break-even sales volume is determined as follows
$12000 (fixed costs) = 1500 gallons or ($22200)
$8.00 (contribution margin per unit)
Questions
a. Currently, all store managers have contracts calling for a bonus of 20 cents per gallon for each gallon sold beyond the break-even point. Compute the number of gallons of ice cream that must be sold per month in order to earn a monthly operating income of $10000 (round to the nearest gallon)
b. To increase operating income, the company is considering the following two alternatives:
1. Reduce the selling price by an average of $2.00 per gallon. This action is expected to increase the number of gallons sold by 20 percent. (Under this plan, the manager would be paid a salary of $2500 per month without bonus.)
2. Spend $3000 per month on advertising without any change in selling price. This action is expected to increase the number of gallons sold by 10 percent. (Under this plan, the manager would be paid salary of $2500 per month without bonus.)
Which of these two alternatives would result in the higher monthly operating income? How many gallons must be sold per month under each alternative for a typical outlet to break even? Provide schedules in support of your answer.
c. Draft a memo to management indicating your recommendations with respect to these alternative marketing strategies
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 7 images
