Question

Starcups Coffee Company is launching a new sustainability initiative that would reward customers for purchasing a reusable cup. During the cup promotion, customers would pay an extra $1.00 for the reusable cup and would receive a 25% discount each time they return with the cup to buy a cup of coffee. Each week Starcups serves 49,000 customers who purchase an average of 3.00 cups of coffee per week (147,000 cups total) Starcups's contribution margin income statement for a typical week is shown below: Sales Revenue Variable Cost Contribution Margin Fixed Coats Net Operating Income Units Per Unit Total 147,000 $5.80 $852,600 147,000 2.40 352,800 147,000 $3.40 $499,800 109,000 $390,000 Assume the new cup promotion is expected to impact sales volume, revenue, fixed, and variable costs as follows: • Starcups estimates that 25% of its current customers (12,250) will participate in the promotion. The remainder of its existing customer base (36,750) will continue to buy an average of 3.00 cups of coffee per week. • Starcups expected to attract 5,900 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% discount on repeat visits when they bring back their reusable cup. • The additional variable cost of purchasing the reusable cup is $2.40. The variable cost savings of the paper cup is $.40. • 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 $19,000 per week advertising the reusable cup promotion

Answer 1

1.

	Units	Per unit	Total
Customers who do not participate
Sales Revenue	110250	$             5.80	$         6,39,450
Variable Costs	110250	$             2.40	$         2,64,600
Contribution Margin	110250	$             3.40	$         3,74,850
First purchase for customers to buy the reusable cup
Sales Revenue	18150	$             6.80	$         1,23,420
Variable Costs	18150	$             4.40	$            79,860
Contribution Margin	18150	$             2.40	$            43,560
Repeat Visits for customers who buy reusable cup
Sales Revenue	72600	$             4.35	$         3,15,810
Variable Costs	72600	$             2.00	$         1,45,200
Contribution Margin	72600	$             2.35	$         1,70,610

2.

	Difference
Sales Revenue	$       2,26,080	=1078680-852600
Variable Costs	$       1,36,860	=489660-352800
Contribution Margin	$          89,220	=589020-499800
Fixed Costs	$          19,000
Net Operating Income	$          70,220

3. Positive impact