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 20% discount each time they return with the cup to buy a cup of coffee.

Each week Starcups serves 50,000 customers who purchase an average of 2.50 cups of coffee per week (125,000 cups total). Starcups’s contribution margin income statement for a typical week is shown below:

		Units	Per Unit			Total
Sales Revenue		125,000	$	6.00	$	750,000
Variable Cost		125,000		2.50		312,500
Contribution Margin		125,000	$	3.50	$	437,500
Fixed Costs						110,000
Net Operating Income					$	327,500

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 (12,500) will participate in the promotion. The remainder of its existing customer base (37,500) will continue to buy an average of 2.50 cups of coffee per week.
• Starcups expected to attract 6,000 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 20% discount on repeat visits when they bring back their reusable cup.
• The additional variable cost of purchasing the reusable cup is $2.50. The variable cost savings of the paper cup is $.35.
• Starcups expects that customers who participate in the reusable cup promotion will visit an average of 4 times per week, including the first purchase of the reusable cup.
• Starcups will spend a total of $20,000 per week advertising the reusable cup promotion.

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?

Required 1 Required 2 Required 3 Prepare a contribution margin income statement to predict how the reusable cup promotion will impact weekly net operating income. Units Per Unit Total Customers who do not participate Sales Revenue Variable Costs Contribution Margin First purchase for customers to buy the reusable cup: Sales Revenue Variable Costs Contribution Margin Repeat visits for customers who buy the reusable cup: Sales Revenue Variable Costs Contribution Margin Required 1 Required 2 > Required 1 Required 2 Required 3 Compute the difference in total revenue, total variable costs, total contribution margin, total fixed costs, and total operating income before and after the promotion. Difference Sales Revenue Variable Costs Contribution Margin Fixed Costs Net Operating Income < Required 1 Required 3 > Required 1 Required 2 Required 3 How will this sustainability initiative impact the company's triple bottom line? How will this sustainability initiative impact the company's triple bottom line? < Required 2 Required 3

Answer 1

Solutions:

1.

	Units	Per Unit	Total
Customers who do not participate
Sales Revenue	93750	$6.00	$5,62,500.00
Variable Cost	93750	$2.50	$2,34,375.00
Contribution Margin	93750	$3.50	$3,28,125.00
First Purchase for customers to buy the reusable cups
Sales Revenue	18500	$7.00	$1,29,500.00
Variable Cost	18500	$4.65	$86,025.00
Contribution Margin	18500	$2.35	$43,475.00
Repeat visit for customers who buy reusable cups
Sales Revenue	55500	$4.80	$2,66,400.00
Variable Cost	55500	$2.15	$1,19,325.00
Contribution Margin	55500	$2.65	$1,47,075.00

2.

	Before Promotion	After Promotion	Difference
Sales Revenue	$7,50,000.00	$9,58,400.00	$2,08,400.00
Variable Cost	$3,12,500.00	$4,39,725.00	$1,27,225.00
Contribution Margin	$4,37,500.00	$5,18,675.00	$81,175.00
Fixed Cost	$110,000.00	$1,30,000.00	$20,000.00
Net Operating Income	$3,27,500.00	$3,88,675.00	$61,175.00

3. Positive Impact

Calculations:

Customers who do not participate = 37500*2.5 = 93750 units

First Purchase for customers to buy the reusable cups = (12500+6000)*1 = 18500 units

Selling price per unit = $6.00+$1.00

Variable cost = $2.50+$2.50-$0.35 = $4.65

Repeat visit for customers who buy reusable cups= (12500+6000)*3 = 55500 units

Selling price per unit = $6.00 Less 20% of $6.00 = $4.80

Variable Cost = $2.50-.35 = $2.15