Question

GoGo Juice is a combination gas station and convenience store located at a busy intersection. Recently, a national chain opened a similar store only a block away; consequently, sales have decreased for GoGo. In an effort to reclaim lost sales, GoGo has implemented a promotional effort; for every $10 purchase at GoGo, the customer receives a $1 coupon that can be redeemed toward the purchase of gasoline. The average gasoline customer purchases 15 gallons of gasoline at $2.50 per gallon. The results of an average month, prior to this coupon promotion, are shown below. Not included in the information presented below is the monthly cost of printing the coupons, which is estimated to be $500. Coupons are issued on the basis of total purchases regardless of whether the purchases are paid in cash or paid by redeeming coupons. Assume that coupons are distributed to customers for 75 percent of the total sales. Also assume that all coupons distributed are used to purchase gasoline. Cost of Sales (per unit or % of retail) $1.875 per gallon 60% 50% Sales $100,000 60,000 40,000 Gasoline Food and beverages Other products Labor-station attendants Labor-supervision Rent, power, supplies, and other Depreciation (pumps, computers, counters, fixtures, and building) Other Costs $ 10,000 2,500 40,000 7,500

Answer 1

GoGo Juice 1. GoGo Juice's profit (loss) before tax, from implementing the promotional coupon with no change in sales volume and sales mix is ($6,500). See below. Gasoline Total Food $60,000 Other $40,000 Sales Revenue Coupons redeemed $1,00,000 15,000 $2,00,000 15,000 Cost of Sales 75,000 36,000 20,000 1,31,000 $10,000 $24,000 $20,000 Contribution Margin Fixed costs Pre-tax profit (loss) $54,000 60,500 ($6,500) Excel Formula 2. The breakeven point in total sales dollars for GoGo: 27.00% wtd. average contribution margin ratio = total contribution margin = total sales = $54,000 - $200,000 = 27.0% $2,24,074 Breakeven in dollars = fixed costs – wtd.-average contribution margin ratio = $60,500 = 0.27 = $224,074 3. Breakdown of the total breakeven sales dollars, on the basis of sales mix determined on the basis of relative sales dollars, not units, for each of the three product lines: $2,24,074 Total breakeven sales dollars (see #2 above) 0.50 0.30 0.20 Sales mix percentages (based on relative sales dollars): Gasoline: $100,000 - $200,000 = 0.50 Food/beverage: $ 60,000 - $200,000 = 0.30 Other: $ 40,000 - $200,000 = 0.20 $1,12,037 $67,222 $44,815 Allocation of total breakeven sales dollars: Gasoline: 0.50 X $224,074 = Food/beverage: 0.30 x $224,074 = Other: 0.20 x $224,074 = Total = $112,037 67,222 44,815 $224.074 $2,40,000 $1,56,000 84,000 60,500 23,500 5. Sensitivity analysis is used to deal more effectively with uncertainty or risk. Sensitivity analysis is a "what-if' type of analysis used to determine the outcomes if any parameters change from the initial assumptions. For example, revenues or costs could be changed from the initial assumptions and a new break-even sales volume calculated. At least three factors that make sensitivity analysis prevalent in decision making include the following: • The availability of computers and spreadsheet software has made it very quick and easy to compute the impact of changing one or more assumptions in a financial model. • As the business environment is becoming more dynamic and competitive, sensitivity analysis provides management with an understanding of the impact of changes in the environment. The increased emphasis on productivity, competitive marketplace, changing consumer demand, shorter product life cycle times, and faster obsolescence of technology makes sensitivity analysis more widely used. 6. Overview of methods presented in the chapter, for dealing with uncertainty in the profit-planning process: Conventional measures associated with CVP analysis: o Degree of operating leverage (DOL) o Margin of safety (MOS) and margin of safety ratio (MOS%) Sensitivity analysis: o Simple "what-if" analysis/analyses o Preparation of decision tables/decision trees/expected values (based on probability information regarding one or more variables in the CVP model) o Monte Carlo simulation analysis (random and independent draws from probability distributions associated with one or more variables in the CVP model, to generate a probability of outcomes--for example, operating incomes)