Question

The Coca Cola Company hardly needs an introduction A line taken from the cover of a recent annual report says t all if you measured time in servings of Coca-Cola "a biltion Coca-Cola's apo was yesterday morning" On average bottlers. These bottlers then sell the finished bottles and cans of Coca Cola to the consumer every U.S. citizen drinks 363 8-ounce servings of Coca-Cola products each year. Coca Colas primary line of business is the making and selling of syrup to in the annual report of Coca-Cola the information shown below was provided THE COCA COLA COMPANY Management Discussion Our gross margpin decined to 6 percent thes year from 62 percent in the prior year primarily due to costs for materials such as sweeteners and packaging The increases Iin selling expenses) in the last two years were primarily due to higher marketing e We measure our sales volume in two ways: (1) galon shipments of concentrates and synups and (a) unit cases of finished product (bottles and cans of Coke sold by bottlers) expenditures in support of our Company's volume growth Answer the following questions a) Are sweeteners and packaging a vaiable cost or a fved cost What is the impact on the coneribution implications for profitability? eb) in your opnon are marketing expendures a foed cost variable cost or mined cost to The Coc-Cola Company? Give juttation %' you inte oo wheh 0, the two measures cited for measuring voume regresents the actty ındex as defned in ths chapter? Why mght CoQ-cou use two dmerent measures? margin of an increase in the per unit cost of sweeteners or packaging? What are the

Answer 1

Please see the below answer

Sweeteners and packaging, for Coco Cola, would be variable costs, because they would vary with the production levels, i.e. if the productions were lower, the consumption of sweeteners and packaging material would automatically be lower. Therefore, these costs would be variable. As these are variable costs, any increase in per unit cost of sweeteners or packaging would result in reduction of contribution margin of the product. As the contribution margin would reduce, so would the profitability. Therefore, any increase in cost of sweeteners or packaging would result in reduced profitability.

Marketing expenses in case of Coca Cola, would be a combination of fixed and variable expenses. Generally, fixed costs would include costs of one time campaigns undertaken by the company, which would be more of specific projects undertaken by the company, depending on the business changes in the particular year. These would be fixed, irrespective of the volume and the need of such expenditure is generally evaluated on a periodic basis.

Variable costs would typically include costs of publicising the products over media channels (print, TV, etc). These costs would directly vary in terms of the number of times a particular advertisement is published. Further, marketing costs would also include some sales based incentives to staff and distributors. These are marketing costs which can be considered to be variable in nature. Therefore, for the industry in which Coca Cola operates, marketing expenses will be a combination of fixed and variable costs

Unit cases of finished products like bottles and cans of coke sold by bottlers represents the activity index as bottle products sold more.

Coca-Cola uses different measures to maintain the costs of production and they ship in gallon for production in different locations

Sweeteners and packaging are variable costs. These costs will vary with production.
For ex: packaging: this will vary according to the no of bottles packed. So packaging is variabe cost.
Like packaging even sweeteners are also variable cost, as the quantity of production increases the consumption of sweeteners will also increase.
b. If unit cost of sweetener and packaging increase, automatically the variable cost will increase, so the contribution margin will be reduced. Once the contribution margin is reduced naturally the net income will also reduce. So the profitability will also reduce