Question

tarcups 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 30% discount each time they return with the cup to buy a cup of coffee.

Each week Starcups serves 57,000 customers who purchase an average of 2.50 cups of coffee per week (142,500 cups total). Starcups’s contribution margin income statement for a typical week is shown below:

		Units	Per Unit			Total
Sales Revenue		142,500	$	7.40	$	1,054,500
Variable Cost		142,500		3.20		456,000
Contribution Margin		142,500	$	4.20	$	598,500
Fixed Costs						117,000
Net Operating Income					$	481,500

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 (14,250) will participate in the promotion. The remainder of its existing customer base (42,750) will continue to buy an average of 2.50 cups of coffee per week.
• Starcups expected to attract 6,700 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 30% discount on repeat visits when they bring back their reusable cup.
• The additional variable cost of purchasing the reusable cup is $3.20. 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 4 times per week, including the first purchase of the reusable cup.
• Starcups will spend a total of $27,000 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?

Answer 1

Let us first compute some basic data which will be used for preparing the Contribution margin income statement

a. No. of current customers = 142500 cups / 2.50 cup per customer = 57,000 customers

25% of the above customers will participate in the promotion. No of customers participating = 57000*25% = 14,250 customers

6,700 new customers will also be attracted to participate in the promotion.

Therefore, no. of customers who do not participate in the promotion = 57000-14250 = 42,750 customers

Also. no. of participating customers = 14250 + 6700 = 20,950 customers

b. Customers who participate in the promotion will pay an additional $1.00 for the reusable cup. They will then receive a 30% discount on repeat visits when they bring back their reusable cup.

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.

Revenue generated per participating customer per week:

1st visit = $1 for reusable cup + $7.40 for the coffee = $8.40

2nd, 3rd and 4th visits = (7.40 - 30% discount) = $5.18 per visit. Total = 5.18*3 - $15.54

Hence, revenue per participating customer per week = 8.40 + 15.54 = $23.94 per week

c. Current variable cost per coffee = $3.20 per unit

Cost saving per paper cup = $0.40 per unit

Therefore, variable cost per coffee for participating customer = 3.20 - 0.40 = $2.80 per unit

No. of reusable cups to be purchased = No. of participating customers = 20,950 customers

Additional variable cost of purchasing the reusable cup = 20950*3.20 = $67,040

d. Starcups will spend a total of $27,000 per week advertising the reusable cup promotion.

1. Now, that we have the basic data, let us prepare the Contribution Margin Income Statement:

		figures in $
		After sustainability promotion
Sales Revenue:
42750 customers * 2.50 cups * $7.40	790,875
20950 customers * $23.94 per week	501,543
Total Sales revenue		1,292,418
Variable costs:
42750 customers * 2.50 cups * $3.20	342,000
20950 customers * 4 cups * $2.80	234,640
Additional variable cost for purchasing the reusable cup	67,040
Total variable costs		643,680
Contribution Margin		648,738
Fixed Costs	117,000
Fixed advertising cost per week	27,000
Total Fixed costs		144,000
Net operating income		504,738

2. Comparative statements:

		figures in $	figures in $	figures in $
		After sustainability promotion	Before promotion	Difference
Sales Revenue:
42750 customers * 2.50 cups * $7.40	790,875
20950 customers * $23.94 per week	501,543
Total Sales revenue		1,292,418	1,054,500	237,918
Variable costs:
42750 customers * 2.50 cups * $3.20	342,000
20950 customers * 4 cups * $2.80	234,640
Additional variable cost for purchasing the reusable cup	67,040
Total variable costs		643,680	456,000	187,680
Contribution Margin		648,738	598,500	50,238
Fixed Costs	117,000
Fixed advertising cost per week	27,000
Total Fixed costs		144,000	117,000	27,000
Net operating income		504,738	481,500	23,238

3. Impact of sustainability initiative on the Company's triple bottom line:

a. Social: Due to the sustainability initiative, there will be a positive social impact on the society and the customers will get benefit of the reduced cost of production. Customers will appreciate the initiatives taken by the Company and will be much more loyal to the brand.

b. Environmental: Due to the sustainability initiative, there will be a positive environmental effect as the usage of disposable coffee cups will reduce and there will be less burden on the environment.

c. Financial: The Company's net operating income has also increased by $23,238 due to the sustainability initiative taken by the Company.