Question

Alicia is the owner-operator of Cool Beans, a local coffee shop. For the past year, Cool Beans sold 280,000 drinks at an average price of $2.92 per serving. Her average variable cost per serving was $1.40. Currently, she has been using local TV and newspapers to generate interest and awareness at a cost of $144,000 per year. She recently contacted Brushfire Social Media and they estimated they could reach the same number of people in her community with a social media budget at half the cost, though it would require an additional one-time investment of $15,000 in their website and social platforms.

As an additional option, Brushfire suggested a separate promotional campaign that would offer a $1 discount to any person who likes their social media page. Brushfire estimates that Cool Beans would sell an additional 6,700 cups with this discount and this new campaign would cost $2,500.

What would be the net savings generated during the first year (including the investment in the website and social platforms) if Alicia chooses to go with the Brushfire plan using the website and social media to generate interest and awareness?

Answer needs to be in dollars.

Answer 1

Given Information

In the past year,

Cups sold = 280,000

Average price of cup = $2.92 per serving

Variable cost = $1.40 per serving

Existing cost to generate interest and awareness = $144,000 per year

Now, as per Brushfire, they can reach the same number of people at half the cost but with one time investment of $15,000 in website and social platforms.

So, Brushfire’s cost to reach same no of people =50% of 144,000 + 15000 = $87,000   (A)

As per the additional option, on providing $1 discount on social media to people liking their page, 6700 more cups could be sold. In addition to cost of discount, this option would cost $2500.

So, total cost of additional option = 1 * 6700 + 2500 = $9,200    (B)

Now, 6700 cups would provide extra income

= 6700 *(average price per cup – variable cost per cup – discount per cup)

=> Extra income = 6700 * (2.92 – 1.40 – 1.00) = $3,484   (C)

So, Total cost of Brushfire’s plan = (A) + (B) – (C) = 87000 + 9200 -3484 = $92,716 (D)

So, Net Savings due to Bushfire’s plan = Existing Cost – Total cost of Bushfire’s plan

Net Savings due to Bushfire’s plan = 144,000 – 92,716 = $51,284 (Answer)