Question

1. The VIMTO Beverages Company manufactures a line of sweet beverages for the Gulf market. VIMTO’s primary line of business is the making and selling of syrup to bottlers. In the annual report of VIMTO, the information shown below was provided.

THE VIMTO LLC COMPANY MANAGEMENT DISCUSSION:

Our gross margin declined to 61 percent this year from 62 percent in the prior year, primarily due to costs for materials such as sweeteners and packaging. The increases [in selling expenses] in the last two years were primarily due to higher marketing expenditures in support of our Company’s volume growth.

Instructions

Answer the following questions. (5 marks each. Total 15 marks)

1. Are sweeteners and packaging a variable cost or a fixed cost?
2. What is the impact on the contribution margin of an increase in the per unit cost of sweeteners or packaging? What are the implications for profitability?
3. In your opinion, are VIMTO’s marketing expenditures a fixed cost, variable cost, or mixed cost? Give justification for your answer.

Answer 1

Answer to a.

Sweeteners and packaging is a variable cost.

Any cost which change according to production is variable cost. VIMTO’s primary line of business is the making and selling of syrup to bottlers so Sweeteners and packaging is direct factory cost and it is variable cost.

Answer to b.

Contribution margin decrease when an increase in the per unit cost of sweeteners or packaging.

Contribution Margin = Selling Price - Variable cost

=Selling Price - per unit cost of sweeteners or packaging

So every increase in per unit cost of sweeterners or packaging; contribution margin decrease.

Implications for profitability

Profitability = Contribution Margin - Fixed Cost

When contribution margin decrease then profitability also decrease.

So

An increase in the per unit cost of sweeteners or packaging reduce the profitability.

Answer to c.

Given that "higher marketing expenditures in support of our Company’s volume growth"

so When marketing expenditure increase company' volume also increase. But Marketing expenditure expenses are not directly linked with Company's volume growth. As per our opinion Marketing expenditure consists both element fixed as well as variable so it is better to called Mixed Cost.

So Marketing Expenditure is a Mixed Cost.