Question

1. Alicia is the owner-operator of Cool Beans, a local coffee shop. For the past year, Cool Beans sold 215,000 drinks at an average price of $2.95 per serving. Her average variable cost per serving was $1.15. Currently, she has been using local TV and newspapers to generate interest and awareness at a cost of $171,000 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 $14,000 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 5,900 cups with this discount and this new campaign would cost $2,500.

1. What is the Marketing ROI for the Brushfire website and social media plan compared to their current approach? ___ %

2. SleepItOff Properties is a West Coast company that owns and operates several hotel chains. Here is their partially completed income statement for the most recent fiscal year. Matt Tress, a summer intern for the finance team was asked to calculate some basic performance metrics as part of his training. He also was told that the company had $15 million in cash and $206 million of other assets. For Year Ending Dec 31, 2013 $Mill Total Revenue $88 Cost of Revenue $31 Gross Profit ? General, Selling and Admin $20 Depreciation $10 Operating Income or Loss ? Interest Expense $15 Pre-Tax Income ? Income Taxes ? Net Income ? If SleepItOff's Tax Rate is 30%

2. What is SleepItOff's Net Income?

Answer 1

1. Computation of Cool-bean Marketing Return on Investment:

	Particulars	Current Approach	Brushfire website and social media plan
	Sales of drinks (Cups)	215000	215000
	Sale of additonal cups due to promotional campaign	0	5900
A	Expected sale of drinks	215000	220900
B	Selling price per cup	2.95	2.95
C	Total sales value = A X B	634250	651655
D	Less: Variable Cost per cup:
	Existing variable Cost per cup	247250	247250
	Promotional campaign	0	2500
E	Contribution = C-D	387000	401905
F	Less: Fixed Cost
	For Current approach- TV and news paper	171000	-
	For Brushfire social media- (50% of Current cost)	-	85500
	For one time website and social platforms	-	14000
G	Profit = E-F	216000	302405
	Marketing ROI = Profit/Total Investment *100	51.64	86.59

Note: Total investment = Total variable cost + Total fixed cost

2. Calculation of Sleepit Off properties Net income:

Particulars	Amount in $ in Million
Revenues	88.00
Less: Cost of Revenue	31.00
Gross Profit	57.00
Less: General and Administraive Expenses	20.00
Less: Depreciation	10.00
EBIT or Operating profit	27.00
Less: Interest expenses	15.00
EBT or Pre Tax income	12.00
Less: Tax expenses 30%	3.60
Net Income	8.40