Question

THE COCA-COLA 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.

We measure our sales volume in two ways: (1) gallon shipments of concentrates and syrups and (2) unit cases of finished product (bottles and cans of Coke sold by bottlers).

Answer the following questions.

(1) Are sweeteners and packaging referenced in the excerpt a variable cost or a fixed cost? What is the effect on the contribution margin of an increase in the per unit cost of sweeteners or packaging? What are the implications for profitability?

(b) In your opinion, are marketing expenditures a fixed cost, variable cost, or mixed cost to The Coca-Cola Company? Justify your answer.

(c) Which of the two measures cited for measuring volume represents an activity base? Why might Coca-Cola use two different measures?

Answer 1

1) Sweeteners and packaging referenced in the excerpt are variable cost. These are raw material and packaging cost which is consumed in product as part of bill of material based on production plan. The contribution margin per unit will reduce when there is increase in per unit cost of sweeteners or packaging. The lower contribution margin per unit will reduce the overall contribution margin and thereby profitablity will reduce. Reduction in contribution margin has a direct impact on profitablity of the firm.

b) Marketing expenditure is fixed cost. The major of marketing expenditure are incurred on advertising and hiring commercials which are paid to the agencies. These costs are fixed in nature as per agreement entered into. Fixed cost is constant at overall level and they do not change

c) Both are measures of activity base. Gallon shipment is activity driver for concentrates and syrups. Unit cases are activity driver for finished product.

There are 2 different units of measure for shipment. Hence Gallons shipment is used as activity base for gallon shipment to customers and units cases of shipment for finished product. Concentrates and syrups are not packed in cases and they are sold in gallons. The finished goods are sold in cases since they are in bottles.