Question

Real-World Focus

The Coca-Cola Company hardly needs an introduction. A line taken from the cover of a recent annual report says it all: If you measured time in servings of Coca-Cola, “a billion Coca-Cola's ago was yesterday morning.” On average, every U.S. citizen drinks 363 8-ounce servings of Coca-Cola products each year. Coca-Cola's primary line of business is the making and selling of syrup to bottlers. These bottlers then sell the finished bottles and cans of Coca-Cola to the consumer.

In the annual report of Coca-Cola, the information shown below was provided.

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).

Instructions

Answer the following questions:

Are sweeteners and packaging a variable cost or a fixed cost? 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?

In your opinion, are Coca-Cola's marketing expenditures a fixed cost, variable cost, or mixed cost? Give justification for your answer.

Answer 1

Sweetners and packaging, for Coco Cola, would be variable costs, because they would vary with the production levels, i.e. if the productions were lower, the consumption of sweetners and packaging material would automatically be lower. Therefore, these costs would be variable. As these are variable costs, any increase in per unit cost of sweetners or packaging would result in reduction of contribution margin of the product. As the contribution margin would reduce, so would the profitability. Therefore, any increase in cost of sweetners or packaging would result in reduced profitability.

Marketing expenses in case of Coca Cola, would be a combination of fixed and variable expenses. Generally, fixed costs would include costs of one time campaings undertaken by the company, which would be more of specific projects undertaken by the company, depending on the business changes in the particular year. These would be fixed, irrespective of the volume and the need of such expenditure is generally evaluated on a periodic basis.

Variable costs would typically include costs of publicising the products over media channels (print, TV, etc). These costs would directly vary in terms of the number of times a particular advertisement is publised . Further, marketing costs would also include some sales based incentives to staff and distributors. These are marketing costs which can be considered to be variable in nature. Therefore, for the industry in which Coca Cola operates, marketing expenses will be a combination of fixed and variable costs