Question

Starcups Coffee Company is launching a new sustainability initiative that would reward customers for purchasing a reusable cup. During the cup promotion, customers would pay an extra $1.00 for the reusable cup and would receive a 20% discount each time they return with the cup to buy a cup of coffee.

Each week Starcups serves 41,000 customers who purchase an average of 2.00 cups of coffee per week (82,000 cups total). Starcups’s contribution margin income statement for a typical week is shown below:

		Units	Per Unit			Total
Sales Revenue		82,000	$	4.20	$	344,400
Variable Cost		82,000		1.60		131,200
Contribution Margin		82,000	$	2.60	$	213,200
Fixed Costs						101,000
Net Operating Income					$	112,200

Assume the new cup promotion is expected to impact sales volume, revenue, fixed, and variable costs as follows:

• Starcups estimates that 25% of its current customers (10,250) will participate in the promotion. The remainder of its existing customer base (30,750) will continue to buy an average of 2.00 cups of coffee per week.
• Starcups expected to attract 5,100 new customers to participate in the promotion.
• Customers who participate in the promotion will pay an additional $1.00 for the reusable cup. They will then receive a 20% discount on repeat visits when they bring back their reusable cup.
• The additional variable cost of purchasing the reusable cup is $1.60. The variable cost savings of the paper cup is $.30.
• Starcups expects that customers who participate in the reusable cup promotion will visit an average of 5 times per week, including the first purchase of the reusable cup.
• Starcups will spend a total of $11,000 per week advertising the reusable cup promotion.

Required:
1. Prepare a contribution margin income statement to predict how the reusable cup promotion will impact weekly net operating income.



2. Compute the difference in total revenue, total variable costs, total contribution margin, total fixed costs, and total operating income before and after the promotion.

Answer 1

ANSWER

1). Contribution Margin Income Statement:

	Units	Per Unit	Total
Customers who do not participate		$	$
Sales Revenue	61,500	4.20	258,300
Variable Costs	61,500	1.60	98,400
Contribution Margin	61,500	2.60	159,900
First purchase for customers to buy the reusable cup
Sales Revenue	25,600	5.20	133,120
Variable Costs $ ( 1.60 - 0.30 + 1.60)	25,600	2.90	74,240
Contribution Margin	25,600	2.30	58,880
Repeat visit for customers who buy the reusable cup
Sales Revenue	102,400	3.36	344,064
Variable Costs $ ( 1.60 - 0.30)	102,400	1.30	133,120
Contribution Margin	102,400	2.06	210,944

2).

Particulars	Before the Promotion	After the Promotion	Difference
	$	$	$
Sales Revenue	344,400	735,484	391,084
Variable Costs	131,200	305,760	174,560
Contribution Margin	213,200	429,724	216,524
Fixed Costs	101,000	112,000	11,000
Operating Income	112,200	317,724	205,524

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