Question

Candy Shop offers 20 coupons for $4 in a coupon book. The coupons are redeemable for a special candy bar.

Coupon sales average

500

books per year.

Which contain

20

coupons

Sale price per coupon book

$4

The printing costs total:

$50

The special candy bar normally sells at

$0.60

The variable cost for a special candy bar is

$0.40

Required:

Determine if it is profitable for the Candy Shop to sell these coupon books if all the coupons are redeemed.   Show your work and recommend if the company should continue selling the coupon books.

Answer 1

A. Value of Coupon Book of 20 Coupons	4
B. Value per Coupon (A/20)	0.20
C. Printing Cost Total for 500 Books	50.00
D. Printing Cost per Coupon Book (C/500)	0.10
E. Variable Cost per Candy Bar	0.4
F. Normal Selling Price per Candy Bar	0.6
G. Contribution Margin per Candy Bar (F-E)	0.2

The above calulcation has been made assuming that the Candy Bars are At the above values, the Candy Shop loses (0.2 - 0.1 - 0.4) = $0.3 on every coupon redeemed. Assuming all of the Coupons are redeemed the promotion would cost the candy shop a total of:

500 X 20 X 0.3 = $3000

The actual profit that could have been made with the same candy bars sold is

500 X 20 X Contribution Margin of 0.2 = $2000

The Company is essentially losing $2000 in profits(an opportunity cost) as well as spending $3000 on the coupons. The promotion is recommended if it can attract business of more than ($2000 + $3000) = $5000. Essentially, the Promotion should enable the candy shop to sell a further 5000/Contribution Margin of 0.2 = 10,000 Candy Bars at least. If not, it is not recommended to continue selling the coupon books.