Question

GoGo Juice is a combination gas station and convenience store located at a busy intersection. Recently, a national chain opened a similar store only a block away; consequently, sales have decreased for GoGo. In an effort to reclaim lost sales, GoGo has implemented a promotional effort; for every $10 purchase at GoGo, the customer receives a $1 coupon that can be redeemed toward the purchase of gasoline. The average gasoline customer purchases 15 gallons of gasoline at $2.50 per gallon. The results of an average month, prior to this coupon promotion, are shown below.

Not included in the information presented below is the monthly cost of printing the coupons, which is estimated to be $500. Coupons are issued on the basis of total purchases regardless of whether the purchases are paid in cash or paid by redeeming coupons. Assume that coupons are distributed to customers for 75 percent of the total sales. Also assume that all coupons distributed are used to purchase gasoline.

	Sales			Cost of Sales (per unit or % of retail)
Gasoline	$	100,000		$	1.875	per gallon
Food and beverages		60,000			60	%
Other products		40,000			50	%
							Other Costs
Labor—station attendants							$	10,000
Labor—supervision								2,500
Rent, power, supplies, and other								40,000
Depreciation (pumps, computers, counters, fixtures, and building)								7,500

Rreq:

2. Calculate the breakeven sales (in dollars) for GoGo Juice if the promotional effort is implemented. Assume that the product mix remains constant. Use the weighted-average contribution margin ratio approach to generate your answer. (Hint: Sales mix for this purpose is defined on the basis of relative sales dollars, not units.)

3. Based on the assumed sales mix (determined on the basis of relative sales dollars, not units), determine the composition of total breakeven sales dollars across the three product lines: gas; food and beverages; and other products.

4. Disregarding your responses to requirements 1 and 2, assume the weighted-average contribution margin ratio, after implementation of the coupon program, is 35 percent. Calculate the before tax profit (loss) for GoGo Juice, assuming sales increase 20 percent due to the new program. Assume that the sales mix in terms of relative sales dollars remains constant.

5. GoGo Juice is considering using sensitivity analysis in combination with cost-volume-profit (CVP) analysis. Discuss this plan. Include in your discussion at least three factors that make sensitivity analysis prevalent in decision making.

6. Provide a brief description of the methods that can be used to deal with uncertainty.

Answer 1

1.	Calcualtion of break even sales ( using weighted average contribution margin analysis) :
	Breakeven sales	=	Total Fixed expenses
			Weighted average contribution margin ratio
	Given that the coupons are issued to 75% of total sales to the customers
	Total sales during the last month = $ 2,00,000
	Value of coupons distributed = ($ 2,00,000 * 75%)/ $10 = $ 15,000
	Assumed that all coupons distributed are used to purchase gasoline.
	Hence the sales of gasoline will be $ 1,15,000
	And as per the information given, coupons are given for the toatl purchases whether paid in cash or thru coupon. So, the additional coupons issued in relation to the earlier coupons are as follows :
	Average purchases of gasoline by the customer = 15 gallons of 2.5 per gallon = $ 37.5
	So, on an average 3 coupons to be issued to such customer purcahsed 15 gallons of gasoline = ($15,000/ $ 37.5 *3) = $ 1,200
	Total increase in gasoline sales = 15000+1200 = $ 16,200
	Break even sales after promotional effort :
	Particulars		Gasoline	Food	Other	Total Amount
	Sales		100000	60000	40000	200000
	Percentage of total sales		50%	30%	20%
	Weighted average sales		50,000	18,000	8,000	76,000
	less : Cost of sales
	For gasoline =116200/2.5*1.875		87,150	36,000	20,000	1,43,150
	Weighted average expenses		43,575	10,800	4,000	58,375
	Weighted average contribution margin		6,425	7,200	4,000	17,625
	Total fixed expenes
	Labor—station attendants		10,000
	Labor—supervision		2,500
	Rent, power, supplies, and other		40,000
	Depreciation (pumps, computers, counters, fixtures, and building)		7,500
	Coupon printing cost		500
	Total Fixed cost		60,500
			Total Fixed expenes
	Breakeven sales	=	Weighted average contribution margin ratio
	Particulars		Gasoline	Food	Other	Total Amount
	Breakeven Contribution	=	22,054.61	24,715	13,730	60,500
2.	Breakeven sales	=	1,71,631	61,787	27,461	2,60,879