Purple Cow operates a chain of drive-ins selling primarily ice cream products. The following information is taken from the records of a typical drive-in now operated by the company:

Based on these data, the monthly break-even sales volume is determined as follows:
$12,000 (fixed costs)/$8.00 (contribution margin per unit) = 1,500 gallons (or $22,200)

Instructions
a. Currently, all store managers have contracts calling for a bonus of 20 cents per gallon for each gallon sold beyond the break-even point. Compute the number of gallons of ice cream that must be sold per month in order to earn a monthly operating income of $10,000 (round to the nearest gallon).
b. To increase operating income, the company is considering the following two alternatives:
1. Reduce the selling price by an average of $2.00 per gallon. This action is expected to increase the number of gallons sold by 20 percent. (Under this plan, the manager would be paid a salary of $2,500 per month without a bonus.)
2. Spend $3,000 per month on advertising without any change in selling price. This action is expected to increase the number of gallons sold by 10 percent. (Under this plan, the manager would be paid a salary of $2,500 per month without a bonus.)
Which of these two alternatives would result in the higher monthly operating income? How many gallons must be sold per month under each alternative for a typical outlet to break even?
Provide schedules in support of your answers.
c. Draft a memo to management indicating your recommendations with respect to these alternative marketingstrategies.

Transcribed Image Text:

Average selling price of ice cream per gallon Number of gallons sold per month... Variable costs per gallon: $14.80 3,000 ce cream. . $4.60 Supplies (cups, cones, toppings, etc.) 2.20 $6.80 Total variable expenses per gallon Fixed costs per month Rent on building Utilities and upkeep Wages, including payroll taxes Manager's salary, including payroll taxes but 2,200.00 760.00 4,840.00 excluding any bonus Other fixed expenses. 2,500.00 1,700.00 $12,000.00 Total fixed costs per month.