Blue Mountain Coffee Company

Blue Mountain Coffee Company sells two different coffees-to-go (flavored coffees and iced coffees). Additionally, they sell their private label ground coffee. Their store fronts are very small with no seating - providing walk-up service only, generally located in outdoor walking/shopping districts. While Blue Mountain did experience a downturn in March and April during the peak of the local shutdown effort in response to COVID-19 concerns, they are now experiencing an increase in sales.

The Budgeted P&L Statement on the next page shows the Corner Shores stores weekly budget for the 3^rd Quarter of 2020 as well as actual results from Week 1 (July 1 July 8, 2020).

Eva, the owner of Blue Mountain Coffee, experimented with offering 10% discounts on flavored and iced coffees through her Twitter and Instagram social media channels. Knowing that not every customer would take advantage of the discount, she hoped that the discounts would increase sales volume for the week and wants to know if the strategy worked.

Instructions

An Excel spreadsheet of the budgeted P&L and actual results is available for download.

Prepare a report for Eva that addresses the performance and CVP analyses below. Be sure to organize your report to Eva in the same order as listed below. The report should be in a single word document, but you can include images from Excel worksheets and/or jpg images of your analysis in the word document.

Performance Analysis

Eva has noted that actual operating income(loss) was -$176 vs. budgeted income(loss) of -$50, 252% less than expected.

1. Prepare a performance analysis report for Blue Mountain Coffee. The report should provide details about revenue and spending variances and activity variances for each product line as well as for the store as a whole.
   1. The individual product line reports should be completed through to product-line margin
   2. The report at the store level should be completed through to pre-tax operating income
2. Briefly discuss the results and assess the degree to which it appears the discounting strategy did or did not work.

CVP Analysis

Eva also wants to know a few more things about her business related to the interaction between prices, costs, and volume. The following issues should be addressed using the budgeted weekly P&L as a reference point.

1. Keeping sales mix, prices, and costs as budgeted, how many units of each of the three product lines would the Corner Shores store need to sell in order to generate $1,000 of pre-tax operating income in a week?
2. Assume Eva offers a 10% discount on Coffee Beans, resulting in average price per bag of $19.00 (10% discount x 50% of customers using the discount x $20.00 budgeted price = $19.00). What is the minimum number of bags of coffee she would need to sell in order to keep product-line margin at $750?

Blue Mountain Coffee ToGo, Corner Shores Store Budgeted Weekly P&L, 3rd Quarter, 2020 Flavored Coffees (12 Coffee Beans Ground oz) Iced Coffees (16 oz) (2.5 lb) Revenue $1,500 $5.00 $3,600 $6.00 $2,000 $20.00 Variable costs (Ingredients, labor) 600 2.00 2.400 4.00 800 8.00 Contribution margin $900 $3.00 $1,200 $2.00 $1,200 $12.00 Direct Fixed costs $100 $300 $450 Product-line margin $800 $900 $750 Fixed operating expenses (rent, marketing) Pre-tax operating Income Total $7,100 $3.800 $3,300 $8.50 $2,450 $2.500 -$50 Operating Data Weekly volume 300 600 100 1,000 Blue Mountain Coffee ToGo, Corner Shores Store Acual P&L, Week 1, 3rd Quarter, 2020 Flavored Coffees (12 Coffee Beans Ground oz) Iced Coffees (16 oz) (2.5 lb) Revenue $1,552 $4.85 $3,983 $5.90 $1,900 $20.00 Variable costs (Ingredients, labor) 720 2.25 2.633 3.99 808 8.50 Contribution margin $832 $2.60 $1,350 $2.00 $1,093 $11.50 Direct Fixed costs $100 $300 450 Product-line margin $732 $1,050 $643 Fixed operating expenses (rent, marketing) Pre-tax operating income Total $7,435 $4.160 $3,275 $850 $2,425 $2.600 $176 Operating Data Weekly volume 320 675 95 1,090