General

In this case you will be evaluating marketing strategies using the cost-volume-profit analysis model. There are three questions in this case. The first two require calculations that you will perform and analyze via the excel spreadsheet template that is provided. For the final question, you need to prepare a memo to management discussing your recommendations based on your analysis.

Case Study Background Information

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.

Average selling price of ice cream per gallon		$15.70
Number of gallons sold per month		3,100
Variable costs per gallon:
Ice cream	$4.85
Supplies (cups, cones, toppings, etc)	2.15
Total variable expenses per gallon		$7.00
Fixed costs per month:
Rent on building		$2,300.00
Utilities and upkeep		740.00
Wages, including payroll taxes		4,870.00
Managers salary, including payroll taxes but excluding any bonus		2,600.00
Other fixed expenses		1,400.00
Total fixed costs per month		$11,910.00

Based on these data, the monthly break-even sales volume is determined as follows:

$11,910 (fixed costs)	=	1,369 gallons or ($21,493)
$8.70 (contribution margin per unit)

Required:

1. Currently, all store managers have contracts calling for a bonus of 25 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 next gallon).
2. To increase operating income, the company is considering the following two alternatives:
   1. Reduce the selling price by an average of $2.10 per gallon. This action is expected to increase the number of gallons sold by 20 percent. (Under this plan, the manager would be paid their salary without a bonus.)
   2. Spend $3,400 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 their salary without a bonus).

Draft a memo to management indicating your recommendation with respect to these alternative marketing strategies. The memo should include supporting evidence for your recommendations. Also, compare the possible strategies to what the company is currently doing.