MALARIE'S LEMONADE STAND COST VOLUME PROFIT ANALYSIS, PART II (contribution margin income statement - multiple product CVP-operating leverage - constraints) Malarie runs a drink stand where she sells 2 products - lemonade and smoothies. The following budgeted information is available per unit of each product: Selling price Variable costs Contribution margin PER UNIT INFORMATION Lemonade Smoothie $2.00 $3.00 0.60 1.20 $1.40 $1.80 Malarie has the following fixed costs per season as well: Annual fixed costs: Cost of goods sold (depreciation) Advertising $250.00 $100.00 1. Malarie wants to approach her father for money with which to purchase a new deluxe blender. She projects sales for the upcoming season of 300 lemonades and 200 smoothies. Prepare a pro-forma income statement in traditional and contribution-margin formats. WHY is the contribution-margin format better for decision making? 2. Malarie advertises by placing signs at strategic points in business and around the neighborhood. Which product should she emphasize? WHY? 3. What if a Smoothie took 1.5 minutes to make while a Lemonade took only 1 minute to make. Assuming that the blender can only operate for a certain number of hours, would this change your answer to #2? 4. Malarie is exploring the possibility of lowering her price on smoothies to $2.75. If she does this, she estimates that her demand will rise from 200 to 240. If she does this: a) What will be the incremental revenues? (the benefits) b) What will be the incremental costs? (the costs) c) Your thoughts on this idea? 5. Assume that Malarie actually sold 350 lemonades and 230 smoothies and showed a profit of $500. What are your thoughts on her performance for the period? Did she operate efficiently and control costs well? WHY? Sarah also has a lemonade stand. A comparison of the results for both Malarie and Sarah are as follows for the most recent period: MALARIE SARAH Sales $1,000 $1,000 Variable costs 500 700 Contribution margin 500 300 Fixed costs N 300 100 Operating income $200 $200 6. If sales go up by 10% for EACH, what will their new profit be? What PERCENT INCREASE does this represent? 7. WHY was the percentage increase in income different for Malarie and Sarah? 8. What is the breakeven point for Malarie & Sarah in $$ dollars? 9. What is the margin of safety (in $$) for Malarie & Sarah? 10. What is the operating leverage for Malarie & Sarah? 11. Which lemonade stand is more risky? WHY