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Case Study Background Information Purple Cow operations 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. $14.80 Average selling price of ice cream per gallon Number of gallons sold per month 3,000 Variable costs per gallon: Ice cream $4.60 2.20 Supplies (cups, cones, toppings, etc) Total variable expenses per gallon $6.80 Fixed costs per month: Rent on building $2,200.00 Utilities and upkeep 760.00 Wages, including payroll taxes 4,840.00 2,500.00 Manager's salary, including payroll taxes but excluding any bonus Other fixed expenses 1,700.00 Total fixed costs per month $12,000.00 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) Required: 1. 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). 2. To increase operating income, the company is considering the following two alternatives: a. 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.) b. 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). 3. Draft a memo to management indicating your recommendation with respect to these alternative marketing strategies. Answer #2 Average Selling price per gallon Less: Variable cost per gallon Contribution Margin per gallon A - Reduce Selling B - Increase Price Advertising Cost $ 12.80 $ 14.80 (6.80) $ (6.80) $ 6.00 $ 8.00 $ 3,600 3,300 Estimated sales (in gallons) Total Contribution margin earned Less: Total fixed cost per month Additional fixed cost Projected monthly operating income $ 2,000.00 1500 Calculation of Monthly Break-even point (in gallons): fixed/ contribution Monthly break-even gallons