Question
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
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) |
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.
Marketing Strategies;
- 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.)
- 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).
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