4:137 Gmail Bakery-48,800 units x $1.25 = 61,000 units (Units x Sales per unit =_) 61,000 x $4= $244,000 61,000 x $1.50 = Total Variable Cost 91,500 (Sales - V.C = C.M) $244,000-91,500 = $152,500 Sale $244,000 - VC $91,500 CM $152,500 Fixed Cost 52,000 + Increase 30,000 = New Fixed Cost 82,000 (Income Before Taxes CM - Fixed Cost) 152,500 - 82,000 = 70,000 Income Tax 21,000 (70,000 x.30) Net Income 70,000 - 21,000 = 49,000 Bakery 152,500/61,000 = 2.5 CM per unit Drive Thru- 48,000 units x Double (2) = 97,600 units Fixed Costs 52,000 + 130,000 = New Fixed Cost 182,000 97,600 units x 3.30 = Sales 322,080 Current VC 29,280/ 48,800 units = 0.6 VC per unit 0.6 x 97,600 units = 58,560 Husband and wife, John and Mae West, decided to start their own business which would bring great coffee from all over the world to their local community. Together they have formed Classic Coffee Company, or CCC. John is selecting and making the coffee they serve. Mae manages the front and back office; selling coffee to customers, paying employees, and running ads for the coffee shop. Last year, the company sold 48,800 units and had the below sales and cost figures. Sales Variable Costs Contribution Margin Fixed Costs Income Before Taxes Income Tax Net Income $ 134,200.00 $ 29,280.00 $ 104,920.00 $ 52,000.00 $ 52,920.00 $ 15,876.00 $ 37,044.00 The husband and wife team have been in business for 2 years. With competition rising in the coffee industry, they know that another challenging and competitive year lies ahead of them. They are considering two alternatives and have hired your consulting group, known for its inventive business and accounting consulting work, to help them make some important business decisions. Classic Coffee Company Alternative 1- Bakery Facing stiff competition from other coffee and beverage shops, Classic Coffee Company (CCC) is considering expanding its products to include bakery items. CCC would now experience higher average sales amounts per customer since beverage sales may be accompanied with food sales. This would, however, increase the company's variable costs since it would need to purchase the food items from outside vendors. The following data pertains to adding the bakery option: Total sales in the number of units would increase 25% with the added bakery option The average sales price per unit would increase from the current $2.75 to $4.00 when food sales are added to the coffee shop. The variable cost per unit would increase to $1.50 per unit to account for the added cost of bakery items. There would be an increase in fixed costs of $30,000 for advertising to inform the public of this change. Alternative 2 - Drive Thru CCC is thinking about having a drive-thru installed. Having this amenity would help the coffee shop increase its customer base, allowing them to reach a greater number of customers. This added convenience would permit CCC to slightly increase the price of its average coffee and would not increase the per unit variable costs for the company. The following data pertains to adding the drive-thru option: This alternative is exclusive of alternative 1 Total sales in the number of units would double what it was last year The construction of the drive-thru would increase fixed costs by $130,000 - which represents one-time construction and installation costs. This alternative would allow CCC to increase their average sales price to $3.30 a cup of coffee and their variable cost per unit would remain the same. Combulion margin ratio under all three scenarios. (Note: Use formulas in Excel and DO NOT round the CMR for accurate calculations i the following questions). 3.) Compute the break-even point in units and in sales dollars under each scenario. 4.) If the company wishes to generate target income of $175,000 (which after-tax would be $122,500), what is the amount of sales that needs to be generated? How many sales units will then need to be served? Prepare a contribution margin (CVP) Income Statement for this step and verify that your after-tax net income in fact equals $122,500 for all three scenarios. 5.) Assume that the company expects customer sales to decline by 20% next year. There will be no change in sales prices. Prepare forecasted financial results for next year following the format of the contribution margin (CVP) income statement for each of the three scenarios (assume a 30% tax rate). 6.) Assume that the company expects customer sales to increase by 20% next year. There will be no change in sales prices. Prepare forecasted financial results for next year following the format of the contribution margin (CVP) income statement for each of the three scenarios (assume a 30% tax rate). 7.) Thinking about coffee shop sales, is there any day of the week or time of day when greater sales are expected? Which shop type (regular, bakery, or drive- thru) is more sensitive to this occurrence? Which product type is less sensitive to this occurrence? Which product type is more advantageous and why? Is there anything else the company can do to manage the decline in sales that come with certain days and times
