Help solving please LO20-1, LO20-4 through Purple Cow operates a chain of drive-

Question

Help solving please

LO20-1, LO20-4 through Purple Cow operates a chain of drive-ins selling primarily ice cream products. The following infor- LO20-7 CASE 20.2 Evaluating Marketing Strategies mation is taken from the records of a typical drive-in now operated by the company Average selling price of ice cream per gallon .. . . . . . . . . . . . . . . . Number of gallons sold per month . . . . . . . . . . . . . . . . . . . . . . . . . $ 14.80 3,000 Variable costs per gallon $4.60 Total variable expenses per gallon $6.80 . . . . . . . . . . . . . . . . . . . . . . Fixed costs per month: $2,200.00 760.00 4,840.00 Manager's salary, including payroll taxes but 2,500.00 1,700.00 $12,000.00 Total fixed costs per month . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Based on these data, the monthly break-even sales volume is determined as follows S12,000 (fixed costs) S8.00 (contribution margin per unit) = 1,500 gallons (or $22,200)

Explanation / Answer

Option 1 Option2 Number of gallons sold 3000 2750 3600 3300 Per gallon Total Per gallon Total Per gallon Total Per gallon Total Selling Price 14.8 44400 14.8 40700 12.8 46080 14.8 48840 Variable costs: Ice-cream 4.6 4.6 4.6 4.6 Supplies 2.2 2.2 2.2 2.2 Total variable exps 6.8 20400 6.8 18700 6.8 24480 6.8 22440 Fixed costs: Rent on building 2200 2200 2200 2200 utilities and upkeep 760 760 760 760 Wages, incl. payroll taxes 4840 4840 4840 4840 Manager's salary, 2500 2500 2500 2500 Other fixed expenses 1700 1700 1700 1700 Advertising 3000 Total fixed costs 12000 12000 12000 15000 Total Operating costs 32400 30700 36480 37440 Operating income 12000 10000 9600 11400 Contribution Margin 8 8 6 8 a. To earn a monthly operating income of $10000, 2750 gallons must be sold as per the computation above b. As per the table above, neither of the Options are resulting in substantial increase in Operating income. c. Memo to Management The recent workshops and meetings held on increasing Operating margins have given rise to some great discussions and ideation. Tying up with available, given in extract, it is increasingly clear that the strategy has to be go full throttle to increase our sales numbers. An inrease in advertising budgets and a three-pronged strategy to publicise our product using social and visual media should help us garner the sales numbers by atleast 20% in addition to our current capacity. Additionally, we would recommend that a crack team is put in place to review further process improvements and create efficiencies, whereby, operating expenses can be reduced further. A full-year plan with monthly reviews initially on progress is recommended.

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