Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 55

CVP Analysis; Sensitivity Analysis; Multiple Products; Strategy GoGo Juice is a combination gas station and convenience store located at a busy intersection. Recently a national chain opened a similar store only a block away; consequently sales have decreased for GoGo. In an effort to reclaim lost sales, GoGo has implemented a promotional effort; for every $10 purchase at GoGo, the customer receives a $1 coupon for the purchase of gasoline. The average gasoline customer purchases 15 gallons of gasoline at $2.50/gal. The results of an average month, prior to this coupon promotion are shown in the following chart.

Not included on the chart is the monthly cost of printing the coupons that is estimated to be $500. Coupons are issued on the basis of total purchases regardless of whether the purchases are paid in cash or paid by redeeming coupons. Assume that coupons are distributed to customers for 80 percent of the total sales. Also assume that all coupons distributed are used to purchase gasoline.

	Sales	Cost of Sales (per unit or % of retail)
Gasoline	$100,000	$1.875 per gallon
Food and beverages	60,000	60%
Other products	40,000	50%	Other Costs
Labor—station attendants			$ 9,000
Labor—supervision			2,500
Rent, power, supplies, interest, and misc.			46,500
Depreciation (pumps, computers, counters, fixtures, and building)			2,500

Required

1. If GoGo Juice implements the promotional coupon effort, calculate the profit (loss) before tax if the sales volume remains constant and the coupons are used to purchase gasoline. Assume the sales mix remains constant.

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2. Calculate the breakeven sales for GoGo Juice if the promotional effort is implemented. Assume that the product mix remains constant.

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3. Disregarding your responses to Requirements 1 and 2, assume the weighted contribution margin ratio, after implementation of the coupon program, is 30 percent. Calculate the profit (loss) before tax for GoGo Juice, assuming sales increase 20 percent due to the new program. Assume that the sales mix remains constant.

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4. GoGo Juice is considering using sensitivity analysis in combination with cost-volume-profit analysis. Discuss the use of sensitivity analysis with cost-volume-profit analysis. Include in your discussion at least three factors that make sensitivity analysis prevalent in decision making.

Step 1 of 4

1.?GoGo Juice’s profit (loss) before tax, from implementing the promotional coupon with no change in sales volume is ($8,000)

	Gasoline	Food and beverage	Other	Total
Sales Revenue	$100,000	$60,000	$40,000	$200,000
Coupons redeemed (note 1)	(16,000)			(16,000)
Cost of Sales (note 2)	75,000	36,000 = .6x60,000	20,000 =.5x40,000	131,000
Contribution Margin	$9,000	$24,000	$20,000	53,000
Fixed costs (note 3)				61,000
Loss before tax				$(8,000)

Note 1: Coupons redeemed: total sales of $200,000 x 80% x 10% ($1 per $10) = $16,00

Note 2: Gasoline cost of sales: $100,000/$2.50 price per gallon = 40,000 gallons

40,000 x $1.875 = $75,000

Note 3: Fixed costs

Labor $9,000 + $2,500	$11,500
Rent, power, supplies, etc	46,500
Depreciation	2,500
Coupon printing cost	500
Total fixed costs	$61,000