Question

Starcups Coffee Company is launching a new sustainability Initiative that would reward customers for purchasing a reusable cup During the cup promotion, customers would pay an extra $1.00 for the reusable cup and would receive a 20% discount each time they return with the cup to buy a cup of coffee Each week Starcups serves 56,000 customers who purchase an average of 2.00 cups of coffee per week (112,000 cups total). Starcups's contribution margin Income statement for a typical week is shown below. Units Per Unit Total 112,000 $7.20 $806,400 1 12,609 3.19 347,200 112,800 $4.10 $459,200 Sales Revenue Variable Cost Contribution Margin Fixed Costs Net Operating Income 116,000 $343, 200 Assume the new cup promotion is expected to Impact sales volume, revenue, fixed, and variable costs as follows: • Starcups estimates that 25% of its current customers (14,000) will participate in the promotion. The remainder of its existing customer base (42000) will continue to buy an average of 200 cups of coffee per week • Starcups expected to attract 6,600 new customers to participate in the promotion • Customers who participate in the promotion will pay an additional $1.00 for the reusable cup. They will then receive a 20% discount on repeat visits when they bring back their reusable cup . The additional variable cost of purchasing the reusable cup is $3.10. The variable cost savings of the paper cup is $.30 • Starcups expects that customers who participate in the reusable cup promotion will visit an average of 4 times per week, Including the first purchase of the reusable cup • Starcups will spend a total of $26,000 per week advertising the reusable cup promotion Required: 1. Prepare a contribution margin income statement to predict how the reusable cup promotion will impact weekly net operating Income 2. Compute the difference in total revenue, total variable costs, total contribution margin, total fixed costs, and total operating income before and after the promotion 3. How will this sustainability Initiative impact the company's triple bottom line?

Answer 1

Requirement #1)

  Contribution Margin Income Statement (Amount in $)

Particulars	Units	Per unit	Total
Customers who do not participate (42000) :
Sales Revenue (A)	84000	7.20	604,800
Variable costs (B)	84000	3.10	260,400
Contribution Margin (C = A-B)	84000	4.10	344,400
First purchase to customers to buy the reusable cup:
Sales Revenue (D)	20600	8.20	168,920
Variable costs (E)	20600	5.9	121,540
Contribution Margin (F = D-E)	20,600	2.3	47,380
Repeat visits for customers who buy the reusable cup:
Sales Revenue (G) (20600*3cups)	61,800	5.76	355,968
Variable costs (H)	61800	2.80	173,040
Contribution Margin (I = G-H)	61800	2.96	182,928
Total Contribution margin (C+F+I)			574,708

Working Notes:-

1) The customer who do not participate in the promotion =42000

Avg no of cups bought per week =2

Units sold =84000 (42000*2).

2) Total customer who particpate in the promotion :

= 14000 + 6600

=20600

In their first visit, total units sold = 20,600

sale price per unit for promotion = $8.20 ($7.20+$1.00)

variable cost = $5.90 ($3.10 existing cost+$3.10 additional variable cost-$0.30 variable cost saved).

3) Total visits of customers who participate in promotion is 5 and after their first visit, the remaining repeat visits for customer is 4.

Sale price after 20% discount ($7.20*0.80) = $5.76

variable cost after deducting saving in variable cost:

=$3.10-$0.30

= $2.8

Requirement #2)

Particulars	Existing	With Promotion	Difference
Sales Revenue	806400	1,129,688	323,288
Variable costs	347200	554,980	207,780
Contribution Margin	459200	574,708	115,508
Fixed costs	116000	142000	26000
Net Operating Income	343200	432,708	89,508

Working Notes:-

i) The total sales revenue with promotion is the sum of amounts of sales revenue in all the three parts shown is part 1 of the question (i.e. $604,800+$168,920+$355,968 = $1,129,688

ii) The total variable cost with promotion is also the sum of amounts of variable cost in all the three parts shown in part 1 of the question (i.e. $260,400+$121,540+$173,040 = $554,980

iii)Fixed Cost =116000+26000=142000

3) Three parts of triple bottom line are social, environmental and financial performance of the company. The social and environmental performance of the company has improved due to this sustainability initiative . Net operating income has increased by $89,508 this indicates improvement in financial performance . Therefore, this sustainability initiative has a positive impact on the company's triple bottom line.