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 51,000 customers who purchase an average of 2.50 cups of coffee per week (127,500 cups total). Starcups's contribution margin income statement for a typical week is shown below: Sales Revenue Variable Cost Contribution Margin Fixed Costs Net Operating Income Units Per Unit Total 127,500 $6.20 $ 790,500 127,500 2.60 331,500 127,500 $3.60 $459,000 111,000 $348,000 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 (12,750) will participate in the promotion. The remainder of its existing customer base (38,250) will continue to buy an average of 2.50 cups of coffee per week. • Starcups expected to attract 6,100 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 $2.60. The variable cost savings of the paper cup is $.20. • 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 $21,000 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

	A	B	C= A*B
Particulars	Units	Per Unit	Total
Customers who do not participate
Sales Revenue	95,625	6.20	592,875
Variable Costs	95,625	2.60	248,625
Contribution Margin	95,625	3.60	344,250
First Purchase of Customer to Buy Reusable Cups
Sales Revenue	18,850	7.20	135,720
Variable Costs	18,850	5	94,250
Contribution Margin	18,850	2.20	41,470
Repeat Visit for Customer who buys the reusable cup
Sales Revenue	56,550	4.96	280,488
Variable Costs	56,550	2.40	135,720
Contribution Margin	56,550	2.56	144,768

Contribution Margin = Sales Revenue - Variable Costs

For Customer who do not Participate

Units = 38,250 Customer * 2.5 Cup per Week = 95,625 Cups of Total Coffee

For First Purchase of Customer

Units = 12,750 + 6,100(New Customers) = 18,850

Sales Price = 6.20 + 1 (for Cup) = 7.20

Variable Costs per Cup = 2.60 + 2.60 ( Additional Purchase of Cups) - 0.20 (Savings in Paper Cup) = $ 5

Repeat Visit for Customer who buy Reusable Cups

Units = 18,850 * 3 = 56,550

Sales Price = 6.20 - 20% of 6.20 = $ 4.96

Variable Costs = 2.60 - 0.20(Savings of avoiding Paper Cups) = $ 2.40

Requirement 2

Particulars	Difference
Sales Revenue	218,583
Variable Costs	147,095
Contribution Margin	71,488
Fixed Costs	21,000
Net Operating Income	50,488

Net Operating Income = Contribution Margin - Fixed Costs

Sales Revenue before Promotion = $ 790,500

Sales Revenue after Promotion = 592,875 + 135,720 + 280,488 = $ 1,009,083

Difference in Sales Revenue = 1,009,083 - 790,500 = $ 288,705

Variable Costs before Promotion = $ 218,583

Variable Costs after Promotion = 248,625 + 94,250 + 135,720 = $ 478,595

Difference in Variable Costs = 478,595 - 331,500 = $ 147,095

Contribution Margin before Sales Promotion = $ 459,000

Contribution Margin after Sales Promotion = 344,250 + 41,470 + 144,768 = $ 530,488

Difference in Contribution Margin = 530,488 - 459,000 = $ 71,488

Fixed Costs before Sales Promotion = $ 111,000

Fixed Costs after Sales Promotion = 111,000 + 21,000 = $ 132,000

Net Operating Income before Sales Promotion= $ 348,000

Net Operating Income after Sales Promotion = 530,488 - 132,000 = $ 398,488

Difference in Net Operating Income = 398,488 - 348,000 = $ 50,488

Requirement 3

Positive Impact.