Question

Jen and Barry’s ice cream shop charges $1.45 for a cone. Variable expenses are $0.33 per cone, and fixed costs total $2,000 per month. A Valentine’s Day promotion is being planned for the second week of February. During this week, a person buying a cone at the regular price would receive a free cone for a friend. It is estimated that 700 additional cones would be sold and that 900 cones would be given away. Advertising costs for the promotion would be $130. Required: Calculate the effect of the promotion on operating income for the second week of February. Do you think the promotion should occur?

Required:
Calculate the effect of the promotion on operating income for the second week of February.

Answer 1

The effect of the promotion on operating income for the second week of February is a negative $643. It may not be financially beneficial to conduct the promotion.

Step-by-step explanation:

To calculate the effect of the promotion on operating income for the second week of February, we need to determine the additional revenue and expenses associated with the promotion.

Additional revenue from selling 700 cones would be 700 x $1.45 = $1015. Additional expenses from variable costs for these 700 cones would be 700 x $0.33 = $231.

Given that 900 cones would be given away for free, there would be no revenue generated from these cones, but there would still be variable costs associated with them. Variable costs for the 900 free cones would be 900 x $0.33 = $297.

So, the total effect on operating income for the second week of February would be: $1015 - $231 - $297 - $130 (advertising costs) - $2000 (fixed costs) = -$643.

Based on this calculation, the promotion would result in a negative operating income for the second week of February, indicating that it may not be financially beneficial to conduct the promotion.