Question

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 that can be redeemed toward the purchase of gasoline. The average gasoline customer purchases 15 gallons of gasoline at $2.50 per gallon. The results of an average month, prior to this coupon promotion are shown below.

Not included in the information presented below is the monthly cost of printing the coupons, which 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 75 percent of the total sales. Also assume that all coupons distributed are used to purchase gasoline.
Sales Cost of sales
Gasoline $100,000 $1.875 gallon
Food & beverage 60,000 60%
Other products 40,000 50%
Other costs
Labor station attendants $10,000
Labor supervision 2,500
Rent, power, supplies, other 40,000
Depreciation 7,500

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. Prepare a contribution income statement to support your answer.
2. Calculate the breakeven sales (in dollars) for gogo juice if the promotional effort is implemented. Assume that the product mix remains constant. Use the weighted-average contribution margin ratio approach to generate your answer.
3. Based on the assumed sales mix, determine the composition of total breakeven sales dollars across the three product lines: gas; food and beverage; and other products.
4. Disregarding your responses to requirements 1 and 2, assume the weighed average contribution margin ratio, after implementation of the coupon program, is 35 percent. Calculate the before tax profit (loss) for gogo juice, assuming sales increase 20 percent due to the new program. Assume that the sales mix in terms of relative sales dollars remains constant.
5. Gogo juice is considering using sensitivity analysis in combination with cost-volume-profit (CVP) analysis. Discuss this plan. Include in your discussion at least three factors that make sensitivity analysis prevalent in decision making.
6. Provide a brief description of the methods that can be used to deal with uncertainty.

Answer 1

1. To calculate profit (loss) before tax, determine the contribution margin and subtract fixed costs. 2. To find the breakeven sales, calculate the weighted-average contribution margin ratio and divide total fixed costs by it. 3. Determine the composition of breakeven sales by multiplying sales percentages by breakeven sales. 4. The profit (loss) with a 20% sales increase can be calculated by applying the contribution margin ratio to the increased sales revenue. 5. Sensitivity analysis can be used in decision making to assess the impact of changes in key variables. 6. Methods to deal with uncertainty include scenario analysis, sensitivity analysis, decision trees, Monte Carlo simulation, and real options analysis.

Step-by-step explanation:

1. Profit (loss) before tax:

To calculate the profit (loss) before tax, we need to determine the contribution margin for each product category. The contribution margin is the difference between the sales revenue and the variable costs. In this case, the variable cost for gasoline is $1.875 per gallon, for food and beverage it's $60% of the sales, and for other products, it's 50% of the sales. We also need to consider the fixed costs, which include labor expenses, rent, power, supplies, and depreciation. After considering the coupon distribution rate and the assumption that all coupons are used to purchase gasoline, we can calculate the profit (loss) before tax.

2. Breakeven Sales:

To calculate the breakeven sales, we need to determine the weighted-average contribution margin ratio. The contribution margin ratio is the contribution margin divided by the sales revenue. We calculate the contribution margin ratio for each product category and then weight them based on their sales percentage. By dividing the total fixed costs by the weighted-average contribution margin ratio, we can find the breakeven sales.

3. Composition of Breakeven Sales:

To determine the composition of total breakeven sales across the three product lines (gas, food and beverage, other products), we multiply the breakeven sales by the sales percentage of each product category. This will give us the dollar amount of sales for each product category at the breakeven point.

4. Profit (loss) with 20% Sales Increase:

To calculate the profit (loss) with a 20% sales increase, we need to apply the weighted-average contribution margin ratio to the increased sales revenue. We assume that the sales mix remains constant, so the relative sales percentage for each product category remains the same. By calculating the contribution margin for the new sales revenue and subtracting the fixed costs, we can determine the profit (loss) before tax.

5. Sensitivity Analysis:

Sensitivity analysis can be used in combination with cost-volume-profit (CVP) analysis to assess the impact of changes in key variables on the financial results. It allows decision-makers to understand the range of outcomes under different scenarios and make more informed decisions. Some factors that make sensitivity analysis prevalent in decision making include uncertainty in key variables, the need to assess risk and uncertainty, and the desire to make robust and flexible plans.

6. Dealing with Uncertainty:

There are several methods that can be used to deal with uncertainty, including scenario analysis, sensitivity analysis, decision trees, Monte Carlo simulation, and real options analysis. Scenario analysis involves considering multiple possible scenarios and assessing the impact of each scenario on the desired outcome. Sensitivity analysis involves analyzing how changes in key variables affect the outcome. Decision trees involve mapping out the different possible decisions and outcomes. Monte Carlo simulation involves running multiple simulations using random inputs to understand the range of possible outcomes. Real options analysis involves considering the value of flexibility and the ability to make decisions in the future based on new information.