CT5-3

Real-World Focus

The Coca-Cola Companyhardly needs an introduction. A line taken from the cover of a recent annual report says it all: If you measured time in servings of Coca-Cola, "a billion Coca-Cola's ago was yesterday morning." On average, every U.S. citizen drinks 363 8-ounce servings of Coca-Cola products each year. Coca-Cola's primary line of business is the making and selling syrup to bottlers. These bottlers then sell the finished bottles and cans of Coca-Cola to the consumer.

In the annual report of Coca-Cola, the information shown below was provided.

THE COCA-COLA COMPANYManagement Discussion

Our gross margin declined to 61 percent this year from 62 percent in the prior year, primarily due to higher costs for materials such as sweeteners and packaging.

The increases [in selling expenses] in the last two years were primarily due to higher marketing expenditures supporting our Company's volume growth.

We measure our sales volume in two ways: (1) gallon shipments of concentrates and syrups and (2) unit cases of finished product (bottles and cans of Coke sold by bottlers).

Instructions

Answer the following questions.

(a)

Are sweeteners and packaging variable or fixed costs? What is the impact of an increase in the per-unit cost of sweeteners or packaging on the contribution margin? What are the implications for profitability?

(b)

Are Coca-Cola's marketing expenditures fixed, variable, or mixed costs? Give justification for your answer.

CT6-7

All About You

One rapidly growing opportunity is no-frills workout centers. Such centers attract customers who want to take advantage of state-of-the-art fitness equipment but do not need the other amenities of full-service health clubs. One way to own your own fitness business is to buy a franchise.Snap Fitnessis a Minnesota-based business that offers franchise opportunities. For a meager monthly fee ($26, without an annual contract), customers can access a Snap Fitness center 24 hours a day.

The Snap Fitness website (www.snapfitness.com) indicates that start-up costs range from $60,000 to $184,000. This initial investment covers pre-opening costs: franchise fee, grand opening marketing, leasehold improvements, utility/rent deposits, and training.

Instructions

(a)

Suppose that Snap Fitness estimates each location incurs $4,000 per month in fixed operating expenses plus $1,460 to lease equipment. A recent newspaper article describing no-frills fitness centers indicated that a Snap Fitness site might require only 300 members to break even. Using the information provided above and your knowledge of CVP analysis, estimate the amount of variable costs. (When performing your analysis, assume that the only fixed costs are the estimated monthly operating expenses and the equipment lease.)

(b)

Using the information from part (a), what would monthly sales in members and dollars be to achieve a target net income of $3,640?

(c)

Provide five examples of variable costs for a fitness center.

(d)

Go to a fitness-business website, such asCurves,Snap Fitness, orAnytime Fitness, and find information about purchasing a franchise. Summarize the franchise information needed to decide whether entering a franchise agreement would be a good idea.