Anna works for a firm that makes a machine that makes single shots of coffee, teas, and
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Anna is considering free shipping for orders for six or more packs. She believes that because it would increase average order size, the promotion would decrease the total number of orders to 60% of the current volume. However, only half of all orders would qualify for free shipping. Finally, the larger order size would also increase the kinds of drinks per order to three (from the current two kinds per order).
Anna notes that whenever an order comes in, the firm has to pick and put the requisite packs into a carton (for shipping), at a cost of $0.10 per pack. Moreover, each kind of drink in the order adds $0.50 to the cost of processing an order. Finally, the firm incurs costs of $6.00 per order to pack and ship the order. (For simplicity, assume that packing and shipping costs are the same regardless of order size.)
Required:
Evaluate the merits of Anna’s idea.
Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Related Book For
Managerial accounting
ISBN: 978-0471467854
1st edition
Authors: ramji balakrishnan, k. s i varamakrishnan, Geoffrey b. sprin
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