9-42 CVP Analysis; Sensitivity Analysis; Multiple Products GoGo Juice is a combination gas station and convenience...

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9-42 CVP Analysis; Sensitivity Analysis; Multiple Products 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. Gasoline Food and beverages Other products Labor-station attendants Labor-supervision Sales Cost of Sales (per unit or % of retail) $100,000 $1.875 per gallon 60,000 60% 40,000 Rent, power, supplies, and other Depreciation (pumps, computers, counters, fixtures, and building) 50% Other Costs $10,000 2,500 40,000 7,500 Required (Round final dollar amounts to whole dollars) Page 348 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. (Hint: Sales mix for this purpose is defined on the basis of relative sales dollars, not units.) 3. Based on the assumed sales mix (determined on the basis of relative sales dollars, not units), determine the composition of total breakeven sales dollars across the three product lines: gas; food and beverages; and other products. 4. Disregarding your responses to requirements 1 and 2, assume the weighted-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. 9-42 CVP Analysis; Sensitivity Analysis; Multiple Products 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. Gasoline Food and beverages Other products Labor-station attendants Labor-supervision Sales Cost of Sales (per unit or % of retail) $100,000 $1.875 per gallon 60,000 60% 40,000 Rent, power, supplies, and other Depreciation (pumps, computers, counters, fixtures, and building) 50% Other Costs $10,000 2,500 40,000 7,500 Required (Round final dollar amounts to whole dollars) Page 348 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. (Hint: Sales mix for this purpose is defined on the basis of relative sales dollars, not units.) 3. Based on the assumed sales mix (determined on the basis of relative sales dollars, not units), determine the composition of total breakeven sales dollars across the three product lines: gas; food and beverages; and other products. 4. Disregarding your responses to requirements 1 and 2, assume the weighted-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.