One of your friends, Mark, came up with an interesting idea to make good use of...

 

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One of your friends, Mark, came up with an interesting idea to make good use of upcoming Christmas and year-end study break. He suggests selling chilled beverages at a Christmas fair, which usually entertains a large crowd. Attem Mark plans to purchase a popular carbonated beverage (soda) from any supermarket that allows him to return all unsold packages for a full refund. He spoke to the organisers and found that an upfront rental of $2,000 would be charged for setting up the stall at the fair. The rental includes the supply of electricity and equipment, and as the stall size does not warrant engaging any other person, there will be no further costs. To minimise operational hassles, Mark plans not to offer his customers any options and serve either cola or orange flavour drinks. a) While Mark can buy orange flavour (being less popular) from the supermarket for $1.00 per can, cola flavour commands a premium during summer and thus costs $1.20 per can at the supermarkets. However, Mark knows both flavours will sell at the stall for the same price of $2.00 per can. Assume there is no limiting factor, and Mark can sell equal quantities of orange or cola flavours due to high demand at the fair. Discuss the concept of contribution per unit and explain to Mark which flavour will allow him to maximise profits. (8 Marks) b) Mark has learnt that in case of rain on the day of the fair, there will be a significant drop in the number of visitors, and he is concerned that his venture may turn unprofitable. One of your friends, Mark, came up with an interesting idea to make good use of upcoming Christmas and year-end study break. He suggests selling chilled beverages at a Christmas fair, which usually entertains a large crowd. Attem Mark plans to purchase a popular carbonated beverage (soda) from any supermarket that allows him to return all unsold packages for a full refund. He spoke to the organisers and found that an upfront rental of $2,000 would be charged for setting up the stall at the fair. The rental includes the supply of electricity and equipment, and as the stall size does not warrant engaging any other person, there will be no further costs. To minimise operational hassles, Mark plans not to offer his customers any options and serve either cola or orange flavour drinks. a) While Mark can buy orange flavour (being less popular) from the supermarket for $1.00 per can, cola flavour commands a premium during summer and thus costs $1.20 per can at the supermarkets. However, Mark knows both flavours will sell at the stall for the same price of $2.00 per can. Assume there is no limiting factor, and Mark can sell equal quantities of orange or cola flavours due to high demand at the fair. Discuss the concept of contribution per unit and explain to Mark which flavour will allow him to maximise profits. (8 Marks) b) Mark has learnt that in case of rain on the day of the fair, there will be a significant drop in the number of visitors, and he is concerned that his venture may turn unprofitable.

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a Contribution per unit is the difference between the selling price of a product and its variable co... View the full answer