Pony Espresso is a small business that sells specialty coffee drinks at office buildings. Each morning and
Question:
Pony Espresso is a small business that sells specialty coffee drinks at office buildings. Each morning and afternoon, trucks arrive at offices’ front entrances, and the office employees purchase various beverages such as Java du Jour and Café de Colombia. The business is profitable. Pony Espresso offices, however, are located north of town, where lease rates are less expensive, and the principal sales area is south of town. This means the trucks must drive across town four times each day.
The cost of transportation to and from the sales area plus the power demands of the trucks’ coffee brewing equipment are a significant portion of variable costs. Pony Espresso could reduce the amount of driving and, therefore, the variable costs, if it moved the offices closer to the sales area.
Pony Espresso presently has fixed costs of $10,000 per month. The lease of a new office, closer to the sales area, would cost an additional $2,200 per month. This would increase the fixed costs to $12,200 per month.
Although the lease of new offices would increase the fixed costs, a careful estimate of the potential savings in gasoline and vehicle maintenance indicates that Pony Espresso could reduce the variable costs from $0.60 per unit to $0.35 per unit. Total sales are unlikely to increase as a result of the move, but the savings in variable costs should increase the annual profit.
Project Focus
Consider the information provided to you from the owner in the data file AYK19_Data.xlsx. Especially look at the change in the variability of the profit from month to month. From November through January, when it is much more difficult to lure office workers out into the cold to purchase coffee, Pony Espresso barely breaks even. In fact, in December, the business lost money.
1. Develop the cost analysis on the existing lease information using the monthly sales figures provided to you in the data file.
2. Develop the cost analysis from the new lease information provided above.
3. Calculate the variability that is reflected in the month-to-month standard deviation of earnings for the current cost structure and the projected cost structure.
4. Do not consider any association with downsizing such as overhead—simply focus on the information provided to you.
5. You will need to calculate the EBIT (earnings before interest and taxes).
Expert Answer:
Stepbystep solution Step 1 of 2 A When cost analysis is done for the existing lease scenario the cel... View the full answer
Cost Accounting A Managerial Emphasis
ISBN: 978-0132109178
14th Edition
Authors: Charles T. Horngren, Srikant M.Dater, George Foster, Madhav
