Question: Starcups Coffee Company is launching a new
Starcups Coffee Company is launching a new sustainability initiative that would reward customers for purchasing a reusable cup. During the cup promotion, customers would pay an extra $1.00 for the reusable cup and would receive a 25 percent discount each time they return with the cup to buy a cup of coffee. Each week Starcups serves 40,000 customers who purchase an average of 2.5 cups of coffee per week (100,000 cups total). Starcups’s contribution margin income statement for a typical week is shown as follows:
Assume the new cup promotion is expected to impact sales volume, revenue, fixed, and variable costs as follows:
∙ Starcups estimates that 25 percent of its current customers (10,000) will participate in the promotion. The remainder of its existing customer base (30,000) will continue to buy an average of 2.5 cups of coffee per week.
∙ Starcups expected to attract 5,000 new customers to participate in the promotion.
∙ Customers who participate in the promotion will pay an additional $1.00 for the reusable cup. They will then receive a 25 percent discount on repeat visits when they bring back their reusable cup.
∙ The additional variable cost of purchasing the reusable cup is $1.50. The variable cost savings of the paper cup is $0.25.
∙ Starcups expects that customers who participate in the reusable cup promotion will visit an average of 4 times per week, including the first purchase of the reusable cup.
∙ Starcups will spend a total of $10,000 per week advertising the reusable cup promotion.
Required:
1. Prepare a contribution margin income statement to predict how the reusable cup promotion will impact weekly net operating income. Include a separate contribution margin calculation for current customers who will not participate in the promotion, the first purchase for customers who buy the reusable cup, and the repeat visits for customers who buy the reusable cup.
2. Compute the difference in total revenue, total variable costs, total contribution margin, total fixed costs, and total operating income before and after the promotion.
3. How will this sustainability initiative impact the company’s triple bottom line?
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