CVP Analysis; Sensitivity Analysis; Multiple Products; Strategy GoGo Juice is a combination gas 1 answer below »

CVP Analysis; Sensitivity Analysis; Multiple Products; Strategy 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 for the purchase of gasoline. The average gasoline customer purchases 15 gallons of gasoline at $2.50/gal. The results of an average month, prior to this coupon promotion are shown in the following chart.

Not included on the chart is the monthly cost of printing the coupons that 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 80 percent of the total sales. Also assume that all coupons distributed are used to purchase gasoline.

Cost of Sales

Sales (per unit or % of retail)

Gasoline $100,000 $1.875 per gallon

Food and beverages 60,000 60%

Other products 40,000 50%

Other Costs

Labor—station attendants

$ 9,000

Labor—supervision

2,500

Rent, power, supplies, interest, and misc.

46,500

Depreciation (pumps, computers, counters, fixtures, and building)

2,500

Required

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.

Calculate the breakeven sales for GoGo Juice if the promotional effort is implemented. Assume that the product mix remains constant.

Disregarding your responses to Requirements 1 and 2, assume the weighted contribution margin ratio, after implementation of the coupon program, is 30 percent. Calculate the profit (loss) before tax for GoGo Juice, assuming sales increase 20 percent due to the new program. Assume that the sales mix remains constant.

GoGo Juice is considering using sensitivity analysis in combination with cost-volume-profit analysis. Discuss the use of sensitivity analysis with cost-volume-profit analysis. Include in your discussion at least three factors that make sensitivity analysis prevalent in decision making.