MBA 101-The Coca-Cola Company hardly needs an introduction
Subject: Business / Accounting
Case 1 (Real-World Focus) The Coca-Cola Company hardly needs an introduction. A line taken from the cover of a recent annual report says it all: If you measured time in servings of Coca-Cola, “a billion of Coca-Cola’s ago was yesterday morning.” On average, every U.S. citizen drinks 363 8-ounce servings of Coca-Cola products each year. Coca-Cola’s primary line of business is the making and selling of syrup to bottlers. These bottlers then sell the finished bottles and cans of Coca-Cola to the consumer. The information below is taken from the annual report of Coca-Cola: Required: Answer the following questions:
1. Are sweeteners and packaging a variable cost or a fixed cost? What is the impact on the contribution margin of an increase in the per unit cost of sweeteners or packaging? What are the implications of profitability?
2. In your opinion, are Coca-Cola’s marketing expenditures a fixed cost, variable cost or mixed cost? Give justification for your answer.
3. Which of the two measures cited for measuring volume represents the activity index? Why might CocaCola use two different measures?
Case 2 (Ethics) Hanson, Inc. requires its marketing managers to submit estimated cost-volume-profit data on all requests for new products, or expansions of a product line. Nancy Stephens is a new manager. Her calculations show a fixed cost for a new project at $100,000 and a variable cost of $5. Since the selling price is only $15 for the proposed product, 10,000 units would need to be sold to break even. That is approximately twice the volume estimate for the first year. She shares her dismay with Patti Patterson, another manager. Patti strongly advises her to revise her estimates. She points out that several of the costs that had been classified as fixed costs could be considered variable, since they are step costs and mixed costs. When the data has been revised classifying those costs as variable costs, the project appears viable.
Required: 1. Who are the stakeholders in this decision?
2. Is it ethical for Nancy to revise the costs as indicated? Briefly explain.
3. What should Nancy do?
Case 3 (Communication) For two years, Annette Larson has been the manager of the production department of a company manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll, whose "clothes" are made of acetate, and stay on the doll with static electricity. The company’s sales were mainly to large educational institutions until last year, when the dolls were sold for the first time to a large discount retailer. The dolls were sold out immediately, and enough orders were received to keep the department at full capacity for the immediate future. The fixed costs for the department are $50,000, with $1 per unit variable costs. A paper doll and one set of clothes sell for $3. The maximum volume is 80,000 units. With the increased volume, Ms. Larson is considering two options to improve profitability. One would reduce variable costs to $0.75, and the other would reduce fixed costs to $35,000. Required: Given the fact that sales are increasing, make a short (one paragraph) recommendation to Ms. Larson about which option she should choose. Support your recommendation with a calculation showing her how profitability will change with each option.
Case 4 (Point of Indifference) Benzon Company sells a product for $20, variable costs are $8 per unit, and fixed costs are $32,000.
(a) What is Dennis’ break-even point in units?
(b) What is the selling price that Dennis must charge to earn an $8,000 profit selling 1,600 units? Furthermore, Benzon is considering new equipment that would increase fixed costs by $2,000 while reducing unit variable costs by $1.60 per unit. With the given date,
(c) find sales level where the company is indifferent between the two cost structures.