Coca-cola Case Study 353iq

COCA-COLA COMPANY (a)

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 for profitability?

The sweeteners and packaging are variable costs. This can be identified directly from the description of variable costs which is the expenses that change in proportion to the activity of a business. The sweeteners and packaging are the direct materials of the Coca-Cola production. They vary depending on the production volume; for example they rise as production increases and fall as production decreases. Variable costs differ from fixed costs as fixed costs remain the same despite of production output. Contribution margin can be defined as sales revenue minus variable expenses. This is the amount of revenue that is available to contribute to covering fixed expenses after all variable expenses have been covered (Hilton & Platt, 2011). These are the general formula for computing the break-even point: Unit Contribution Margin = Unit Revenue – Unit Variable Cost

Contribution Margin Ratio (CM Ratio) = Unit Contribution Margin Price

Break-Even Point = Fixed Expenses CM Ratio An increase in unit variable cost will decrease the contribution margin per unit. In addition, the decrease in contribution margin per unit will lead to decrease in the contribution margin ratio (CM ratio). Due to decrease in CM ratio, it will directly affect the break-even point (BEP) where the BEP will increase. Thus, Coca-Cola Company has to increase its total sales in order to achieve the new BEP. Besides, it can choose whether to increase the total sales or reduce the fixed costs. So, to gain profit, the company needs to sell more than the BEP.

(b)

In your opinion, are marketing expenditures a fixed cost, variable cost, or mixed cost to The Coca-Cola Company? Give justification for your answer.

In our opinion, the marketing expenditure are mixed costs. Mixed costs contain both variable and fixed portions. When changes in productions or sales occur, mixed costs will change in total but not proportionately. Other examples of mixed costs are electricity and telephone bills. The fixed portion of mixed cost stands for the basic or minimum cost of just having a service available for use. The variable portion on the other hand represents the cost incurred for actual use of the service. According to Coca-Cola Company, its fixed portion arrives from the monthly

payments of marketing employees where as the variable portion arrives from the costs that are directly affected by the increase in volume of production for instance the advertising cost.

(c)

Which of the two measures cited for measuring volume represents the activity index as defined in this chapter? Why might Coca-Cola use two different measures?

There are two measurements of sales volume employed by Coca-Cola Company. They are (1) gallon shipments of concentrates and syrups and (2) unit cases of finished product (bottles and cans of Coke sold by bottlers). The first measurement computes the estimated cost based on the estimated production of unfinished product. For instance, the production of concentrates and syrups based on cost of sweeteners. The second measurement computes the estimated cost based on the estimated sales of finished product. For example, the sales of finished product based on cost of packaging. The activity index is the first measurement because it represents the company’s productions and sales in the best way as the main line of Coca-Cola’s business is the making and selling of syrup to bottlers. The reason Coca-Cola use two different measurement is it can identify the cause that contributes to the decrease of gross margin. From the first measurement, Coca-Cola can identify the level of costs that contribute to the decrease of gross margin whether the costs are derived from the manufacturing of Coke ingredient or the cost of bottle packaging. From the second measurement, the company may identify the reason why its sales reduced. Reduce in sales may due to defect in manufacturing process for example, human error in putting together the ingredients or formulas. Moreover, the decrease in sales maybe caused by the fault from bottles such as accident occurred during packaging.