Karges Coffee Inc MEMORANDUM TO: Janet Hamilton, President of Karges Coffee Inc. FROM: RE: Evaluation of the various options proposed at the planning meeting DATE: In anticipation of the meeting held recently of the senior management, I would like to bring to your attention the evaluation of various options proposed at the planning meeting: The overall sales value of all the products comes up to $9,600,000 and the contribution margin comes up to $2,880,000 which in turn generates a Profit/Volume Ratio of 0.30…
Assuming no changes to the Home Brewer or Office Deluxe unit sales and unit selling prices, and variable costs will remain same for each model with total fixed costs remaining unchanged. The Office Basic sales units if doubled will result in increase in the overall sales volume, contribution margin and profit of the company. Here we see that by just doubling the sales volume units we see a jump in sales value and contribution margin by more than 150% and the profit has grown by more than 200%. These drastic changes in the sales figure and profit is just because of the extra volumes of the Office Basic model. This means that if we sell 60,000 units of Office Basic we are in a profitable position. The sales volume of Office Basic is the highest among the other models which indicates that increasing the production of Office Basic model will generate far more revenues than if we double the other two models. This analysis helps us in analyzing the revenues and profits on changing a single factor such as sales volume units. If an advertising campaign is implemented costing $150,000 to raise overall consumer awareness of the product offerings and to increase sales, the company will have to attain a profit level of $1,530,000 to maintain the same profit percentage. This means that minimum of $500,000 sales is required to compensate for the advertising cost at the same profit level. In the same year maybe we do not receive the benefits in terms of sales revenue and profits but in the long run it may generate benefits. The new advertising campaign instead of being designed to increase total sales volume will focus on getting customers who would purchase the Office Basic model to buy the Office Deluxe model instead with an assumption of no impact on the sales of Home Brewer model. As per the calculations 1,250 customers should purchase Office Deluxe model instead of Office Basic model to cover the advertising costs incurred. The last option for evaluation is if the company chooses to add a new product (Office Plus) to its line of brewers targeted at the office use market, it would have to sell a minimum of 3,933 units approximately to justify its addition to the product line next year. This level of sales stated above is just a break-even point for the product. This product will generate additional profits over and above the units mentioned above. I would like to recommend going with the new product Office Plus in an optimistic view that it would start generating sales revenue higher than the current levels and thereby increase the profitability of the company in the long run. This product would also add to the current varieties of product and is a mid-priced product between the Office Basic model and the Office Deluxe model. I would also recommend another alternative of implementing an advertising campaign for initiating the sales of Office Premium model which is comparatively lower than Office Basic model which can result in more profitability as because the Profit/Volume ratio is higher than the other two models. The Profit/Volume ratio of Office Premium model is 0.40. The contribution per unit is also highest among the three products that is $120 which signifies that the variable costs are comparatively low ...
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