Question

Pam and Lennyâs ice cream shop charges $1.6 for a cone. Variable expenses are $0.35 per cone, and fixed costs total $2,200 per month. A "sweetheart" promotion is being planned for the second week of February. During this week, a person buying a cone at the regular price would receive a free cone for a friend. It is estimated that 650 additional cones would be sold and that 850 cones would be given away. Advertising costs for the promotion would be $165.
Required:
a. Calculate the effect of the promotion on operating income for the second week of February.
b. Do you think the promotion should occur? Explain your answer.

Answer 1

Answer:

Pam and Lenny's Ice Cream Shop

a. The effect of the promotion on operating income for the second week of February is an increase by $350.

b. The promotion should occur.  The shop will make additional operating income of $350 within the second week.  And there will be spillover positive effects during the coming weeks after the promotion.

Explanation:

a) Data and Calculations:

Selling price per cone of ice cream = $1.60

Variable expenses = $0.35

Contribution = $1.25

Fixed costs per month = $2,200

Additional sales from the promotion = 650 cones

Revenue from additional sales = $1,040.00 ($1.60 * 650)

Variable cost                                     227.50 ($0.35 * 650)

Cost of promotions:

Giveaways                                        297.50 ($0.35 * 850)

Advertising costs                              165.00

Total costs                                      $690.00

Additional income                          $350.00