Koffee Express operates a number of espresso coffee stands in busy suburban malls.

The
fixed weekly expense of a coffee stand is $1,100 and the variable cost per cup of coffee
served is $0.26.
Required:
1.
Fill in the following table with your estimates of total costs and average cost per
cup of coffee at the indicated levels of activity for a coffee stand. (Round the "Average
cost per cup of coffee" to 3 decimal places. Omit the "$" sign in your response.)
2.
Does the average cost per cup of coffee served increase, decrease, or remain the
same as the number of cups of coffee served in a week increases?
Solution:

1
.
Fixed cost
Variable cost

Total cost

Average cost per cup

served*

Cups of Coffee Served

in a Week
1,800
1,900
2,000
$1,100 $1,100
$1,10
0
468
494
520
$1,568 $1,594
$1,62
0
$0.871 $0.839
$0.81
0

* Total cost cups of coffee served in a week

2. The average cost of a cup of coffee declines as the
number of cups of coffee served increases because the
fixed cost is spread over more cups of coffee.
2. Redhawk, Inc., is a merchandiser that provided the following information:

Number of units sold

Selling price per unit
Variable selling expense per unit
Variable administrative expense per unit
Total fixed selling expense
Total fixed administrative expense
Merchandise inventory, beginning balance

10,000
$
15
$
2
$
1
$ 20,000
$ 15,000
$ 12,000

Merchandise inventory, ending balance

Merchandise purchases

$ 22,000
$ 90,000

Required:
1.
Prepare a traditional income statement. (Input all amounts as positive values
except losses which should be indicated by a minus sign. Omit the "$" sign in your
response.)
2.
Prepare a contribution format income statement. (Input all amounts as positive
values except losses which should be indicated by a minus sign. Omit the "$" sign in your
response.)
Solution:

1. Traditional income statement

Redhawk, Inc.
Traditional Income Statement
Sales ($15 per unit 10,000 units)............
Cost of goods sold
($12,000 + $90,000 $22,000)................
Gross margin...............................................
Selling and administrative expenses:
Selling expenses
(($2 per unit 10,000 units) + $20,000)...........
40,000
Administrative expenses
(($1 per unit 10,000 units) + $15,000)...........
25,000
Net operating income.................................

$150,00
0
80,000
70,000

65,000
$ 5,000

2. Contribution format income statement

Redhawk, Inc.
Contribution Format Income Statement
Sales...........................................................
Variable expenses:
Cost of goods sold
($12,000 + $90,000 $22,000).............
Selling expenses ($2 per unit 10,000

$150,00
0
$80,000
20,000

units)......................................................
Administrative expenses
($1 per unit 10,000 units)...................
Contribution margin....................................
Fixed expenses:
Selling expenses.......................................
Administrative expenses...........................
Net operating income.................................

10,000 110,000
40,000
20,000
15,000

35,000
$ 5,000