BYP 5-3 : The 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?

Sweeteners and packaging are variable cost to Coca-Cola since the primary line of the company is the making and selling of syrup to the bottlers. Therefore,, the cost of the sweeteners and packaging are directly contributed to the total variable cost of the production. Variable costs are directly related to the contribution margin, because the higher the variable cost, the lower the contribution margin is (assumed sales remain constant). Resulted from that, an increase in the per unit cost of sweeteners and packaging will reduce the contribution margin for the company. This will lead to a decline in the profitability unless the company can increase its selling price, increase the number of unit sells or reduce other cost.

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.

Based on the description of the company the increase in selling expenses in the last two years were primarily due to higher marketing expenditures in support of our Companys volume growth, it sounds like the marketing expenditures are a variable cost since it suggest that they vary with the amount of unit sold. However, the marketing expenditures are not directly proportional to sales, since other factors also influence the units sold. Therefore, it is not a pure variable cost. On the other hand, it is also not a fixed cost, given that there is a relationship between marketing expenditures and sales. For that reason, marketing expenditure might best be handled as a mixed cost, having both a fixed and variable element.

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?

Coca-Cola Company measure their sales volume in two ways which are gallon shipments of concentrated and syrups, and unit cases of finished product (bottles and cans of Coke sold by bottlers). The activity index is the first measure since it best reflect the companys production and sales at the wholesale level, in view of the fact that the primary line of business is the making and selling of syrup to bottlers. While, the second measure (unit cases of finished product), indicate the amount of activity by Cokes primary customers, the bottlers. Coca-Cola also keep track of this because it provide information about what is the situation at the retail level.