CT18-3 The CocaCola Company hardly needs an introduction. A line taken from the cover of a recent annual report says it all: If you measured time in servings of CocaCola, a billion CocaCola's ago was yesterday morning. On average, every U.S. citizen drinks 363 8ounce servings of CocaCola products each year. CocaCola's primary line of business is the making and selling of syrup to bottlers. These bottlers then sell the finished bottles and cans of CocaCola to the consumer.

In the annual report of CocaCola, the information shown below was provided.

THE COCACOLA COMPANY Management Discussion

Our gross margin declined to 61 percent this year from 62 percent in the prior year, primarily due to costs for materials such as sweeteners and packaging.

The increases [in selling expenses] in the last two years were primarily due to higher marketing expenditures in support of our Company's volume growth.

We measure our sales volume in two ways: (1) gallon shipments of concentrates and syrups and (2) unit cases of finished product (bottles and cans of Coke sold by bottlers).

Instructions

Answer the following questions.

(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?

(b) In your opinion, are CocaCola's marketing expenditures a fixed cost, variable cost, or mixed cost? Give justification for your answer.

(c) Which of the two measures cited for measuring volume represents the activity index as defined in this chapter? Why might CocaCola use two different measures?