Question

The No Doze Cafe coffee shop sells 50 different types of coffee to its patrons. It costs $4 for a cup of coffee. Each day it sells on average 500 cups of coffee. On the weekends it sells closer to 1000 cups of coffee. Here is a breakdown of the shop’s expenses per cup of coffee:

Variable Costs

Item	Amount
Coffee/Water	$1.50
Paper Cup	$0.30
Sweetener	$0.20

Fixed Costs

Item	Amount
Labor	$100/day per employee
Store Space Rent	$800/month

If the shop sells 1000 cups on Saturday. What is Saturday’s contribution margin?

Answer 1

Contribution margin does not factor in the effect of fixed costs. It only factors in variable costs.

Total variable cost for 1 cup = Cost of coffee /water + Cost of paper cup + Cost of Sweetener = $1.50 + $0.30 + $0.20 = $2.00

Sales price per cup = $4.00

Contribution margin per cup= Sales price per cup - Variable cost per cup = $4.00 - $2.00 = $2.00

Contribution margin on saturday = Contribution margin per cup x Number of cups sold on Saturday = $2.00 x 1,000 cups = $2,000