You have a business that makes and sells specialty cupcakes. Your menu consists only of a variety of cupcakes. Your costs are:
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Planning Period: |
1 year |
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Forecast Qty: |
25,000 |
cupcakes |
|
|
Fixed Costs |
Variable Costs |
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|
Rent |
$8,000 |
Ingredients |
$18,000 |
|
Utilities |
$1,200 |
Oven Fuel |
$6,000 |
|
Equipment |
$2,400 |
Packaging |
$1,000 |
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Fixtures |
$3,600 |
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|
Labor (inc insurance,taxes and fringe) |
$95,000 |
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|
TOTAL |
$110,200 |
|
$25,000 |
|
Total Cost |
$135,200 |
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|
ATC |
$5.41 |
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|
AFC |
$4.41 |
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|
AVC |
$1.00 |
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You only have one employee – YOU. The salary and fringe listed above are for your compensation. Your business does not record a separate profit, the more cupcakes you make and sell, the more money you earn.
You have determined that the Price Elasticity of Demand for your products is 2.
The selling price per cupcake is $5.41 and you are on pace to sell 25,000 cupcakes this year as planned.
- Based on the information above, what can you deduce about the market structure and situation for this business. Be descriptive, address each of the columns of our market structure table.
- What are examples of your business’ Complements and Substitutes?
- Are you applying Cost Plus / Markup Pricing to determine your price? Why or Why not?
- What is the Operating Leverage for your business?
- What opportunities or threats do you face as a result of this level of Operating Leverage?
- You get a quantity discount from your vendors which would reduce your AVC by 20 cents. Do you reduce the selling price of your cupcakes by 20 cents?
- You are taking an Economics class and discuss the wacky idea of selling coffee in your store for 10 cents per cup. Would this be an example of a product line extension or bundling? Explain why.
- If you acted on this idea (in question 3) and started selling basic coffee (help yourself to cream and sugar), what impact on profitability do you expect this to have on your business?
- What is the constraint to generating more profit in this business? Explain your answer. HINT: What does your Elasticity tell you about your situation?
- How would you apply Odd Pricing to your business? Do you think it would be effective at increasing profit?
- How would you implement Personalized Pricing to take advantage of any Consumer Surplus? Explain your answer. Include a description of Personalized Pricing and Consumer Surplus in your answer.
- In your Economics class you learned about Economies of Scope. How would you apply this concept to your cupcake business to improve profit. Explain what you would do and the desired outcomes.
- In your solution to Question 11, how would you avoid Cannibalization?
- By developing and implementing a pricing strategy using the concepts described in the preceding questions, you are hoping to generate more sales (throughput). (a) At what point would the Law of Diminishing Marginal Returns affect the costs of your business? (i.e., what is your bottleneck to production) (b)What is the affect on your Marginal Cost as you make and sell more product?
- How might you change the worth of your Value Proposition without adding cost to allow you to raise price?
- What’s your ultimate dilemma? HINT: compare your answers to Question 14 and Question 9.
