Cost-based Pricing Assignment Chart

Sales by Segment

Cafe sales to consumers Cafe sales to consumers One time sales to Contract sales to
1 - 11 cupcakes Dozen increments caterers restaurants
> 10 dozen/event >10 dozen/ week
50 customers per day * 5 customers per day * (6 2 restaurants *
(6 days a week * 52 days a week * 52 weeks - Estimated sales: 15 tables on avg *
weeks - 10 day holidays) 10 day holidays) * 12 2 events per weekend * 3 people per table on avg *
* 4 cupcakes = cupcakes = 48 weekends per year * Turned over 3 per day *
60 400 or 200 per day 18 120 or 60 per day each event 325 (middle 20% buying cupcake *
between 150-500) = 250 days =
31 200 cupcakes 13 500 cupcakes

Cost per unit:

As it does not matter which segments Chris bakes for as ‘first’, suggest to calculate cost per unit across all for
the basic cost and add the extra help at the register only to the café sales unit costs.
Total base cost:
240 cupcakes (ccs) for higher cost * (6 days a week * 52 weeks - 10 day holidays) = 72 480 ccs at 1.5$ cost =
108 720 $
Rest of ccs (123 220 – 72 480)= 50 740 will cost 1$ and therefore 50 740 $
… so total base cost for all segments is (108 720 + 50 740) / 123 220 = 1.3 $
For café segments we need to add extra help cost = 3 hours per day * 302 days = 906 hours * 10$ = 9 060$ /
number of café sales (78 520) = 0.12$ which will be added to café per unit costs

Parts Cost-plus pricing Cost per unit = 1.3 + 0.12 Cost per unit = 1.3 + 0.12 1.3 + 10% markup = 1.3 + 10% markup = 1.43$
1&2 suggested price = 1.42 + 20% markup = = 1.42 + 15 % markup = 1.43$
1.85$ 1.633$
Marginal cost Marginal cost of all Marginal cost of all Marginal cost of all Marginal cost of all
pricing suggested cupcakes after 240 ccs cupcakes after 240 ccs are cupcakes after 240 ccs cupcakes after 240 ccs are
price are sold is 1$. + 20% sold is 1$. + 15% markup = are sold is 1$. + 10% sold is 1$. + 10% markup =
markup = 1.2$ 1.15$ markup = 1.10$ 1.10$

Peak-load pricing Can be applied during 12- Can be applied during 12- Peak load pricing Peak load pricing does not
suggested price 3pm when there is surge 3pm when there is surge probably does not make make sense in this case.
in demand so cupcakes in demand so cupcakes sense unless there is a However, we could use the
might cost more during might cost more during peak in certain weeks, cost+ pricing as basis:
this time. Might be this time. Might be better for example before 1.3 + 10% markup =
better to account for this to account for this as a Christmas. 1.43$
as a discount other times discount other times of However, we could use
of day rather than surge day rather than surge the cost+ pricing as
during peak. during peak. basis:
10% markup on cost-plus 10% markup on cost-plus 1.3 + 10% markup =
price = 2$ price = 1.8$ 1.43$

Target cost If we assume the market If we assume the market This is where target cost This is where target cost
pricing suggested price is 1.7$ then if we price is 1.7$ then if we pricing could make pricing could make sense as
price want our margin to be want our margin to be sense as we have an we have an indication of
0.5$ then Chris needs to 0.5$ then Chris needs to indication of market market price 18$ per dozen
figure out how to bring figure out how to bring price 18$ (caterers so 1.5$ per unit. So if we
the costs down to 1.2$ the costs down to 1.2$ could behave as want to have 0.2$ margin
per unit. However we per unit. However we restaurants) per dozen Chris needs to figure out
don’t have a clear don’t have a clear so 1.5$ per unit. So if how to get the costs down
indication of market indication of market price we want to have 0.2$ to 1.3$ per unit
price for this segment. for this segment. margin Chris needs to
Therefore the Therefore the assumption figure out how to get
assumption of 1.7 is of 1.7 is based on retail the costs down to 1.3$
based on retail having having probably higher per unit
probably higher market market price than
price than restaurants. restaurants.
Part 3 Your Cost+ pricing with peak-
recommended load pricing between 12-
strategy 3pm. Would recommend
to phrase it as discount in
off-peak times.
Peak pricing – 2$
Off-peak – 1.85$
Cost+ pricing with peak- Target cost pricing Target cost pricing
load pricing between 12- 1.5$ per unit (18 per 1.5$ per unit (18 per
3pm. Would recommend dozen) dozen)
to phrase it as discount in
off-peak times.
Peak pricing – 1.8$
Off-peak – 1.63$

Rationale for your The strategy satisfies the total profit >35k
overall Cost+ seems to be a reasonable strategy for Segments 1 and 2:
recommended  The product could have a unique brand so price setting might be an options
price/strategy*  Peak-load pricing might be possible to implement but from customer perspective phrased in terms of
discount in off-peak times as the product is perishable, capacity is constrained and demand is volatile
 We don’t know market prices (or where not provided with indication that we should know)
Target cost pricing seems like a reasonable strategy for segments 4 and 5:
 There seems to be a market price in sales to restaurants and I would assume that similar principle would
work for catering companies
 Chris seem to be a price taker in those segments

Part 4 Where do you In Cafe sales to consumers 1 - 11 cupcakes

expect the Chris is a price setter compared to Segment 3 and 4
highest margin? Customers also wont expect a quantity discount as in segment 2 (and costs are pretty much the same if don’t
Why? account for Cost to serve of dozen vs lower number of cupcakes)

Where might you Segment 3 and 4 as Chris is a price taker in this case
suggest Chris take
a lower margin?
Why?

Part 5 Should Chris open Depends entirely on demand for Segments 1 and 2. The profit generated under this scenario is more than
the cafe? Explain, required 35k$:
using projected Realistic profit scenario (no peak load pricing):
revenues and Total sales: 1.5$ * 13 500 units + 1.5$ * 31 200 units + 1.63$ * 18 120 units + 1.85 * 60 400 units = 208k
profits to support Total costs = 108 720 + 50 740 + 9060 (all from the cost calc on the first page) = 168k (continued on next page)
your decision. Profit ~ 50k
Based on this I would recommend to open the café but to monitor the quantity sold and compare the plan with
reality. Might be entirely possible that there won’t be such demand in Segments 1 and 2 and plan (and / or
pricing) would need to be adjusted.