Cost-based Pricing Assignment

ASSUMPTIONS:
Assumptions for Demand to meet at-least $ 35000 revenue target:
Week Wise quantity Restaurant Caterers Individual – (1-11) Individual – (Dozens) Total Quantity
120 (10 Dozen) 300 (25 Dozen) 576 72 1860

Total daily production = 1860 / 6 = 310 Cupcakes

Week wise demand Assumption:
Restaurant: 10 dozen / week = 120 Cupcakes / week
Caterers : 2*150 = 300 Cupcakes / week
Store : Store opens from 10 AM to 10 PM, Orders per hour are approx 20 Cupcakes; including 1 order of a Dozen
8*12*6 = 576 Cupcakes / week
Individual order of a dozen: 1*12*6 = 72 Dozens cupcakes / Week

Sales by Segment

Cafe sales to consumers Cafe sales to consumers One time sales to caterers Contract sales to
1 - 11 cupcakes Dozen increments restaurants

Parts Cost-plus pricing (Fixed cost + variable (Fixed cost + variable (Fixed cost + variable (Fixed cost + variable
1 &2 suggested price cost) per unit + cost) per unit + cost) per unit + cost) per unit +
Margin% = Selling Margin% = Selling price Margin% = Selling price Margin% = Selling price
price per unit per unit per unit per unit
200+430 200+430 200+430 200+430
+ 50%=3.04 $ + 40%=2.84 $ + 20%=2.43 $ + 5%=2.13 $
310 310 310 310

Assumptions: Selling price per Selling price per Selling price per
  Fixed cost = $ 6000 dozen=2.84*12=$ 34.14 dozen=2.43*12=$ 29.6 dozen=2.13*12=$ 25.6
/ Month or $ 200 Assumptions: Assumptions: Assumptions:
per day  Fixed cost = $ 6000 /  Fixed cost = $ 6000 /  Fixed cost = $ 6000 /
 Rent= $ 5000 / Month or $ 200 per Month or $ 200 per Month or $ 200 per
month day day day
Salaries= $ 600/  Rent= $ 5000 /  Rent= $ 5000 /  Rent= $ 5000 /
month month month month
Others = $ 400 / Salaries= $ 600/ Salaries= $ 600/ Salaries= $ 600/
month month month month
Others = $ 400 / Others = $ 400 / Others = $ 400 /
 Variable (Cost of month month month
production) =  Variable (Cost of  Variable (Cost of  Variable (Cost of
1.5*240+1*70=430 production) = production) = production) =
1.5*240+1*70=430 1.5*240+1*70=430 1.5*240+1*70=430

Marginal cost MC should atleast MC should atleast cover Marginal cost will not be Marginal cost will not be
pricing suggested cover variable cost variable cost hence applicable as cupcakes applicable as cupcakes
price hence formula would formula would be: would be produced would be produced
be: based on order based on weekly
Variable cost + Variable cost + contract
Margin% = Marginal Margin% = Marginal
Cost Cost

430 430
+ 40%=1.94 $ + 30%=1.8 $
310 310

Assumptions: Selling price per

 Variable (Cost of dozen=1.8*12=$ 21.6
production) =
1.5*240+1*70=430 Assumptions:
 Cupcakes that are  Variable (Cost of
not sold during the production) =
1.5*240+1*70=430
 whole day can be  Cupcakes that are
sold in the night at not sold during the
the time of closing whole day can be
the café every day sold in the night at
the time of closing
the café every day

Peak-load pricing  Peak load will not  Peak load will not be  Peak load will not be  Peak load will not be
suggested price be applicable here applicable here as applicable here as applicable here as
as café business café business would café business would café business would
would not want to not want to have not want to have not want to have
have variable prices variable prices variable prices variable prices
 Cupcakes can be  Cupcakes can be  Cupcakes can be  Cupcakes can be
stored for some stored for some time stored for some time stored for some time
time duration duration duration duration

Target cost Target cost can-not be Target cost can-not be Target cost can-not be  Market price is given
pricing suggested calculated as reference calculated as reference calculated as reference as $ 18 / dozen
price market price is not market price is not market price is not  Per unit price would
provided in the
provided in the business provided in the business be $ 1.5
business case
case case  1.5 = Cost price +
margin
 With Full cost will not
be able provide $18
to restaurants
 With Marginal cost
will be able to serve
the restaurants with
less margins
Part Your  Cost plus pricing  Cost plus pricing Regular buyers will  Target cost pricing:
3 recommended strategy would be strategy would be save from demand Restaurants will have
strategy best suited in case of best suited in case of shocks so should be other vendor’s too so it
Café’s sale to Café’s sale to given advantage on important to follow the
Consumer. For a Consumer. For a new pricing. market price. It is also
new business, it is business, it is the in Chris favors to sell
the best strategy. best strategy. to Restaurants as it
 Quantity discount would help in reducing
 Marginal cost would would bring down production cost per
further enhance the cost per unit unit. (from 1.5 to 1)
revenue  Marginal cost would  Regular buyers will
further enhance the save from demand
revenue shocks so should be
given advantage on
pricing. If overall
demand is less than it
might be risky to sell
at $ 18 / dozen
because the margins
are very less here.

Rationale for All segments have different demands and pricing. It is important to have a weekly demand chart otherwise
your overall it will be difficult to estimate profit from each segment. Mix of Cost plus pricing, Marginal cost pricing and
recommended target cost pricing will be required to serve different segments.
price/strategy*
Sufficient commentary is being provided under each segment. Please check above.

Part Where do you Highest margins can be in B2C (Café sales to Consumer). As these are individual buyers and their
4 expect the purchases are usually small. So Café can take a risk to charge more for Cupcakes. If more Cupcakes are
highest margin? sold then this will lead to higher consumptions of Cupcakes (consumption adjusted margin concept)
Why?

Where might Chris should take lower margins from Restaurants because:
you suggest  They have more bargaining power. They can switch to others if Chris doesn’t offer good prices to
Chris take a them
 lower margin?  B2B sales relationships are usually contract bound so demand is kind of secured even in crisis.
Why? This can be useful to maintain profitability of business as it can bring down the production cost per
unit

Part Should Chris Yes

5 open the cafe?
Explain, using In order to achieve $ 35000 profit at year end, $ 673 would be required to achieve every week. And based
projected on the demand estimated, it can be possible. More demand will improve profitability as it will create more
revenues and revenue and also reduce costs.
profits to Please find below profit calculations which suggest that $673 is quite achievable.
support your
Cost Plus Pricing:
decision.
Week Wise Individual –
Profit Restaurant Caterers Individual – (1-11) (Dozens) Total Profit
120*(2.13- 300*(2.43- 576*(3.04- 72*(34.1-
2.03)=12 2.03)=120 2.03)=581 24.3)=705 $ 1419

Marginal cost and Target cost pricing

Individual
–
Week Wise Profit Restaurant Caterers Individual – (1-11) (Dozens) Total Profit
72*(21.1-
120*(1.5-1.38)=14.4 300*(2.43-2.03)=120 576*(1.94-1.38)=322 16)=367 $ 824