Cost-based Pricing Assignment Chart

Sales by Segment

Cafe sales to consumers Cafe sales to consumers One time sales to caterers Contract sales to
1 - 11 cupcakes Dozen increments > 10 dozen/event restaurants
>10 dozen/ week

Parts Cost-plus pricing • Selling price= cost/unit+ • Selling price= • Selling price= • Selling price/dozen=
1&2 suggested price Markup cost/unit+ Markup cost/unit+Markup $18= $1.5/unit
• Selling price • Selling price • Selling price • Selling price=
/unit=$1.5+$0.5=$2/unit /unit=$1.5+$0.5=2$/ /unit=$1.5+$0.5=$2/un cost/unit+ markup
• Profit/unit= selling price- unit it • Profit for 1st
cost/unit • Profit/unit= selling • Profit/unit for 1st 240units= $1.5-
• Profit/unit=$2 - price- cost/unit 240units=$2- $1.5=0
$1.5=$0.5/unit • Profit/unit=$2 - $1.5=$0.5 • Profit for >240
• Annual $1.5=$0.5/unit • Profit/unit above 240 units=0.5
profit=profit/unit*11unit • Annual units=$2-$1=$1 • Assume selling 80
s/day*((48weeks*6days/ profit=$0.5*12units/ • Profit selling 300 dozens(960
dozen*6dozen/day*( units/event(25 units)/week for 48
week) -(10 holidays))
dozens)=(0.5*240)+(1 weeks
• Annual profit= (48weeks*(6days/we
*60)= $180 • Annual profit=
ek)-10 holidays))
$0.5*11*(288-10) =$ • Annual profit from 2 ((0*240)
1,529 • Annual profit= events/48weekends= +(0.5*720))*48=
$0.5*12*6*(288-10) (180*2*48)= $17,280
$17,280
=$ 10,008

Annual profit= total profit -cost of hiring a person for 3 hours/week for 48 weeks
= ($1,529+$10,008+$17,280)+$17,280-($10*3hrs*((48weeks*(6days/week)-10 holidays))
= $46,097-$8,340= $37,757
Marginal cost • Selling price= Marginal • Selling price= • Marginal • Selling price/dozen=
pricing suggested cost + Markup Marginal cost + cost+markup=selling $18= $1.5/unit
price • $1.5+$0.25= $1.75 Markup price • Marginal
• Profit/unit= selling price- • $1.5+$0.25= $1.75 cost+markup=sellin
• Selling price
Marginal cost/unit • Profit/unit= selling /unit=$1.5+$0.25=$1.7 g price=$1.5/unit
• Profit/unit= $1.75- price- Marginal 5/unit • Marginal
$1.5=$0.25 cost/unit • Profit/unit for 1st Cost/unit+markup>2
• Annual • Profit/unit= $1.75- 240units=$1.75- 40 units= $1+$0.25
profit=profit/unit*11unit $1.5=$0.25 $1.5=$0.25 • Profit for 1st
s/day*((48weeks*6days/ • Annual • Profit/unit for 2nd 240units= $1.5-
week) -(10 holidays)) profit=$0.25*12units 120units=$1.75- $1.5=0
$1=$0.75 • Profit for >240
• Annual profit= /dozen*10dozen/day
• Profit selling 420 units=$0.25
(0.25*11)*((6*48)-10)= *((48weeks*(6days/
units/event(35 • Assume selling to
$764.50 week-10 holidays)) dozens)=(0.25*240)+( 160
• Annual profit= 0.75*180)= $195 dozens(1920units)/w
$0.25*12*10*(288- • Annual profit from 2 eek for 48 weeks
10) =$ 8340 events/48weekends= • Annual profit=
(195*2*48)= $18,720 ((0*240)
+(0.25*1680))*48=
$20,160

Annual profit= total profit -cost of hiring a person for 3 hours/week for 48 weeks
= ($764.5+$8340+$18,720+$20,160)-($10*3hrs*((48weeks*(6days/week)-10 holidays))
= $47,984-$8,340= $39,644

Peak-load pricing • Surge price= (peak load • Surge price= (peak • Surge price= (peak • Surge price= peak
suggested price price for 1st240 load price for 1st240 load price for 1st240 load price for 1st240
units,cost) units,cost) units,cost) units,cost
+markup=selling price +markup=selling +markup=selling price +markup=selling
• Selling price= price • Selling price= price
cost/unit+Markup • Selling price= cost/unit+Markup • Selling price/dozen=
 • Selling price cost/unit+Markup • Selling price $18= $1.5/unit
/unit=$1.5+$0.75=$2.25/ • Selling price /unit=$1.5+$0.75=$2.2 • Selling price /unit
unit /unit=$1.5+$0.75=$ 5/unit for
• Profit/unit=$2.25- 2.25/unit • Profit/unit for 1st 1st240=$1.5+$0=$1.
$1.5=$0.75/unit • Profit/unit=$2.25- 240units=$2.25- 5/unit
• Annual $1.5=$0.75/unit $1.5=$0.75 • Profit/unit for 1st
profit=profit/unit*5units/ • Annual • Profit selling 240units= $0
day*((48weeks*6days/w profit=$0.75*12units 240units/event (20 • Selling price /unit
/dozen*10dozen/day dozens) = (0.75*240)= for
eek) -(10 holidays))
$180 >240=$1+$0.75=$1.
• Annual profit= *((48weeks*(6days/
• Annual profit from 2 75/unit
(0.75*5)*((6*48)-10)= week-10 holidays))
event/48weekends= • Profit for >240
$1,042.5 • Annual profit= (180*2*48) = $17,280 units=$0.75
$0.75*12*3*(288- • Assume selling to
10) =$ 7,506 40
dozens(480units)/we
ek for 48 weeks
• Annual profit=
((0*240)
+(0.75*240))*48=
$8,640

Annual profit= total profit -cost of hiring a person for 3 hours/week for 48 weeks
= ($1,042+$7,506+$17,280+$8,640)-($10*3hrs*((48weeks*(6days/week)-10 holidays))
= $34,468-$8,340= $25,828

Target cost • Target cost/unit= market • Target cost/unit= • Target cost/unit= market • Target cost/unit=
pricing suggested price/unit(selling price)- market price/unit(selling price)- market
price target margin/unit price/unit(selling target margin/unit price/unit(selling
• Market price(selling price)-target • Market price(selling price)-target
price/unit)=Target margin/unit
price/unit)=Target margin/unit
cost/unit(1st240 • Market price(selling
cost/unit(1st240 • Market price(selling units)+target margin/unit price/unit)=Target
units)+target margin/unit price/unit)=Target
 • Selling price= $1.5+0 cost/unit(1st240 • Selling price= $1.5+0 cost/unit(1st240
• Profit/unit= selling units)+target • Profit/unit= selling units)+target
price/unit- cost/unit margin/unit price/unit- cost/unit margin/unit
• • Profit for the 1st 240 • Selling price/dozen=
• Profit for the 1st 240 Selling price=
units= 1.5-.15=0 $18= $1.5/unit
units= 1.5-.15=0 $1.5+0
• Profit/unit above • Selling price /unit for
• Annual • Profit/unit= selling 1st240=$1.5+$0=$1.5/
240units=$1.5-$1=0.5$
price/unit- cost/unit
profit=profit/unit*5units/ • Profit selling 500 unit
day*((48weeks*6days/w • Profit for the 1st 240 units/event (20 dozens) • Profit/unit for 1st
units= 1.5-.15=0 =(0*240)+(0.5*260)= 240units= $0
eek) -(10 holidays))
• Annual $130 • Selling price /unit for
• Annual profit=
0*11/day*((6 profit=$0.0*12unit • Annual profit from 2 >240=$1+$0.75=$1.7
event/48weekends= 5/unit
day/week*48weeks)-10 s/dozen*14dozen/d (130*2*48) = $12480 • Profit for >240
days)=0 ay*((48weeks*(6d units=$0.5
• Assume selling to 180
ays/week-10 dozens(2160units)/we
holidays)) ek for 48 weeks
• Annual profit= • Annual profit=
$0.0*12*3*(288-10) ((0*240)
=$ 0 +(0.5*1920))*48=
$46080

Annual profit= total profit -cost of hiring a person for 3 hours/week for 48 weeks
= ($0+$0+$12,480+$46,080) -($10*3hrs*((48weeks*(6days/week)-10 holidays))
= $58,560-$8,340= $50220

Part 3 Your Peak load pricing Cost plus pricing Marginal cost pricing Target cost pricing
recommended
strategy

Rationale for your • Charges highest • Simple to execute. • To add revenues • Buyers set price
overall at peak hours to • Guarantees target and profits • get repetitive
 recommended balance supply & margin. • To get foot in the orders to lower the
price/strategy* demand • Easy to defend. door cost
Seller sets price • Large quantities
make up for low
margins

Part 4 Where do you The highest margin is expected in the individual unit sales(1-11cupcakes), because small quantities are
expect the sold with higher cost
highest margin?
Why?

Where might you The lowest margin is expected in contract sales, because buyers have the power of setting selling
suggest Chris take prices, in return, they guarantee a big quantity and regular flow of orders/week.
a lower margin?
Why?

Part 5 Should Chris open Chris should open the Café if she implements the above recommended price strategies. Please see
the cafe? Explain, above Revenue and profit projections. Moreover, below is Net profit projections for a combination of the
using projected recommended pricing strategy that yields best profit for the above segments.
revenues and • Café sales to consumers (1-11 cupcakes): peak load pricing=$1,042
profits to support • Café sales to consumers dozen increments:cost plus pricing=$10,008
your decision. • Caterers (events): marginal cost=$18,720
• Restaurant contracts: Target cost=$46,080
• Annual payroll= $8,340
•
Annual net profit= total profit -cost of hiring a person for 3 hours/week for 48 weeks=
($1,042+$10,008+$18,720+$46,080) -payroll cost
= $75,850-$8,340= $67,510