Cost-based Pricing Assignment Chart:

Sales by Segment

Cafe sales to Cafe sales to One time sales to Contract sales to

consumers consumers caterers restaurants
1 - 11 cupcakes Dozen increments > 10 dozen/event >10 dozen/ week

Parts Cost-plus Full cost per Unit + % Full cost per Unit + % Full cost per Unit + % Full cost per Unit + %
1&2 pricing Markup = Selling Price Markup = Selling Price Markup = Selling Price Markup = Selling Price
suggested 1.5 $ + 0.5 $ = 2 $ , 1.5 + 0.2 $ = 1.7 $ , 1.5 $ + 0.2 $ = 1.7 $ , 1st 240 units will keep
price Profit = 2 - 1.5 = 0.5 $ Profit = 1.7 – 1.5 = 0.2 $ Profit/unit for 1st 240 0.0 markup to sell
Annual Profit = 0.5 * 11 Annual Profit = 0.2 * 14 Units = 0.2 $ Profit/unit dozen by 18 $ =1.5 $
Units / day * ( (48 dozen / day * 12 after 1st 160 units= 0.7$ /unit. After that, full cost
weeks * 6 day/week) - Cupcake/dozen * ( (48 Profit from selling 400 = 1$ + 0.5 $ Markup =
10 day holidays) = weeks * 6 day/week) - unit / event = ( 1.5 $ / Unit Profit/unit for
1’529 $ 10 day holidays) = (0.2*240)+(0.7*160) ) = 1st 240 Units = 0.0 $
9’341 $ 160 $ Annual Profit = Profit/unit after 1st 240
160 * 2 events * 48 Units= 0.5 $ Profit from
weeks = 15’360 $ selling 83 dozens (996
Units) for at least two
restaurants weekly = (
(0.0*240)+(0.5*756) ) =
378 $ Annual Profit =
378 * 48 weeks =
18’144 $

Annual Net Profit = Total Profits – Cost of hiring one person for three hours daily
= (1’529 + 9’341 + 15’360 + 18’144 ) – (10 $ * 3 hours * ( (48 weeks * 6 day/week) - 10 day holidays) )
= 44’374 – 8340
= 36’034 $
Marginal cost Marginal Cost + Marginal Cost + Markup Marginal Cost + Markup Selling Price = Marginal
pricing Markup = Selling Price = Selling Price 1.5 $ + = Selling Price Selling Cost + Markup 1st 240
suggested 1.5 $ + 0.2 $ = 1.7 $ , 0.2 $ = 1.7 $ , Profit = price for 1st 240 unit = units will keep 0.0
price Profit = 1.7 - 1.5 = 0.2 1.7 – 1.5 = 0.2 $ Annual 1.5 $ + 0.2 $ = 1.7 $ markup to sell dozen by
$ Annual Profit = 0.2 * Profit = 0.2 * 14 dozen / Selling price for 18 $ =1.5 $ /unit. After
11 Units / day * ( (48 day * 12 remaining 660 unit = 1 $ that, full cost = 1$ + 0.2
weeks * 6 day/week) - Cupcake/dozen * ( (48 + 0.2 $ = 1.2 $ , $ Markup = 1.2 $ / Unit
10 day holidays) weeks * 6 day/week) - Profit/unit = 0.2 $ Profit Profit/unit for 1st 240
= 612 $ 10 day holidays) from selling 900 unit / Units = 0.0 $ Profit/unit
= 9’341$ event = 0.2 * 900 = 180 after 1st 240 Units= 0.2
$ Annual Profit = 180 * $ Profit from selling
2 events * 48 weeks 2000 Units for at least
= 17’280 $ two restaurants weekly
= (0.0*240)+(0.2*1560)
= 352 $ Annual Profit =
352 * 48 weeks
= 16’896 $

Annual Net Profit = Total Profits – Cost of hiring one person for three hours daily
= (612 + 9’341 + 17’280 + 16’896 ) – (10 $ * 3 hours * ( (48 weeks * 6 day/week) - 10
day holidays) )
= 44129 – 8340
= 35’789 $

Peak-load Surge pricing = Peak Surge pricing = Peak Surge pricing = Peak Surge pricing = Peak
pricing load pricing For 1st load pricing For 1st 240 load pricing For 1st 240 load pricing 1st 240
suggested 240 unit , cost + unit , cost + markup = unit , cost + markup = units will keep 0.0
price markup = selling price selling price = 1.5 $ + selling price = 1.5 $ + markup to sell dozen by
= 1.5 $ + 0.5 $ = 2 $ , 0.5 $ = 2 $ Profit = 2 – 0.5 $ = 2 $ Profit/unit for 18 $ =1.5 $ /unit. After
Profit = 2 - 1.5 = 0.5 $ 1.5 = 0.5 $ Annual Profit 1st 240 Units = 0.5 $ that, full cost = 1$ + 0.5
Annual Profit = 0.5 * 11 = 0.5 * 6 dozen / day * Profit/unit after 1st 160 $ Markup = 1.5 $ / Unit
Units / day * ( (48 12 Cupcake/dozen * ( units= 1$ Profit from Profit/unit for 1st 240
weeks * 6 day/week) - (48 weeks * 6 selling 300 unit / event = Units = 0.0 $ Profit/unit
10 day holidays) day/week) - 10 day ( (0.5*240)+(1*60) ) = after 1st 240 Units= 0.5
= 1’529 $ holidays) 180$ Annual Profit = $ Profit from selling 83
= 10’008 $ 180 * 2 events * 48 dozens (996 Units) for
 weeks at least two restaurants
= 17’280 $ weekly = (
(0.0*240)+(0.5*756) ) =
378 $ Annual Profit =
378 * 48 weeks
= 18’144 $

Annual Net Profit = Total Profits – Cost of hiring one person for three hours daily
= (1’529 + 10’008 + 17’280 + 18’144 ) – (10 $ * 3 hours * ( (48 weeks * 6 day/week) -
10 day holidays)
= 46961 – 8340
= 38’621 $

Target cost Target Cost per Unit = Target Cost per Unit = Target Cost per Unit = Target Cost per Unit =
pricing Market price per unit – Market price per unit – Market price per unit – Market price per unit –
suggested Target Margin 1.5 $ = Target Margin 1.5 $ = Target Margin 1.5 $ = Target Margin 1.5 $ =
price 1.5 $ - 0.0 $ , For 1st 1.5 $ - 0.0 $ , For 1st 1.5 $ - 0.0 $ , For 1st 1.5 $ - 0.0 $ , For 1st
240 Unit Profit = 1.5 - 240 Unit 1 $ = 1.5 $ - 240 Unit 1 $ = 1.5 $ - 240 Unit 1 $ = 1.5 $ -
1.5 = 0.0 $ Annual 0.5 $ , After 1st 240 Unit 0.5 $ , After 1st 240 Unit 0.5 $ , After 1st 240 Unit
Profit = 0.0 * 11 Units / Profit for selling 30 Profit from selling 500 Profit/unit for 1st 240
day * ( (48 weeks * 6 dozens/day = (0.0 $ * unit / event = (0.0 * 240) Units = 0.0 $ Profit/unit
day/week) - 10 day 240 unit ) + (0.5 * 120 + (0.5 * 260) = 130 $ after 1st 240 Units= 0.5
holidays) unit ) = 60 $ Annual Annual Profit = 130 * 2 $ Profit from selling
= 0.0 $ Profit = 60 $ * ( (48 events * 48 weeks 1000 Units for at least
weeks * 6 day/week) - = 12’480 $ two restaurants weekly
10 day holidays) = (0.0*240)+(0.5*760) =
= 16’680 $ 380 $ Annual Profit =
380 * 48 weeks
= 18’240 $

Annual Net Profit = Total Profits – Cost of hiring one person for three hours daily
= (0.0 + 16680 + 12480 + 18240 ) – (10 $ * 3 hours * ( (48 weeks * 6 day/week) - 10
day holidays) )
= 47400 – 8340
= 39’060 $
Part 3 Your Cost-plus pricing Peak-load pricing Marginal cost pricing Target cost pricing
recommended
strategy

Rationale for • Small quantity with • Charging highest at • To secure the order • Competitor sell with
your overall high cost rush hours to balance from the customer as no low price
recommended • Secure profit supply and demand contract with them • Regular orders
price/strategy* • Seller is price setter • Convenient for all • Large quantities guaranteed
• Simple to execute those working around compensate the low • Buyer is price setter
• Guarantees targeted the Café margin
margin • Encourage future
• Intuitively repetitive orders
understandable
• Easy to defend

Part 4 Where do you She should put the highest margin on the 1st segment where individual buyers with small quantities are
expect the going to buy. She would better use lower margins for bigger volumes to attract customers to take more
highest and accordingly get benefited from the smaller margins multiplied by big volumes.
margin? Why?

Where might Chris should take the lowest margin from the contract sales to restaurants to secure her market share
you suggest versus competitors providing already these restaurant at almost Chris cost price 1.5 $. Also, Chris will
Chris take a be doing good after the 1st 240 units supply as her cost will be reduced to 1 $. And sales volume will
lower margin? compensate any early low profits.
Why?
Also, Chris may consider lowest margin for the one time sales caters to for the same reasons
discussed above.

Part 5 Should Chris If she is capable to implement these price strategies and end by having more than 35000$ profit per
open the cafe? year then its recommended to open the café. The current profit calculated from all segments revenues
Explain, using allow her to take this decision.
projected
revenues and
profits to
support your
decision.