Assumptions:

 Working Days: Tuesday, Wednesday, Thursday, Friday, Saturday and Sunday. Monday is holiday. (Since 6 working days)
 Has got contract for 2 restaurants and 2 events per weekend for 48 weekends.
 Higher demand during weekends than weekdays.
 Total 302 working days
 Markups on production cost of cupcake, i.e. $1.5, excluding assistant salary. Assistant salary for a year is later excluded from total
revenue to get the final annual profit
 Price per cupcake is mentioned

Weekdays (Tue, Wed, Thur, Fri)

Demand/Day Demand/Weekdays for 52w
Customer buying (0-11) 10 40
Cust buying dozen increment 6 24
Restaurants 4 16
Total Demand per day= 20 dozen per day for 52 weeks in weekday

Weekend (Sat,Sun)
Demand/Day Demand/Weekend for 52w
Customer buying (0-11) 12 24
Cust buying dozen increment 8 16
Restaurants 8 16
Demand/Weekend for 48w
Events 25 50
Total Demand per day= 28 dozen per day for 4 weeks in weekend
Total Demand per day= 53 dozen per day for 48 weeks in weekend

Major Concepts used:

 Price Discrimination: Selling identical product to different customers at different prices
 Quantity differentiated pricing: Lower price charged for buying higher quantities of identical product
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

Parts Cost-plus pricing $1.80 $1.73 $1.73 $1.55

1&2 suggested price
Markup: 20% Markup: 15% Markup: 15% Markup: 3.3%

Marginal cost (T-1)Quantity: (1-6) Cupcakes (T-1)Quantity: <2 doz T-1Quantity: <20doz T-1)Quantity: < 2 doz
pricing suggested (T-1)Price: $1.88 (T-1)Price: $1.75 (T-1)Price: $1.75 (T-1)Price: $1.50
price Markup: 25% Markup: 16.7% Markup: 16.7% Markup: 0%

(T-2= 50% of (T-2)Quantity: (7-11) (T-2)Quantity: >2 doz T-2 Quantity: >20doz (T-2)Quantity: >2 doz
total demand Cupcakes (T-2)Price: $1.70 (T-2)Price: $1.70 (T-2)Price: $1.60
T-2= 50% of (T-2)Price: $1.80 Markup: 13.3% Markup: 13.3% Markup: 6.7%
total demand) Markup: 20%

Peak-load pricing Weekdays: $1.73 Weekdays: $1.65 Weekdays: $1.65 Weekdays: $1.50
suggested price Markup: 15% Markup: 10% Markup: 10% Markup: 0%
Weekdays (12-3) pm: $1.80 Weekdays 12-3: $1.73 Weekdays (12-3)pm: Weekdays (12-3)pm:
Markup: 20% Markup: 15% $1.73 $1.65
Markup: 15% Markup: 10%
Weekend: $1.80
Markup: 20% Weekend: $1.73
Markup: 15% Weekend: $1.73
Higher Markup is charged during Markup: 15% Weekend: $1.65
weekends & 12-3 to shift demand Markup: 10%
to weekdays without Asst. time
 Target cost Reqd. Profit + Asst. Salary= 44060 Price: $1.70 Price: $1.70 Price: $1.70
pricing suggested Total annual Cupcakes demand = Margin: 23% Margin: 23% Margin: 23%
price 113664 Target Cost: $1.31 Target Cost: $1.31 Target Cost: $1.31
Reqd. Profit/Cupcake ~= 0.39

Price: $1.70
Margin: 23%
Target Cost: $1.31 (Avg. per
cupcake)

Part 3 Your Based on Max profit for a Based on Max profit for a Based on Max profit for a Based on Max profit for a
recommended segment: Marginal Cost segment: Cost Plus Pricing segment: Peak-load segment: Marginal Cost
strategy Pricing pricing Pricing

Rationale for your Overall Recommended Strategy is Cost Plus Pricing Strategy. Using concepts of Price Discrimination, Quantity
overall differentiated pricing & Price-Markup, Cost-plus was found to be the best. It yields a maximum profit of
recommended $36705, which is higher than other pricing strategies. It encourages customers to buy in larger quantities to get
price/strategy* discount. It also increases consumption as now consumers have greater number of cupcakes at hand. The more
you have the greater you consume is general human behavior. Cost-plus pricing Strategy plays on this and will
be even more profitable in future.

Part 4 Where do you As per calculations, all the pricing strategies suggest that Individual customers buying in quantities less than a
expect the dozen pay the highest margin to profit. A single customer buys less, hence he doesn’t get quantity discount.
highest margin? Also, the demand per customer isn’t fixed hence it causes production uncertainties. Most of them would be
Why? buying (12-3) pm which is the peak time due to which Asst. is reqd. Hence they pay higher than other segments.

Where might you Chris can take a lower margin in case of restaurants as their demand is constant and she doesn’t have to supply
suggest Chris take during peak time (12-3) pm. They are loyal customers and regularly buy from her in fixed quantities. As demand
a lower margin? uncertainty is lowered her cost of production goes down.
Why?
Part 5 Should Chris open Yes, Chris should open the café. But, she should keep it open only during weekends (Sat, Sun). I came to this
the cafe? Explain, inference after profit calculations based on assumed demand. She should Cost Plus Pricing Strategy as this is
using projected best suitable for her current situation as explained in Part-3 answer. The total profit earned during weekdays is
revenues and $6115 which is very less compared to profit earned during weekends which is $30590. Though keeping open
profits to support only during weekends at the current pricing and demand, Chris can’t make $35000 annual profit, but this would
your decision. free her during weekdays in which she can go for some other business with higher profit.