16-13. Most large egg farmers sell eggs directly to retailers.

Using Kroger’s prices, what is the farmer’s price per dozen to the retailer for conventional and organic eggs if Kroger’s margin is 20 percent based on its retail price?

(AACSB: Communication; Analytical Reasoning)

Kroger, the country’s leading grocery-only chain, added a line of private-label organic and natural foods call Simple Truth to its stores. If you’ve priced organic foods, you know they are more expensive. For example, a dozen conventionally farmed Grade A eggs at Kroger costs consumers $1.70, whereas Simple Truth eggs are priced at $3.50 per dozen. One study found that, overall, the average price of organic foods is 85 percent more than that of conventional foods. However, if prices get too high, consumers will not purchase the organic options.

One element of sustainability is organic farming, which costs much more than conventional farming, and those higher costs are passed on to consumers. Suppose that a conventional egg farmer’s average fixed costs per year for conventionally farmed eggs are $1 million, but an organic egg farmer’s fixed costs are three times that amount. Further assume that the organic farmer’s variable costs of $1.80 per dozen are twice as much as a conventional farmer’s variable costs.