Advise GLAM Co. what to Plan for Next Year

Glam Co. is an upscale home decor store, and has sold a sweet-smelling gift bag of scented dried flowers with very luxurious packaging for the past two Holiday seasons. Heavily scented with roses and orchids, the mixture gives a pleasant holiday aroma to any room, including the store.

In 2019, the mixture cost $4.50 a bag. Glam Co. (the only store in town that carried it) sold 300 pieces for the retail price of $9.50. Their supply ran out ten days before Christmas, and it was too late to get any more.

In 2020, the manufacturer raised the cost to $5.00, so Glam Co. raised its retail price to $9.95. Even though the markup was lower than the previous year, the store owner felt there was "magic" in retailing for under $10 price. As before, the store had a complete sellout, this time five days before Christmas. Sales last year were 600 units.

For 2021, the cost has gone up to $5.50, and the store is trying to determine the correct retail price. The owner once again wants to hold the price at $9.95 because gifts under $10 significantly outperform gifts over $10 as there is more competition over $10, but the buyer disagrees: "It's my job to push for the highest possible markup and gross margin wherever I can. This item is a sure seller, as we're still the only store around with it, and we had some unsatisfied demand last year. I think we should retail it at $12.50, which will improve the markup to 56 percent, even if volume drops, the gross margin will still be better. Staying at $10 will make the markup even lower than last year. Even if we run into price resistance, we'll only have to sell 480 units to maintain the same dollar volume." The owner says, "This scent is part of our store's ambiance. It acts as a draw to get people into the store, and its pleasant smell keeps them in a free-spending state of mind. I think we should keep the price at $9.95, despite the poorer markup. And if we can sell many more at this price, we'll realize the same dollar gross margin as last year. I think we should buy 1000. Furthermore, if people see us raising the price 25 percent, they might wonder whether our other prices are fair."

1. Which price would result in the highest gross profit and why? (Which price would result in greatest profit based on logic)

This chart below analyzes three potential 3 retail prices for GLAM Co.

	2019 $	2019 %	2020 $	2020 %	2021A $	2021A %	2021B $	2021B %	2021C $	2021C%
Price	9.50	100 %	9.95	100 %	10.00	100 %	12.50	100 %	9.95	100 %
Cost	4.50	47.37 %	5.00	50.25 %	5.50	55 %	5.50	44 %	5.50	55.28 %
Mark-up	5.00	52.63 %	4.95	49.75 %	4.50	45 %	7.00	56 %	4.45	44.72 %
Units	300 pieces		600 units		480 units		500 units		1000 units
Net Sales	2,850	100 %	5,970	100 %	4,800	100 %	6,250	100 %	9,950	100 %
COGS	1,500	52.63 %	3,000	50.25 %	2,640	55 %	2,750	44 %	5,500	55.28 %
GPM	1,350	47.37 %	2,970	49.75 %	2,160	45 %	3,500	56 %	4,450	44.72 %