Chris, a local baker, is interested in opening her very own Cupcake Cafe—but to make it worth her while she needs to earn at least $35,000 per year in profit from all segments. She's lucked out and found an ideal location, right in the heart of a busy shopping district, and so expects big demand. Within a block of her location are five restaurants, and she is pretty certain she can win contracts with at least two of them.

Chris knows from her prior work that restaurants are generally paying ~$18 per dozen cupcakes. Additionally, Chris has pre-existing relationships with several caterers and figures she'll bake for at least two events (weddings, showers, graduations, big parties) for 48 weekends each year. Each event usually results in orders of 150-500 cupcakes. She's also counting on heavy foot traffic from shoppers and office workers to her bakery for individual sales or by the dozen.

Chris calculates that it will cost $1.50 to produce each of the first 240 cupcakes she sells each day, but after that, costs will be reduced to $1 per cupcake. Although she'd like to avoid hiring more than one per

son at the start of her business, her cafe will be busiest from 12 -3 each day, when she'll likely need extra help to handle the register at $10 per hour.

Chris knows how hard it is to start a business and is ready to commit to opening the cafe six days a week minus 10 holidays throughout the year.

While using formulas correctly is a key part of the assignment, there are many potential right answers. Your main goal should be to defend the choices and assumptions you make; grading is based on your ability to justify the numbers you use, how you defend your choice of the best pricing strategy for each customer segment, and rationale for why this best meets Chris’ overall annual profit goal.

Next, complete the attached chart based on the scenario above:

1. Apply the appropriate formula to determine and recommend a price for each customer segment and pricing method. Note: While we provide minimums for some segments, it is up to you to decide how many sales to expect from each segment (and to justify those assumptions in step 3).
2. Write the formula and your recommended price in each cell of the table.
3. Given her goal (for all segments combined) of $35,000 a year in profit, which strategy should Chris choose for each segment? Explain your reasoning for your overall strategy, providing at least three well-thought out reasons for your approach. Note: you can justify your choices from a purely profit standpoint or from a combination of concepts you’ve learned in this course.
4. For which customer segment would you expect to have the highest margin? Where might you suggest Chris take a lower margin and why?
5. Make a decision! Based on projected revenues and profits given your recommended prices, should Chris open the cafe?

Cost-based Pricing Assignment Chart

		Sales by Segment
		Cafe sales to consumers 1 - 11 cupcakes	Cafe sales to consumers Dozen increments	One time sales to caterers > 10 dozen/event	Contract sales to restaurants >10 dozen/ week
Parts 1 & 2	Cost-plus pricing suggested price
	Marginal cost pricing suggested price
	Peak-load pricing suggested price
	Target cost pricing suggested price

Part 3	Your recommended strategy
	Rationale for your overall recommended price/strategy*
Part 4	Where do you expect the highest margin? Why?
	Where might you suggest Chris take a lower margin? Why?
Part 5	Should Chris open the cafe? Explain, using projected revenues and profits to support your decision.

FORMULAS:

Cost-plus pricing: Cost + markup = selling price;

Target cost Pricing: Target cost = market price - target margin;

Unit margin = margin/unit quantity;

Consumption-adjusted margins = (unit margin) * (1 + % consumption expansion);

Break-even analysis: (1 + % consumption expansion) * (margin per unit on larger size) = smaller size unit margin;

markup percent = (selling price - cost)/cost;

Marginal Cost = change in cost/change in quantity

Margin = selling price - cost;

Margin percent = selling price - cost)/selling price;

Selling price = cost/(1- margin %);

Profit = quantity * (price - cost)