Cost-Based Pricing and Loss Leaders

Quencher Beverage is a large regional retail establishment. Quencher recently decided to start selling one of its most popular productsCoca-Cola 10-packsat a loss (i.e., a loss leader) in order to entice consumers to purchase other items in greater amounts than they would oth-erwise purchase. Quencher's loss leader pricing rule is to set unit price by marking up its unit variable product cost by 20 percent (as opposed to marking up full unit cost by a much larger percentage as it does for regular products). Quenchers accounting system reports a full unit cost for each 10-pack (considered as one unit) of $10.00. Quenchers full unit cost is based on an expected volume of 30,000 units and comprises its variable product costs, $2.00 per-unit for shipping, $50,000 of allocated fixed cost for R&D product packaging redesign, and $40,000 of allocated fixed cost for customer service-related activities (phone hotlines, website complaint monitoring, replacement of faulty or bad products, etc.). Quencher expects to sell 30,000 units (i.e., each participating customer will purchase one 10-pack).

Part 1 Requirements: Budgeted Results

1. Calculate Quenchers unit variable product cost. $fill in the blank 1

2. Calculate Quenchers 10-pack loss leader unit selling price as well as expected total 10-pack revenues.

Unit selling price	$fill in the blank 2
Expected total 10-pack revenues	$fill in the blank 3

3. Quencher anticipates that the Coca-Cola loss leader strategy will bring in additional customer traffic that will result in incremental contribution margin of $100,000. Also, assume that the R&D costs and customer service-related costs are unaffected by Quenchers Coca-Cola loss leader decision. Estimate the expected total net financial impact from using the Coca-Cola 10-packs as a loss leader. $fill in the blank 4

Part 2 Requirements: Actual Results

4. Unfortunately, upon reviewing the actual results, Quencher management was extremely disappointed with the performance of its Coca-Cola loss leader strategy. The perplexing part was that Quencher actually sold considerably more 10-packs than expected (10 times more to be exact), but the stores overall profit was down considerably. Upon conducting interviews with store employees, one cashier shared the following observation with Quencher management:

I have observed many customers checking out through my lane. Do you know what I have learned fits perfectly inside a Quencher shopping cart?! Ten, 10-packs of Coca-Cola with NO ROOM TO SPARE FOR ANYTHING ELSE!!

Finally, management now realizes that its regular contribution margin from non-loss leader products actually decreased by $200,000 as a result of loss leader customers filling their carts with excessive 10-packs and no longer buying as many regular products that they otherwise would have bought.

Calculate the actual financial impact from Quenchers decision to pursue the Coca-Cola loss leader strategy. $fill in the blank 5

5. What suggestions do you have for Quencher management when and if the company decides to continue its Coca-Cola loss leader strategy?

Quencher might set a smaller limit on how many 10-packs each customer

cancan not

purchase in a single transaction. This control

wouldwould not

require an effective inventory tracking and cashier scanning system to be effectively implemented. In addition, Quencher might change its

lossgain

leader pricing rule, such as marking up full cost or

increasingdecreasing

the markup percentage to a number

greaterless

than 20 percent.

6. Briefly explain how Quenchers accountant might have utilized predictive data analytics to more effectively respond to requirement 3 (i.e., more accurately estimate the expected total net financial impact from the loss leader strateg y). (See Exhibits 2.5 and 2.6, for a review of data analytics types.)

Quenchers accountant might utilize predictive analytics to

moreless

accurately identify the possible outcome scenarios that potentially could result if the Coca-Cola 10-pack loss leader strategy were to be implemented. Furthermore, once the potential outcome scenarios are identified, predictive analytics also

could becould not be

used to forecast the likely financial results under each scenario, thereby hopefully identifying scenarios where sales revenue is less than expected or costs are

higherlower

than expected.