Discussion Board Activity 18-5: The Case of Mallory's Lemonade Stand (A)

Learning Objective

This activity helps achieve the following learning objective fromEssentials of Marketing:

LO18.1:Understand how most wholesalers and retailers set their prices by using markups.

LO18.2: Understand the advantages and disadvantages of average-cost pricing.

LO18.3: Know how to use break-even analysis to evaluate possible prices.

LO18.5: Understand other demand-oriented factors that influence price setting.

Eleven-year-old Mallory is a budding entrepreneur. She is always coming up with new business ideas. In early summer 2018, her latest venture is a lemonade stand. Mallory is focused on making a high level of profits - she was saving for a new bike. Mallory is trying to develop a marketing strategy to help her achieve her goals.

Last year Mallory helped a friend with a lemonade stand. This year she wants to run her own business. Her parents expect her to pay for almost everything related to her business. Her dad built her a small lemonade stand - and while he donated his time, he did ask for the $12 in materials needed to build the stand. Mallory had to purchase other supplies as well. She bought a nice one-gallon pitcher for $5 and cups cost her $.10. She figured out that sugar and lemons were costing her $.30 for each 12-ounce cup she sold. Her parents let her use ice from the freezer - no cost there. Mallory planned to charge $.75 per cup for her lemonade. Oh, and Mallory has a secret weapon. Her grandma had a little spice combination she put into lemonade that people just love - she knows from experience that once customers tasteherlemonade they will be coming back for more.

She is looking for some help with some of her calculations and in determining a price. Answer the following questions:

1.Which of Mallory's costs arefixed costs? These are the costs that will not change whether Mallory sells few or many cups of lemonade.

2.What are thevariable costs? These are costs that change directly with Mallory's sales. They go up proportionately to Mallory's increased number of sales.

3.What is Mallory'sfixed-cost contribution per unit(assumed selling price minus the variable cost per unit)?

4.How many cups of lemonade does Mallory need to sell tobreak-even (BEP)?Recall that the break-even point (in units) = (total fixed costs)/(fixed cost contribution per unit).