Pricing

As Erb considered the pricing issue, she couldnt help but recall that Elenis New York, the companys biggest competitor, sold a single cookie for $16 at retail A Couple of Squares cookies sold for average retail price of $5 for an individual cookie. Gift boxes of smaller cookies retailed for $21.95. Erb and Bradshaw were concerned about the impact of raising their prices on demand. Yet, internally, they believed had a better product, which should therefore command a better price. Erb and Bradshaw were determined to keep quality of their product high, and yet to do so required certain costs. Labour was the biggest cost for the firm. When the minimum wage increased, so did the firms labour costs. Food costs were the smallest part of their costs, yet their commitment to quality meant that food costs were not an insignificant factor in the business. For example, the bakery used butter instead of oil in its cookies. Oil could extend the shelf life of cookies, but it had no taste, whereas butter imparted great flavour in the cookies. They also used high-quality cinnamon from Saigon, which was more costly than other sources, as were the raisins and nuts they bought from California. Flour, sugar and butter were purchased in quantities large enough to require skids. Flour was subject to much price fluctuations. Overhead costs included the payroll, as described above, the office, waste and materials.

Prices varied depending on the volume of the particular customer, with the unit price decreasing depending on volume. The margins for the bakerys smaller customers were currently about 10%. In other words, a cookie that cost A Couple of Squares $2.25 to produce was sold to a smaller customer for $2.50. The margins with larger customers were closer to 5%. Erb and Rachel Bradshaw often used a quote sheet as tool as they priced their cookies for customers. The retailer customers then marked up their cookies 100%, so the bakerys regular line of decorated cookies were sold to the retailers at $2.50 and retailed for $5.00.

The Pricing Decision

Erb felt that lot rode on the pricing decision she was about to make. If the cookies were priced too low, the firm would continue to struggle to keep afloat. Priced right, they could alleviate the cash flow issues the partners had faced in the past enabling them to buy back the company from their investor and achieve their goals from growth in revenue. Also, even though the partners anticipated they would be profitable for the fiscal year ending 31 July 2012, after operating at a loss for three consecutive fiscal years, they still had approximately $49 000 in credit card debt and a line of credit. If they priced the cookies too high, demand could dry up and they might be even worse off than when they had started. Erb needed to complete the pricing if she was to have the fall and holiday sales collateral ready in time for the selling season. She wasnt even sure whether they were using the correct process to set the price. She also worried about the fluctuations of the ingredients costs and the operations process, both of which could affect the margins. She needed to make a decision.

Exhibit 1 A Couple of Squares Single-Day Activities for Producing a Large Iced Cookie

Dough Making:	Dough-making time	45 minutes
Baking:	Cookies per sheet	36
	Sheets per oven	40
	Baking time	20 minutes
	Number of baking employees	59
Icing:	Number of icers	5 12
	Icing time per layer of icing for a single cookie	1.5 1.75 minutes
	Average layer of icing	1.5
Packaging:	Number of packagers	38
	Packaging time	45 seconds

Company Name: Contact Person: Date:

Exhibit 2 A Couple of Squares Quote Sheet for a 2010 Sale

Retail Merchandisers 2010 Bern & Rach Apr 2010

All merchandisers all ribboned. 48 Faces in a case. All cookies ribboned. $2.50/each. Case Price - $120.00. Customer Pays Shipping.

Selling Price	$ 120.00
Profit 8%	10.10
Packaging
Flowwrap - .05 x 48	2.40
Box 16 x 12 x 12	1.12
Label 48 x .02 (PDP)	0.96
Label 48 x .02 (N.F &ing)	0.96
Ribbon 48 cookies x 16 inch 5/8 x .06	2.88
Foam (.32) x 3	0.96
Bubble .09 x 4	0.36
Total Packaging Costs	10.80
Labour to pack a case 3 min	0.71
Labour to Package
40 seconds	7.59
OVERHEAD (22%)	26.40
OTHER LABOUR (16%)	19.20
Food Cost
Face 19 x 48	9.12
Roll/Cut/Bake
32 sec/pc x 48	6.07
Decorating Labour
Faces 1.75 min plus .166 min x 48	22.00
Commission
5% of sale price	6.00
Waste (Cookie Breakage)
1% of the sale price	1.20
TOTAL COST OF THE PRODUCT	$ 109.09

Q1: Bernadette Erbs used four (4) main factors in their pricing decisions. Explain these four (4) factors.

Q2: If Erb and Bradshaw decided not to raise prices, discuss other actions that they could take in response to their circumstances.