Small Batch Artisan Rye Bread

General Info

This activity is about a small baker that sells a very specific, hard to make (it takes 3 days), dense, and very nutritious rye bread.It is made with very few ingredients (see below).The bread cannot be stored because it deteriorates in quality very quickly like many fresh baked breads.

The baker sells this bread to restaurants and delis in their city; not to the public directly.

Current price of a loaf is $6.95.

Costs

The baker owns (free of mortgage) the facility where the majority of the bread is baked, which doubles as the baker's home (i.e., lives in a loft above the facility).All the equipment in this facility was inherited from the family and has essentially zero value on the open market, but it works really well and is fully capable of handling the current level of production - EXCEPT IN ONE MONTH (JULY) (more info below).This facility can handle production of 10,000 loaves per month.If the baker needs to produce more than 10,000 loaves, they must rent a nearby facility.

This nearby facility is fully equipped and can handle an additional 7,000 loaves per month.HOWEVER, the owner of the rental facility will not do a month-to-month lease.It must be rented for a minimum of 3 consecutive months at a time.It costs $7,000 per month to rent.

Labor costs:$80,000 of labor costs are salaried employees.The rest of the labor cost was hourly depending on volume of business.

The baker considers overhead is a fixed cost.

Currently the baker looks at total cost divided by number of loaves sold to calculate per unit profitability.You have looked at the baker's costs already.

Information on Sales volumes

Here's the current monthly sales in loaves of bread

Month Sales

January 8000

February 8000

March 8000

April 8000

May 8000

June 8000

July 17000

August 8000

September 8000

October 8000

November 8000

December 8000

Annual 105000

The baker also provides you with the following "heuristically determined" price & quantity schedules.

March

Price Volume

6.95 8,000

6.75 10,000

6.55 12,000

6.45 12,500

6.00 15,000

5.85 15,300

5.70 15,500

NOTE:In March, the 2^nd facility IS available for rent, but has to be rented for the 1^st quarter and January & February sales don't seem to be tremendously sensitive to changes in price.

NOTE 2:August and March have similar customer preferences.

Here's July price & quantity schedule.

July

Price Volume

7.55 8,000

7.45 10,000

7.35 10,500

7.25 12,000

7.15 13,500

7.05 15,000

6.95 17,000

During discussions, the baker says, "...I think that January & February might be like March.I haven't really tested them."

The rest of the months do not seem to be sensitive to price changes and the baker likes the $6.95 price in those months.

Your "Consulting" Job

You are a friend of this baker who asks you to help them out with their business, specifically pricing of their bread.

1. In general, what is the best way to price the bread?Are they considering the correct costs when deciding how to price the bread?

2. Should the baker consider different prices in different months?Obviously, July is one that they should consider.BTW: What is the economic phenomenon that accounts for what's going in July?

3. Remember also that according to the baker, March and August sales seem sensitive to pricing.

a. Suggest the appropriate price per loaf in March

b. Suggest the appropriate price per loaf in August

c. Finally, any ideas about January & February prices?

NOTES:

1)The price can vary from month to month.

2)Make sure to consider ALL the relevant costs associated with these pricing decisions.

3)Make sure to consider the two pricing conditions that we have discussed often in class

a. The markup condition (i.e. the relationship between price and marginal cost)

b.The margin condition (i.e. the relationship between price and average total cost)

The corresponding excel spread sheet:

https://drive.google.com/file/d/1SrqPIL_PmQ41LYMaR5iqfDwh_EQwShrz/view?usp=sharing