The Cottage Bakery sells a variety of gourmet breads, cakes, pies, and pastries. Although its wares are considerably more expensive than those available at supermarkets and other bakeries, the Cottage Bakery has a loyal clientele willing to pay a premium price for premium quality.

The Cottage Bakery sells a variety of fresh-baked muffins daily for $1.50 each. The variable cost of making each muffin is $0.90. Invariably, approximately 20 muffins are left over at day’s end, and Cottage currently donates these muffins to the local homeless shelter. Joe Smart, a bright young man on Cottage’s counter-staff, suggests selling the unsold muffins the next day, labeling them as “day-old” and selling them at a 50% discount.

Joe believes that sales of “day-old” muffins would average 15 per day and would not affect the sales of regular muffins.

Management of Cottage Bakery likes Joe’s proposal, but they were considering using the remaining counter space to sell fresh raspberry-filled croissants for $2.00 each. The variable cost of making each croissant is $1.20, and management expects sales to average 20 croissants per day without affecting the sales of other (e.g., chocolate) croissants.

In addition, management estimates that, on average, 2 raspberry-filled croissants would be left over at day’s end (i.e., Cottage plans to produce 22 croissants per day). Any leftover croissants would be donated to the local homeless shelter as there would not be any space to sell “day-old” croissants. Moreover, if Cottage sells fresh raspberry-filled croissants, it will not have any space to sell “day-old” muffins.

Required:

a. List all of the options in Cottage Bakery’s opportunity set with respect to the remaining counter space. What is the status quo? Is it a viable option?

b. Compared to the status quo, what is the incremental daily profit associated with Cottage Bakery’s other options?

c. What should Cottage Bakery do with the remaining counter space?