## Understanding the effects of pricing on revenues, costs and pricing

Introduction: It is April and you have recently been hired as the manager of Springvale Seaside Caramel Company in Springvale, Maine. You have been asked to improve profitability. The company got its name from a propriety caramel truffle first sold in a coffee shop also owned by the Prescott family. Note: Please use Excel for all calculations.

Analysis of Pricing: You manage The Springvale Seaside Caramel Company which makes a chocolate – caramel truffle for sale to gift shops from Cape Cod to Mount Desert Island near Bar Harbor Maine. The company sells individually wrapped candies in boxes of 50 for \$81.00 each. The candies retail for \$3.99 for an individual piece and sales have been strong. The owners of the Seaside would like to increase its sales and profits. They know that, if price is lowered, they will generate more sales. Sales are typically steady at 35,000 boxes per month from May through October. Last year they sold 35,000 boxes in May. So they run an experiment. Price is lowered to \$73.00 per box in May of this year and the number of deliveries increases to 37,000.
What is the Price Elasticity of Demand?
Is elasticity elastic, inelastic or neither?
What does this mean and why does it matter?
Will Revenues increase or decrease as a result of the price cut? By How much?
You calculate that the fixed costs for the Springvale Seaside Caramel are \$25,000 per month and each box costs \$48 for the labor, candy, packaging and shipping. Will profits go up or down as a result of the price cut? By How much? (Profits are revenue minus all costs. )
Shaun Prescott, the 19 year old son of the owner, says that there wasn’t enough time in the experiment. He estimates that in the second month, June, Seaside Caramel will sell 40,000 boxes at \$73.00 per box. Please answer the following assuming that Shaun is correct. You want to get an idea of what will happen to profits before you commit to an action and make a projection. If profits are projected to go up assuming that Shaun is correct, then you will keep the current price of \$73.00 during June. If the profits are projected to go down, you plan to return to \$81 per box.
What would be the Price Elasticity of Demand compared to a month ago if Shaun is correct?
Is elasticity elastic, inelastic or neither?
What does this mean and why does it matter?
Will Revenues increase or decrease as a result of the price cut to \$73.00 at 40,000 boxes? By How much?
You calculate that the fixed costs for the Seaside Caramel are still \$25,000 per month and each box costs \$48.00. Make a projection of revenues, costs and profits for June. Will profits go up or down as a result of the price cut if Springvale Seaside Caramel sells 40,000 boxes? By How much?
The Springvale Seaside owners see the change in profits from the price decrease in May and the projection for June. They decide to go back to a price of \$81.00 and have sales of 35,000 boxes in June. The May production required staff to work 2 weekends and there were many complaints. No one wanted to work weekends during vacation season in Maine and there was no room to expand production. The owners were willing to add a second location that would permit greater production if profits justified. They decide that they are only willing to manage enough production to support 35,000 deliveries at a price of \$81.00. However, if they raised price to \$90.00 per box for July, they would be willing to hire additional staff, lease more space across town and produce 58,000 boxes.
Calculate the Elasticity of Supply. Is it elastic or inelastic?
How many deliveries will Seaside have at a price of \$90.00? Hint: since the product is perishable, you will only want to produce what customers will buy. Use the original the elasticity of demand calculated in #1 above.
What will be the Revenue?
What will be the Profit?
Should Springvale Seaside raise the price to \$90.00? Why or why not?