Question

Assume that Main Street Kent, an organization that hosts outdoor events in downtown Kent, approaches you about bringing your Snowie kiosk to the Octoberfest in Kent for one day in October. Main Street Kent will provide the cups for the event that are branded with the Kent Octoberfest logo, so you will not have any cup costs for this event. Main Street Kent will also not be charging you a registration fee for this event. Main Street Kent will allow you to advertise your business in its mailings for two months at no cost and asks you to cut your Snowie price for this one event to US$3.00 in exchange for the free advertising. You have no other event scheduled for this one day in October, and you would work the event by yourself (you will not pay an employee for this one-day event). You anticipate that you will sell 200 Snowies on this one day at Octoberfest. Do you accept Main Street Kent’s special price offer? Why or why not? Support your answer

Costs All listed costs relate to the large size Snowie Ice per Snowie Spoon straw (need one per Snowie) Styrofoam cup (need one per Snowie) Napkin per sheet (need two per Snowie) $0.20 $0.02 $0.08 $0.01 $4.25 Servings per gallon of syrup Cost per gallon of syrup (includes concentrate, preservative, and sugar) Hourly rate for workers Event registration fee per day Electricity insurance, maintenance, and permit costs per month Kiosk rental per month Purchase cost of two ice shavers (five-year life) Purchase cost of a flavor station (five-year life) $10.00" $25.00 $250.00" $650.00 $3,180.00 $1,080.00

Answer 1

Yes, we should accept the offer, as we would earn $600 ($3*200 snowies) as against expense of $82 ($0.41*200) and also get a free advertisement space.

Definitions:

Sunk Costs: These are the costs which already have been incurred and thus should not have any impact on our decision making, we should avoid considering them as cost for any decision making. In this particular case; Kiosk rental, cost of ice shavers and flavor station are sunk cost (Assuming that we already own ice shavers and flavour station)

Also Electricity, insurance, maintenance and permit costs are monthly fixed cost and would be incurred irrespective of the fact that we go to this event or not (Since we do not have any other event for 1 day in october); thus is also a sunk cost

Irrelevant costs: These are the cost which do not effect our decision making. In this particular case; Cost of Styrofoam cup, hourly rate of workers, event registration fee are irrelevant as we do not have to incur them and thus will not consider them in decision making.

Calculation of Total cost per snowie
Ice/snowie	0.2
Spoon Straw	0.02
Styrowfoam Cup (provided by Main street kent)	0
Napkin (2*0.01)	0.02
Syrup (See note 1)	0.17
Total Cost per Snowie	0.41

Note 1:

Assuming that we would not be able to use unutilized syrup elsewhere
We need 7.14(200/28)gallon of syrup
Rounding off to next integer, thus we need 8 gallons of syrup
Total cost of 8 gallons of syrup (4.25*8)	34
Total Snowie to be sold	200
Cost per snowie (34/200)	0.17