Question

Eleven-year-old Mallory is a budding entrepreneur. She is always coming up with new business ideas. In...

Eleven-year-old Mallory is a budding entrepreneur. She is always coming up with new business ideas. In early summer 2014, her latest venture is a lemonade stand. Mallory is focused on making a high level of profits – she was saving for a new bike. Mallory is trying to do develop a marketing strategy to help her achieve her goals.

She is looking for some help with some of her calculations and in determining a price. Answer the following questions:

1. Which of Mallory’s costs are fixed costs? These are the costs that will not change whether Mallory sells few or many cups of lemonade.

2. What are the variable costs? These are costs that change directly with Mallory’s sales. They go up proportionately to Mallory’s increased number of sales.

3. What is Mallory’s fixed-cost contribution per unit (assumed selling price minus the variable cost per unit)?

4. How many cups of lemonade does Mallory need to sell to break-even (BEP)? Recall that the break-even point (in units) = (total fixed costs)/(fixed cost contribution per unit).

* All bold terms are key terms from your Essentials of Marketing textbook.

In-Class Activity 18-5: The Case of Mallory’s Lemonade Stand (B)

It is March 2015 and Mallory has come a long way since last summer. Her lemonade was a hit – everyone raved about her secret formula (she added some special spices suggested by her grandmother). When Mark Cuban (billionaire investor) happened to drive through the neighborhood he had a cup of Mallory’s lemonade and offered to invest in the company. So Mallory’s Lemonade Stand Lemonade will soon be found in a limited number of local Whole Foods Stores. Mallory had to figure out some pricing. She started with the knowledge that retailers would want to sell her 20 oz bottles for \$2.00 at retail.

Mallory figured her costs as follows:

• \$10,000 in fixed costs for various costs including some local advertising she to support Whole Foods.

• A co-packer (company that manufactures food products to specifications) will charge \$.50 for each 20 oz bottle – including bottles, packages, and delivery.

• Mallory assumes she can sell 30,000 bottles.

• Mallory plans to charge Whole Foods \$1.00 each for the bottles. Whole Foods will charge \$2.00.

• Using average cost pricing, she is counting on a \$5000 profit.

1. Assuming the numbers shown here, what is Whole Foods markup percent on each bottle of Mallory’s Lemonade Stand Lemonade?

2. Using Mallory’s projected sales of 30,000 bottles, calculate Mallory’s: a) average fixed cost, b) average variable cost, c) margin in dollars per bottle, and d) total profit?

3. What is Mallory’s profit if sales only turn out to be 15,000 bottles?

When MLS Lemonade failed to meet sales targets, Whole Foods quietly dropped the line. But all was not lost. Mark Cuban was able to help get her a presentation at a convenience store chain. Cuban also suggested that Mallory use marginal analysis (which focuses on the changes in total revenue and total cost from selling one more unit to find the most profitable price and quantity). This approach recognized that price and quantity sold change together. Cuban called in a favor from a friend who is an expert in the beverage market. This woman was able to provide a well-informed estimate of how much Mallory could sell during her test at different prices. Fill out the table and suggest an appropriate price. Since the convenience store manager knew it would have a 50% markup, the first column is actually the store’s purchase price and Mallory’s selling price.

Mallory has partially filled out a spreadsheet with the numbers (see below). Finish below to answer questions.

1. Assuming the expert’s estimates are accurate what price maximizes revenue? What is that revenue?

2. Assuming the expert’s estimates are accurate what price maximizes profit? What is that profit?

3. What would help Mallory reduce the price sensitivity some customers may have for her lemonade?

 Price (P) Quantity Revenue (P*Q) Total VC Total FC Total Cost Profit (Rev-Cost) \$3.00 0 \$0 \$0 \$10,000 \$10,000 -\$10,000 \$1.75 10,000 \$17,500 \$5,000 \$15,000 \$2,500 \$1.40 15,000 \$21,000 \$17,500 \$3,500 \$1.20 20,000 \$24,000 \$10,000 \$1.00 30,000 \$30,000 \$15,000 \$0.85 45,000 \$38,250 \$0.77 51,000 \$39,270 \$0.70 55,000 \$37,500 \$1,000

Markup on sale = Margin/Sale price = 1*100/2 = 50% on sale price.

iii Price sensitivity means degree to which consumers' decision to buy a product gets affected. Mallory can reduce her price sensitivity by building her brand and focusing on the quality of her product so that the customers are satisfied with the price offered. Building her brand name in the long term and good quality will help her gain the customers' trust and loyalty and to keep their taste buds addicted to her Lemonade. She can advertise the benefits of lemonade over aerated drinks which may guide the health conscious customers make healthy choices.

Explanation on formulas used in Excel

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