Question

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.

Last year Mallory helped a friend with a lemonade stand. This year she wants to run her own business. Her parents expect her to pay for almost everything related to her business. Her dad built her a small lemonade stand – and while he donated his time, he did ask for the $12 in materials needed to build the stand. Mallory had to purchase other supplies as well. She bought a nice one-gallon pitcher for $5 and cups cost her $.10. She figured out that sugar and lemons were costing her $.30 for each 12-ounce cup she sold. Her parents let her use ice from the freezer – no cost there. Mallory planned to charge $.75 per cup for her lemonade. Oh, and Mallory has a secret weapon. Her grandma had a little spice combination she put into lemonade that people just love – she knows from experience that once customers taste her lemonade they will be coming back for more.

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.

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

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

6. 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

Answer 1

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

a) Aueaje Tind oe Hired Coet total Sales dollaus pe bole Sales Reuenu IS

Format Painter Numbe Clipboarc Font Alignment A5 2 Price Sensitivity Analysis Profit Total (Rev- 4 (P)Quantity le (P*Q) VC Total FC CostCost) Price Revenu Total 0SOSO $10,000 $10,0001 ($10,000 5 $3.00 1.7510,000 $17,500 $5,000 $10,000 $15,000 $2,500 7 $1.4015,000 $21,000$7,500 $10,000 $17,500$3,500 8 $1.20 20,000 $24,000 $10,000 $10,000 $20,000$4,000 9 $1.0030,000 $30,000 $15,000 $10,000 $25,000$5,000 10 $0.8545,000 $38,250 $22,500 $10,000 $32,500 $5,750 11 $0.77 51,000 $39,270 $25,500 $10,000 $35,500 $3,770 12 $0.7055,000$38,500 $27,500 $10,000 $37,500 $1,000 13 14Price of $0.77 maximises revenue at $39,270 (Highlighted in Pink) 15 Price of $0.85 maximises profit at $5,750 (Highlighted in Blue) 16 17

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

Alignment Editing Clipboard Cells f Price Sensitivity Analysis A2 A. Price Sensitivity Analysis Total FC 10000 10000 10000 10000 10000 10000 10000 10000 4 Price (P) Quantity Revenue (P*Q) Total VO Total Cost Profit (Rev-cost) SUM D5:E5) -10000 SUM(D6:E6) SUM(D7:E7 SUM(D8:E8 SUM(D9:E9 -SUM(D10:E10) C10-F 10 SUM(D11:E11) EC11-F11 SUM(D12:E12) C12-F12 2500 3500 17500 21000 24000 30000 38250 39270 B12 A12 10000 15000 20000 30000 45000 51000 55000 B6*0.5 B7*0.5 B8 B9*0.5 B10*0.5 B11 0.5 B12 0.5 6 1.75 C9-F9 10 0.85 12 0.7 13