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What is the price elasticity of demand

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Reference no: EM132116610

Question: Saco Atlantic Truffle Case

Understanding the effects of pricing on revenues, costs and pricing

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

1. Analysis of Pricing: You manage The Saco Atlantic Truffle Company which makes a chocolate - caramel truffle for sale to gift shops from Cape Cod to Mount Desert Island near Bar Harbor Maine. In 2017, the company sold individually wrapped candies in boxes of 25 for $51.00 each. The candies retail for $4.49 for an individual piece and sales have been strong. The owners of Saco 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 70,000 boxes per month from May through October. Last year they sold 70,000 boxes in May. So they run an experiment. Price is lowered to $46.00 per box in May of this year and the number of deliveries increases to 75,000.

a. What is the Price Elasticity of Demand?

b. Is elasticity elastic, inelastic or neither?

c. What does this mean and why does it matter?

d. Will Revenues increase or decrease as a result of the price cut? By How much?

e. You calculate that the fixed costs for the Saco Atlantic Truffle are $25,000 per month and each box costs $25 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.)

2. Peter Hill, 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, Saco Atlantic Truffle will sell 80,000 boxes at $46.00 per box. Please answer the following assuming that Peter 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 Peter is correct, then you will keep the current price of $46.00 during June. If the profits are projected to go down, you plan to return to $51 per box.

a. What would be the Price Elasticity of Demand compared to a month ago if Peter is correct?

b. Is elasticity elastic, inelastic or neither?

c. What does this mean and why does it matter?

d. Will Revenues increase or decrease as a result of the price cut to $46.00 at 80,000 boxes? By How much?

e. You calculate that the fixed costs for the Truffles are still $25,000 per month and total variable costs are $25 for each box. Make a projection of revenues, costs and profits for June. Will profits go up or down as a result of the price cut if Saco Atlantic Truffle Caramel sells 80,000 boxes? By How much?

3. (40 points) The Saco Atlantic Truffle 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 $51.00 and have sales of 70,000 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 70,000 deliveries at a price of $51.00. However, if they raised price to $60.00 per box for July, they would be willing to hire additional staff, lease more space across town and produce 118,000 boxes.

a. Calculate the Elasticity of Supply. Is it elastic or inelastic?

b. How many deliveries will Saco Atlantic Truffle have at a price of $60.00? 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.

c. What will be the Revenue?

d. What will be the Profit?

e. Should Saco Atlantic Truffle raise the price to $60.00? Why or why not?

Reference no: EM132116610

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