Expert answer:What did you learn from the Pricing Case?

  

Solved by verified expert:Discuss what you learned from the Pricing case. Post as a main point what you learned from the case. Be specific in describing what you learned and how answering the questions led to your learning.2019 Atlantic Taffy Pricing Case Understanding the effects of pricing on revenues, costs and profits Introduction: It is April and you have recently been hired as the manager of Atlantic Taffy Company in Bay Head, New Jersey. You have been asked to improve profitability. The company got its name from a propriety taffy first sold in a Jersey Shore concession also owned by the Talbot family. Analysis of Pricing: You manage The Atlantic Taffy Company which makes a saltwater taffy bar for sale to gift shops from Atlantic City, New Jersey, to Mount Desert Island near Bar Harbor Maine. The company sells individually wrapped bars in boxes of 50 for $81.00 each. The candies retail for $3.99 for an individual bar and sales have been strong. The owners of the Atlantic 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 Atlantic Taffy are $25,000 per month (independent of number of boxes created), and each box costs $48 for the labor, candy, packaging and shipping (variable costs=per units produced). Will profits go up or down as a result of the price cut? By How much?Income statement profits are revenue minus all costs (fixed plus variable).David Talbot, 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, Atlantic Taffy will sell 40,000 boxes at $73.00 per box. Please answer the following assuming that David 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 David 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 if David 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 Atlantic Taffy 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 Atlantic Taffy sells 40,000 boxes? By How much?The Atlantic Taffy 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 on the East Coast 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 Atlantic have at a price of $90.00? Hint: you can only sell what customers will buy. Use the original elasticity of demand calculated in #1 above.What will be the Revenue?What will be the Profit?Should Atlantic Taffy raise the price to $90.00? Why or why not?As Manager of the company, compile your report and recommendations to the owners.
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Basic Economics for
Management: supply and
demand elasticity
DMBA 620 You will need to
download this file in order to see
the notes that explain the slides.
Supply & Demand



Economics has information for
managers setting price
Assumes nothing changes but price
Marketing looks to improve the product
or service to satisfy customer needs
Supply and Demand – basics



If Supply goes up and Demand stays
the same, price goes down – gasoline
If Demand goes up and Supply stays
the same, price goes up – UBER at New
Years Eve.
If Demand goes up and price is
restricted, long lines – gasoline 1978
Demand




Demand is an economic concept
It is the quantity that people will buy at
a price
It is not what people would like, desire,
or need.
It is just what they will buy if allowed to
make purchase decisions freely
Price Elasticity for a product




Tells what happens with price changes
To Demand
To Supply
Important for managers to
understand and manage Price
Elasticity – Simple







Change in Quantity / Original Quantity
Change in Price / Original Price
Elasticity = % ΔQuantity / % ΔPrice
Elasticity of Demand is usually negative
Elasticity of Supply is usually positive
Δ means change
This is sufficient for our purposes
Elasticity

Inelastic if less than 1


Elastic if more than 1



Examples -.5 and +.8
Examples -1.4 and +4.5
Even if you sell more with lower price,
seldom does profit increase
Need to sell lots more to increase profit
Elasticity of Demand Example




Let’s assume that demand for your services
is price inelastic.
If you raise your hourly rate 20%, then
demand drops 10%
% ΔQuantity/% Δ Price = -10% / 20% =
-.5
Note: Elasticity of Demand is negative and
inelastic as it is minus -0.5
Elasticity of Demand Example



Example: suppose that as a UMUC MBA, your income
was $100,000 for 2,000 hours work.
That works out to $50 per hour, 40 hours per week
with 2 weeks vacation.
Raise your rate to $60 (20%) but hours worked drop
10% to 1,800 hours


Elasticity -.5
New income is $60 x 1,800 = $108,000 AND you
only have to work 36 hours per week or take
another 25 days vacation
Elasticity and Algebra
New demand after price change

Calculate demand with 10% lower rate


% change quantity (Q1 – Q0)/Q0



$45 instead of $50 per hour
(Q1 – 2,000 )/2000 = 1- (Q1 /2000)
% change price -10% = (P1 – P0)/P0
Elasticity = -.5 = [(Q1 /2000)-1]/-10%



Solve and get Q1 = 2000 x 1.05 = 2100
Demand goes up 100 hours
P x Q = Revenue = $45 x 2100 = $94,500
Small Price changes




Raise your rates from $50 to $60, and
good things happened.
Lower rates and your revenue declines
Raise rates to $200 per hour and result
may be no income
Small price changes generally work
much better than big changes.
Elasticity of Supply
Work 40 hrs. @ $20





Would you willingly work 7 days a week
for 70 hours at $20 per hour?
Would you willingly work 7 days a week
for 70 hours at $400 per hour?
$20 per hr. x 70 = $1,400
$400 per hr. x 70 = $28,000
Your elasticity of supply is inelastic
Elasticity of Supply
Work 40 hrs. @ $20

40 hrs. x $20 = $800


Example: will work overtime up to 20
hours for two times the pay rate




$800 x 52 = $41,600
ΔQ =+50%
ΔP = +100%
Elasticity = 50% / 100% = +.5
Your elasticity of supply is inelastic
Supply






Consumers dislike price increases emotionally
Supply increases with price
Oil, food, gas, housing, chemotherapy drugs
We prefer higher prices for our labor
LAG TIME: Supply adjusts slower than
Demand (housing, gas, food)
Why are gasoline prices down and food prices
up in 2016?
Elasticity





It helps businesses set price
Predicts consumer behavior & Profits
Explains much but often misunderstood
We want to pay less – 50% off Sales
We often act by paying more – Why?
Price matters but so do
competitive advantages






Convenience
Quality
Courtesy
Security
Style
Personal Safety
Regulations also matter





Minimum prices for gasoline, milk,
raisins
55 Different “blends” for gasoline?
Licensing requirements – UBER
EPA – regulates
FDA – still hasn’t approved sunblock
used in Europe
Profit





Revenue = price x units sold
Minus Costs equals
Profits
Note: Revenue can go up and profits go
down
TAKE AWAY – Small price increases
help
Hints for Conference Work


Personal Opinions are worth little
Use examples to make points







Personal Experience worth a lot
References
Articles
Videos
Text
Quote experts
Use facts carefully
Required



MUST use Excel for math.
Explain what you do in words
Explain what the answer means for
management

What would you say if the CEO asks you,
“So what?”

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