MKT 414.12B Hwk 1

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School

University of Rochester *

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414

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Economics

Date

Jan 9, 2024

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docx

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Uploaded by LieutenantFogAlbatross15

1. For Proposal 1: Cumulative sales before the price increase (March 2016 - August 2016) are 409 units. Cumulative sales after the price increase (October 2016 - March 2017) are 583 units. For Proposal 2: Cumulative sales before the price increase (October 2015 - March 2016) are 673 units. Cumulative sales after the price increase (October 2016 - March 2017) are 583 units. Price Elasticity of Demand (PED)= % Change in Quantity Demanded/% Change in Price % Change in Quantity Demanded=Quantity After−Quantity Before/Quantity Before X 100 For Proposal 1 the % change in Quantity demanded = 583-409/409= .425427873 PED for Proposal 1 = 42.54/25= 1.7016 For Proposal 2 the % change in Quantity demanded= 583-673/673 = -.133729 PED for Proposal 2 = -13.37/25 = -.5348 These PED values suggest the following: For Proposal 1, the demand is elastic since the PED is greater than 1. This means that the percentage change in quantity demanded is greater than the percentage change in price, indicating that the quantity required is relatively responsive to price changes. For Proposal 2, the demand is inelastic since the PED is less than 1 in absolute terms (and damage due to the decrease in quantity demanded). This means that the percentage change in the amount required is less than the percentage change in price, and the total revenue would likely increase with the price increase since the percentage drop in demand is smaller than the percentage increase in price. b) Why do the two estimates differ, and which of the two procedures would you favor? The two estimates differ due to the different time frames and possibly due to the other conditions under which each data set was collected. Proposal 1 measures the change in demand from just before to just after the price increase, while Proposal 2 compares the change in need to the same months in the previous year, which could account for seasonal variations.

Proposal 1 could be more immediate and reactive to the price change as it directly follows the event, but it might not account for any seasonal variations that could affect demand. Proposal 2 accounts for these seasonal effects by comparing the same months in consecutive years. Given the presence of seasonal trends in many industries, including the tire industry (e.g., winter tires in colder months), Proposal 2 could potentially provide a more accurate estimate of the true elasticity by controlling for seasonality. Therefore, I would tend to favor Proposal 2 for a more accurate year-over-year comparison, although the negative elasticity found warrants further investigation. c) Did the price change increase or decrease total revenue? To determine if the price change increased or decreased total revenue, we need to look at the sign of the price elasticity of demand: Proposal 1 shows an elastic demand (PED > 1), which typically indicates that an increase in price will lead to a proportionally larger decrease in quantity demanded, thus decreasing total revenue. Proposal 2 shows inelastic demand (PED < 1 in absolute terms), which typically indicates that an increase in price will lead to a smaller proportionate decrease in quantity demanded, thus increasing total revenue. Considering the fact that Proposal 2 accounts for seasonality and might give a better year-over-year comparison, it suggests that the price increase would have led to an increase in total revenue. d) What other information would you like to have to improve your estimates? Several additional pieces of information could help improve these estimates: ● Cost Data: Knowing how costs have changed in response to the price increase would provide insight into profitability, not just revenue. ● Competitor Prices: Information on competitors' pricing and sales could indicate whether changes in demand might be due to customers switching brands. ● Market Conditions : Any changes in market conditions, such as a downturn in the economy or an increase in the price of raw materials, could affect demand. ● Consumer Behavior: Surveys or studies on consumer preferences and reactions to price changes could give a more detailed understanding of the demand elasticity. ● Long-Term Sales Data: Longer-term sales data before and after the price change would help to see if there is a delayed response to the price change. ● Advertising and Promotion Efforts: Information on any marketing campaigns or promotions that could have affected demand during the periods in question. ● Substitute and Complementary Goods: Data on sales of substitute goods (other brands) or complementary goods (like automobiles) might also affect tire

sales and hence elasticity estimates. 2.1 Which costs are relevant for pricing and which are not? Explain. Direct labor is a relevant cost because these are costs that they would only incur if an order was to be made. Material cost is also relevant given the same thinking as the direct labor cost. Material spoilage is relevant because this is a cost that only incurs if they accept a buyer’s order. Direct Department expense is relevant because these are variable costs. Indirect department expense is not relevant because these costs (depreciation & supervision) are non-incremental fixed costs. General overhead appears to be similar to a variable overhead and is thus relevant as it is a variable cost. Factory cost is relevant because this is an incremental fixed cost and these are costs that wouldn't have been incurred if the decision or project hadn't been undertaken. Selling and admin is not relevant because salespersons are paid straight salaries. 2.2 Do a product-cost analysis for this product similar to the one we did in class. Assume Beauregard’s price is $4.00 and Calhoun and Pritchard’s price is $3.00. Beauregard Calhoun & Pritchard Direct Labor $ 0.79 $ 0.79 Material Cost $ 0.40 $ 0.40 Material Spoilage $ 0.03 $ 0.03 Direct Department $ 0.12 $ 0.12 General Overhead $ 0.03 $ 0.03 Factory Cost $ 1.38 $ 1.38 Total Cost $ 1.38 $ 1.38 Net Sales (1988 - 1990) 1,306,155 1,175,000

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Selling Price $4.00 $3.00 Revenue $5,224,620.00 $3,525,000.00 Margin $3,426,697.64 $1,907,612.50 The costs are averages of the volumes of production that were estimated by Beaurgard. In this case, it states that C&P has similar prices to Beaurgard, so our team used the same costs. 3) Wendy’s Chili case (HBS). a) What is the cost of a batch (and bowl) of chili? Make the assumptions required to calculate the cost and justify them. The below were pulled from our excel table which is also attached as a separate document for easier reading. Ingredients: a. Costs of batch and bowl of chili Ingredients Quantity Description Cost per unit Per batch* Per Bowl **(8oz) Per Bowl ***(12oz) 1 Crushed Tomatoes $2.75 $2.75 $0.05 $0.07 5 Tomato Juice $1.25 $6.25 $0.11 $0.16 1 Seasoning Packet $1.00 $1.00 $0.02 $0.03 2 Red Beans $2.25 $4.50 $0.08 $0.12 *Per batch calculations were the cost per unit column multiplied by the quantity of the ingredient description **Per Bowl Calculation 8oz calculations were calculated by taking the per batch value and dividing the amount of servings in a batch: 57 ***Per Bowl Calculation 120z Calculations were calculated by taking the per bowl 8oz value and multiplying that value by 1.5

Ground Beef was not added to the calculation because meat has been taken from hamburgers already cooked (sunk cost) Batch Servings 57 Beef = 12 lb., unit $ in lbs. not patties 60% sales from Oct-March Oct-March Quantity Description Cost per unit Per batch* Per bowl **(8oz) Per Bowl (12oz)*** 12 Ground beef $3.50 $4.20 $0.07 $0.11 *The cost per batch was calculated by multiplying the quantity amount by the cost per unit and . 1 **The cost per bowl (8oz) was calculated by dividing the per batch amount by the Batch Servings: 57 ***The cost per bowl (12oz) was calculated by multiplying the cost per bowl 8oz amount by 1.5 Utensils Quantity Description Cost per unit Per *batch Per **Bowl (8oz) Per Bow***l (12oz) 57 Bowls $0.04 $2.00 $0.04 $0.05 57 Lids $0.01 $0.71 $0.01 $0.02 Lids are only for drive- thru customers. Assumption is approximately half of customers are drive- thru. Cost/U calculated as $.025*0.5 57 Spoons $0.01 $0.57 $0.01 $0.02 *The cost per batch column was calculated by taking the costper unit value column and multiplying that by 57

**The cost per bowl (8 oz) column was calculated by taking the cost per batch column and dividing by 57 ***The cost per bowl (12oz) column was calculated by taking the value of the cost per bowl 8oz and and multiplying it by 1.5 Direct Labor Description Cost per minute* Per batch** Per bow*** (8oz) Assistant Manager $0.18 $3.94 $0.07 *The cost per minute column value was calculated by taking 10.5/60 **The cost per batch column was calculated by taking the cost per minute calculation ($.18) and multiplying and adding the associated tasks (preparing and chopping ingredients as well as stirring) so together it would be $.18*12.5minutes for preparing, chopping, adding ingredients + $.18 *10 minutes for stirring. See below table for explanation of assumptions. ***The cost per bowl was calculated by taking the cost pet batch column value of $3.94 and dividing that by 57. Oct-March mins to produce (10- 15, averaged to 12.5) 12.5 Preparing, Chopping, adding ingredients Description Cost per* minute Per **Batch Per bowl extra minutes to produce in peak season 10 Assistant manager $0.18 $4.11 $0.07 Mins to stir (4- 6 hours hours - averaged to 5 - multiplied by assumed 2 minutes stir time 10 Stirring

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*The cost per minute column was calculated by $10.5/60 **The per batch calculation was calculated by taking the cost per minute value of .18 and multiplying and adding the associated steps of preparing, extra minutes to produce in peak season, and stirring. ($.18 * 12.5+$.18*10*.1+$.18*10) ***The Per bowl column calculation was calculated by taking the value of the per batch colum ($4.11) and dividign that by 57 so $4.11/57 Cost per batch non- peak* Per 8oz bowl, non-peak** Per 12oz bowl, non-peak Cost per batch, peak*** Per 8oz bowl, Peak**** $21.72 $0.38 $26.09 $0.46 *The cost per batch non peak was calculated by taking adding the values of the per batch columns from ingredients, utensils, direct labor: ($2.75 +$6.25+$1+$4.50+$2+$.71+$.57+ $3.94) **The cost per bowl non peak calculation was taking the value of the cost per batch non-peak column and dividing that by 57 *** The cost per batch peak column was calculated by taking the sum of the cost per batch columns for the ingredients table($2.75+$6.25+$1+$4.5), ground beef oct-march ($4.20), utensils ($2 +$.71+$.57) and the per batch of the assistant manager oct-march calculation of ($4.11) ****The cost per 8oz bowl peak was calculated by taking the value of the cost per batch peak value of $26.09 and dividing that by 57. b) What is the profitability of chili? Should Wendy’s drop chili from its menu? Size Price Releva Relev Releva Relevan Profitability per Bowl, Profitability

nt Cost per Batch, Non- Peak Seaso n ant cost per bowl, Non- Peak Seas on nt Cost per batch, Peak Seaso n t cost per bowl, Peak Season Non-Peak** per bowl, Peak 8 oz $0.99 $21.72 $0.38 $26.09 $0.46 $0.61 $0.53 12oz $1.59 $21.72 $0.57 * $26.09 $0.69 $1.02 $0.90 *The relevant cost per bowl non peak season of 12oz was calculated by taking the relevant cost per bowl non-peak season of 8oz and multiplying that value by 1.5 **The profitability non-peak costs were calculated by taking the price of the associated size 8oz for example and subtracting the relevant cost per bowl non peak so $.99-$.38 and $1.59- $.57 ***The same process was used for the profitability of peak costs for the associated sizes so $.99-$.46 and $1.59 -$.69 Wendy's should keep chili on the menu. While chili does only comprise 5% of sales, it is presents a significantly positive contribution margin per unit; it's highly profitable. c) Outline the pros and cons of a chili price increase and chili price reduction for Wendy’s. The only way to reasonably maintain the item in the menu is increasing its price so the recommendations will only refer to an increase in the item's price. Pros of price increase Cons of price increase

Raising the price would give Wendy's a better contribution margin/unit. Raising the price of the 8oz would bring it closer in line to the 12oz. Combined with product line pricing (perhaps adding a size larger than the 12oz), Wendy's could convince customers to buy more of the 12oz size. Perception of Quality: Sometimes, a higher price can be associated with better quality, potentially enhancing the brand's perceived value Number of sales would fall, and if demand falls enough, increase in CM/U would be offset or even overtaken by a significant decrease in sales. Competitive Disadvantage: If competitors offer similar products at lower prices, a price increase could drive customers to competitors. Pros of price decrease Cons of price decrease Increases number of chili sales Competitive Advantage: Offering a lower price than competitors for a similar product could position Wendy’s more favorably in the market. Marketing Opportunity: A price reduction can be a strong promotional tool, potentially attracting media attention and driving traffic to stores CM/Unit woul go down Perception of Lower Quality: Some consumers might perceive the lower price as an indicator of inferior quality. Impact on Other Products: A cheaper chili might cannibalize the sales of other more profitable menu items if customers choose chili over them

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MKT 414.12B Hwk 1

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