Question

Pricing a cup of coffee can be a challenge. Luke’s currently serves a basic blend of coffee that costs $10/lb. Currently about 75% of the transactions at Luke’s include a coffee. The current selling price of a cup of coffee is $2.00 for a 6oz up. Each lb. of coffee produces 48 cups at this size. Please show your work.

1. What is the cost per cup of coffee? (4pts)

2. What is the Markup % for a cup of coffee based on retail? And based on Cost? (2 pts)

3. Based on the markup% at retail, would you classify coffee as an elastic of inelastic good? (1 pt)

4. How many cups of coffee does Luke’s sell per month? (3 bonus pts)

-by number of cups?

- by sales volume?

- by number of lbs. of coffee?

5. If Luke’s switches to a premium coffee to remain competitive. The premium coffee costs $15/lb., and sells an 12oz coffee for $3.50 per cup, what is the cost per cup of coffee? (3 pts)

statastics question may be

Answer 1

each lb of coffee produces 48 cups and each cup is priced at 2. So,

Revenue from one lb of coffee= 48*2=96.

1. Per lb the cost to Luke is 10. Since there are 40 cups in one lb,

Cost per coffee to Luke=10/48=$.2083

2. The cost to Luke is .2083, while the price is 2.

S0, markup %= (2-.2083)/.2083=860%

3. Based on markup, it is clear that coffee is an inelastic good. That is, its demand doesnt change much when price is changed. Because if demand was elastic and would change drastically with change in price, the markup would be much smaller.

4. Not enough data is given to find out how many cups of coffee Luke sells each month. Lets make some assumptions. Lets say Luke has 10000 transactions per month. That means 75% of those will have coffee, so

Number of cups of coffee Luke sells=10000*75%=7500

By sales volume=7500*2=$15000

By lbs=7500/48=156.25

5. In earlier part 48 6OZ cups could be made from 1 lb. Now the size is 12Oz, so 24 cups can be made. Since the new coffee costs $15 per lb, per cup cost is

=15/24=$.625