Question

Part 2: Special-Order Pricing for a Snowie Event (Chapter 8)

Assume that Main Street Kent, an organization that hosts outdoor events in downtown Kent, approaches you about bringing your Snowie kiosk to the Octoberfest in Kent for one day in October. Main Street Kent will provide the cups for the event that are branded with the Kent Octoberfest logo, so you will not have any cup costs for this event. Main Street Kent will also not be charging you a registration fee for this event. Main Street Kent will allow you to advertise your business in its mailings for two months at no cost and asks you to cut your Snowie price for this one event to $3.00 in exchange for the free advertising. You have no other event scheduled for this one day in October and you would work the event by yourself (you will not pay an employee for this one-day event.) You anticipate that you will sell 200 Snowie's on this one day at Octoberfest. Do you accept Main Street Kent’s special price offer? Why or why not? Support your answer.

Table 1: Costs

All listed costs relate to the large size Snowie.

Ice per Snowie	$          0.20
Spoon straw (need one per Snowie)	$          0.02
Styrofoam cup (need one per Snowie)	$          0.08
Napkin per sheet (need two per Snowie)	$          0.01
Servings per gallon of syrup	28
Cost per gallon of syrup (includes concentrate, preservative, and sugar)	$          4.25
Hourly rate for workers	$      10.00*
Event registration fee per day	$      25.00*
Electricity, insurance, maintenance, and permit costs per month	$    250.00*
Kiosk rental cost per month	$    650.00*
Purchase cost of two ice shavers (5-year life)	$   3,180.00
Purchase cost of a flavor station (5-year life)	$   1,080.00

Answer 1

Solution

Special order pricing:

Snowie Price	$3.00
Relevant costs:
ice per snowie	$0.20
spoon straw	$0.02
Napkin per sheet	$0.02	(0.01 x 2
cost of syrup per serving	$0.15
Total relevant costs	$2.19
Contribution margin	$0.81
number of snowies sold	200
total contribution margin	$162

The incremental cost per unit $2.19 is less than the offer price,$3.00, the special order results in an incremental profit of $0.81 per unit and an overall contribution margin of $162. Hence, the special order should be accepted.

Notes:

1. The cost of cup is not included in the above costs as the cups are provided by Main Street Kent.
2. No registration fee is charged.
3. Cost of syrup is computed as follows,

Gallon cost = $4.25

Number of servings = 28

Cost of syrup = 4.25/28 = $0.15

1. No employee wages.
2. All other kiosk rental and depreciation on ice shaver and flavor station costs are not relevant as they are sunk costs.
3. Electricity, insurance and maintenance and permit costs per month are given as fixed monthly costs and hence not relevant for decision making.