Question

It is March 2019 and Mallory has come a long way since last summer. Her lemonade was a hit – everyone raved about her secret formula (she added some special spices suggested by her grandmother). When Mark Cuban (billionaire investor) happened to drive through the neighborhood he had a cup of Mallory’s lemonade and offered to invest in the company. So Mallory’s Lemonade will soon be found in a limited number of local Whole Foods Stores. Mallory had to figure out some pricing. She started with the knowledge that retailers would want to sell her 20 oz bottles for $2.00 at retail.

Mallory figured her costs as follows:

• $10,000 in fixed costs for various costs including some local advertising to support Whole Foods.
• A co-packer (company that manufactures food products to specifications) will charge $.50 for each 20 oz bottle – including bottles, packages, and delivery.
• Mallory assumes she can sell 30,000 bottles.
• Mallory plans to charge Whole Foods $1.00 each for the bottles. Whole Foods will charge $2.00.
• Using average cost pricing, she is counting on a $5000 profit.

1. Assuming the numbers shown here, what is Whole Foods markup percent on each bottle of Mallory’s Lemonade Stand Lemonade?
2. Using Mallory’s projected sales of 30,000 bottles, calculate Mallory’s: a) average fixed cost, b) average variable cost, and c) total profit?

3. What is Mallory’s profit if sales only turn out to be 15,000 bottles?

Please show in Excel and include ALL calculations

Answer 1

Solution:

As given in question,

Fixed cost for Mallory = $10,000

Variable Cost per bottle or mallory = $0.50

Sale Price for Mallary = $1.00 ----> (It will be cost per bottle for Whole foods store)

Retail Price for Whole foods store = $2.00

1. Calculation of Whole Foods markp percent

Markup Percentage is a percentage mark-up over the cost price to get the selling price.

Markup Percentage = [(Sales Price - Cost) / Cost] * 100

= [($2.00 - $1.00) / $1.00] * 100

= 100%

Therefore, markup percentage for whole foods store will be 100%.

2. Using projected sales of Mallory for 30,000 bottles:

a) Average Fixed Cost = Total Fixed Cost / Total output

= $10,000 / 30,000 bottles

= $0.33 per bottle

b) Average Variable Cost

Average variable cost of the bottle will be the cost which incurs to produce one bottle other than fixed costs.

As, It is already given in question that a co-packer will charge $0.50 per bottle. That means:

Average variable cost = $0.50 per bottle

c) Total Profit for Mallory

Total Profit = Total Revenue - Total Cost

Here, Total Revenue = Units Sold * Sale price per unit

= 30,000 * $1.00

= $30,000

Total Cost = Fixed Cost + (Units Sold * Variable cost per unit)

= $10,000 + (30,000 * $0.50)

= $10,000 + $15,000

= $25,000

Hence, Total Profit = $30,000 - $25,000

= $5,000

3.) Profit if Units sold = 15000

Total Profit = Total Revenue - Total Cost

Here, Total Revenue = Units Sold * Sale price per unit

= 15,000 * $1.00

= $15,000

Total Cost = Fixed Cost + (Units Sold * Variable cost per unit)

= $10,000 + (15,000 * $0.50)

= $10,000 + $7,500

= $17,500

Hence, Total Profit = $15,000 - $17,500

= -$2,500

Hence, There will be a loss of $2,500 if total sales is of 15000 units of bottles.