Question

1. A cafe specializes in short order meals; and, morning and afternoon snack breaks. It is open from 9:00 am until 4:00 pm. An office manager in a nearby high rise office building offers the owner a contract to provide her 50 employees with afternoon snack breaks for $2.00 each. Each employee would receive a drink and a snack item. The shop has an hourly capacity of 50 customers. The owner estimates that the variable costs of the afternoon breaks would be $1.20 each. Currently the afternoon service, starting at 2:00, is running at only 50 percent capacity, although the morning and noon activities are near capacity. At the present level of operations each meal/snack served is allocated a fixed cost of $0.25.

Required:

a. What nonfinancial factors should be considered by the owner?

b. Given your concerns listed in part a. and quantitative analysis, should the offer be accepted? Why or why not?

2. Doggie Dinner, Inc., currently manufactures three different types of scientifically balanced dog food. The firm is considering eliminating one of the three products. What factors should be taken into account in making this decision?

3. Explain the differences between short-run pricing decisions and long-run pricing decisions.

Answer 1

Ans a: Non Financial Factor:

1. Brand and customer base among corporate offices
2. Full utilization of capacity

Ans b: COntribution from the offer is = $2 - $1.2 = $0.8 per employee per day= $40 per day

Fixed cost has not been considered for decision making since such cost is sunk cost and hold no relevance in decision making.

Hence offer shall be accepted.

Ans B: differences between short-run pricing decisions and long-run pricing decisions

Short-run decisions include pricing for a one-time-only special order with no long term im­plications. The time horizon is typically six months or less. Business firms can encounter situations where they are faced with the opportunity of bidding for a one-time special order in competition with other suppliers. In this situation, only the incremental costs of undertaking the order should be taken into account. It is likely that most of the resources required to fill the order have already been acquired and the cost of these resources will be incurred whether or not the bid is accepted by the customer.

Short-run pricing decisions are not appropriate for long-run pricing policy since short-run pricing policy is subject to short-run demand and supply conditions. Most firms use full cost information while setting long-run pricing decisions.