Question

Stater Sisters, a privately held supermarket chain, based in San Bernardino, California, has recently started a fresh produce club to provide support to local chains and to promote the benefits of buying locally grown food. Families pay a seasonal membership fee of $100 and place their orders a week in advance for a price of $40 per order. In turn, Stater Sisters delivers fresh-picked seasonal local produce to several neighborhood distribution points. Five hundred families joined the club for the first season, but the number of orders varied from week to week.

Jack Brown has run the produce club for the first season. Jack is now a store manager but remembers a few things about cost analysis from CSUSB. In planning for next year, he wants to know how many orders will be needed each week for the club to break even, but first he must estimate the club’s fixed and variable costs. He has collected the following data over the club’s first season of operation:

Week	Number of Orders per Week	Weekly Total Costs
1	415	$26,900
2	435	27,200
3	285	24,700
4	325	25,200
5	450	27,995
6	360	25,900
7	420	27,000
8	465	28,300
9	380	26,425
10	350	25,750

Required (Make sure to show your work!):

Q1.   Estimate the cost equation using the high-low method.

Q2.   Did Stater Sister break even this season? Remember that each of the families paid a seasonal membership fee of $100.

Q3.   Assume that 500 families join the club next year (remember, this is an annual membership) and that prices and costs do not change. How many orders, on average, must Stater Sister receive each of 10 weeks next season to break even?

Answer 1

1.

	Number of Orders	Total Costs
High level	465	$           28,300
Low level	285	$           24,700
Change	180	$             3,600

Variable cost per order = $3600/180 = $20

Fixed cost (at high level) = $28300 - (465 x $20) = $28300 - $9300 = $19000

Fixed cost (at low level) = $24700 - (285 x $20) = $24700 - $5700 = $19000

Cost equation: y = $19000 + $20x

2.

At break-even: Total revenue = Total cost

Total revenue = (500 x $100) + (3885 x $40) = $50000 + $155400 = $205400

Total cost = (10 x $19000) + (3885 x $20) = $190000 + $77700 = $267700

Since total cost exceeds the total revenue, Stater Sister did not break even this season.

3.

Break even (order) = Fixed costs/Contribution per order

Fixed costs = $190000 - (500 x $100) = $190000 - $50000 = $140000

Contribution per order = $40 - $20 = $20

Break even (order) = Fixed costs/Contribution per order = $140000/($40 - $20) = $140000/$20 = 7000

Number of orders on average required each of 10 weeks = 7000/10 weeks = 700 orders