Understanding the effects of pricing on revenues, costs and pricing

Introduction: It is February andyou have recently been hired as the manager of Mt. Claire Café.  You have been asked to improve profitability.  Note: Please use Excel for all calculations.

1. Analysis of Pricing:You manage  Mt. Claire Café which sells meals at a price of $8.50 each.  The meal includes a hot dish and a beverage of your choice.  The  average number of meals sold per month is 21,000. The owners of Mt. Claire Café would like to increase its sales and profits.  They  know that if price is lowered, they will sell more meals.  So they run an experiment.  Price is lowered to $7.50 per meal in March  and the number of meals sold increases to 23,000.

a. What is the Price Elasticity of Demand?

b. Is elasticity elastic, inelastic or neither?

c. What does this mean and why does it matter?

d. Will Revenues increase or decrease as a result of the price cut? By How much?

e. Beatrice has calculated the fixed costs for the Café are $18,000 per month and each meal costs $4.50.  Will profits go up or down as a result of the price cut?  By How much?

2. Shaun suggests that there wasn't enough time in the experiment.  He estimates that in the second month, April, the Café will sell 26,000 meals at $7.50.  Please answer the following assuming that Shaun  is correct.  You want to get an idea of what will happen to profits before you commit to an action. If profits go up when Shaun is correct, then you will keep the current price of $7.50.

a. What would be  the Price Elasticity of Demand if Shaun is correct?

b. Is elasticity elastic, inelastic or neither?

c. What does this mean and why does it matter?

d. Will Revenues increase or decrease as a result of the price cut at 26,000 meals? By How much?

e. Beatrice has calculated the fixed costs for the Café are $18,000 per month and each meal costs $4.50.  Will profits go up or down as a result of the price cut if Mt. Claire sells 26,000 meals?  By How much?

3. The owners, see that after seeing the change in profits from the price decrease in March.  They  go back to a price of $8.50  and sell 21,000 meals in April.  They decide that they are only willing to produce 21,000 meals at a price of $8.50.  However, if they raised price to $9.50 per meal, they would be willing to produce 30,000 meals. 

a. Calculate the Elasticity of Supply.  Is it elastic or inelastic?

b. How many meals will Mt. Claire Café sell at $9.5 each?Hint: you can only sell what customers will buy.  Use the original the elasticity of demand calculated in 1 above.

c. What will be the Revenue?

d. What will be the Profit?

e. Should Mt. Claire Café raise the price to$9.50? Why or why not?

4. What did you learn from this case? Post your response to this question in the discussion area.

Choose one additional question in the discussion area and answer it.  Please respond to at least 2 classmate posts with an insight.