# The Effects of Pricing on Revenues, Costs and Profits 2019 Atlantic Taffy Pricing Case Understanding the effects of pricing on revenues, costs and profits

The Effects of Pricing on Revenues, Costs and Profits 2019 Atlantic Taffy Pricing Case

Understanding the effects of pricing on revenues, costs and profits (6% of course grade)

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Introduction: It is April and you have recently been hired as the manager of Atlantic Taffy Company in Bay Head, New Jersey. You have been asked to improve profitability. The company got its name from a propriety taffy first sold in a Jersey Shore concession also owned by the Talbot family. Note: Please use Excel for all calculations and turn in your Excel worksheet. Then use Word for a final 5-8 page written report to the owners detailing your findings, analyses and recommendations, making sure that your written report answers all the specific questions in this assignment.

Analysis of Pricing: You manage The Atlantic Taffy Company which makes a saltwater taffy bar for sale to gift shops from Atlantic City, New Jersey, to Mount Desert Island near Bar Harbor Maine. The company sells individually wrapped bars in boxes of 50 for \$81.00 each. The candies retail for \$3.99 for an individual bar and sales have been strong. The owners of the Atlantic would like to increase its sales and profits. They know that, if price is lowered, they will generate more sales. Sales are typically steady at 35,000 boxes per month from May through October. Last year they sold 35,000 boxes in May. So they run an experiment. Price is lowered to \$73.00 per box in May of this year and the number of deliveries increases to 37,000.
What is the Price Elasticity of Demand?
Is elasticity elastic, inelastic or neither?
What does this mean and why does it matter?
Will Revenues increase or decrease as a result of the price cut? By How much?
You calculate that the fixed costs for the Atlantic Taffy are \$25,000 per month (independent of number of boxes created), and each box costs \$48 for the labor, candy, packaging and shipping (variable costs=per units produced). Will profits go up or down as a result of the price cut? By How much?
Income statement profits are revenue minus all costs (fixed plus variable).
David Talbot, the 19 year old son of the owner, says that there wasn’t enough time in the experiment. He estimates that in the second month, June, Atlantic Taffy will sell 40,000 boxes at \$73.00 per box. Please answer the following assuming that David is correct. You want to get an idea of what will happen to profits before you commit to an action and make a projection. If profits are projected to go up assuming that David is correct, then you will keep the current price of \$73.00 during June. If the profits are projected to go down, you plan to return to \$81 per box.
What would be the Price Elasticity of Demand if David is correct?
Is elasticity elastic, inelastic or neither?
What does this mean and why does it matter?
Will Revenues increase or decrease as a result of the price cut to \$73.00 at 40,000 boxes? By How much?
You calculate that the fixed costs for the Atlantic Taffy are still \$25,000 per month and each box costs \$48.00. Make a projection of revenues, costs and profits for June. Will profits go up or down as a result of the price cut if Atlantic Taffy sells 40,000 boxes? By How much?
The Atlantic Taffy owners see the change in profits from the price decrease in May and the projection for June. They decide to go back to a price of \$81.00 and have sales of 35,000 boxes in June. The May production required staff to work 2 weekends and there were many complaints. No one wanted to work weekends during vacation season on the East Coast and there was no room to expand production. The owners were willing to add a second location that would permit greater production if profits justified. They decide that they are only willing to manage enough production to support 35,000 deliveries at a price of \$81.00. However, if they raised price to \$90.00 per box for July, they would be willing to hire additional staff, lease more space across town and produce 58,000 boxes.
Calculate the Elasticity of Supply. Is it elastic or inelastic?
How many deliveries will Atlantic have at a price of \$90.00? Hint: you can only sell what customers will buy. Use the original elasticity of demand calculated in #1 above.
What will be the Revenue?
What will be the Profit?
Should Atlantic Taffy raise the price to \$90.00? Why or why not?
As Manager of the company, compile your report and recommendations to the owners.
Format of the report should include:
A meaningful report title
A short executive summary with all key results and recommendations
A short introduction with report purpose and contents
Conclusions with key points repeated from the report body
References list in APA format
Page numbers on all pages

Below is the rubric to be used for evaluating this project part of the assignment. Basic Economics for
Management: supply and
demand elasticity
DMBA 620 You will need to
the notes that explain the slides.
Supply & Demand

Economics has information for
managers setting price
Assumes nothing changes but price
Marketing looks to improve the product
or service to satisfy customer needs
Supply and Demand – basics

If Supply goes up and Demand stays
the same, price goes down – gasoline
If Demand goes up and Supply stays
the same, price goes up – UBER at New
Years Eve.
If Demand goes up and price is
restricted, long lines – gasoline 1978
Demand

Demand is an economic concept
It is the quantity that people will buy at
a price
It is not what people would like, desire,
or need.
It is just what they will buy if allowed to
make purchase decisions freely
Price Elasticity for a product

Tells what happens with price changes
To Demand
To Supply
Important for managers to
understand and manage Price
Elasticity – Simple

Change in Quantity / Original Quantity
Change in Price / Original Price
Elasticity = % ΔQuantity / % ΔPrice
Elasticity of Demand is usually negative
Elasticity of Supply is usually positive
Δ means change
This is sufficient for our purposes
Elasticity

Inelastic if less than 1

Elastic if more than 1

Examples -.5 and +.8
Examples -1.4 and +4.5
Even if you sell more with lower price,
seldom does profit increase
Need to sell lots more to increase profit
Elasticity of Demand Example

is price inelastic.
If you raise your hourly rate 20%, then
demand drops 10%
% ΔQuantity/% Δ Price = -10% / 20% =
-.5
Note: Elasticity of Demand is negative and
inelastic as it is minus -0.5
Elasticity of Demand Example

Example: suppose that as a UMUC MBA, your income
was \$100,000 for 2,000 hours work.
That works out to \$50 per hour, 40 hours per week
with 2 weeks vacation.
Raise your rate to \$60 (20%) but hours worked drop
10% to 1,800 hours

Elasticity -.5
New income is \$60 x 1,800 = \$108,000 AND you
only have to work 36 hours per week or take
another 25 days vacation
Elasticity and Algebra
New demand after price change

Calculate demand with 10% lower rate

% change quantity (Q1 – Q0)/Q0

\$45 instead of \$50 per hour
(Q1 – 2,000 )/2000 = 1- (Q1 /2000)
% change price -10% = (P1 – P0)/P0
Elasticity = -.5 = [(Q1 /2000)-1]/-10%

Solve and get Q1 = 2000 x 1.05 = 2100
Demand goes up 100 hours
P x Q = Revenue = \$45 x 2100 = \$94,500
Small Price changes

Raise your rates from \$50 to \$60, and
good things happened.
Lower rates and your revenue declines
Raise rates to \$200 per hour and result
may be no income
Small price changes generally work
much better than big changes.
Elasticity of Supply
Work 40 hrs. @ \$20

Would you willingly work 7 days a week
for 70 hours at \$20 per hour?
Would you willingly work 7 days a week
for 70 hours at \$400 per hour?
\$20 per hr. x 70 = \$1,400
\$400 per hr. x 70 = \$28,000
Your elasticity of supply is inelastic
Elasticity of Supply
Work 40 hrs. @ \$20

40 hrs. x \$20 = \$800

Example: will work overtime up to 20
hours for two times the pay rate

\$800 x 52 = \$41,600
ΔQ =+50%
ΔP = +100%
Elasticity = 50% / 100% = +.5
Your elasticity of supply is inelastic
Supply

Consumers dislike price increases emotionally
Supply increases with price
Oil, food, gas, housing, chemotherapy drugs
We prefer higher prices for our labor
LAG TIME: Supply adjusts slower than
Demand (housing, gas, food)
Why are gasoline prices down and food prices
up in 2016?
Elasticity

Predicts consumer behavior & Profits
Explains much but often misunderstood
We want to pay less – 50% off Sales
We often act by paying more – Why?
Price matters but so do

Convenience
Quality
Courtesy
Security
Style
Personal Safety
Regulations also matter

Minimum prices for gasoline, milk,
raisins
55 Different “blends” for gasoline?
Licensing requirements – UBER
EPA – regulates
FDA – still hasn’t approved sunblock
used in Europe
Profit

Revenue = price x units sold
Minus Costs equals
Profits
Note: Revenue can go up and profits go
down
TAKE AWAY – Small price increases
help
Hints for Conference Work

Personal Opinions are worth little
Use examples to make points

Personal Experience worth a lot
References
Articles
Videos
Text
Quote experts
Use facts carefully
Required

MUST use Excel for math.
Explain what you do in words
Explain what the answer means for
management

What would you say if the CEO asks you,
“So what?”
DMBA 620 GRADING RUBRIC FOR PRICING ASSIGNMENT
1. LG: Demonstrate the ability to communicate clearly in writing.
1.1. Organize document or presentation clearly in a manner that promotes understanding and
meets the requirements of the assignment.
1.1.1.Present material in clear and/or logical order appropriate to task
1.1.2.Articulate thesis and purpose clearly
1.1.3.Support thesis and purpose fully
1.1.4.Transition smoothly and develop connections from point to point
1.1.5.Create coherent progress from introduction through conclusion
1.1.6.Complete assignment in accordance with instructions
1.2. Develop coherent paragraphs or points so that each is internally unified and so that each
functions as part of the whole document or presentation.
1.2.1.Create meaningful topic sentence for each paragraph or point
1.2.2.Develop each paragraph’s single topic to the appropriate depth
1.2.3.Supply relevant and original supporting detail
1.3. Provide sufficient, correctly cited support that substantiates the writer’s ideas.
1.4. Tailor communications to the audience
1.4.1.Identify target audience
1.4.2.Explain unfamiliar terms or material
1.4.3.Employ precise, appropriate language
1.4.4.Use audience appropriate consistent tone
1.4.5.Avoid language which indicates bias against individuals/groups, their affiliations,
orientations and beliefs
1.5. Use sentence structure appropriate to the task, message and audience.
1.5.1.Demonstrate variation in sentence structure
1.5.2.Express ideas clearly and concisely
1.5.3.Eliminate sentence-level errors, such as run-ons/ comma splices, and sentence fragments
1.6. Follow conventions of standard written English
1.6.1. Adhere to standard usage rules of grammar
1.6.2.Adhere to standard usage rules of word choice
1.6.3.Adhere to standard usage rules of spelling
1.7. Create neat and professional looking documents appropriate to the project or presentation
1.7.1. Create a professional-looking and relevant presentation that delivers the desired content.
1.7.2.Employ visual aids and multi-media tools as appropriate to enhance the presentation
message
2. LG: Critical thinking and analysis. You can apply logical processes to formulate clear, defensible
ideas based on the analysis of facts and ethical considerations
2.1. Identify and clearly explain the issue, question or problem under consideration
2.2. Locate and access sufficient information to investigate the issue or problem
2.3. Evaluate the information in a logical and organized manner to determine its value and
relevance to the problem
2.4. Consider and analyze information in context to the issue or problem
2.4.1.Articulate clearly and fairly others’ alternative viewpoints and the basis of reasoning
2.4.2.Identify significant, potential implications and consequences of alternative points of view
2.4.3.Evaluate assumptions underlying other analytical viewpoints, conclusions and/or solutions
2.5. Develop well-reasoned ideas, conclusions or decisions, checking them against relevant
criteria and benchmarks
2.5.1.Present and explain those inferences and deductions that follow logically from the
evidence provided.
2.5.2.Assert logical conclusions only when sufficient evidence supports them, and distinguish
between attainable and unattainable solutions.
2.5.3.Incorporate legal and ethical reasoning when formulating ideas, conclusions and decisions
2.5.4.Complete assignment in accordance with instructions
3. LG: Quantitative reasoning: You can use mathematical information, operations and quantitative
analyses to solve problems and inform decision-making
3.1. Identify numerical or mathematical information that is relevant in a problem or situation
3.1.1.Extract relevant information needed to solve the problem or situation.
3.2. Employ mathematical or statistical operations and data analysis techniques to arrive at a
correct or optimal solution.
3.2.1.Perform accurate calculations which are suifficiently comprehensive to solve the problem
3.3. Analyze mathematical or statistical information, or the results of quantitative inquiry and
manipulation of data
3.3.1.Communicate key relevant mathematical information or results using appropriate
mathematical vocabulary and, when appropriate, referencing mathematical symbols,
definitions, theorems, and laws
3.3.2.Draw logical inferences and conclusions from calculations, results, analyses
3.4.Employ software applications and analytic tools to analyze, visualize and present data to
inform decision-making
3.4.1.Prepare dataset for use using the chosen application or tool and execute functions that
enable insight into data.
3.4.3 Generate required output to support the quantitative taskin
3.4.4 Complete assignment in accordance with instructions.
10. LG Strategic management of financial capital: MBA graduates demonstrate the ability to plan,
evaluate, and manage the financial implications of the organization’s operations
10.1 Apply relevant microeconomics principles to support strategic decisions for the organization.
10.1.1 Analyze costs and revenues for varying levels of production
10.2 Analyze financial statements to evaluate and optimize organizational performance
10.2.1 Determine the impact of transactions carried out by an organization on the income
statement
10.2.3 Make recommendations to improve organizational performance based on the analysis of
the income statement.
10.5 Develop Operating forecasts and budgets and apply managerial accounting techniques to
support strategic decisions
10.5.3 Apply cost-volume-profit analysis
Step one: The above competencies (bolded) for each learning goal will be evaluated without percentage
grades as: Excellent (exceeds Expectations) Good (meets Expectations) or Needs Improvement (does not meet
Expectations) based on how well each competency is demonstrated. Faculty will provide guiding feedback for
Each competency that Needs Improvement.
Step two: Each Learning Goal is given a percentage grade based on the assessments of the individual competencies
required for that learning goal. When the above evaluations of competencies result in a mix of Excellent and
Good evaluations, faculty will assign the learning goal an overall percentage grade that reflects the majority of the
individual competency evaluations. Faculty will make that percentage determination based on practitioner/
academic judgment as to how well the overall demonstrations of supporting competencies met or exceeded
expectations.
Excellent
90-100%
Good
Meets Expectations – 80-89.99%
Needs Improvement
70-79.99%
Unsatisfactory
Below 70%
Note: For Each learning goal, every supporting competency must be determined to Meet Expectations (Good) or
Exceed Expectations (Excellent) for the learning goal to be graded with a corresponding percentage as Good
(80-89.99) or Excellent (90-100). If even one competency is not demonstrated sufficiently to receive at least a
Good evaluation, the overall learning goal will be graded as Needs Improvement (70-79.9). Faculty will make the
percentage determination within the category based on practitioner/academic judgment as to how far the
overall demonstrations of supporting competencies fell short of expectations.
Step three: For an assignment grade, the percentage grades for the four learning goals will be averaged with
equal weight for each.

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