Product Pricing: Single Product Assume that you plan to open a soft ice cream fr
ID: 2517785 • Letter: P
Question
Product Pricing: Single Product
Assume that you plan to open a soft ice cream franchise in a resort community during the summer months. Fixed operating costs for the three-month period are projected to be $10,520. Variable costs per serving include the cost of the ice cream and cone, $0.77, and a franchise fee payable to Austrian Ice, AG, $0.25. A market analysis prepared by Austrian Ice indicates that summer sales in the resort community should total 24,000 units.
Determine the price you should charge for each ice cream cone to achieve a $25,000 profit for the three-month period. Round answer to two decimal places.
Explanation / Answer
Total variable costs per serving=(0.77+0.25)=$1.02
Target contribution margin=Fixed costs+Target profits
=(10520+250000)=$35520
contribution margin/unit=(35520/24000)=$1.48
contribution margin=Sales-Variable costs
hence price to be charged=(1.48+1.02)=$2.50
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