Question

Suppose Trader Joe's direct supplier of its exclusive $2.99 Charles Shaw wine ("Two-Buck Chuck") is encountering a problem in production and even in logistics given the economic crisis brought about by the pandemic. Because of this, the supplier will have to incur a 5% increase in cost per bottle just to continue production and deliver the current demand of Trader Joe's at 1,000,000 bottles. Increased costs from the supplier's end would mean increased costs for Trader Joe's as well because the supplier refuse to operate at a margin below 20% (Assume Trader Joe's current margin at 10\%). In addition to this, a decrease in demand ( 50% decrease from the current demand) would be expected if Trader Joe's decides to increase the selling price.

a.How much is the current cost per bottle of the supplier?
b.How much is the current profit of Trader Joe's on their Charles Shaw Wine?
c.How much would the new retail price be if Trader Joe's decides to keep its 10% margin?
d.How much would their profit be if they decide to increase the retail price to keep its 10% margin?
e.If Trader Joe's decides to retain the retail price at $2.99, what will be its new % margin?
f.How much would their profit be if they decide to retain the $2.99 retail price?

Answer 1

Trader Joe's supplier's current bottle cost is $2.49. To maintain a 10% margin after a 5% cost increase, Trader Joe's must raise the price or accept a reduced margin.

Step-by-step explanation:

The current cost per bottle from the supplier for Trader Joe's $2.99 Charles Shaw wine, considering a supplier's margin of 20%, is $2.49. Trader Joe's current profit per bottle, with its 10% margin, is $0.30. If the supplier increases the cost by 5%, the cost per bottle would go up to $2.62. To maintain a 10% margin, Trader Joe's would need to set the new retail price at approximately $2.88. However, if they chose to retain the $2.99 retail price with the increased supplier cost, their new margin would drop to roughly 12.4%, and the profit per bottle would decrease to $0.37 if demand stayed the same.

But with the projected 50% decrease in demand after a price increase, if the new retail price is $2.88, their profit would be half of the current total profit, factoring in reduced volume sales.