Question

You operate a lemonade stand. The wholesale cost of lemonade is $0.50 per unit. The cost of rent for the stand is $30 per day. You need to choose your pricing and advertising strategy. You are considering three alternatives:

A: If you set the selling price to $1.50 per unit and spend $0 on advertising, you will sell 120 units per day.
B: If you reduce the selling price to $1.20 per unit and spend $0 on advertising, you will sell 180 units per day.
C: If you set the selling price to $1.50 per unit and spend $30 per day on advertising, you will sell 180 units per day.
a) Compute revenue, costs, and profit per day for each alternative.
Costs:
Lemonade (wholesale)
rent
chvrisi
Profit
b) Which alternative should you choose?
a. A
b. B
c. C
c) Is rent a relevant cost?
A. NO (the cost is the same for all three alternatives; it can be ignored)
B. YES (the cost differs across alternatives; it should not be ignored)
d) Is advertising a relevant cost?
A. YES (the cost differs across alternatives; it should not be ignored)
B. NO (the cost is the same for all three alternatives; it can be ignored)

Answer 1

Answer and Explanation:

a. The computation of revenue, costs, and profit per day for each alternative is shown below:-

Particulars A B C

Revenue 180 216 270

(120 × $1.50) (180 × $1.20) (180 × $1.50)

Costs

Lemonade 60 90 90

(120 × $0.50) (180 × $0.50) (180 × $0.50)

Rent $30 $30 $30

Advertising 0 0 0

Profit 90 96 150

For computing the profit we simply deduct the cost from the revenue

b. Since, C gave maximum profit. So, C is the right answer.

c. Since, Rent is not an accurate cost as rent is the same for all. so, it can be ignored. Hence, the correct answer is A.

d. Advertising is an equal cost as advertising differs across different alternatives, it should not be ignored.

Hence, the correct answer is A.