Question

Mallory started a lemonade stand. She has the following cost structure to her business:

•Her cups cost her $.05 each.

•She spent $2 on materials to make signs.

•The lemonade mix and ice cost her $.20 per cup.

•She spent $10 on materials to build a lemonade stand.

1- Mallory was charging $1.00 for each cup of lemonade. Her sister Ally told her that her price of $1 per cup of lemonade was too high — and she should really be selling them for $.50 each. Mallory figured out that this cut in price would cut profit margin per cup by ____.  

2- Mallory sold bottles of her lemonade to Tommy Wiseacre for $.50 each. Tommy would take the bottles and sell them to people at the neighborhood park for $1.00 each. Tommy uses a ____ markup percentage for his pricing.

3- Assuming Mallory sells cups of lemonade for $1.00 each and has the cost structure noted above, how many Mallory needs to sell _____ cups to break even?

Answer 1

Question 1:

Total variable costs per cup = 0.05+0.20 = $ 0.25 per cup

Initial total selling price = $ 1 per cup

Inital Profit = 1-0.25 = $ 0.75 per cup

If Cup is sold for 0.50 per cup, then profit = 0.50-0.25 = 0.25 per cup

Therefore, cut in price would cut profit margin per cup by $ 0.50 (0.75-0.25)

Question 2:

Tommy purchasing the Lemonade bottles for 0.50 each & selling the same at $1 each. That means he is selling the bottle at double the rate he purchased. So, he is using a 100% markup percentage for his pricing.

Question 3:

Fixed costs = $ 10 for lemonade stand + $ 2 for materials to make signs = $ 12

Contribution per cup at selling price of $1 = 1-0.25 = $ 0.75  

Contribution margin ratio = 0.75/1 = 75%

Break even point = fixed costs/contribution margin ratio = 12/75% = $ 16

Break even point units = $ 16/1 cup = 16 cups