Frank owns a flower shop in a local mall in Detroit. He offers ten different bouquet arrangements using seasonal flowers at standard prices that allow him to make an average contribution margin of 40 cents for every dollar of revenue. Demand varies from day to day. On some days, Frank cannot sell all that he makes, and on other days Frank has to turn customers away. Recently, Frank decided to give a ten percent discount on days when demand is low, and to charge a ten percent premium on days when demand is high.
Required:
a. Is Frank offering a discount when faced with excess demand or excess supply? Is Frank charging a premium when faced with excess demand or excess supply? Do you agree with his new pricing policy?
b. Calculate the contribution margin per dollar of revenue whenever Frank offers a ten percent discount. Calculate the contribution margin per dollar of revenue whenever Frank charges a ten percent premium.
c. After Frank has been following his new pricing policy for some time, he observes that his loyal customers don't seem to be coming in as much, and he is mostly offering discounts, and only occasionally charging premiums. Can you explain why this might be happening? Do you have any suggestions for Frank?