Artisan, Small Batch Danish Rye Bread (Pricing ICA)

This ICA is about a small baker that sells a very specific, hard to make (it takes 3 days), dense,

and very nutritious rye bread.It is made with very few ingredients (see below)

The bread cannot be stored because it deteriorates in quality very quickly like many fresh baked

breads.

The baker sells this bread to restaurants and delis in their city; not to the public directly.

The baker owns (free of mortgage) the facility where the majority of the bread is baked, which

doubles as the baker's home (i.e., lives in a loft above the facility).All the equipment in this facility

was inherited from the family and has essentially zero value on the open market, but it works really

well and is fully capable of handling the current level of production - EXCEPT IN ONE MONTH (JULY)

(more info below).This facility can handle production of 10,000 loaves per month.If the baker

needs to produce more than 10,000 loaves they must rent a nearby facility.

This nearby facility is fully equipped and can handle an additional 7,000 loaves per month.

HOWEVER, the owner of the rental facility will not do a month-to-month lease.It must rented for a

minimum of 3 consecutive months at a time.It costs $7,000 per month to rent.

Current price of a loaf is $6.95

Labor costs:$80,000 of labor costs are salaried employees.The rest of the labor cost was hourly

depending on volume of business.

The baker considers overhead is a fixed cost.

Currently the baker looks at total cost divided by number of loaves sold to calculate per unit

profitability.They would like to know if this is a good approach when determining price per loaf.

Month

Sales

January

8000

February

8000

March

8000

April

8000

May

8000

June

8000

July

17000

August

8000

September

8000

October

8000

November

8000

December

8000

annual

105000

Costs

Annual

Per loaf

Ingredients

Rye Flour

52,500.00

0.500

Cracked rye grains

26,250.00

0.250

Whole rye grains

26,250.00

0.250

Sunflower seeds

31,500.00

0.300

Sea salt

2,100.00

0.020

Yeasty beer

25,200.00

0.240

Rolled oats

15,750.00

0.150

Kefir

10,500.00

0.100

Labor

134,600.00

1.282

Utilities (electricity, water, gas, etc)

122,850.00

1.170

Rent for 2nd facility

21,000.00

0.200

Overhead costs

94,500.00

0.900

Total

563,000.00

5.36

You are a friend of this baker who asks you to help them out with their pricing.You are going to be

asked a series of questions and see if you can make recommendations.

Here's question #1

Is this the best way to price the bread?Are they considering the correct costs when

deciding how to price the bread?What information might you need to better help the

baker with this question?

NOTE:Frame this in ECONOMICS.Use what we've learned in this class (& previous

economics courses).There are a couple of concepts that should be jumping out at you