Case Study –Sweet Thang Cupcakes
Sweet Thang Cupcakes is a local bakery that specializes in the production and sale of gourmet cupcakes directly to consumers. The bakery’s top-selling products are its chocolate turtle cupcake, banana split cupcake, and maple bacon cupcake. To increase sales the owner of the bakery performed an elasticity analysis to evaluate whether price has any impact on the quantity of cupcake sold.
Price Elasticity Assumptions
The study is based on the assumption that the price of the gourmet cupcakes was elastic. This implies that a reduction in the price of the product will lead to an increase in demand as more people will be able to afford it. This will translate into an increase in sales. Hence the price was reduced from $3.50 per cupcake to $2.75 per cupcake. The price reduction is also based on the assumption that at a slightly lower price, existing customers will be able to buy more cupcakes thereby increasing the average sale per customer.
Assumptions Used in Sweet Thang Elasticity Analysis
Elasticity Assumptions
Regular Price
Discounted Price
Price
$3.50
$2.75
Quantity Sold
29,800
32,600
Revenue
$104,300
$89,650
Price Elasticity Analysis
A general review of the data will lead one to believe that changes in price lead to changes in demand. This assumption stems from the fact that a reduction in price facilitated a 2,800 increase in quantity sold. However, to determine whether the changes had any significance it is imperative to conduct an elasticity evaluation. From the study, it is evident that the price of the gourmet cupcakes is inelastic. Evidence of this is reflected in the fact that the computed elasticity statistic following the price change was only -0.37 which is too small to institute any changes to the bakery’s demand level. The results of -0.37 are extremely small and thus makes it logical for one to argue that there is no relationship between the price and quantity of cupcakes sold. The determination stems from the fact that as per Daniel’s (2019) Elasticity Calculator benchmarks, a relationship is only recognized if it is less or equal to negative one or greater or equal to 1. This implies that reducing the price of the cupcakes had no consequence on the level of demand. Demand is regarded as inelastic if a change in price does not impact the demand (Elasticity of Demand, 2020). This can be effectively understood through an analysis of the revenue.
Revenue Analysis
The bakery’s revenue at the regular price(price A) was $104,300 while its revenue at the discounted price ( price B) was $89,650. Based on this, it is evident that by discounting their prices the bakery experienced a decline in revenue by $14,650. The decline in revenue is an indicator that the reduction in price did not facilitate an increase in demand. This is because an increase in demand would have resulted in an increase in revenue for the bakery. The decreased revenue can be attributed to the company having significantly lower margins at the discounted price.
Conclusion
From the study, it is evident that Sweet Thang gourmet cupcakes are not elastic as reflected in the elasticity statistic of -0.37. This implies that the bakery should not discount the price of its products to increase demand. It is also essential to note that at the discounted rate the bakery is operating under extremely low margins which us unsustainable. This is reflected in the revenue reduction from $104,300 to $89, 650. Therefore in its third year of business, the bakery must revert to its original price of $3.50. Through the study, it is also evident that a bottom-line approach to income statements is more suited for increased profitability than a top-line approach.