Growing up in Boston Massachusetts there was a commercial for Dunkin’ Donuts that promoted the company by stating that there was a Dunkin’ Donuts every, one hundred square feet. Considering the state of Massachusetts is 10554 square feet in total, that would mean that there is about 106 Dunkin’ Donuts locations in Massachusetts. The size of the state of Massachusetts is relatively small in comparison to other states, so having 106 Dunkin’ Donut locations is rather impressive. Fortunately, for Dunkin’ Donuts I have frequented most of the l06 locations in my lifetime, love the blueberry iced coffee. I realize this coffee may not sound good to most of you all, however, from a northerner’s prospective blueberry iced coffee is like Coke in the south, …show more content…
As an example, let us say a Dunkin’ Donut store, average sales for iced coffee is 4,000 cups a month, the production cost would be the variable cost (Thomas & Maurice, 2010). The fixed cost plus the variable cost will equal the total cost (Thomas & Maurice, 2010). The total cost divided by the quantity sold will equal the average total cost (Thomas & Maurice, 2010). Dunkin’ Donuts uses the average total cost multiplied by a percentage markup to price their iced coffee, this is called cost-plus pricing (Thomas & Maurice, 2010). As an example, the average total cost is $1.55, the markup percentage for a small iced coffee is 44%, which would equal $1.99 (Thomas & Maurice, 2010). The same average cost is used for a medium and large iced coffee, however, the markup for a medium is 60% and a large is 80% (Thomas & Maurice, 2010). Therefore, the price increases from $1.99 for a small to $2.49 for a medium and $2.79 for a large (Thomas & Maurice, …show more content…
Therefore, marginal cost must be used for making optimizing decisions (Thomas & Maurice, 2010). Cost-plus pricing involves average rather than marginal cost, for this reason it does not generally give the profit-maximizing price (Thomas & Maurice, 2010). Another conceptual problem with cost-plus pricing is demand conditions, which creates practical problems with the MR = MC pricing rule (Thomas & Maurice, 2010). Demand conditions enter through the marginal revenue function; however, cost-plus pricing does not use this information (Thomas & Maurice, 2010). The lack of demand information makes it impossible to find the optimal or profit maximizing price using the cost-plus pricing method (Thomas & Maurice,