You operate a lemonade stand. The wholesale cost of lemonade is $0.50 per unit. The cost of rent for the stand is $30 per day. You need to choose your pricing and advertising strategy. You are considering
three alternatives:
A: If you set the selling price to $1.50 per unit and spend $0 on advertising, you will sell 160 units per day.
B: If you reduce the selling price to $1.20 per unit and spend $0 on advertising, you will sell 240 units per day.
C: If you set the selling price to $1.50 per unit and spend $30 per day on advertising, you will sell 240 units per day.
a) Compute revenue, costs, and profit per day for each alternative.
Revenue
Costs:
A
B
C
Lemonade (wholesale)
Rent
Advertising
Profit
b) Which alternative should you choose?
A
B
C
c) Is rent a relevant cost?
NO (the cost is the same for all three alternatives; it can be ignored)
YES (the cost differs across alternatives; it should not be ignored)
d) Is advertising a relevant cost?
YES (the cost differs across alternatives; it should not be ignored)
NO (the cost is the same for all three alternatives; it can be ignored)
