Opening Case I am sure that most of you may have visited the food court at your
ID: 2554582 • Letter: O
Question
Opening Case
I am sure that most of you may have visited the food court at your local malls and noticed that the prices of portions for various items are reduced after a certain hour. It is commonplace in Trinidad and Tobago to see signs that state “All Portions $5.00 After 7:00 p.m.” or “Half Price After 6:00 p.m.”. Why is this done? Is this beneficial to the food seller? Food tends to be perishable so that businesses can rarely store the prepared dishes for the next day. If food is stored one may find that the quality has been drastically reduced and serving these stale dishes to consumers may place the business in a negative light. The regular price charged during the day for the food portions would have most likely taken into account all cost items, both fixed and variable. This would include the cost of ingredients, direct labour cost, rent, depreciation on equipment, manager’s salaries and advertising. During the day it is expected that all the food that is cooked would be sold out so a customer would be charged the regular stated price. As the evening draws closer and closing time approaches, the manager may find that items on the menu are unlikely to be sold out. At this point it is better that the shop reduce its price and sell the remaining portions than let them go to waste. Costs such as rent, depreciation, advertising etc. are fixed and would be incurred whether or not the portions are sold out. The manager may therefore choose to charge a price that covers the variable cost of production. In this way the shop can reduce its losses and make some customer very happy.
1. How would you classify fixed cost in the above situation?
2. Can you think of other situations where similar pricing strategies are used?
Explanation / Answer
Answer for 1)
In above situation fixed costs may be classified as sunk cost however it will become sunk costs only after 6 p.m.In general sunk costs means the costs which are not recoverable and the fixed cost are considered to be sunk costs only after 6 pm is because the manager intends to charge only variable costs after 6 pm to reduce loss and in regular business time fixed costs are recoverable and hence colannot be considered as sunk costs.
Answer for 2)
Reduction of pricing can be termed as a strategy to sell every slow moving item.An example for other situations where similar pricing strategies can be used may be bakery products like Bread,Bun,Cake etc can be considered.We can observe the prices of Bakery products decline when they are close to expiry.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.