School Store Pricing and the Booster Donation
At Riverside High School, the student-run school store sells a custom spirit shirt. The store's fixed costs are $1,200 per semester. The shirt costs $8 in variable materials and currently sells for $20; last semester the store sold 180 shirts. An online competitor sells a similar shirt for $18 plus $5 shipping. A student survey of 300 students suggests demand would be 240 shirts at $18 and 150 shirts at $22, but the survey did not mention shipping or production delays. The store can hold at most 250 shirts and has no cash reserve for unsold inventory. The marketing class must recommend a price for next semester and present the reasoning to the school business manager. The teacher wants the decision to model contribution margin, capacity, and evidence quality-not just charge what students will pay. A parent has complained that $20 is too expensive, while the athletics booster club wants a $2 donation per shirt from proceeds.
1. Calculate contribution margin per shirt and total semester profit at $18, $20, and $22, assuming survey quantities are accurate. Recommend a price and justify with both financial and nonfinancial reasoning.
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Contribution margin per shirt is price minus $8 variable cost. At $18: $10 per shirt; total contribution is $10 × 240 = $2,400; profit after $1,200 fixed costs is $1,200. At $20: $12 per shirt; $12 × 180 = $2,160; profit is $960. At $22: $14 per shirt; $14 × 150 = $2,100; profit is $900. On the survey assumptions, $18 yields the highest profit and stays within the 250-shirt capacity (240 units). The $22 option has the highest unit margin but lower total contribution because volume falls. The $20 status quo is not optimal if the survey is credible.
Nonfinancial factors matter. At $18, the store undercuts the online competitor's effective $23 delivered price and may build goodwill; it also reduces leftover inventory risk. But a price cut can signal lower quality, and the booster donation of $2 per shirt changes net proceeds: $720 at $18, $600 at $20, and $600 at $22. I would recommend $18 only as a preorder pilot, because the survey did not mention shipping or production delays and the store has no cushion for unsold shirts.
2. Evaluate the reliability of the survey evidence and identify two operational constraints that could change the recommendation. Explain how you would present the uncertainty to the business manager.
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The survey is useful but weak evidence. It is a stated-preference survey, so students may overstate willingness to buy at a lower price. It did not mention the competitor's $5 shipping, which makes the store's $18 price more attractive than the survey assumed. It also did not test whether students would pay shipping, whether they prefer online ordering, or how many of the 300 surveyed responded. A 300-student sample can be informative, but response rate and question wording are unknown.
Two operational constraints could change the recommendation. First, storage capacity is 250 shirts, so the $18 demand estimate of 240 leaves almost no margin for error; if demand is 260, the store cannot serve it and may lose sales. Second, the store has no cash reserve, so unsold inventory at $22 or $18 creates a real loss. I would present a range, not a single forecast: break-even units are 120 at $18, 100 at $20, and about 86 at $22. I would recommend a preorder window with a deposit, then order only confirmed units plus a small buffer. That tests demand while limiting inventory risk.
3. Propose two pricing or promotion alternatives that could satisfy the booster club's donation request without simply raising the price. Explain the business-education objective each alternative would teach.
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Alternative 1: A bundled preorder that includes local pickup and a small spirit-section discount. The store could set the shirt at $19 with a $1 donation, require prepayment, and order only confirmed quantities. This teaches price segmentation, break-even analysis, and the trade-off between margin and volume. It also reduces inventory risk because demand is confirmed before purchase. The booster club receives a defined donation without a $2 per-shirt charge that erodes contribution margin.
Alternative 2: A sponsorship or 'donate a shirt' add-on rather than a per-unit donation. Local businesses could sponsor $100 in exchange for a logo on the pickup bag, and buyers could add $1 to donate a shirt to a student in need. This teaches promotion mix, sponsorship valuation, and social responsibility. It separates the donation from unit cost, so the store can keep a competitive price. Students would compare net revenue under each option, calculate the donation per shirt, and defend the option that best balances margin, goodwill, and learning goals.