# Kroger, the country’s leadin

Kroger, the country’s leading grocery-only chain, added aline of private label organic and natural foods call Simple Truthto its stores. If you’ve priced organic foods, you know they aremore expensive. For example, a dozen conventionally farmedGrade-A eggs at Kroger costs consumers$1.81,whereas Simple Trutheggs are priced at $4.1 per dozen. One study found that, overall,the average price of organic foods is 85 percent more than that ofconventional foods. However, if prices get too high, consumerswill not purchase the organic options. One element ofsustainability is organic farming, which costs much more thanconventional farming, and those higher costs are passed on toconsumers. Suppose that a conventional egg farmer’s average fixedcosts per year for conventionally-farmed eggs are $1 million peryear, but an organic egg farmer’s fixed costs are five times thatamount. Further assume that the organic farmer’s variable costsof$2.22.2per dozen are twice as much as conventional farmer’svariable costs.

Most large egg farmers sell eggs directly to retailers. UsingKroger’s prices, what is the farmer’s price per dozen to theretailer for conventional and organic eggs if Kroger’s marginis

25 percent based on its retail price?

The price the farmer sells a dozen of conventional eggs is$_______________

Answer:

First look at how profit margin is calculated as apercentage.

Revenue is the price at which the retailer sells one unit of aproduct.

Cost of goods sold (COGS) is the cost of 1 unit to the retailer( the amount paid by the retailer to buy one unit).

The gross profit earned by the retailer is then Revenue – COGS,and the profit margin is given by the formula

.

————————————————————————————————————–

To find the farmer’s price per dozen (or the COGS) to theretailer for a dozen of conventional eggs:

Revenue per dozen = $1.81 ( given in the question).

Let the COGS per dozen be $ x.

Profit margin = 25.

Substitute all the above data in the formula for profitmargin.

Solving the equation, we find .

The price the farmer sells a dozen conventional eggs for is$1.3575.

—————————————————————————————————————

Repeat the same calculation to find the price for which thefarmer sells a dozen organic eggs.

Revenue per dozen = $4.1.

Let the price per dozen to the retailer be x.

Profit margin = 25.

Again using the formula for profit margin

Solving the equation, we find .

The price the farmer sells a dozen organic eggs for is $3.075.