Eddy & Anne's Bake Shop
Eddy and Anne are bakers who met in school and co-own a
small baked goods shop. They pride themselves on quality ingredients,
hand-mixed batters, and friendly customer service. The shop is open Monday to
Saturday from 8:00 am to 6:00 pm. Their staff consists of four bakers and one
cashier. The bakers are knowledgeable and hard-working and earn $10 per hour
for their efforts. Each baker is allotted one day off per week. The cashier is
a young woman, Sally, who takes college classes at night while working 5 days a
week at the bakery. Sally earns $8 per hour as the cashier. Eddy and Anne value
her interaction with their customers and her positive attitude.
The owners have put up their own money and taken out loans
to start the shop. They have chosen a modest annual salary of $50,000 per owner
to support their respective families. The total labor costs, including the
owners who work in the shop filling in for bakers and the cashier on their off
days, amount to about $220,500 annually. The shop makes $364,000 in revenue in
an average year and incurs expenses (rent, cost of ingredients, equipment) of
$122,000 each year. This leaves a net profit of $21,500 at the end of most
years. Eddy and Anne typically pay their staff a holiday bonus of $1,000 per
employee. The other $16,500 of profit is stored away in the company bank
account to insure against a down year in sales, increases in costs, and/or to
invest in new equipment or ingredients.
The state where Eddy and Anne live and work has recently
passed a minimum wage law requiring employers to pay $15 per hour to all
full-time employees. Every worker at their shop must now be paid at least that
amount, given their full-time status. This law alone will increase their labor
costs by $67,770 and turn their net profit of $21,500 into a net loss of
$46,650.
Eddy and Anne consider many options. They think about
reducing their own salaries, but they are already taking modest salaries for entrepreneurs
who have risked their own savings. Besides, even lowering their salaries to the
new minimum wage would only cut the net loss to $24,700. They reconsider a
crucial element of their business: hand-mixing. Customers seem to like the idea
of hand-mixing and Eddy and Anne figure they may pay a premium price partly
because of this practice. However, to keep their business afloat they reason
they can invest in 4 stand mixers and layoff their least experienced baker. The
don’t want to sacrifice any of their beloved staff, but the mixers will save
time and increase the amount of work each baker can perform. The mixers cost
$700 a piece for a total of $2,800, but that will be far offset by the salary
of $37,650 that they save by laying-off one baker.
That one change would save the bakery about $35,000 but would
still leave it with a net loss. Eddy and Anne think about raising prices, but
their customers already pay a premium compared to grocery store baked goods.
They worry that increasing prices by the amount they would need to break-even
would drive away too much business. And they still would not be operating at
their previous profit level.
Eddy and Anne decide that as much as they hate it, they
should lay-off Sally as well. She makes the shop a better place, but the owners
can’t reason paying nearly twice what they normally would for a cashier. Instead,
they decide to split days working at the register and with the bakers. One week
Eddy will work 2 days at the register and 3 days in the back with the bakers,
then flip with Anne the next week and work 3 days at the register and 2 days in
the back of the shop. This last change would reduce their labor costs to
$212,950. That would be below the original, pre-minimum wage salaries of $220,480 by about
$7,500.
The owners of the bake shop have had to sacrifice one
element of operations they considered a competitive advantage over grocery
stores. They also had to fire two beloved employees whom they also consider
friends. Yet, with the layoffs and use of new equipment they anticipate being
able to keep the shop open and operating at the same profit level as usual. The
remaining bakers on staff will be $12,550 richer each year, but at the cost of two
of their fellow employees’ old salaries. It will be a bittersweet reward for
them. The shop will survive and the community will continue to enjoy its
treats, but they may not know or understand the costs of the new minimum wage.