Download 08-2 Price Planning 2_-_price_planning

Objectives
Analyze costs and expenses to determine break even point
Recognize consumer perceptions based on price
Consider legal and ethical pricing issues
Break Even Point (BEP) – the point where sales revenue equals the costs and
expenses of making and distributing a product.
Job One for any business is to know their break even point
Quantity Produced
Costs + Expenses per unit
-
+
Amount above
BEP = profit
Revenue Generated
Expenses
Fixed + Variable
Perception may or may not = reality!
High Price = High quality
High Price = Rip off!
Low Price = Poor quality
Low Price = Value
Odd / Even pricing concept
Odd number price = value. Example - $199.99
Even number price = quality. Example - $200.00
Price Fixing – when competitors agree
to certain price ranges.
Legal?
Price Discrimination – charging
different prices to different customers in
similar situations.
Unit Pricing – including price
information for a standard unit of measure.
Loss Leader – item priced at or below
Break Even Point.
Legal?
Yes – Required
Legal? some places
Legal?
Varies
Assignment
Work independently. Look at this scenario and then determine the pricing answers
required. Your company is producing the latest cool gadget called a “thingamabob.”
1) Determine Break Even Point for a variety of manufacturing & sales volume levels
Sales
Volume
Variable
Cost of goods
Variable
Sales Comm.
Fixed Costs
Rent, etc.
1000
$10,000
$15,000
$80,000
2000
$18,000
$32,000
$80,000
3000
$25,000
$48,000
$80,000
4000
$30,000
$70,000
$80,000
Total Costs
(BEP)
Unit Cost =
BEP ÷
Sales Volume
2) Using results from #1, determine price for each profit margin given
Unit Cost
10% Margin
(x 1.1)
25% Margin
(x 1.25)
33% Margin
(x 1.33)
3) Answer this question:
When might a company
implement a variety of
profit margins as shown
here?
A – loss leader, sale item,
clearance, promotion, etc.