# Chapter 18 - PowerPoint PPT Presentation Download Presentation Chapter 18

Chapter 18 Download Presentation ## Chapter 18

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -
##### Presentation Transcript

1. Chapter 18 Price Setting in the Business World

2. How are prices set by business people? • Costs provide a price floor. • See what substitute products are priced at • Can you offer something of additional value that people will pay a price premium for? • Use this information and market responses to set your prices. • Remember, price increases & decreases have a direct impact on unit profits

3. Markup Pricing • Markup - a dollar amount added to the cost of products to get a selling price (638) • Many retailers apply a standard markup to everything they sell. • However, with modern data information price setting is changing to more of a market response method for many firms.

4. Markup Formulas • Markup On Selling Price = • (Selling Price - Cost) / Selling Price • Markup on Cost = • (Selling Price - Cost)/ Cost

5. Markup Conversions • Percent Markup On Selling Price = • (Percent Markup on Cost) • (100% + % Markup on Cost) • Percent Markup on Cost = • (Percent Markup on Selling Price) • (100% - % Markup on Selling Price)

6. Markup Example 1 • Your cost is \$20 each and your selling price is \$25. What is your markup on selling price and your markup on cost?

7. Answer 1 • Markup on selling price = • (\$25 - \$20) / \$25 = 20% • Markup on cost = • (\$25 - \$20) / \$20 = 25%

8. Markup Example 2 • Your cost is \$100 each and your selling price is \$130. What is your markup on selling price and your markup on cost?

9. Answer for # 2 • Markup on selling price = • (130 - 100) / 130 = 23.08% • Markup on cost = • (130 - 100) / 100 = 30%

10. Markup Example 3 • Your cost is \$50 each and your selling price is \$70. What is your markup on selling price and your markup on cost?

11. Answer to #3 • Markup on selling price = • (70 - 50) /70 = 28.57% • Markup on cost = • (70 - 50) / 50 = 40%

12. Markup Example #4 • A] You have a 30% markup on selling price. What would this be if it was a markup on cost? • B] You have a 20% markup on cost. What would this be if it was a markup on selling price?

13. Answer # 4 • A] 30 / (100 - 30) = 42.86% • B] 20 / (100 + 20) = 16.67%

14. Stockturns • Stockturn rate (498) • Stockturn rate = • (sales in units) / (avg. inventory in units) • Faster stockturn rates lower inventory holding costs. What is a “high” or “low” stockturn rate depends on the industry.

15. Average Cost Pricing • Average Cost Pricing (490) • Problems: • does not consider cost changes at different output levels. • Does not consider the impact price has on quantity demanded

16. Cost Relations (Exhibit 18-4)

17. Break Even Analysis • Break - even analysis (505) • Break - even point (505) • BEP (in units) = • (Total Fixed Cost) / (Fixed Cost Contribution per Unit)

18. Break-Even Analysis (Exhibit 18-8)

19. Break Even #1 • Your fixed costs are \$100,000, your variable cost per unit = \$15 and your unit price = \$40. What is the break-even quantity? • If you sell 3000 units, what is the profit? • If you sell 6000 units, what is the profit?

20. Answer #1 • Break-even Quantity = • (100,000) / (40-15) = 4,000 units • At 3000 units? • 3,000 (\$40 - 15) - \$100,000 = \$25,000 loss • At 6000 units? • 6000 ( 40 - 15) - \$100,000 = \$50,000 profit

21. Break-even #2 • Your fixed costs are \$25,000, your variable cost per unit = \$5, and your unit price = \$15. What is the break-even quantity? • If you sell 1000 units what is the profit? • If you sell 3000 units, what is the profit?

22. Answer #2 • Break-even • (\$25,000) / (\$15 - 5) = 2,500 units • For 1000 units: • 1000 (\$15 - 5) - \$25,000 = -\$15,000 • For 3000 units: • (3000 (\$15 - 5) - \$25,000 = \$5,000

23. Break-Even #3 • Your fixed costs are \$500,000, your variable cost per unit = \$2.50, and your unit price is \$10. What is the break-even quantity? • If you sell 50,000 units what is the profit? • If you sell 80,000 units, what is the profit?

24. Answer #3 • Break-Even • (\$500,000) / (\$10 - 2.5) = 66,667 units • For 50,000 units • 50,000 (\$10 - 2.5) - \$500,000 = \$125,000 loss • For 80,000 units • 80,000 (\$10 - 2.5) - \$500,000 = \$100,000

25. BE & ROI • A target profit amount can be added to break even analysis to give the quantity needed to hit a certain profit goal. The target profit amount is added to the fixed costs in the equation.

26. BE & ROI Problem • Take the last example. Our goal is now a 10% ROI. What is the quantity needed to hit this ROI target?

27. BE ROI Answer • Our new “fixed costs” are • \$500,000 & the profit goal. • \$500,000 + (500,000 x 0.1) = \$550,000 • Break even for this ROI level is • \$550,000 / (\$10 - 2.50) = 73,334 units

28. Break Even • Calculating BEP at several possible prices and forecasting the probable demand at those price points can be helpful. • BE Analysis is also a good illustration of why managers constantly look for ways to cut costs. Cost cuts means you can achieve profitability at much lower sales levels.

29. Problems with BE Analysis • Break-even analysis has two big assumptions • 1] There is a horizontal demand curve • 2] Cost curves do not change over the production horizon

30. Competitive Bidding • Six steps a firm should use: • 1] Decide if the bid is worth the bid preparation costs • 2] Calculate the direct & indirect costs of the contract • 3] Estimate the probabilities of acceptance at each of several bid levels • 4] Calculate the expected profits at each bid level • 5] Evaluate the process after submission