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Basic Questions on the Operating Statement

Basic Questions on the Operating Statement. Ted Mitchell. Inputs.

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Basic Questions on the Operating Statement

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  1. Basic Questions on the Operating Statement Ted Mitchell

  2. Inputs

  3. Speedy Shoe can maintain its current costs and sales volume in the next period but it wants to improve its net profit. It has a goal to increase its ROS by an additional 5% over its current ROS percentage. What price must be charged for Speedy shoe to achieve its targeted return on sales? The new selling price per unit is ________________.

  4. Speedy Shoe can maintain its current costs and sales volume in the next period but it wants to improve its net profit. It has a goal to increase its ROS by an additional 5% over its current ROS percentage. What price must be charged for Speedy shoe to achieve its targeted return on sales? The new selling price per unit is ________________.

  5. What is the current ROS? 41.17% • What is the desired ROS? 41.17% + 5% = 46.47% • What is the formula you learned in Mkt 210 for calculating a selling price when you have a target return on sales? • Price = (Average Cost per Unit) / (1-ROS)

  6. What is the current ROS? 41.17% • What is the desired ROS? 41.17% + 5% = 46.47% • What is the formula you learned in Mkt 210 for calculating a selling price when you have a target return on sales? • Price = (Average Cost per Unit) / (1-ROS)

  7. What is the current ROS? 41.17% • What is the desired ROS? 41.17% + 5% = 46.47% • What is the formula you learned in Mkt210 for calculating a selling price when you have a target return on sales? • Price = (Average Cost per Unit) / (1-ROS) • Price = (Average Cost per Unit) / (1-0.4617) • Need to know the average cost per unit or BEP?

  8. What is the average cost per unit or BEP? • BEP = (Total Cost) / Units Sold • BEP = (R-Z)/Q = 4,911,463/86,065 • BEP = $57.07

  9. What is the average cost per unit or BEP? • BEP = (Total Cost) / Units Sold • BEP = (R-Z)/Q = 4,911,463/86,065 • BEP = $57.07 • Solve for Price • Price = (Average Cost per Unit) / (1-ROS) • Price = $57.07 / (1-0.4617) • Price = $106.02

  10. Speedy Shoe can maintain its current costs and sales volume in the next period but it wants to improve its net profit. It has a goal to increase its ROS by an additional 5% over its current ROS percentage. What price must be charged for Speedy shoe to achieve its targeted return on sales? The new selling price per unit is ________________. $106.02

  11. Two Points • You can NOT just memorize the formulaKnow where it comes from! • You can N0T just learn the mechanics of the solution.Know why you are doing it!

  12. Two Points This is why we need Mkt316 • You can NOT just memorize the formulaKnow where it comes from! • You can N0T just learn the mechanics of the solution.Know why you are doing it!

  13. Why are you doing it? • Your Boss wants it. BUT WHY! • Cost based prices are benchmarks • Cost based pricing formula sets the stage for discussions on profitable pricing strategy • ROS is a central measure of the firm’s operating efficiency

  14. Where did it come from? Price = (Average Cost per Unit) / (1-ROS) Price = BEP /(1-ROS)

  15. The Total Costs

  16. Revenue The Total Costs

  17. Revenue The Total Costs Profit

  18. Basic Profit Equation • Profit = Revenue -Total Cost • Revenue = Total Cost + Profit Let Revenue = PQ • PQ = Total Cost + Profit • P = (Total Cost)/Q + Profit/Q We know have to solve for the price, P

  19. Basic Profit Equation • Profit = Revenue -Total Cost • Revenue = Total Cost + Profit Let Revenue = PQ • PQ = Total Cost + Profit • P = (Total Cost)/Q + Profit/Q We know we have to solve for the price, P

  20. We know we have to solve for the price, P • P = (Total Cost)/Q + (Desired Profit)/Q We know Total Cost/Q = average cost per unit or BEP Desired Profit = ROS(P)(Q) Substitute what we know • P = BEP + ROS(P)(Q)/Q • P = BEP + ROS(P) • P - ROS(P) = BEP • P (1-ROS) = BEP • P = BEP/ (1-ROS)

  21. We know we have to solve for the price, P • P = (Total Cost)/Q + (Desired Profit)/Q We know Total Cost/Q = average cost per unit or BEP Desired Profit = ROS(P)(Q) Substitute what we know • P = BEP + ROS(P)(Q)/Q • P = BEP + ROS(P) • P - ROS(P) = BEP • P (1-ROS) = BEP • P = BEP/ (1-ROS)

  22. We know we have to solve for the price, P • P = (Total Cost)/Q + (Desired Profit)/Q We know Total Cost/Q = average cost per unit or BEP Desired Profit = ROS(P)(Q) Substitute what we know • P = BEP + ROS(P)(Q)/Q • P = BEP + ROS(P) • P - ROS(P) = BEP • P (1-ROS) = BEP • P = BEP/ (1-ROS)

  23. The pricing equation We memorized in Mkt210 • We know have to solve for the price, P • P = (Total Cost)/Q + (Desired Profit)/Q We know Total Cost/Q = average cost per unit or BEP Desired Profit = ROS(P)(Q) Substitute what we know • P = BEP + ROS(P)(Q)/Q • P = BEP + ROS(P) • P - ROS(P) = BEP • P (1-ROS) = BEP • P = BEP/ (1-ROS)

  24. Why we are in Mkt 316! • You can NOT just memorize the formulaKnow where it comes from! • You can N0T just learn the mechanics of the solution.Know why you are doing it!

  25. Why we are in Mkt 316 To learn something in this course takes a lot of time and a lot of effort • You can NOT just memorize the formulaKnow where it comes from! • You can N0T just learn the mechanics of the solution.Know why you are doing it!

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