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10-28 Lecture - AEM 2400 Lecture Agenda Pricing strategies...

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10/28/09 AEM 2400 Lecture Agenda: Pricing strategies Estimating demand/revenue/costs Breakeven analysis Selecting a price level Halloween Sales 2008: Candy chocolate Miniatures 154 Million 18% Price Elasticity increases when: 1. Large number of substitutes 2. Product is not a necessity 3. Product is expensive relative to income a. Tobacco – always assumed to be price inelastic, however in the last 5- 10 years, tobacco prices (in response to taxes), tobacco demand has decreased greatly Adding costs – MR = ΔTR/ ΔQ MC = ΔTC/ΔQ Where MR = MC, profits are maximized Anywhere to the right of the intersection, costs exceed total revenue TC = VC + FC Profit = TR – TC Break-even Analysis Puts TC and TR together to determine profitability at different output levels BEP (Q) = Fixed cost / Price-variable cost P = [Fixed costs + (Variable cost * Quantity)] / Quantity Example: Luxury cruise business o P = $2,000 o FC = $10,000,000 o VC = $1,000 o How many cruises to break even?
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