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Price_Setting_350_Notes_Apr_09

# Price_Setting_350_Notes_Apr_09 - Pricing Fundamentals Cost...

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Pricing Fundamentals

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Cost Pricing Strategies 1. Markup 2. Average Cost 3. Experience Curve 4. Target Return 5. Break-Even Analysis 6. Marginal Analysis
Markup Pricing Resellers set prices by using a markup Markup => a dollar amount added to the cost of a product to reach the selling price Markup (percent) is based on selling price

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Markup Pricing (continued) Resellers often use a std markup percent, apply it to all products A standard markup is acceptable: (a) covers the firm’s operating expenses (b) provides a reasonable profit
Markup: Algebraic Method ♠ Manufacturer => Fix-It Tools (power drill) Key Issue: Since we use a 10% markup, what is the cost of the drill to the wholesaler?

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Markup: Algebraic Method (cont) Solve for both x and y: cost + markup = selling price (Equation 1) 21.60 + x = y percent*selling price = markup (Equation 2) .10y = x
Markup: Algebraic Method (cont) Substitute y for x: 21.60 + .10y = y 21.60 = .90y y = 24, x = 2.40

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Markup: Ratio Method Express markup & cost in terms of y: markup/cost = .10y/.90y x/21.60 = .10/.90 .90x = .10(21.60) x = 2.40 Note Markup Chain
Markup Price: Useful Equations Equation #1: Markup % = Markup / (Cost + Markup) Equation #2: Selling Price = Cost / (100% - Markup %)

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Markup Pricing Insights High markups can’t insure big profits Low markups => speed turnover, raise stockturn rate Stockturn rate => the number of times the average inventory is sold in a year
Stockturn Rate Store A Store B Annual Sales: \$100,000 \$100,000 Stockturn Rate : 1 5

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Price_Setting_350_Notes_Apr_09 - Pricing Fundamentals Cost...

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