Com pe tition m ay be m inim iz e d p rice it is pe

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Unformatted text preview: os Adding a s ta nda rd ma rkup to cos t Ignore s de ma nd a nd compe tition P opula r pricing te chnique be ca us e : It s im plifie s the pricing proce s s It Price com pe tition m ay be m inim iz e d P rice It is pe rce ive d as m ore fair to both buye rs and s e lle rs a nd General Pricing Approaches Cos t-Ba s e d P ricing Exa mple C os Va ria ble cos ts : $20 Fixe d cos ts : $ 500,000 E xpe cte d s a le s : 100,000 units De s ire d S a le s Ma rkup: 20% Expe Va ria ble Cos t + Fixe d Cos ts /Unit S a le s = Unit Cos t Va $20 + $500,000/100,000 = $25 pe r unit Unit Cos t/(1 – De s ire d Re turn on S a le s ) = Ma rkup P rice $25 / (1 - .20) = $31.25 General Pricing Approaches • C os t-Ba s e d P ricing: B re ak-Eve n Cos Analys is and Targe t Profit Pricing A nalys Bre a k-e ve n cha rts s how tota l cos t a nd Bre tota l re ve nue s a t diffe re nt le ve ls of unit volume . volume The inte rs e ction of the tota l re ve nue a nd The tota l cos t curve s is the bre a k-e ve n point. tota C ompa nie s wis hing to ma ke a profit mus t Compa e xce e d the bre a k-e ve n unit volume . General Pricing Approaches Bre a k-Eve n Ana lys is a nd Ta rge t P rofit P ricing Revenues 1000 Thousands of Dollars Target Profit $200,000 800 Total Costs Break-even point 600 400 Fixed Costs 200 0 10 20 30 40 Sales Volume in Thousands of Units Quantity To Be Sold To Meet Target Prof...
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