Method of setting prices is found useful particularly

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method of setting prices is found useful, particularly while introducing a new produce. It is also useful for keeping labour employed during slack seasons and to prevent a shut-down. Despite all, the method cannot be followed for long. Because, we do not find the relevance of fixed cost in this method. 4.1.3. Break-Even Pricing Method This is the most sophisticated pricing method which takes into account both fixed costs and variable costs. Breakeven analysis is a managerial tool that emphasizes the relationship among decision variables such as price, costs and volume of sales. Sales Volume is a function of prices charged and the amount of products sold. (Price per unit multiplied by quantity sold). Any marketing plan is based on sales budget and the sales budget is itself based on the sales forecasts, i.e. estimated sales volume. As regards costs, we know that there are broadly two categories of cost viz. fixed costs and variable costs. Fixed costs remain constant for a given range of operations. Variable costs vary with the output or number of units produced. The concept of contribution is important in breakeven analysis. Unit contribution to fixed costs is found out by subtracting variable costs per unit from the selling price per unit. Mathematically: Unit Contribution Selling Price Variable Costs = –– to Fixed Costs per unit per unit Break-even point is the point at which the firm has neither gains nor losses. The firm just manages to cover its total costs. When the sales revenue exceeds total costs, the result or difference is profit and when sales revenue is less than total costs, the result or difference is loss. Thus, break even point is that point at which sales revenue is just equal to total costs. The equation for arriving at BEP is: BEP = C FC or VC SP FC Where FC = Fixed Cost SP = Selling Price Annamalai University
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126 VC = Variable Cost C = Contribution A diagrammatic representation of the breakeven point has been depicted in Fig.1. Figure 1 Break even Analysis In figure 1, OX axis indicates the quantity of production and OY the cost and revenue in rupees. With a rise in production, we find a rise in the variable cost. But the fixed cost remains static. The point where the total cost is equal to the revenue is the break-even point. In Fig. 1 this point is B. The assumption that fixed costs remain static is not true in the long run. Again, the demand estimate would also vary. Hence, it is doubted whether this method of pricing is perfect. Especially in a firm where we find fluctuation unit costs, this method would not be suitable. 4.2. Pricing Methods Based on Market Conditions: Besides costs, the market condition is also a reliable basic for the setting of prices. The stage of competition determines the market condition. Usually three methods exist which are based on market condition or demand viz; Pricing to meet competition Pricing above competition Pricing below competition 4.2.1. Pricing to Meet Competition: This is the simplest method of price setting. Here, each company or firm prices
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