Thus the full cost of production would be Rs 1150 1 Now if the marketer wishes

Thus the full cost of production would be rs 1150 1

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Thus the full cost of production would be Rs. 11.50 … … … (1) Now if the marketer wishes to sell the soap and continue in business he will have to price the cake of soap @ Rs. 11.50 + some amount be it 0.50 paise. Rs. 1, Rs. 2 or whatever. In this method the marketer has limited himself to a cost of Rs. 11.50, above which only he has to price his product. Here he has gone by a concept, called full cost pricing. Supposing on the basis of (1) above, taking a 0.50 p margin per cake of soap the marketer feels that the estimated demand would be 50000 cakes of soap … … (2) He would make a profit as shown below: Sales of 50000 * 12.00 = Rs. 600000.00 Less: Cost of Soap (variable) 50000*10.00 = Rs. 500000.00 + Fixed Cost = 75000.00 Rs. 575000.00 Profit Rs. 25000.00 …(3) Rs. Raw material per cake of soap (including all ingredients such as vegetable oil, perfumes, binding agents etc….) 5.00 Packing Material (Including tissue, wrapping etc….) 4.00 Labor variable charges per cake of soap 1.00 Total 10.00 78
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PRICING But supposing @ Rs. 12.00 per cake the actual demand turns out to be only 40000 cakes Then he would have sales of 40000 * 12.00 = Rs. 480000.00 Less: variable cost 40000 * 10.00 = Rs. 400000.00 + fixed Cost 75000.00 Rs. 475000.00 Profit Rs. 5000.00 + Unsold 1000 cakes of soap @ Rs. 10.00 = Rs. 100000 worth of idle stocks….. (4) There is another way to look at the issue. In this other method, the marketer will look at the issue from the perspective of variable cost, viz., Rs. 10.00 per cake of soap, and try to fix prices at different levels to estimate likely demand. He would approach the issue in the following way: He would now take into consideration the marginal cost of Rs. 10.00 per cake of soap. You will observe that whatever units of soaps the plant is going to produce, the variable cost will remain @ Rs. 10 per unit. Thus, if one unit is produced the variable cost will be Rs. 10.00, if 2 units are produced the cost will be 2*10= Rs. 20.00, if 20 units are produced the cost would be 20*10 = Rs. 200.00. Now the marketer may carry out a market survey and find that if the price is reduced to Rs. 11.75 the likely demand may be 60000 units. … … … (5) If the price is reduced to Rs. 11.50 the likely demand may be 80000 units … … (6) and if the price is reduced to Rs. 11.25 the likely demand may be 90,000 units… … (7) 79
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PRICING Market survey may indicate that reducing prices further may not significantly impact the demand. By taking a marginal cost approach, where the two types of costs viz. variable cost of manufacturing a unit of soap Rs. 10.00 and the total monthly fixed cost Rs. 75000.00 which would be incurred irrespective of values produced, are treated separately the marketer will see how the profit scenario changes: At price level Rs. 12.00 total demand 50000 units The total contribution is (12.00-10.00) * 50000 = Rs. 100000 Less: Fixed cost Rs. 75000 Profit Rs. 25000 .(8) At price level Rs. 11.75 total demand 60000 units The total contribution is (11.75-10.00)* 60000 = Rs. 105000 Less: Fixed cost Rs. 75000 Profit Rs. 30000 …(9) At price level Rs. 11.50 total demand 80000 units The total contribution is (11.50-10.00)* 80000 = Rs. 120000 Less: Fixed cost Rs. 75000 Profit Rs. 45000 ..(10) At price level 11.25 total demand 90000 units The total contribution is (11.25-10.00)* 90000 = Rs. 112500 Less: Fixed cost Rs. 75000 Profit Rs. 37500 …(11) The marketer finds that of the different options the pricing @ Rs. 11.50 maximizes his profit is. Rs. 45000.00 80
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PRICING
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