Transcript Price - Cambridge College Secondary Humanities

AS Business Studies Marketing
Cost-based pricing
Cost plus pricing
The business assesses the cost per unit and adds an
amount on top (profit margin) of the calculated cost
Unit Cost
50% mark up on the cost
Selling Price
$10
Cost Plus Pricing Exercise
Unit Cost
20% mark up on the cost
Selling Price
$250
Unit Cost
33.3% mark up on the cost
Selling Price
$750
Unit Cost
75% mark up on the cost
Selling Price
$400
Target Pricing
The price is determined by a required rate of return on a
certain level of output or sales
A business sets a target on 100,000 units
Total Cost of 100,000 units
$1,000,000
Required return 30%
Total Return
Price per unit (1,300,000/100,000)
Target Pricing Exercise
Total Cost of 50,000 units
Required return 50%
Total Return
Price per unit (
/
Total Cost of 100,000 units
Required return 25%
Total Return
Price per unit (
/
Total Cost of 50,000 units
Required return 33.3%
Total Return
Price per unit (
/
$250,000
)
$1,800,000
)
$600,000
)
Full Cost (Absorption Cost) Pricing
The company attempts to calculate a unit cost for the
product and adds a profit margin
Output
10,000
Fixed Cost
$100,000
Variable Cost
$10
Total Variable Cost
Total Cost of Production
Average Cost (Unit Cost)
Profit margin of 25%
Selling price
Full Cost Pricing Exercise
Output
Fixed Cost
Variable Cost
Total Variable Cost
Total Cost of Production
Average Cost (Unit Cost)
Profit margin of 25%
Selling price
10,000
$100,000
$10
Full Cost Pricing Exercise
Output
Fixed Cost
Variable Cost
Profit Margin (25%)
25,000
$100,000
$4
Output
Fixed Cost
Variable Cost
Profit Margin (50%)
80,000
$400,000
$7
Contribution Cost Pricing
 Pricing does not try to allocate the fixed costs to specific
products
 A firm will calculate the variable cost per unit and add an
extra amount (the contribution) for fixed costs
 If enough units are sold then sales revenue will cover all
fixed costs
Unit Cost
Fixed Cost
Contribution
Selling Price
Sales required to cover all costs
$5
$750,000
$2.50
Contribution Cost Pricing Exercise
Variable Cost
Fixed Cost
Contribution
Selling Price
Sales required to cover all costs
$10
$1,500,000
$5
Variable Cost
Fixed Cost
Contribution
$7
$300,000
$3
Variable Cost
Fixed Cost
Contribution
$6
$1,200,000
$6
Select and explain a suitable pricing strategy for the
following products
New Range of Televisions
New Fashion Magazine
Rolex Watches
Cinema Tickets
Pepsi Cola
What determines Prices?
 Costs of Production
 Number and strength of competitors in the market
 Price Elasticity of Demand
 Branding/ Firm reputation or image
 Whether the product does or does not have a USP
 How much the consumer is willing to pay
Evaluate what is the most
important factor in determining
the price of Marlboro Cigarettes
Answering the essay question
 Introduction: Key Terms
 Main body: Analyse each factor that determines price and
relate to Marlboro. Each factor should be one paragraph.
 E.g. The costs of production are an important consideration
for any business that is making a pricing decision. If the price
Marlboro sets for its product does not cover the cost of
producing it then with each sale the company will return a
loss and will quickly fail. The difference between the cost of
producing one unit and the selling price represents the firms
profit margin.
 Evaluation: Answer the initial question. This should be
the identification of the most important factor(s) with
clear reasoned judgement for your choice