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18 Price Setting in the Business World

Introduction to Price Setting (1). Setting price:Cost-Based Pricing: most firmsMarkup: Amount added to cost(High Markup ? High Profits) What is marked up most? (slow sellers; Ford vs. Mercedes)Usually % of sales PRICE* (keystone)Often standard for industry Easy supermarkets (1%) (similar

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18 Price Setting in the Business World

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    1. 18 Price Setting in the Business World Professor Close

    2. Introduction to Price Setting (1) Setting price: Cost-Based Pricing: most firms Markup: Amount added to cost (High Markup ? High Profits) What is marked up most? (slow sellers; Ford vs. Mercedes) Usually % of sales PRICE* (keystone) Often standard for industry Easy – supermarkets (1%) (similar operating expenses)

    3. Introduction to Price Setting (2) Methods: Average Cost mean cost (+) markup example: 50,000 cans Fixed Costs: $30,000 (salaries, mortgage, utilities) Variable costs: 40 cents/can (costs change w/produce) Total Cost: $30,000 + (.40 x 50,000) = $50,000 Avg Cost: $50,000 / 50,000 = $1 Price: add markup to avg cost – 25 cents Revenues: $1.25 x 50,000 = $62,500 Profit: Revenue – Total Cost = $62,500 – 50,000 = $12,500

    4. Introduction to Price Setting (3) Problem with average cost: may not sell projected # For example: sell 20,000 cans for $1.25 Revenues: 20,000 x 1.25 = $25,000 Costs: $30,000 + (1 x 20,000) = $50,000 Loss: $25,000

    5. Introduction to Price Setting (4) Markup Strategy (general: faster turn needs less markup) High: emphasize earnings on each item (luxury; jewelry) Low: emphasize turnover and decreasing inventory costs (bread; milk)

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