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Determining the Price of a Product or Service

Determining the Price of a Product or Service. Two factors to consider: The cost of doing business Intended profit. Profit: The amount of money left over after all products are paid for and all expenses are covered. Price = Cost of Doing Business + Profit. Example. Expenses $0.11. Cost

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Determining the Price of a Product or Service

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  1. Determining the Price of a Product or Service Two factors to consider: • The cost of doing business • Intended profit

  2. Profit: The amount of money left over after all products are paid for and all expenses are covered Price = Cost of Doing Business + Profit

  3. Example Expenses $0.11 Cost $0.34 $0.20 Profit Price = $0.34 + 0.11 + 0.20 = $0.65

  4. 2 Ways to Examine Price After it is Set

  5. 1. Markup • The amount of money a business adds to the cost of a product • Expressed as a % • Markup is used to cover all expenses plus make a profit Markup = $ Amount Store Adds Cost

  6. Example Expenses = $0.11 Profit = $0.20 Cost = $0.34 Markup = $0.11 + 0.20 $0.34 = 91%

  7. Example Therefore, Wal-Mart buys Skittles for $0.34 and marks them up by 91%

  8. 2. Margin • The percentage of the price charged to customers that is not used to pay for the product Margin = $ Amount Store Adds Selling Price

  9. Example Expenses = $0.11 Profit = $0.20 Price = $0.65 Margin = $0.11 + 0.20 $0.65 = 48%

  10. Example Therefore, every time Wal-Mart sells Skittles it makes a 48% profit margin

  11. Markup and Margin Question • Cody needs to make some extra money to buy Christmas presents for all of his ladies so he opens a hotdog stand on Bank St.

  12. Markup and Margin Question • He pays $0.30 for every hotdog that he sells. • Propane and condiments cost him an additional $0.22 per hotdog. • He wants to make $0.23 profit per hotdog

  13. Markup and Margin Question • What is his selling price? • What is the markup? • What is the margin?

  14. Answers Price = Cost of doing business + profit = $0.30 + 0.22 + 0.23 = $0.75 Markup = $ Amount store adds / cost = $0.22 + 0.23 / 0.30 = $0.45 / 0.30 = 1.5 OR 150%

  15. Answers Margin = $ Amount store adds / selling price = $0.22 + 0.23 / $0.75 = $0.45 / $0.75 =0.6 OR 60%

  16. Break-Even Analysis • How many units must be sold at a given price to cover all operating costs?

  17. Break-Even Analysis Three parts to break-even analysis: • Variable Costs: Costs that depend on the quantity of products or services sold Example:

  18. Break-Even Analysis 2. Fixed Costs: Costs that are constant. These do not depend on the quantity of sales. Example:

  19. Break-Even Analysis 3. Sometimes called Contribution Margin Example: Gross Profit = Selling Price – Variable Costs

  20. Break-Even Analysis • Gross Profit Example • Selling Price = $1.49 • Variable Cost = $0.35 • GP = Selling Price - VC • Therefore, $1.14 of Gross Profit is made with every sale of an Iced Cap • This is used to pay for Fixed Costs

  21. Break-Even Point Again, Break-Even Point (BEP) is the # of units that must be sold at a given price to cover all operating costs BEP = Fixed Costs Gross Profit

  22. Break-Even Point Back to Cody • He pays $0.30 for every hotdog • $0.22 for gas and condiments per hotdog • Sells hotdogs for $0.75 each • Pays $200/month to rent the cart (Fixed)

  23. What is Cody’s BEP? • Gross Profit = Selling Price – VC = $0.75 – 0.30 – 0.22 = $0.23 • BEP = FC / Gross Profit = $200 / $0.23 = 870 hotdogs

  24. What is Cody’s BEP? • Therefore, Cody has to sell 870 hotdogs in order to cover the cost of renting the cart. • If he doesn’t sell 870 he will lose money!

  25. Pricing and BEP Example • Subway has the following costs for a 6”assorted sub it sells: • Bread = $0.37 • Meat = $1.68 • Toppings = $0.39 • Expenses = $1.30 (includes all other FC and VC) • Subway wants to make $1.25 per sub

  26. What should the price be? • Price = $4.99

  27. What it the markup?What is the margin? • Cost = $2.44 • Markup = 105% • Margin = 51%

  28. What is the Gross Profit? • Assuming that: • Bread = $0.37 • Meat = $1.68 • Toppings = $0.39 • Expenses = $1.30 (includes all other FC and VC) • Other VC = $0.90

  29. What it the gross profit? • Total VC = $3.34 • Gross Profit = $4.99 – 3.34 = $1.65

  30. What is the BEP? • Assume that Subway pays the following monthly Fixed Costs: • Wages $12,500 • Rent $2,100 • Hydro $800

  31. What is the BEP? • FC = $15,400 • BEP = $15,400 / $1.65 = 9,333 subs Therefore, every month Subway needs to sell 9,333 subs just to break even!

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