1 / 31

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

carol
Télécharger la présentation

Determining the Price of a Product or Service

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  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!

More Related