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Understanding ROI and Pricing Strategies: Formulas and Calculations for Profit Maximization

This guide explores key financial concepts including ROI (Return on Investment) and pricing strategies. It details essential formulas such as ROI calculation, sales margin, and turnover, as well as the impact of price elasticity of demand on pricing decisions. The profit-maximizing price can be determined through a specific formula, integrating variable costs and markup percentages. These calculations aid in effective decision-making for businesses aiming for increased profitability. Understanding these factors is crucial for effective financial management and strategic planning.

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Understanding ROI and Pricing Strategies: Formulas and Calculations for Profit Maximization

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  1. Exam 2 - Formulas

  2. Net operating income Average operating assets ROI = Net operating income Sales Margin = Sales Average operating assets Turnover = Margin  Turnover ROI = Understanding ROI

  3. Calculating Residual Income ( )

  4. ln(1 + % change in quantity sold)ln(1 + % change in price) Єd = Natural log function Price elasticity of demand Price Elasticity of Demand

  5. Profit-maximizingmarkup onvariable cost -1 = 1 + Єd The Profit-Maximizing Price Under certain conditions, the profit-maximizing price can be determined using the following formula: Using the above markup, the selling price would be set using the formula: Variablecost perunit -1 Profit-maximizingprice ) × = (1 + 1 + Єd

  6. Markup %on absorptioncost (Required ROI × Investment) + S & A expensesUnit sales × Unit product cost = Determining the Markup Percentage The equation for calculating the markup percentage on absorption cost is shown below.

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