Ch 12 - Price setting strategies Flashcards
What are the factors affecting prices?
- break even analysis
- recommended retail prices
- percentage markup
- competitors prices
- market reactions
What is recommended retail price?
the selling price recommended by wholesalers
What is a percentage mark up?
- is the amount added to a cost price to determine a selling price
- PERCENTAGE mark up determines the profit margin made on an item
How do you calculate percentage mark up? eg: mark up of 50% for item $5
50% of $5 = $2.5 +$5 = $7.50
What are competitors prices?
- The price of the same product sold by different businesses
What are market reactions?
the amount of customers compared to the competitors customers
What is a break even analysis?
A calculation to determine the price of a product in order to cover all expenses it took to make
How do you calculate break even?
break even = fixed costs / selling price - variable costs
What is a fixed cost?
the expenses that remain constant regardless of the number of units sold in a period
What is a variable cost?
expenses that vary directly with a change in the volume of sales
What is a semi variable cost?
expenses that have both a variable and fixed component
What is a contribution margin?
the difference between the selling price and the variable cost of a product
How do you calculate profit to prove the break even point?
(selling price x units sold) - (variable cost x units sold) - fixed costs = profit
How do you calculate for profit?
break even + profit = (fixed costs + profit) / selling price - variable costs
What are the break even assumptions?
- all goods made are sold
- expenses can be divided into fixed and variable
- selling price of goods will remain constant
- all costs are known and will remain constant
