Chapter 14 Flashcards
Keystone method
Set price at a fixed percent over cost of merchandise.
Retail price by doubling it
Markup %
= (retail -cost)/retail
Initial markup %
Initial mu%= merchandise cost/ (100%+reduction %)
Mmu% is same as GM%
What is the maintained markup percentage on coffee makers if cost of goods sold is $70,000 and net sales are $140,000?
140,000-70,000/140,000
=50%
Initial Retail $
Initial R$ = Cost / (100%-IMU%)
IMU% = 42.5% + 15%
100% + 15%
= 50%
Initial R$ = Cost / (100%-IMU%)
= $18/50%
= $36.00
The merchandise cost for a Kim toaster is $63.00 and the store wants to use an initial markup of 62%. Calculate the initial retail price
=Cost/(100%-IMU%)
=63/(100%-62%)
=165.79
Setting Retail Price Based on Demand
- Based on customer price sensitivity and cost
- Charges as much as customers are willing to pay
- Considers the wants and needs of the target market
- Consider the effect of price changes on sales and profit
- Attempts to achieve target levels of profits
- Set prices to maximize profits
Price Elasticity Formula
Price Elasticity = % change in q’ty sold (or demand)/ % change in price
(new q’ty sold – old q’ty sold)/old q’ty sold / (new price – old price)/(old price)
What is the price elasticity estimated by the retailer for this product in case the retailer increases the price from $25 to $35? Is the product price elastic or inelastic? If it is elastic or inelastic, what does that mean?
Old price 25 and 35 new price (1200quantity -1500q)/1500 (35-25)/25 =-.50 Price insensitive (inelastic)
Demand-based pricing: T or F
is based on how much customers are willing to pay
True
Demand-based pricing: T or F
is based on customer price sensitivity and cost
true
Demand-based pricing: T or F
attempts to achieve target levels of profits
True
Demand-based pricing: T or F
is used to determine profit-maximization prices
True
Demand-based pricing: T or F
is easy to implement
False
Break-Even Analysis
BEP= TOTAL FIXED COSTS/ ACTUAL UNIT SALE PRICE -UNIT VARIABLE COST
Fixed Cost
Cost that are stable and don’t change with the q’ty of product that’s produced and sold
Variable Cost
Cost that varies with the level of production and/or sales
Market share to break even formula
Market Share to break-even = BEP units/ Total units (market size)
Complementary method:
Cost-oriented pricing strategy
Retailers may use this strategy as a starting point
Complementary method:
Competition-oriented pricing strategy
Retailers may use this strategy for an outside check in the market place.
Complementary method:
Demand-oriented pricing strategy
Retailers may use this strategy to fine-tune their pricing strategy
