Pricing

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Pricing
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• 1. If percentage change in quantity demanded is
  10 and percentage change in price is -10 then
  what will happen to total revenues when we raise
  price?
• Total revenue will increase
• Total revenue will decrease
• Total revenue will remain constant

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• 2.Lane furniture finds that the unit cost of
  manufacturing its recliner is 200. What price
  should they set if they want a 30 markup on
  COST?
• 60.00
• 1250.00
• 260.00
• 285.71

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• 3.Lane furniture finds that the unit cost of
  manufacturing its recliner is 200. What price
  should they set if they want a 30 markup on
  PRICE?
• 60.00
• 1250.00
• 260.00
• 285.71

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• 4. A local McDonalds Franchise sells its
  Cheeseburgers for 2.00. It knows that its unit
  variable costs are 0.75 and that its fixed costs
  are 500,000. What is the total revenue at break
  even?
• 500,000
• 400,000
• 800,000
• 1,300,000

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• 5. A local McDonalds Franchise sells its
  Cheesburgers for 2.00. It knows that its unit
  variable costs are 0.75 and that its fixed costs
  are 500,000. How many cheeseburgers must they
  sell to earn a 15,000 return (that is, a 15,000
  target profit)?
• 412,000 units
• 12,000 units
• 250,000 units
• 686,667 units

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Answers to Pricing Problems and Related Concepts
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• 1. If percentage change in quantity demanded is
  10 and percentage change in price is -10 then
  what will happen to total revenues when we raise
  price?
• Total revenue will increase
• Total revenue will decrease
• Total revenue will remain constant
• Unit Elastic demand, in which case TR stays the
  same when price goes up.

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• 2.Lane furniture finds that the unit cost of
  manufacturing its recliner is 200. What price
  should they set if they want a 30 markup on
  COST?
• 60.00
• 1250.00
• 260.00
• 285.71

• Selling Price Unit Cost (MU 1)
• 200(1.20) 260

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Mark-Up on Cost

• Designed to achieve a given target mark-up (MU)
  relative to the cost of the product
• Always remember
• Selling PriceMU Unit Cost

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Mark-Up on Cost

• So, all you need to know is how to calculate MU.
  And, when it is cost-based, it is
• MU on cost MUUnit Cost
• So
• Selling Price MUUnit Cost Unit Cost
• Selling Price Unit Cost (MU 1)

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• 3. Lane furniture finds that the unit cost of
  manufacturing its recliner is 200. What price
  should they set if they want a 30 markup on
  PRICE?
• 60.00
• 1250.00
• 260.00
• 285.71

• selling price Unit Cost / (1 - MU)
• 200/(1-.3) 200/.7 285.71

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Mark-Up on Price

• Designed to achieve a given target mark-up (MU)
  relative to the selling price of the product
• Again, always remember
• Selling PriceMU Unit Cost

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Mark-Up on Price

• So, all you need to know is how to calculate MU.
  And, when it is price-based, it is
• MU on selling price MUselling price
• So
• Selling Price MUselling price Unit Cost
• selling price (MUselling price) Unit Cost
• selling price (1-MU) Unit Cost
• So
• selling price Unit Cost / (1 - MU)

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• 4. A local McDonalds Franchise sells its
  Cheeseburgers for 2.00. It knows that its unit
  variable costs are 0.75 and that its fixed costs
  are 500,000. What is the total revenue at break
  even?
• 500,000
• 400,000
• 800,000
• 1,300,000
• This is a break-even problem
• Recall that

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Breakeven Quantity Fixed Costs
Price - Variable
Cost/Unit

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So.
Break Even Quantity 500,000 2.0 - 0.75
400,000 Units AND Total RevenuePriceQuantity
so TR at Breakeven 2.00400,000 800,000
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• 5. A local McDonalds Franchise sells its
  Cheesburgers for 2.00. It knows that its unit
  variable costs are 0.75 and that its fixed costs
  are 500,000. How many cheeseburgers must they
  sell to earn a 15,000 return (that is, a 15,000
  target profit)?
• 412,000 units
• 12,000 units
• 250,000 units
• 686,667 units
• Here we can adapt break-even formula to find the
  answer

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Quantity To Achieve a Target Profit
Fixed Cost Profit Goal Price -
Unit Variable Cost

• The target profit goal is treated as a fixed
  cost.

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Fixed Target Return Calculation
Quantity 500,000 15,000 2.00-0.75
412,000 Units
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Want profits 10 of sales. How many units must
be produced and sold to achieve this target?
Target 10 Pretax Profit on Sales (i.e., Price
per Unit)
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Fixed Costs Price -
VC (Target Price)
Another adaptation on break-even formula
III. To Achieve a Target Return On Sales

• The target return on sales is treated as a per
  unit variable cost.

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10 Target return on sales calculation
Quantity 500,000 2.00 .75
(2.10) 476,191 (rounded up to nearest unit)
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Profit/Loss Calculations

• Profit /loss TR TC
• TR number units unit selling price
• TC total fixed costs
• (unit variable costnumber of units)