ROI Pricing Strategy: Desired ROI per Unit Formula Quiz and Flashcards

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Questions and Answers

What is the primary purpose of using ROI pricing in a business?

To determine the estimated units of sales

To allocate fixed costs to a product or service

To ensure the business covers its costs and earns a suitable return on investment (correct)

To calculate the markup percentage

According to the ROI pricing formula, what is the purpose of the '1+' in the denominator?

To calculate the markup percentage

To ensure the business earns a return on investment

To express the Desired ROI as a percentage (correct)

To account for fixed costs

Which of the following is a benefit of using ROI pricing?

It determines the contribution approach to pricing

It helps to allocate variable costs to a product or service

It calculates the total costs of production

It ensures a business prices its offerings competitively (correct)

What is the term for the target return that a business wants to achieve, expressed as a percentage?

Desired ROI Signup and view all the answers

According to the ROI pricing formula, what is the numerator composed of?

Total Costs and Desired ROI Signup and view all the answers

What is the primary goal of pricing decisions for profit-oriented organizations?

Maximize profit Signup and view all the answers

What is the approach to pricing that involves allocating a proportion of fixed costs to each unit of production?

Full-cost pricing Signup and view all the answers

Which pricing approach involves adding a markup to the total variable cost per unit to determine the selling price?

Variable cost-plus pricing Signup and view all the answers

What is the pricing approach that involves calculating the selling price based on the rate of return on investment desired by the firm?

Return on investment (ROI) pricing Signup and view all the answers

What is the approach to pricing that involves calculating the selling price by adding a markup to the total cost per unit, including both variable and fixed costs?

Full-cost pricing Signup and view all the answers

What is the main purpose of the mark-up percentage in the contribution approach pricing method?

To ensure a target profit and recover fixed costs Signup and view all the answers

Which pricing approach involves calculating the selling price based on the contribution margin per unit, minus the fixed costs, and then adding a markup?

Contribution approach pricing Signup and view all the answers

What is not included in the computation of selling price under the contribution approach pricing?

Fixed cost Signup and view all the answers

What is the formula to compute the selling price under the contribution approach pricing?

SP = VC + (MU% × VC) Signup and view all the answers

What is the main goal of the ROI pricing strategy?

To set a price that is perceived as fair and valuable by the customer Signup and view all the answers

What is the ROI formula expressed as a percentage?

ROI % = (Gain from Investment - Cost of Investment) / Cost of Investment x 100 Signup and view all the answers

Which pricing method is based on the expected return on investment for the customer?

Return on Investment (ROI) pricing Signup and view all the answers

Study Notes

Pricing Decisions

Pricing refers to the determination of the appropriate selling price for a product or service provided by a firm.
The selling price includes all the costs incurred to produce and sell the product or service, plus an acceptable mark-up or profit.

Factors Affecting Pricing

No information provided in the given text.

Cost-Based Pricing

Full-Cost Pricing: includes all costs incurred to produce and sell the product, or all the costs incurred in rendering the service, plus an acceptable mark-up or profit.
Material Cost Pricing: No information provided in the given text.
Conversion Cost Pricing: No information provided in the given text.
Variable Cost Pricing: uses only variable costs that vary with the product as the basis for computing the mark-up.

Return on Investment (ROI) Pricing

ROI pricing strategy sets prices based on the expected return on investment for the customer.
The goal is to set a price that is perceived as fair and valuable by the customer, while also ensuring a profitable return for the business.
Formula: Price = (Total Costs + Desired ROI) / Expected Sales Volume
Desired ROI: the target return that the business wants to achieve, expressed as a percentage.
Expected Sales Volume: the estimated units that the business expects to sell in a specific period of time.
ROI pricing helps ensure profitability, manages risk, and enables competitive positioning.

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Description

Test your understanding of ROI pricing, a method used to determine the price of a product or service based on total costs, desired ROI, and expected sales volume. Learn how businesses use ROI pricing to ensure profitability and competitiveness. Evaluate your knowledge of this pricing strategy and its benefits.

ROI Pricing Method

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