Pricing Calculations with BEP Graph.pptx

Price BMI3C What is a price? Definition: The amount of money, asked for or given in exchange for something else. It is an arbitrary amount determined by marketers. PRICE = VALUE Two Key Factors that determine price: • Cost of doing business • The profit that a company hopes to make from the sale...

Price BMI3C What is a price? Definition: The amount of money, asked for or given in exchange for something else. It is an arbitrary amount determined by marketers. PRICE = VALUE Two Key Factors that determine price: • Cost of doing business • The profit that a company hopes to make from the sale of its product/service Five factors affect price 1. Laws and pricing regulation 2. The competition’s pricing 3. Product positioning or image the company wants for the product 4. Consumer demand 5. Marketers judgement about the price the market will accept. What influences a price? • • • • • • • • • • • Convenience Status and image (positioning) Trends Competition Quality Cost to make and sell it How much the target customer will spend for it Profit that a company wants to make How much a company wants to sell How quickly they want/need to sell Others? Pricing Calculations BMI3C Success Criteria I will be successful when I can calculate the following: ▪ Variable Costs ▪ Fixed Costs ▪ Markup ▪ Margin ▪ Gross Profit ▪ Breakeven Point Determining the Price of a Product or Service Two factors to consider: 1. The cost of doing business 2. Intended profit Profit: The amount of money left over after all products are paid for and all expenses are covered Price = Cost of Doing Business + Profit Example Cost Expenses Profit $0.34 $0.11 $.20 Price = $0.34 + 0.11 + 0.20 = $0.65 2 Ways to Examine Price After it is Set 1. Markup ▪ The amount of money a business adds to the cost of a product ▪ Expressed as a % ▪ Markup is used to cover all expenses plus make a profit Markup = (Price – Cost) Cost Example Expenses = $0.11 Profit = $0.20 Cost = $0.34 Markup = ($0.11 + 0.20 +$0.34) - $0.34 $0.34 = 91% Example Therefore, Wal-Mart buys Skittles for $0.34 and marks them up by 91% 2. Margin ▪ The percentage of the price charged to customers that is not used to pay for the product Margin = Expenses + Profit Selling Price Example Expenses = $0.11 Profit = $0.20 Price = $0.65 Margin = $0.11 + 0.20 $0.65 = 48% Example Therefore, every time Wal-Mart sells Skittles it makes a 48% profit margin A typical retail scenario Buy product from manufacturer (cost) Add an amount to the price paid (mark-up) (% of cost) Sell it to a consumer (cost + mark-up = retail price) Pay business expenses (rent, salaries, etc) from $$ gained (margin) (% of retail price) Keep the extra! (profit) Markup and Margin Question Cody needs to make some extra money to buy Christmas presents for all of his friends so he opens a hotdog stand on Bank St. Markup and Margin Individual Question Cody needs to make some extra money to buy Christmas presents for all of his friends so he opens a hotdog stand on Bank St. ▪ He pays $0.30 for every hotdog that he sells. ▪ Propane and condiments cost him an additional $0.22 per hotdog. ▪ He wants to make $0.23 profit per hotdog ▪ What is his selling price? ▪ What is the markup? ▪ What is the margin? Answers Price = Cost of doing business + profit = $0.30 + 0.22 + 0.23 = $0.75 Markup = (Price – Cost) / Cost = ($.75 - $.30) / 0.30 = ($0.45 / 0.30) * 100 = 1.5 times OR 150% Answers Margin = Expenses + Profit/ Selling Price = $0.22 + 0.23 / $0.75 = $0.45 / $0.75 =0.6 OR 60% Break-Even Analysis ▪ How many units must be sold at a given price to cover all operating costs? Break-Even Analysis Three parts to break-even analysis: 1. Variable Costs: Costs that change in relation to the quantity of products or services sold 2. Fixed Costs: Costs that are do NOT change in relation to the quantity of products or services sold 3. Contribution (Gross Profit) = Selling Price – Variable Costs https://www.youtube.com/watch?v=7RocdGhTd6Q Variable Costs ▪ Costs that change in relation to the quantity of products or services sold ▪ If you were making bread – what would variable costs be? If you were making chairs? ▪ The more you make, the more variable costs are Fixed Costs ▪ Costs that are do NOT change in relation to the quantity of products or services sold ▪ If you ran a bakery, what would your fixed costs be? ▪ If you ran a chair manufacturing factory, what would your fixed costs be? ▪ Regardless of the quantity produced, this number is constant Practice! Quantity 0 100 200 300 400 VC per item ($5) Fixed cost $2000 Total costs Sales ($15 Gross per item) Profit Practice! Quantity VC per item ($5) Fixed cost $2000 Total costs Sales ($15 Gross per item) Profit 0 100 200 300 400 Wha t if 300 this bu max items sines s imu a m th day? is selli n A e is 5 y can nd the g 00 u s nits? ell a da y Practice! Quantity 0 1250 2500 3750 5000 VC per item ($20) Fixed cost $50,000 Total costs Sales ($40 Gross per item) Profit Practice! Quantity VC per item ($20) Fixed cost $50,000 Total costs Sales ($40 Gross per item) Profit 0 250 500 750 1000 1250 What if this 750 ite business i ma xim ms a day? s selling And th um the e y ca n sell a is 100 day 0 units ? Break-Even Analysis Gross Profit Example ▪ ▪ ▪ Selling Price = $1.49 Variable Cost = $0.35 GP = Selling Price – VC Therefore, $1.14 of Gross Profit is made with every sale This is used to pay for Fixed Costs Break-Even Point (BEP) is the # of units that must be sold at a given price to cover all operating costs BEP = Fixed Costs Gross Profit Break-Even Point Back to Cody ▪ He pays $0.30 for every hotdog ▪ $0.22 for gas and condiments per hotdog ▪ Sells hotdogs for $0.75 each ▪ Pays $200/month to rent the cart (Fixed) What is Cody’s BEP? ▪ Gross Profit = Selling Price – VC = $0.75 – 0.30 – 0.22 = $0.23 ▪ BEP = FC / Gross Profit = $200 / $0.23 = 870 hotdogs What is Cody’s BEP? ▪ Therefore, Cody has to sell 870 hotdogs in order to cover the cost of renting the cart. ▪ If he doesn’t sell 870 he will lose money! Break Even Point Graph Pg. 248 ▪ A teddy bear manufacturing company sells its bears to retailers for an average price of $18. ▪ The variable costs are $3 per pear. ▪ The company’s fixed costs are $150,000. To calculate the break even point, we first need to find the gross profit: Gross profit =selling price – variable costs =$18 - $3 =$15 We can now calculate the break-even point: BEP = fixed costs ÷ gross profit = $150,000 ÷ $15 = 10,000 bears BREAK-EVEN ANALYSIS $270,000 Break-even point Costs and Revenue $180,000 Fixed costs: $1,50,000 $18,000 Variable costs: $3 per unit 1000 bears QUANTITY SOLD 10,000 bears 15,000 bears Pricing and BEP Example ▪ Subway has the following costs for a 6”assorted sub it sells: ▪ Bread = $0.37 ▪ Meat = $1.68 ▪ Toppings = $0.39 ▪ Expenses = $1.30 (includes all other VC) ▪ Subway wants to make $1.25 per sub ▪ What is the Price? Markup? Margin? Gross Profit? What should the price be? ▪ Price = $4.99 What it the markup? What is the margin? ▪ Cost = $2.44 ▪ Markup = 105% ▪ Margin = 51% What is the Gross Profit? ▪ Assuming that: ▪ Bread = $0.37 ▪ Meat = $1.68 ▪ Toppings = $0.39 ▪ Expenses= $1.30 (includes all other VC) What it the gross profit? ▪ Total VC = $3.74 ▪ Gross Profit = $4.99 – 3.74 = $1.25 What is the BEP? Assume that Subway pays the following monthly Fixed Costs: ▪ Wages $12,500 ▪ Rent $2,100 ▪ Hydro $800 What is the BEP? ▪ FC = $15,400 ▪ BEP = $15,400 / $1.25 = 12,320 subs Therefore, every month Subway needs to sell 12,320 subs just to break even! Economies of Scale ▪ Economies of Scale – Means the more of a product that a company makes, the cheaper it’s production cost becomes. ▪ Ex) Our factory has Fixed Costs of $10,000 and it costs us 10$ per shoe that we make (VC = $10). ▪ If we make only 1 shoe it costs us $10,010 (which is $10,010 per shoe) ▪ If we make 23 shoes, it costs us $10,230 (which is $444 per shoe). ▪ If we make 900 shoes, it costs us $19,000 (which is $21 per shoe) ▪ As you can see, because of fixed costs, the more that we make the cheaper it becomes per product. This is called economies of scale.