Pricing Solutions PDF

PRICING – EXERCISES Sp= Sale price Cp= Cost price Manufacturer → Agent → Wholesaler → retailer → consumer M*= Markup on Selling price Mº = Markup on cost price INITIATION TO THE PRICE CALCULATION 1. A retailer buys a product at 100€. What is your sale price if you apply a margin of 17% on s...

PRICING – EXERCISES Sp= Sale price Cp= Cost price Manufacturer → Agent → Wholesaler → retailer → consumer M*= Markup on Selling price Mº = Markup on cost price INITIATION TO THE PRICE CALCULATION 1. A retailer buys a product at 100€. What is your sale price if you apply a margin of 17% on selling price? 100€ Sp retailer consumer 𝑆𝑝−𝐶𝑝 𝑆𝑝−100 M*retailer= 17% → 0.17 = → 0.17= → 0.17Sp= Sp – 100; 100= 0.83Sp; 𝑆𝑝 𝑆𝑝 Sp= 120,48€ 2. A consumer pays 200€ for a product. This costs the seller 125€. With what markup is the seller working? 125 € 200€ retailer consumer 𝑆𝑝−𝐶𝑝 200−125 M0retailer= = = 0.6 = 60% (markup on cost price) 𝐶𝑝 125 𝑆𝑝−𝐶 200−125 M*retailer= = = 0.375 = 37.5% (markup on selling price) 𝑆𝑝 200 3. A retailer buys products for 100€ and decides to apply an 80% markup on cost price. At what price will the retailer sell? 100 € Sp retailer consumer 𝑆𝑝−𝐶𝑝 𝑆𝑝−100 M0m= 0.80= = ; 80= Sp-100; Sp= 180€ 𝐶𝑝 100 4. A buyer has purchased a sofa for 1022€. Knowing that the retailer works with a margin on selling price of 30% (and that it is a short channel) What is the manufacture price? Sp 1022€ Manufacturer retailer consumer 𝑆𝑝−𝐶𝑝 1022−𝐶𝑝 M*m= 0.30= ; 0.30= ; 306.6= 1022-Cp ; Cp=715.4 € (the cost Price for the 𝑆𝑝 1022 retailer is the sale price for the manufacturer) 5. In a channel there are 3 intermediaries. The first is an agent that charges a commission of 2% on the selling price. The second is a wholesaler that charges 15% on its selling price. And the third is a retailer that applies a margin of 30% on cost price. If the consumer buys at € 1000, can you calculate how much the manufacturer is selling? 1,000€ * * M. A (M =2%) Wholesaler (M =15%) retailer (M0=30%) consumer 1000−𝐶𝑝 M0retailer= 0.30= ; 0.30Cp =1,000 – Cp; Cp= 769.23€ → Manufacturer Sp 𝐶𝑝 769.23−𝐶𝑝 M*Wholesaler= 0.15= ;115.385= 769.23-Cp; Cp= 653.84€ → Agent Sp 769.23 653.84−𝐶𝑝 M*Agent= 0.02= ;13.076= 653.84-Cp; Cp= 640.76€ → Manufacturer Sp 653.84 TONCE BROTHERS The company Tonce Bothers has made a large investment (5,000,000€) in its production system, with the intention of improving the quality of its final product. It is very concerned about making the most of its investment, but it is not clear if the resulting sale price will be acceptable or not taking into account that from a survey, it has been obtained that the maximum price acceptable to the final consumer is 245 euros. Negotiations with its retailers have made the company agree a 20% markup on cost price. Similarly, the conditions of the wholesaler are a markup of 12% on selling price. In addition, the following data is available: - Fixed costs of Tonce Brothers: 182,000€ - Variable costs of Tonce Brothers: € 700,000 - Expected sales: 7,000 units Knowing that the wholesaler sells at 200 €, answer: 1. What is the return on investment of Tonce Brothers? 𝐹𝑐 𝑟∗𝐾 Price = Vc(unit) + + 𝐸(𝑄) 𝐸(𝑄) Cost Profit margin 200−𝐶𝑝 M*Wholesaler.= 12%; 0.12= ; 24= 200-Cp; Cp= 176€ 200 700,000 182.000 𝑟∗5,000.000 176 = + + → 176= 126 + 714.29r; r=0.069; r= 7% 7,000 7,000 7,000 2 2. Is the price at which the product finally reaches the public acceptable? 𝑆𝑝−200 Mºretailer=20%; 0.20= ; P= 240€ 200 Because 240€ < Maximum acceptable price, the price is acceptable MOTORACE The company MOTORACE has made an investment of 2,000,000 € at its carburetor manufacturing plant located in Almusafes (Valencia) in order to produce a new model. Before launching the new product to the market, market research has been carried out among car manufacturers who are willing to accept a price for a product with these characteristics of 180.3 € On the other hand, the Administration Board requires to the director an annual return of 35% on the investment. In addition, the director considers necessary to have the collaboration of intermediaries, who would be those who deal directly with the car manufacturers. That collaboration imply agreeing a margin on cost price of 45% with the intermediaries. The accounting department indicates that the only fixed costs attributable to the project have their origin in the amortization of the investment (estimated useful life: 5 years, linear amortization system). Knowing that the aforementioned research estimates possible sales of 30,000 carburetors for next year. It is requested: K= 2,000,000 € Max. accepted price: 180.30 € r= 35% Fixed costs (total)= 2,000,000€/ 5 years = 400,000 € Máx. accept. price= 180.30€ Manufacturer (Motorace) Intermediary (Mº= 45%) consumer 𝐹𝐶 𝑟∗𝐾 Precio = VC(unit) + + 𝐸(𝑄) 𝐸(𝑄) 1. Calculate the maximum allowed unit variable cost. 180.30−𝐶𝑝 Mº= 0.45= ; 0.45Cp= 180.30 – Cp; Cp= 124.34€ 𝐶𝑝 400,000 0,35∗2,000,000 124.34 = VCu + + ; VCu= 87.67€ 30,000 30,000 3  2. Assuming that the unit variable cost was 100€, what profitability would you have to agree with your Administration Board to continue selling at the same price? 400,000 𝑟∗2,000,000 124.34 = 100 + + ; r= 16.51% 30,000 30,000 3. Maintaining the initial profitability, what other measures could our director undertake to not alter the price, assuming a variable cost of 100€? RENEGOTIATING THE INTERMEDIARY'S MARKUP 400,000 0.35∗2,000,000 P (VCu= 100) → P= 100 + + = 136.67€ 30,000 30,000 180.30−136.67 Mº intermediary= → Mº= 31.93% 136.67 THE COMPANY X The Company X distributes its products in the following way: its products are sold in 200 retail stores. Company X works with 4 agents who resell the product at 50 euros, with a markup on cost price of 4.17% to 15 wholesalers. The wholesalers work with a markup on sale price of 12.28%. 1. Calculate the income that the manufacturer receives from the 65 euros paid by the final consumer. 50€ 65€ Company X 4 agents 15 Wholesalers 200 retailers Consumer (Mº=4.17%) (M*=12.28%) 50−𝐶𝑝 Mº=0.0417 = ; C= 47.99 € 𝐶𝑝 2. The company has realized that 65 euros is an excessive price since consumers are willing to pay a lower price (60 euros). Assuming that retailers apply a markup on sale price, at what price would the manufacturer have to sell respecting the margins of the intermediaries in this case? 1st) retailer markup: 𝑃−50 M*Wholesaler→ 0.1228= ; P=56.99€ 𝑃 65−56.99 M* retailer = = 12.32% 65 4 2nd) “backwards process” (according to intermediaries markup) 60−𝐶𝑝 M* retailer = 0.1232= ; Cp= 52,6€ 60 52.6−𝐶𝑝 M* Wholesaler = 0.1228= , Cp= 46.13€ 52.6 46.13−𝐶𝑝 Mº Agent = 0.0417= ; Cp= 44.3€ 𝐶𝑝 FLEX The company Flex, manufacturer of mattresses, has a series of wholesalers for distribution, with whom it has negotiated a margin on selling price of 19%. Wholesalers, in turn, work with retailers who take 8% margin on cost price. The current sale price of mattresses is 400 euros. Calculate the sales price Flex works with. 400€ Flex Wholesalers retailers Consumer (M*=19%) (Mº=8%) 400−𝐶𝑝 Mº retailer = → 0.08Cp= 400 – Cp; 1.08Cp=400; Cp=370.37€ 𝐶𝑝 370.37−𝐶𝑝 M* wholesaler= → 0.19 (370.37)= 370.37 – Cp; Cp=300 € 370.37 Flex is considering to invest in the production plant, which will mean a change in its cost structure and wants to know if the new structure will be bearable, maintaining the retail price. o Margin desired by mattress = 40 euros. o Expected sales for the next year of 200 mattresses. o Fixed unit costs of 250 euros. o Unit variable costs of 110 euros. Price= 250+110+40= 400€ The new structure will NOT be bearable as Flex price is the same as retail price (which cannot be changed). RAYMON RAYMON jewelry has decided to modify its pricing policy in order to stimulate the demand for one of its products. The distribution system of the company is based on a long channel where intermediaries that operate apply the following commercial markups (wholesalers, a 3% on sale price, retailers, a 12% on cost price). The cost of each product unit consists of a production cost and a distribution cost. The marketing department has outlined two possible scenarios: With the current distribution structure, for a retail price of 48€, sales of 15,000 units of product could be obtained. The company has estimated that for these sales a total production costs of 353,550€ would be incurred and obtaining a total margin of 210,000€ 5  If the price was reduced to 46€, sales could reach up to 20,000 units of product. To reach that volume it would be necessary to introduce an agent in the distribution chain. This would save costs to the company, as a consequence of the specialization of functions. The agent would take on most of the distribution tasks. The company estimates that working with the agent would reduce distribution costs by 75%, although the increase in demand would increase production costs by 10%. 1. Calculate the distribution costs under the assumptions of the first scenario. RAYMON Wholesaler (M*= 3%) retailer (Mº=12%) consumer E(Q)= 15.000 uds Production (total costs)= 353.550€ Margin= 210.000 € 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑇𝐶 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑇𝐶 𝑀𝑎𝑟𝑔𝑖𝑛 Price = + + ; 𝐸(𝑄) 𝐸(𝑄) 𝐸(𝑄) 353,550 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑇𝐶 210,000 Precio = + + → calculate price 15,000 15,000 15,000 𝑆𝑝−𝐶𝑝 48−𝐶𝑝 Mº retailer → 0.12 = ; 0.12= ; Cp= 42,86€ 𝐶𝑝 𝐶𝑝 𝑆𝑝−𝐶𝑝 42.86−𝐶𝑝 M* Wholesaler → 0.03= ; 0.03= ; C= 41.57€ 𝑆𝑝 4.,86 Price= 41.57 € 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑇𝐶 41.57= 23.57 + + 14; Distribution TC= 60,000€ 15,000 2. What markup would RAYMON have to negotiate with the agent to continue maintaining a global margin of € 210,000? 46€ * RAYMON Agent (M?) Wholesaler (M = 3%) retailer (Mº=12%) consumer E(Q)= 20,000 units Production total costs= 75% decrease Distribution total costs= 10% increase Margin= 210,000 € 353.550∗1.1 60.000∗0.25 210.000 Price = + + ; P= 30.69€ 20.000 20.000 20.000 46−𝐶𝑝 Mº retailer= 0.12; 0.12= ; Cp= 41.07€ 𝐶𝑝 41.07−𝐶𝑝 M* Wholesaler= 0.03; 0.03= ; Cp= 39.83€ 41.07 6  Agent markup: 𝟑𝟗.𝟖𝟑−𝟑𝟎.𝟔𝟗 Mº agent= = 29.78% 𝟑𝟎.𝟔𝟗 𝟑𝟗.𝟖𝟑−𝟑𝟎.𝟔𝟗 M* agent= = 22.94% 𝟑𝟗.𝟖𝟑 DIGITAL CAMERAS A manufacturer of digital cameras is going to launch a new model to the market. To fix its price, the company has consulted the prices of its main competitors. Thus, for a model with similar characteristics, the product of competitor A is being sold in stores at 199 euros, the competitor B at 215 euros and the competitor C at 249 euros. The company believes that the best competitive strategy would be for the product to reach the market at an average price. It is a very competitive market, in constant growth, with a dispersed distribution of consumers throughout the national territory. In this market, wholesalers operate, who usually work with margins on selling price of 20%, as well as retailers that do so with a margin of 23% on cost price. This manufacturer wants to follow an intensive distribution strategy since it is a low range product. With its strategy, the company expects to sell 100,000 units. The different manufacturers of this product use both short channels and long channels (direct distribution is less common). Competitor: A: Sp= 199 € B: Sp= 215€ C: Sp=249€ Average price= 221€ Manufacturer Wholesaler (M*= 20%) retailer (Mº=23%) consumer E(Q)= 100.000 units Recommend the most appropriate distribution system for this company (justify its response from the information provided) and calculate the sale price to which the manufacturer would sell in that case. It is a very competitive market, in constant growth, with a dispersed distribution of consumers throughout the national territory → IDS (long channel) 221−𝐶𝑝 Mº retailer= 0.23; 0.23= ; Cp= 179.67€ 𝐶𝑝 179.67−𝐶 M* Wholesaler= 0.20; 0.20= ; C= 143.74€ 179.67 The company has designed a promotional plan for its intermediaries, consisting of stimulation actions on the point of sale which means that the company will increase its unit variable cost by 6 euros (final variable cost in units: 56€/ unit). Given that the company wants to maintain its global margin (knowing that without the promotions they have set an initial unit margin of 80 euros), what increase in sales would have to be produced as a result of the promotional policy to maintain the sale price? 7 Before: VCu= 50€ Now: VCu= 56€ Before: 𝐶𝐹 143.74€= 50 + + 80 → TFC= 1,374,000€ 100,000 FCu= 13.74€ Now: 1,374,000 8,000,000 143.74€= 56€ + + ; E(Q)= 106,838 units 𝐸(𝑄) 𝐸(𝑄) E(Q) increase= 6.838 uds 8