Break-even point The break-even point is the point where Revenue = Expenses and Profit = 0.

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Presentation transcript:

MKT-MP-8 Utilize pricing strategies to maximize return and meet customer’s perception of value.

Break-even point The break-even point is the point where Revenue = Expenses and Profit = 0.

Expenses may be fixed or variable. Fixed expenses do not vary based on units sold. They include: rent utilities insurance and licenses. Labor can be a fixed expense if workers are paid salary or hourly, not by the job. Variable expenses are related to production of each unit. raw materials Packaging per-unit expenses. Labor can be a variable expense if workers are paid per product produced or per service rendered.

Problem #1 If you sell a product for $79.99 that costs $11.99 per unit to produce and your fixed costs total $27,336, how many units must you sell to break even? P = 79.99 V = 11.99 FC = 27336 FC 27336 (P – V) (79.99 – 11.99) 68 X = 402 units

What is the minimum price Sal and Mario can charge for each pizza? Problem #2 Consider Sal and Mario’s Pepperoni Delight Restaurant, which only sells pepperoni pizza. The expenses for Sal and Mario’s are shown below. $5.56 covers the variable costs of each pizza, so one pizza could be sold for this price. Fixed costs Variable costs General Labor $1,500 Flour $0.50 Rent $3,000 Yeast $0.05 Insurance $200 Water $0.01 Advertising $500 Cheese $3.00 Utilities $450 Pepperoni $2.00 Total $5,650 $5.56 What is the minimum price Sal and Mario can charge for each pizza?

Problem #3 A start-up company has the following expenses: Rent = $1,100 Utilities = $265 Material and assembly = $12.65/unit Monthly labor = $625 If its product sells for $29.99/unit, how many units must it sell to break even? FC = rent + utilities + labor = 1100 + 265 + 625 = 1990 V = 12.65 P = 29.99 FC (P – V) 1990 (29.99 – 12.65) 17.34 X = 114.76 = 115 units

Problem #4 A start-up company has the following expenses: Rent = $875 Utilities = $115 Material and assembly = $4.75/unit Monthly labor = $480 If its product sells for $18.99/unit, how many units must it sell to break even? FC = rent + utilities + labor = 875 + 115 + 480 = 1470 V = 4.75 P = 18.99 FC (P – V) 1470 (18.99 – 4.75) 14.24 X = 103 units

Achieving Return on Investment/ Maximizing Profits Return on investment is a calculation used to determine the relative profitability of a product. The formula for calculating return on investment is ROI = Profit / Investment Companies often price products to produce a certain return on investment. Companies that seek to maximize profits carefully study consumer demand and determine what customers in the target market are willing to pay for their products.