1. Determining the Price of a Product or Service Two factors to consider: 1. The cost of doing business 2. Intended profit

2. Profit: The amount of money left over after all products are paid for and all expenses are covered Price = Cost of Doing Business + Profit

3. Example Cost $0.34 $0.20 Profit Expenses $0.11 Price = $0.34 + 0.11 + 0.20 = $0.65

4. 2 Ways to Examine Price After it is Set

5. 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 = $ Amount Store Adds Cost

6. Example Markup = $0.11 + 0.20 $0.34 = 91% Expenses = $0.11 Profit = $0.20 Cost = $0.34

7. Example Therefore, Wal-Mart buys Skittles for $0.34 and marks them up by 91%

8. 2. Margin The percentage of the price charged to customers that is not used to pay for the product Margin = $ Amount Store Adds Selling Price

9. Example Margin = $0.11 + 0.20 $0.65 = 48% Expenses = $0.11 Profit = $0.20 Price = $0.65

10. Example Therefore, every time Wal-Mart sells Skittles it makes a 48% profit margin

11. Markup and Margin Question Cody needs to make some extra money to buy Christmas presents for all of his ladies so he opens a hotdog stand on Bank St.

12. Markup and Margin Question 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

13. Markup and Margin Question What is his selling price? What is the markup? What is the margin?

14. Answers Price = Cost of doing business + profit = $0.30 + 0.22 + 0.23 = $0.75 Markup = $ Amount store adds / cost = $0.22 + 0.23 / 0.30 = $0.45 / 0.30 = 1.5 OR 150%

15. Answers Margin = $ Amount store adds / selling price = $0.22 + 0.23 / $0.75 = $0.45 / $0.75 =0.6 OR 60%

16. Break-Even Analysis How many units must be sold at a given price to cover all operating costs?

17. Break-Even Analysis Three parts to break-even analysis: 1. Variable Costs: Costs that depend on the quantity of products or services sold Example:

18. Break-Even Analysis 2. Fixed Costs: Costs that are constant. These do not depend on the quantity of sales. Example:

19. Break-Even Analysis 3. Sometimes called Contribution Margin Example: Gross Profit = Selling Price – Variable Costs

20. Break-Even Analysis 3. 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 of an Iced Cap This is used to pay for Fixed Costs

21. Break-Even Point Again, 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

22. 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)

23. 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

24. 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!

25. 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 FC and VC) Subway wants to make $1.25 per sub

26. What should the price be? Price = $4.99

27. What it the markup? What is the margin? Cost = $2.44 Markup = 105% Margin = 51%

28. What is the Gross Profit? Assuming that:  Bread= $0.37  Meat= $1.68  Toppings = $0.39  Expenses= $1.30 (includes all other FC and VC)  Other VC = $0.90

29. What it the gross profit? Total VC = $3.34 Gross Profit = $4.99 – 3.34 = $1.65

30. What is the BEP? Assume that Subway pays the following monthly Fixed Costs: Wages $12,500 Rent $2,100 Hydro $800

31. What is the BEP? FC = $15,400 BEP = $15,400 / $1.65 = 9,333 subs Therefore, every month Subway needs to sell 9,333 subs just to break even!