Principles of Marketing Pricing Exercise

Suppose you are the owner of a picture frame store. Assume that the average price customers are willing to pay for each picture frame is $120. Also, suppose your fixed costs (FC) total $32,000 (real estate taxes, interest on a bank loan, etc.) and unit variable cost (UVC) for a picture frame is $40 (labor, glass, frame, and matting). According to Figure 11-6a, how much profit will your picture frame store make if it sells 400 picture frames?

$0 The break-even point (point A) is defined as the point at which profit is exactly $0. This occurs when the quantity sold equals 400 pictures. See Figure 11-6a.

Calculate a firm's profit using the following information: the unit price (P) for a product is $40; the quantity sold (Q) is 2,000; the fixed cost (FC) is $50,000; and the variable cost (VC) is $20,000.

$10,000 A firm's profit equation = Total revenue − Total cost or [(Unit price × Quantity sold) − (Fixed cost + Variable cost)]. Profit = (TR − TC) = [(P × Q) − (FC + VC)] = [($40 × 2,000) − ($50,000 + $20,000)] = $10,000.

Suppose you are the owner of a picture frame store and you wish to calculate how many frames you must sell to cover your fixed and variable costs at a given price. Let's assume that the demand for your frames is strong, so the average price customers are willing to pay for each picture frame is $120. Also, suppose your fixed costs (FC) total $32,000 (real estate taxes, interest on a bank loan, etc.) and unit variable cost (UVC) for a picture frame is $40 (labor, glass, frame, and matting). If your picture frame store sold 2,000 picture frames, what would your profit (or loss) be?

$128,000 profit If the picture frame store could increase the quantity sold to 2,000 frames, it will earn a profit of $128,000. Using the profit equation, Profit = Total revenue − Total cost; Profit = (Unit price × Quantity sold) − Total cost; Profit = (P × Q) − [FC + (UVC × Q)]; Profit = [($120 × 2,000) − ($32,000 + ($40 × 2,000))]; Profit = $240,000 − [$32,000 + $80,000]; Profit = $240,000 − $112,000; Profit = $128,000.

Each month, the owner of a car wash pays $2,500 in rent, $500 in utilities, $750 interest on the business loan, an insurance premium of $200, and $250 on advertising on local bus routes. A full-service car wash is priced at $10.50. Unit variable costs for the car wash are $7.50. At what level of revenue will the car wash break even?

$14,700 Break-even point (BEP) = [Fixed cost ÷ (Unit price − Unit variable cost)] or $4,200 ÷ ($10.50 − $7.50), which equals 1,400 car washes; the break-even point in dollars = 1,400 × $10.50, which equals $14,700.Break-even point (BEP) = [Fixed cost ÷ (Unit price − Unit variable cost)] or $4,200 ÷ ($10.50 − $7.50), which equals 1,400 car washes; the break-even point in dollars = 1,400 × $10.50, which equals $14,700.

Forever Quilting is a small company that makes quilting kits priced at $120 each. There is no quantity discount. The costs of the materials that go into each kit total $45. It costs $5 in labor to assemble a kit. The company has monthly expenses of $1,000 for rent and insurance, $200 for heat and electricity, $500 for advertising, and $4,500 for the monthly salary of its owner. Last month the company sold 150 kits. Forever Quilting's total revenue for the month was

$18,000. Total revenue is the unit price multiplied by the quantity sold. In this case, $120 per kit × 150 kits = $18,000. Costs do not affect total revenue.

A custom tailor wishes to use target profit pricing to establish a price for a custom-designed business suit. Assume variable cost is $200 per suit, fixed cost is $44,000, and the target profit is $50,000 based on a volume of 50 suits. What price should be charged for a typical custom suit?

$2,080 Using the profit equation: Profit = Total revenue − Total cost. Profit = (P × Q) − [FC + (UVC × Q)]. $50,000 = 50P − [$44,000 + ($200 × 50)], or $2,080.

Tara is enrolled for spring semester at college. The tuition is $6,000, but she has a scholarship for $1,000 as well as a work-study grant of $1,500. The health fees and student activity fees are $150 for the semester. What is the final price that Tara will pay for the spring semester?

$3,650 Using the price equation, Tuition = Published tuition − (Scholarship, other financial aid, discounts for number of credits taken) + Special activity fees = $6,000 − ($1,000 Scholarship + $1,500 Work study financial aid) + $150 Special activity fees = $6,000 − ($1,000 + $1,500) + $150 = $3,650. See Figure 11-1.

SHAPE magazine is targeted at young women seeking healthier lifestyles. At a price of $3.00 per copy, 1.25 million copies are sold. If the price per issue is increased to $3.25, only 1 million copies would be sold. Fixed costs are $1 million and unit variable costs are $0.50 per magazine. From the information provided here, what is SHAPE magazine's total revenue obtained at the lower $3.00 price?

$3,750,000 Total revenue = Unit price × Quantity sold. Total revenue at the lower price = $3.00 per copy × 1,250,000 copies = $3,750,000. Costs do not affect total revenue.

A company that manages apartments decides to buy 15 new dishwashers at a list price of $550 each as replacements for old dishwashers in a small apartment complex it owns. Because the company is buying more than 10 dishwashers, it is eligible for a $150-per-unit quantity discount. Financing charges total $20 per unit. The company gets $10 per dishwasher for the 15 dishwashers traded in. What is the final price the company will pay for each dishwasher?

$410 Using the price equation, Final price = [List price − (Incentives and allowances) + Extra Fees] = [$550 − ($150 Quantity discount + $10 Trade in) + $20 Financing] = [$550 − ($150 + $10) + $20] = $410. See Figure 11-1.

Lady Marion Seafood, Inc., sells five-pound packages of Alaskan salmon. Assume that its unit variable cost per package is $30 and its fixed cost is $250,000. It wants a target profit of $38,000 based on a volume of 16,000 packages. What should the firm charge for a five-pound package of salmon?

$48.00 Using the profit equation: Profit = Total revenue − Total cost. Profit = (P × Q) − [FC + (UVC × Q)]. $38,000 = 16,000P − [$250,000 + ($30 × 16,000)], or $48.00.

Forever Quilting is a small company that makes quilting kits priced at $120. The costs of the materials that go into each kit total $45. It costs $5 in labor to assemble a kit. The company has monthly expenses of $1,000 for rent and insurance, $200 for heat and electricity, $500 for advertising, and $4,500 for the monthly salary of its owner. Forever Quilting's unit variable cost for its kits is

$50. Unit variable cost is variable cost expressed on a per unit basis—$45 of materials plus $5 of labor equals $50 per kit.

Tim Marlow, the owner of The Clock Works, wanted to know how many clocks he must sell in order to cover his fixed cost at a given price. Marlow knew that he had total fixed costs of $20,000 for equipment, taxes, and a bank loan. He also had a unit variable cost of $20 per clock for labor and materials. If the price Marlow charges for each of his clocks is $40, what is his break-even point quantity?

1,000 clocks Break-even point (BEP) = [Fixed cost ÷ (Unit price − Unit variable cost)] or $20,000 ÷ ($40 − $20) = 1,000 clocks.

The owner of a small restaurant that sells takeout fried chicken and biscuits each month pays $2,500 in rent, $500 in utilities, $750 interest on his loan, insurance premium of $200, and $250 on advertising on local buses. A bucket of chicken is priced at $9.50. Unit variable costs for the bucket of chicken are $5.50. How many buckets of chicken does the restaurant need to sell to break even each month?

1,050 buckets Break-even point (BEP) = [Fixed cost ÷ (Unit price − Unit variable cost)] or $4,200 ÷ ($9.50 − $5.50) = 1,050 buckets of chicken.

Ampro-Mag is a small company that makes materials for safely controlling hazardous spills of all kinds. It sells these items as a neutralizing kit priced at $100. The costs of the materials that go into each kit are $45. It costs $5 in labor to assemble a kit. The company has monthly expenses of $1,000 for rent and insurance, $200 for heat and electricity, $500 for advertising in trade journals, and $3,500 for the monthly salary of its owner. What is Ampro-Mag's monthly break-even point in terms of number of neutralizing kits sold?

104 kits Break-even point (BEP) = [Fixed cost ÷ (Unit price − Unit variable cost)] or BEPQuantity = [($1,000 + $200 + $500 + $3,500) divided by (Price {$100} minus Unit variable costs {$50})], or [$5,200 ÷ ($100 − $50)] = 104 kits.

Suppose you want to buy a Tesla Model S, the world's leading all-electric, zero-emission car that has a 265-mile range and can be recharged in three hours. The Tesla Model S Performance model has a list price of $87,500. However, you want several options (Performance Plus Package, red multi-coat armor paint, Tech Package, Sound Studio Package, home charging station, performance wheels, and others) that will cost $17,500. An extended warranty will add an additional $5,000. However, if you put $50,000 down now and finance the balance over the next year, you will receive a dealer rebate of $5,000 off the list price. The dealer will give you a $7,000 trade-in allowance for your 2008 Honda Civic DX four-door sedan. In addition, you will have to pay a state sales tax of $10,000, an auto registration fee of $1,000 to the state, and a $1,000 destination charge to ship and prep the car. But because the Tesla Model S is an alternative energy vehicle, you qualify for a $2,500 state rebate and a $7,500 federal tax credit! Finally, your total finance charge is $7,000. Applying the price equation, what is your final price for the Tesla Model S?

107,000 Final price = $87,500 − [($5,000 Dealer rebate + $2,500 State rebate + $7,500 Federal rebate) + $7,000 Trade-in allowance] + [$17,500 Options + $5,000 Extended warranty + $1,000 Auto registration fee + $1,000 Destination charge + $10,000 State sales tax + $7,000 Finance charge] = $107,000. NOTE: Ignore the down payment of $50,000—it is used to calculate and lower the finance charge but doesn't affect the list or quoted price of $87,500, which means that the final price of $107,000 is not reduced by $50,000 (final price is not $57,000). See Figure 11-1.

Suppose you are the owner of a picture frame store and you wish to calculate how many pictures you must sell to cover your fixed and variable costs at a given price. Demand for pictures is strong, so the average price customers are willing to pay for each picture frame is $120. Also, suppose your fixed costs (FC) total $32,000 (real estate taxes, interest on a bank loan, etc.) and unit variable cost (UVC) for a picture frame is $40 (labor, glass, frame, and matting). What is the quantity of picture frames you will need to sell to break-even?

400 picture frames The break-even point quantity (BEPQuantity) is the quantity at which total revenue and total cost are equal and profit is exactly $0. This occurs when the quantity sold equals 400 picture frames. Profit then comes from all units sold beyond the BEPQuantity of 400 units. BEPQuantity = FC ÷ (P − UVC) = $32,000 ÷ ($120 − $40) = $32,000 ÷ $80 = 400 units. See Figure 11-7 in the textbook.

You are selling a new line of t-shirts on the boardwalk. The selling price will be $25 per shirt. The labor cost is $5 per shirt. The administrative costs of operating the company are estimated to be $60,000 annually and the sales and marketing expenses are $20,000 a year. Additionally, the cost of materials will be $10 per shirt. What is the break-even quantity?

8,000 shirts Break-even point (BEP) = [Fixed cost ÷ (Unit price − Unit variable cost)] or $80,000 ÷ ($25 − $15) = 8,000 shirts needed to break even.

Which of the following statements most likely would account for the shift in the demand curve from D1 to D2 shown in Figure 11-3b?

The firm's price remained the same but changes occurred in consumer tastes. The shift in the demand curve to the right from D1 to D2 shows that the quantity demanded increased without reducing the price. This may be due to a change in consumer tastes, the price of substitutes increasing or their availability decreasing, or consumer income increasing. See Figure 11-3b.

Suppose you are the owner of a picture frame store. Let's assume that the average price customers are willing to pay for each picture frame is $120. Also, suppose your fixed costs (FC) total $32,000 (real estate taxes, interest on a bank loan, etc.) and unit variable cost (UVC) for a picture frame is $40 (labor, glass, frame, and matting). Figure 11-6a shows that by selling 800 picture frames, you will

earn a profit. At a quantity of 800 pictures, the firm will earn a profit because the 800 units sold will generate a sales level that resides in the area GAF—a sales level that exceeds 400 units, the break-even point beyond which the picture frame store will earn a profit. See Figure 11-6a.At a quantity of 800 pictures, the firm will earn a profit because the 800 units sold will generate a sales level that resides in the area GAF—a sales level that exceeds 400 units, the break-even point beyond which the picture frame store will earn a profit. See Figure 11-6a.

Figure 11-3a shows that when the quantity demanded for Red Baron frozen cheese pizzas moves from 2 to 3 million units along the demand curve D1, the profit

impacts cannot be determined. Figure 11-3a does not indicate what happens to profit when the quantity demanded changes. The demand curve shows that as the price for Red Barron frozen cheese pizzas is lowered from $8 to $6 per pizza, the quantity demanded increases from 2 million to 3 million units per year. It does not show any relationship to profit. See Figure 11-3a.

Figure 11-3b shows that when the quantity demanded for Red Baron frozen cheese pizzas moves from 2 to 3 million units from the demand curve D1 to the demand curve D2, the profit

impacts cannot be determined. Figure 11-3b does not indicate what happens to profit when the quantity demanded changes. The shift in the demand curve shows that the quantity demanded increases without reducing the price. It does not show any relationship with profit. See Figure 11-3b.

Figure 11-3a shows that when the price for Red Baron frozen cheese pizzas moves from $8 to $6 per unit along the demand curve D1, the quantity demanded

increases from 2 to 3 million units per year. The demand curve D1 shows that as the price for Red Barron frozen cheese pizzas is lowered from $8 to $6 per pizza, the quantity demanded increases from 2 million to 3 million units per year. See Figure 11-3a.

Suppose you are the owner of a picture frame store. Assume that the average price customers are willing to pay for each picture frame is $120. Also, suppose your fixed costs (FC) total $32,000 (real estate taxes, interest on a bank loan, etc.) and unit variable cost (UVC) for a picture frame is $40 (labor, glass, frame, and matting). Figure 11-6a shows that by selling 200 pictures, your picture frame store will

incur a loss. At a quantity of 200 pictures, the firm will incur a loss; in fact, the firm will not even cover its fixed costs. See Figure 11-6a.

A shift of the demand curve from D1 to D2 in Figure 11-3b indicates

more units are demanded at the given price. The shift in the demand curve from D2 to D3 shows that more units are demanded at the given price. This may be due to a change in consumer tastes, the price of substitutes increasing and their availability decreasing, or consumer income increasing. See Figure 11-3b.