Break-Even Pricing And Minimum Pricing Methodologies(Part5)

In this Part 5, we look at two other pricing methodologies which are as follows:

Break-Even Pricing:

• For this type of pricing, the price at which the products will break-even is used. This break-even price will then be added a profit mark up.

Simple Illustration:

Fixed Cost $25,000

Variable cost $2.00 per unit

Number of Units produced 4,000

Mark-up is 15% on the break-even price

What will be selling price to the customers?

Solution:

Break-even price

= Fixed Cost + Variable cost/marginal cost

Total Number of units produced

= $25,000+ $8,000

4,000

= $8.25

+ mark up of 15% ($1.24)

= $9.50 which is the selling price to the customer.

Minimum Pricing Methodology:

• For this type of pricing, the selling price is the lowest price that a company may sell its product.
• Normally the price will be the Total Relevant Costs of Manufacturing.

Useful method in situations where:-

· there is a lot of intense competition, surplus production capacity, clearance of old stocks, getting special orders and or improving market share of the product.

Minimum Price is Incremental costs of manufacturing + Opportunity Costs ( if any)

Simple Illustration:

Assuming the following details of product X:

Material $2.50

Labor( 2 hrs @ $3.00) $6.00

Variable production overhead $2.50

Fixed production overhead $1.20

Total $9.70

Say that the labor is in short supply and is used for other product Y which generates a contribution of $6 per unit and requires 2 hours of the same labor.

Material $2.50

Labor $6.00

Variable production overhead $2.50

Add:

Opportunity cost from labor scarcity:

$6 / 2 hours= $3.00 per hr x 2 hr = $6.00

Minimum price = $17.00