Your business provides a service to local residents. Your fixed costs are $2,000 per month, and you expect 40 customers per month. The variable cost associated with each service is $35.
1. Using cost-based pricing and a markup of 20%, what should the price be? Show calculations.
2. Using breakeven analysis, what should the break-even volume of production be? Show calculations.
3. Using target costing, a price you think is acceptable to customers ($99) and an acceptable profit margin (20%), what should the price be? Show calculations.
4. If your nearest competitor charges $95, what should the price be? Explain.
5. With all this information and the results you calculated for parts 1-4, what do you think your price should be?
i dont know im asking too
1. To calculate the price using cost-based pricing and a markup of 20%, we need to first determine the total cost per service.
Fixed costs per month are given as $2,000, and the variable cost per service is $35. So the total cost per service is the sum of the fixed cost and the variable cost:
Total cost per service = Fixed cost + Variable cost = $2,000 + $35 = $2,035
Next, we need to add the markup to the total cost per service. The markup is calculated as a percentage of the total cost. In this case, the markup is 20% of $2,035:
Markup = 20% of $2,035 = 0.2 * $2,035 = $407
Finally, to determine the price, we add the markup to the total cost per service:
Price = Total cost per service + Markup = $2,035 + $407 = $2,442
So, using cost-based pricing and a markup of 20%, the price should be $2,442.
2. To calculate the break-even volume of production using breakeven analysis, we need to consider the total revenue and total cost.
Total revenue is calculated as the price per service multiplied by the number of customers:
Total revenue = Price per service * Number of customers
Total cost is calculated as the sum of fixed costs and variable costs:
Total cost = Fixed costs + (Variable cost per service * Number of customers)
At the break-even point, total revenue equals total cost. So we can set up the equation:
Price per service * Number of customers = Fixed costs + (Variable cost per service * Number of customers)
Substituting the known values:
$2,442 * Number of customers = $2,000 + ($35 * Number of customers)
Now, solving for the break-even volume of production:
$2,442 * Number of customers - $35 * Number of customers = $2,000
$2,407 * Number of customers = $2,000
Number of customers = $2,000 / $2,407
Number of customers = 0.8308
Therefore, the break-even volume of production should be approximately 0.8308 (rounded to the nearest whole number) or 1 customer.
Please note that this result indicates the number of customers needed to cover the costs and break even, so in practice, you would need to round up to ensure profitability.
3. To calculate the price using target costing, an acceptable selling price ($99), and an acceptable profit margin (20%), we need to determine the target cost per service.
The target cost per service is calculated as the selling price minus the desired profit margin:
Target cost per service = Selling price - Desired profit margin
Desired profit margin is 20% of the selling price:
Desired profit margin = 20% of $99 = 0.2 * $99 = $19.8
So, the target cost per service is:
Target cost per service = $99 - $19.8 = $79.2
Therefore, using target costing, an acceptable selling price of $99, and an acceptable profit margin of 20%, the price should be $99.
4. If your nearest competitor charges $95, you may consider adjusting your price based on market conditions and your business strategy. Potential options include:
a) Match the competitor's price: If you want to stay competitive, you may decide to set your price equal to your competitor's price of $95.
b) Price slightly lower: To entice customers away from your competitor, you could set your price slightly lower, such as $94 or $93.
c) Price slightly higher: If you offer additional value or unique features compared to your competitor, you may choose to set your price slightly higher, such as $96 or $97.
Ultimately, the decision should be based on your understanding of your target market, your competitive advantage, and your overall business goals.
5. Based on the calculations from parts 1-4 and considering the market conditions and competition, you may decide to set your price at approximately $99 or make slight adjustments based on your business strategy. It is important to consider factors such as the target market's willingness to pay, the value your service provides, and your desired profit margin, among others, to arrive at the most appropriate pricing decision for your business.