Solutions to Pricing Questions

Question 1: Cat Harbour

Fixed Costs = $200,000

Selling Price = $250

Variable Costs = $200

Sales (expected) = $1,250,000

a) B/E Quantity = FC/ (SP – VC) = 200,000/ (250-200) = 4,000 units

b) B/E ($) = 4,000 units x $250 = $1,000,000

c) Expected profit if sales reach $1,250,000 • How many units are we selling at this sales level? = $1,250,000/$250 = 5,000 units

Profit = 1,000 units sold above the breakeven point x $50 = $50,000 or Total Revenue = 1,250,000 Fixed Costs - 200,000 Variable Costs - 1,000,000 (=200 x 5,000 units) Profit = $50,000

d) Expected profit if sales reach $875,000 # of units = $875,000/$250 = 3,500 units

Total Revenue = 875,000 Fixed Costs - 200,000 Variable Costs - 700,000 (= 200 x 3,500 units) = ($25,000)

Question 2: Golf Town

Variable Costs: $0.50

Fixed Costs: $5,000

Expected Sales: 10,000

Desired Profit: 30%

a) Selling Price

SP = TC + (TC x 30%) (SP) (10,000) = [$5,000 + (10,000 x $0.50)] + ($10,000 x 30%) SP = ($5,000 + $5,000) + $3,000 SP = $13,000 (for all 10,000 units) SP/unit = $13,000/ 10,000 units SP/unit = $1.30/unit

b) B/E Quantity

= FC/ (SP – VC) = $5,000/ ($1 -$0.50) = 6,250 gadgets

c) Profit when selling 10,000 units

= Revenue – Total Costs = (10,000 x $1.30) - $5,000 – (10,000 x $0.50) = $13,000 - $5,000 - $5,000 = $3,000

d) Profit when selling 6,000 units = Revenue – Total Costs = (6,000 x $1.30) - $5,000 – (6,000 x $0.50) = $7,800 - $5,000 - $3,000 = ($200)

Question 3: Dog Cove Knitworks Variable Costs

Labour: 7 hours x $8.00/hr = $56

Materials: $19

Total VC: $75

Fixed Costs = $7,000 Demand = 1000 sweaters

a) Lowest price to B/E (i.e., must cover all costs) Total revenue = Total Cost (SP) (1,000) = $7,000 + (1,000 x $75) SP = ($7,000 + $75,000) SP = $82

b) Desired profit: 25%

SP = TC + (TC x 25%) = ($7,000 + $75,000) + (82,000 x 25%) = $82,000 + 20,500 = $102,500 (for all 1000 sweaters) = $102,500/ 1000 = $102.50

c) B/E Quantity = FC/ (SP – VC) = $7,000/ (102.50 - $75) = 254.5 sweaters = 255 (must round up as you cannot produce and sell part of a sweater)

Question 4: Crocs Shoes

Fixed Costs

Var. Costs

Market Size

Shorts

2,000,000

6.50

650,000

Shirts

1,000,000

4.50

500,000

SHORTS

Croc’s

Wholesaler’s

Retailer’s

Cost

6.50

27.01

30.01

MU

3.00

←10%

9.98

←25%

Selling Price

27.01

30.01

39.99

Part a) B/E shorts = 2,000,000/ 27.01 – 6.50 = 97,513.4 = 97,514

Part b) B/E Market Share = 97,514/650,000 =15%

SHIRTS

Crocs

Whole

Retail

Cost

4.50

23.62

26.24

MU

2.62

←10%

8.75

←25%

Selling Price

23.62

26.24

34.99

Part a) B/E shirts = 1,000,000/ 23.62 – 4.50 = 52,301.3 = 52,302

Part b) B/E Market Share = 52,302/500,000 = 10.46% =10.5%

NOTE: Achieving 15% and 10.5% market share in year 1 extremely difficult.

Question 5: Dave’s Trampolines

a) What is the Variable Cost per trampoline? VC: $150 = Labor ($15 x 10 hours) $200 = Frame $140 = Springs ($4 x 35) $50 = Packaging materials $100 = Delivery = $640 Variable Costs

b) What are the total fixed costs? FC: $12,000 = Rent $6,000 = Utilities $2,000 = Insurance $3,000 = Office expenses $30,000 = Salary = $53,000 Fixed Costs

Cost/unit = FC/unit + VC = 53,000/300 + $640 = $816.67

c) What is Dave’s mark-up on the price to Wal-Mart (%)? What is the same markup on cost? Selling Price to Wal-Mart = $1000

MU on SP = SP-Cost/Selling Price MU on cost = SP- Cost/Cost = $1,000 – $816.67/ 1000 = $1000 - $816.67/ $816.67 = 18.3% = 22.45%

d) What is Wal-Mat’s markup on price to the consumer (%)? What is its markup on cost? Selling Price to Consumer = $1500

MU on SP = SP - Cost/Selling Price MU on cost = SP-Cost/Cost = $1500 - $1000/$1500 = $1500 - $1000/$1000 = 33.3% = 50%

e) What is Dave’s break-even quantity