B2210 Pricing Questions Solutions Winter 2014 Essay

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B2210 Introduction to Marketing Tactics
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