Profit-Oriented Pricing Approaches This activity is important because choosing the correct price has a significant effect on profit. Many firms choose to utilize a profit-oriented pricing approach to keep the focus on profit maximization. Profit-oriented approaches take a balanced approach to both revenue generation and cost control. The goal of this activity is for you to use the profit equation to determine what price a firm would need to charge given a specific profit goal. Read the case and answer the questions that follow. Gary is a retired school administrator who loves woodworking with reclaimed woods from old buildings, particularly barns. Over the past few years, he has made beautiful kitchen tables for his wife and children. For the last two years, his family has been suggesting that he open a business selling reclaimed wood tables to the general public through a website that his son has offered to build and run for him. Gary has enjoyed his retirement and has told his family repeatedly that he would never consider such a venture unless he could make at least a $50,000 profit each year. To get his family off of his back, Gary has done some research on reclaimed wood tables, pricing, and manufacturing. Much to Gary's surprise, he found that reclaimed wood tables are selling on the Internet for anywhere from $1,750 to nearly $10,000 per table. Gary is curious to know how much he would have to charge for his tables to make the $50,000 a year that he desires. A smart businessman, Gary understands the relationship between price and demand and realizes that he could sell many more tables if he could price his tables closer to the low end of the scale spectrum rather than the high end. Gary has spoken to some friends of his in his woodworking club who have offered to help with the production of his tables. Gary estimates that, with the support of his friends, they could reasonably produce approximately two tables a week, or 100 tables each year. Because he has had more than 200 inquiries from friends and community members over the years, Gary feels confident that he could sell every table he produces. After reviewing the costs of labor and materials, he estimates that the cost per table would be approximately $1,500. The rent for the space and machinery to produce the tables would be $50,000 per year. Gary knows that the profit equation is simply profit equals total revenue minus total cost. Gary also knows that total revenue is equal to tables sold times price per table, and total costs equals cost per table times tables sold plus overhead costs. What he needs to determine now is what to charge for the tables to make his desired profit of $50,000. Therefore, he must first solve this equation for price per table: Profit = [Tables sold × price per table – (Cost per table × tables sold) + Overhead costs]. Answer the questions to determine what minimum price Gary must charge to make a $50,000 profit. After solving the profit equation to isolate price, you have Multiple Choice Price per table = [Profit + (cost per table x tables sold) + Overhead cost] / Tables sold Price per table = Tables sold − Cost per Table − Overhead cost Price per table = [Profit + (cost per table x tables sold)] / Tables sold
Customary Pricing
There are various types of pricing strategies followed in the market. They are psychological pricing, odd pricing, free onboard pricing, customary pricing, prestige pricing, dual pricing, ruling pricing, negotiated pricing, mark up pricing, etc. each one can be explained as follows:
Multiple Unit Pricing
“Multiple-unit pricing is a practice where a company offers consumers a lower than unit price if a specified number of units are purchased.”
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Profit-Oriented Pricing Approaches This activity is important because choosing the correct price has a significant effect on profit. Many firms choose to utilize a profit-oriented pricing approach to keep the focus on profit maximization. Profit-oriented approaches take a balanced approach to both revenue generation and cost control. The goal of this activity is for you to use the profit equation to determine what price a firm would need to charge given a specific profit goal. Read the case and answer the questions that follow. Gary is a retired school administrator who loves woodworking with reclaimed woods from old buildings, particularly barns. Over the past few years, he has made beautiful kitchen tables for his wife and children. For the last two years, his family has been suggesting that he open a business selling reclaimed wood tables to the general public through a website that his son has offered to build and run for him. Gary has enjoyed his retirement and has told his family repeatedly that he would never consider such a venture unless he could make at least a $50,000 profit each year. To get his family off of his back, Gary has done some research on reclaimed wood tables, pricing, and manufacturing. Much to Gary's surprise, he found that reclaimed wood tables are selling on the Internet for anywhere from $1,750 to nearly $10,000 per table. Gary is curious to know how much he would have to charge for his tables to make the $50,000 a year that he desires. A smart businessman, Gary understands the relationship between price and demand and realizes that he could sell many more tables if he could price his tables closer to the low end of the scale spectrum rather than the high end. Gary has spoken to some friends of his in his woodworking club who have offered to help with the production of his tables. Gary estimates that, with the support of his friends, they could reasonably produce approximately two tables a week, or 100 tables each year. Because he has had more than 200 inquiries from friends and community members over the years, Gary feels confident that he could sell every table he produces. After reviewing the costs of labor and materials, he estimates that the cost per table would be approximately $1,500. The rent for the space and machinery to produce the tables would be $50,000 per year. Gary knows that the profit equation is simply profit equals total revenue minus total cost. Gary also knows that total revenue is equal to tables sold times price per table, and total costs equals cost per table times tables sold plus overhead costs. What he needs to determine now is what to charge for the tables to make his desired profit of $50,000. Therefore, he must first solve this equation for price per table: Profit = [Tables sold × price per table – (Cost per table × tables sold) + Overhead costs]. Answer the questions to determine what minimum price Gary must charge to make a $50,000 profit. After solving the profit equation to isolate price, you have
Multiple Choice
Price per table = [Profit + (cost per table x tables sold) + Overhead cost] / Tables sold
Price per table = Tables sold − Cost per Table − Overhead cost
Price per table = [Profit + (cost per table x tables sold)] / Tables sold
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