Вы находитесь на странице: 1из 14

PRICING EXERCISES

1. You have just become the product manager for Alpino which is a consumer product with a retail
price of Rs.10/-. Retail margins on this product are 33% while the wholesalers take 12% margin on
their selling price to the retailer. Alpino and its competitors together sell 20 million units annually.
Alpino’s has a share of 24% of this market. Variable manufacturing costs for Alpino is Rs.0.90 per
unit. Fixed manufacturing cost is Rs.90 lakhs.
The advertising budget for Alpino is Rs. 50 lakhs and the Product Managers salary and expenses
are Rs.3.5 lakhs. Salespeople are paid entirely on 10% commission on sales. Shipping, Breakage,
insurance and so forth is at Rs.0.20 per unit

i. What is Alpino’s unit contribution?

Wholesaler price to retailer = Retail Price* (1-Retail Margin)=Rs 10*(1- 33%) =Rs 6.7
Manufacturer price to wholesaler = Wholesaler to retailer price*(1-Wholesaler margin)
➔ 6.7*(1-12%)= 5.90
Variable cost :
➔ Manufacturing cost =0.90 per unit
➔ Sales commission = 10% on manuf. To wholesaler
Rs.5.90*10%= Rs.0.59
➔ Shipping cost, breakage, insurance = Rs.0.20 per unit

Variable cost : Rs( 0.90 +0.59+0.20)=Rs 1.69

Unit Contribution=Retail selling Price per unit -variable cost per unit
➔ Rs (5.90-1.69)= Rs.4.21
Unit Contribution = Rs.4.21

ii. What is Alpino’s Break Even Point?

Break even point = Fixed Cost/Unit Contribution


➔ Rs (90,00,000 fixed manuf. Cost +350,000manager salary+ 50,00,000
advertisement)/Rs.4.21
Rs.14350000/Rs.4.21
➔ Rs.34,08,551
Break even point = Rs.34,08,551

iii. What market share does Alpino need to break even?

Break even volume or point/market share


market share = 2,00,00,000
Market share need to break even =34,08,551/2,00,00,000
➔ 17.04%
Break even market share = 17.04%

iv. What is Alpino’s profit Impact?


Industry demand is expected to increase to 23 million units next year and you are considering
raising your advertising budget to Rs.1 crore.
a. How many units of Alpino would have to be sold to have the same profit impact as that of last
year?
b. What will Alpino’s market share have to be next year for its profit impact to be the same as this
year?
c. What will Alpino market share have to be for it to have a Rs.1 crore profit impact.

Profit Impact = Unit Contributions* Unit Sold -Fixed Cost


➔ 2,00,00,000*0.24(market share ) * 4.21(unit contribution)-1,43,50,000
➔ Rs.58,58,000
Profit Impact = Rs.58,58,000

Advertisement budget increased to Rs.1,00,00,000 (Fixed cost increased by 50,00,000


Total production increased to 2,30,00,000

a. Profit Impact = Unit Contributions* Unit Sold -Fixed Cost


➔ 2,30,00,000*0.24(market share ) * 4.21(unit contribution)-1,93,50,000
➔ Rs.38,89,200
Profit Impact = Rs.38,89,200

b. Unit sold= (Profit impact + fixed cost)/unit contribution


= Rs.(( 58,58,000 + 1,93,50,000)/4.21)
➔ 59,87,649 units.
c. Unit sold= (Profit impact + fixed cost)/unit contribution (profit impact 1,00,00,000)
= Rs.((1,00,00,000+ 1,93,50,000)/4.21)
➔ 69,71,497 units
v. Upon reflection, you decide not to increase Alpino’s advertising budget. Instead you think you might
give retailers an incentive to promote Alpino by raising their margin from 33% to 40%. The margin
increase would be accomplished by lowering the price of the product to retailers. Wholesaler margins
would remain at 12%.
a. If retailer margins are raised to 40% next year, how many units will Alpino have to sell to break
even?
b. How many units of Alpino would have to be sold to have the same profit impact as tha t of last
year?
c. What will Alpino’s market share have to be next year for its profit impact to be the same as
this year?
d. What will Alpino market share have to be for it to have a Rs.35 lakhs profit impact.

a. Wholesaler price to retailer = Retail Price* (1-Retail Margin)=Rs 10*(1- 40%) =Rs 6
Manufacturer price to wholesaler = Wholesaler to retailer price*(1-Wholesaler margin)
➔ 6*(1-12%)= 5.28
Variable cost :
➔ Manufacturing cost =0.90 per unit
➔ Sales commission = 10% on manuf. To wholesaler
Rs.5.90*10%= Rs.0.59
➔ Shipping cost, breakage, insurance = Rs.0.20 per unit

Variable cost : Rs( 0.90 +0.59+0.20)=Rs 1.69

Unit Contribution=Retail selling Price per unit -variable cost per unit
➔ Rs (5.28-1.69)= Rs.3.59
Unit Contribution = Rs.3.59

Break even point = Fixed Cost/Unit Contribution


➔ Rs (90,00,000 fixed manuf. Cost +350,000manager salary+ 50,00,000
advertisement)/Rs.3.59
Rs.14350000/Rs.3.59
➔ Rs.39,97,214
Break even point = Rs.39,97,214

b. Unit sold= (Profit impact + fixed cost)/unit contribution


= Rs.(( 58,58,000 + 1,43,50,000)/3.59)
➔ 56,28,970 units
c. Break even volume or point/market share
market share = 2,30,00,000
Market share need to break even =39,97,214/2,30,00,000
➔ 17.37%
Break even market share = 17.37%
d. Unit sold= (Profit impact + fixed cost)/unit contribution* total demand
= Rs.((35,00,000+ 1,43,50,000)/(4.21*2,30,00,000))*100
= 21.61% market share .

2. A company sells its product at Rs.100 per unit. The product’s variable cost is Rs.60 and the total
fixed cost is Rs.10,000. The company now wants to reduce the unit price to Rs.90. It also wants to
advertise the special price in newspaper at a cost of Rs.5000. A new packaging to promote the
product costs Rs.5 more than the regular packaging. The company wants to earn a profit of
Rs.6000, after a tax of 20 %. How many units are to be sold to achieve this objective?

Selling Price (S.P)=Rs.100/units


Variable Cost = Rs. 60
Fixed cost = Rs.10,000

Changes:
Selling Price (S.P)=Rs.90/units
Advertisement =Rs.5000
Fixed cost= Rs.15000
Tax= 20%
Profit =Rs.6000
Variable cost =Rs.65 (extra Rs.5 for new packaging)

Profit including tax= 6000*100/80=7500


Profit Impact = Unit Contributions* Unit Sold -Fixed Cost
Unit contribution= (Profit Impact + Fixed cost)/unit sold
Let x be units sold
Selling Price – Cost Price = Profit
➔ 90*x-[15000+65*x]=7500 (:cost price = fixed cost +variable
price)
➔ x=22500/25
➔ x= 900 units
Units sold to achieve its objective : 900 units
3. Rip-Off Rods Limited has been selling pink welding electrodes at a price of Rs.300 per unit. The
variable cost is Rs.100 per unit. They sell about 1000 pink electrodes per mo nth. The R&D
department has developed another type of electrode called the yellow electrode which is longer
lasting than the pink electrode. The variable cost of this is Rs.200 per unit. Rip -Off Rods plans to
sell the new yellow electrodes at a price of Rs.350 per unit. It is expected that, due to introduction
of the superior yellow electrode, the cannibalization rate of pink electrodes is 80%. (This means
80% of yellow electrode sales is due to cannibalization). The sales forecast for yellow electrodes is
as follows –

Month April May June July August September


Forecasted 500 650 700 720 750 800
Unit Sales

Current Month: March


When should the company introduce the new product?

For April:

SP of pink electrodes = 300


Variable cost of pink electrode= 100 per unit
Cannibalization rate = 80%
Units sold= 1000-400 (500(yellow sales forecast)*0.80 = 400)
Unit sold = 600 -> (400 unit cannibalized to yellow electrode)
Total revenue = Unit sold* SP
➔ 600*300=180000
Total cost = Unit sold *variable cost
➔ 600*100=6,000
Profit= Total revenue- Total Cost
Profit= Rs(1,80,000-6000)
Profit = Rs.1,74,000 (Profit for April for Pink electrodes)

SP of yellow electrode = Rs.350 per unit


Variable cost of yellow electrode = 200 per unit
Sales forecast = 500 units
Total Revenue = Rs.(500*350=175000)
Total cost= Rs.(500*200 =1,00,000)
Profit= Total revenue- Total Cost
Profit = Rs.(175000-1,00,000)
Profit=Rs. 75,000 (Profit for April for Yellow electrodes)

Similarly using Excel we calculated all the profit at all months depending upon sales forecast of
yellow electrode as shown in table below:
Yellow Electrode
Sales forecast for yellow electrode has 80% cannibalization from pink electrode; Price/unit= Rs.350; Cost /unit= Rs.200;Profit /unit= Rs. 150
Month Sales forecast Price/unit Revenue Cost Total cost Profit
April 500 350 175000 200 100000 75000
May 650 350 227500 200 130000 97500
June 700 350 245000 200 140000 105000
July 720 350 252000 200 144000 108000
August 750 350 262500 200 150000 112500
September 800 350 280000 200 160000 120000

Pink electrode
Sales is lost to yellow electrode; Price/unit= Rs.300; Cost /unit= Rs.100;Profit /unit= Rs. 100
Sales trend Sales lost New sales trend Price/unit Revenue Cost/unit Cost Profit
April 1000 400 600 300 180000 100 60000 120000
May 1000 520 480 300 144000 100 48000 96000
June 1000 560 440 300 132000 100 44000 88000
July 1000 576 424 300 127200 100 42400 84800
August 1000 600 400 300 120000 100 40000 80000
September 1000 640 360 300 108000 100 36000 72000

After looking at profit of both yellow and pink electrode in different months it is observed that in
month of May the yellow electrode profit will surpass pink electrode profits. Hence it is better for
management to introduce the new product i.e yellow electrode in the month of May.
4. You are the marketing manager of Shocking Ride Automobiles Limited (SRAL) which began its
operation one year ago with an initial investment of Rs. 9,50,00000 (Rs.9.5 crores). Your company
manufactures 95cc, gearless two-wheelers that run on electric power supplied by a battery pack.
The total market for this product is about 55000 units per year of which you are confident of
securing 10% market share. Your fixed cost of operations is Rs.55,00,000 and it costs you Rs.37500
to make one additional unit.
Your closest competitor is High Voltage Motors Limited (HVML) who also makes a comparable
product – a 93cc, gearless, electric two-wheeler – and sells in the same market where you operate.
He has priced his product at Rs.37000 per unit.
These two-wheelers on an average are expected to run about 8000 kilometers per year and the
battery pack needs to be re-charged after every 60 km of running. The cost of charging is
Rs.0.70/km for SRAL bikes where as it is 0.60/km for HVML bike. The battery pack (Each Battery
Pack consists of 4 batteries) needs to be replaced after 12000 km of running for these bikes.
Replacement cost for each battery for SRAL bikes is Rs.10000 and for HVML bikes is Rs.14000. Both
models are expected to have a useful life of 6 years after which they will have zero resale value.
Since these are environment friendly vehicles, the Government has waived off excise duty and
sales tax on these products. Other levies if applicable are all negligible.

a) If your firm wants to do a 10% mark up, how much will be the unit price for your product and
what is this pricing approach called?
b) On the other hand, if your firm expects a 10 % annual ROI, how much should it charge per unit?
What is this pricing approach called?
c) Does your price match your competitor’s price? Why should customers consider buying your
product at all?

a) Fixed Cost = 5500000


Variable cost per unit = 37500
Total market = 55000
Market share = 5500 (10% of market share)
Variable cost/unit= 55,00,000/5500
➔ 1000
Total Cost = Rs. 37,500 + 1,000= Rs. 38,500
Mark up = 10 %
Mark up% = (Retail Price – Cost)/Cost
0.10 = (Retail Price-38,500)/38,500
Retail Price – 38,500= 3850
Retail Price = Rs. 42,350

Retai Price after 10% mark-up = Rs.42,350 (COST-PLUS Pricing)


b) Investment = Rs.9,50,00,000
10% ROI = Rs.95,00,000
Total Cost/unit = 38,500
Total units sold = 5500 units
Total cost = Rs.38,500* 5500 units
Total Cost = Rs.21,17,50,000
Adding 10% ROI to Total cost will be Expected Revenue
Expected Revenue = Rs.22,12,50,000
Retail Price /unit= Expected Revenue / units sold
➔ Rs.22,12,50,000/5,500
Retail Price/unit = 40,227.273 (Rate of Return Approach)

c)

Comparing pricing with Competitor SARL HVML


Expected km/year 8000km 8000km
Total km for 6 years (Expected km/year *6) 48000km 48000km
Charging cost per km Rs.0.7 per km Rs.0.6per km
Total charging cost to customer for 6 years (total km * cost/km) (-1) Rs.33600 Rs.28800
Batteries need to be replaced after these many km 12000km 12000km
Number of times Battery pack will be replaced 4 4
Cost of 1 battery Rs.10000 Rs.14000
Cost of 1 battery pack (4* cost of 1 battery) Rs.40000 Rs.56000
Cost for battery packs in 6 years (-2) Rs.160000 Rs.224000
Total Cost Spend for Maintenance (1+2) Rs.193600 Rs.252800

The difference between the maintenance of SARL and HVML is 59,200 ,SARL incurring less expenditure on
maintenance even if SARL sells the product at 10 % mark up i.e Rs. 42,350 , and selling price of HVML is Rs.
37,000 the difference between them is Rs. 5,350. So in long run it is profitable to purchase SARL product
because maintenance of SARL product for six year is less than HVML.
6. Always Right Corporation (ARC) is in the business of industrial valves. With it’s factory in Chennai
and marketing offices in four metros in India, the company enjoys 45% market share in India. The
company makes several types of valves and enjoys a good reputation among its customers who
happen to be chemical process industries. The ARC valves are known for their superior quality and
durability.

One of the several types of valves that ARC makes is the stainless steel ball valve and finds
extensive application in oil refineries due to its fire resistant property. ARC offers this valve in four
sizes and the details of these are as given below

Variable Unit
Valve Valve Annual Sales
Cost/unit Selling
Type Diameter in units
(Rs) Price (Rs)
SSB1 1 inch 156000 100 140
SSB2 1.5 inch 250000 130 200
SSB3 2 inch 80000 165 265
SSB4 2.5 inch 68000 178 290

Recently a new competitor from Baroda, Signet Engineering Company (SEC), has entered with a
low cost stainless steel ball valve in the 1.5 inch category with a selling price of Rs.130 per unit.
With this attractive price SEC has made significant inroads into the western India market which is
the major consumer of SSB valves. ARC is alarmed and based on the recommendations made by
its marketing personnel and distributors, is planning to introduce a low cost 1.5 inch valve to
combat the SEC threat. Initial investigation has revealed that such valve can be made in the
Chennai factory with no additional fixed costs at a variable cost of Rs.120 per unit.

A market study reveals that there will be no growth in the sales of SSB valves for the next year.
However the new low cost valve from ARC will cannibalize 10% of its existing SSB2 1.5 inch valve
sales. The projected annual sales for the new low cost 1.5 inch valve by ARC is shown below –

Selling Expected
Price/Unit Unit Sales
130 70000
150 60000
165 40000

At what price (of the above 3) should ARC sell its new 1.5 inch SSB valve? Why?

Valve Diameter ( SSB2) 1.5 inch


Annual Sales = 2,50,000units
Variable Cost = Rs.130/unit
Selling Price = Rs.200 /unit
Variable cost/unit – selling price/unit= Rs. 70/unit
Total Contribution =2,50,000units( Annual Sales) * Rs. 70/unit( profit/unit) =Rs.1,75,00,000
Contribution post Cannibalization of 10% =Rs. 17,50,000
New Low Cost Valve:
Valve Diameter = 1.5 inch

Variable Contribution/Unit Total


Expected Selling Cost/Unit (Rs.) Contribution (Rs.)
Unit Sales Price/Unit (Rs.)
70000 130 120 10 7,00,000
60000 150 120 30 18,00,000
40000 165 120 45 18,00,000
Based on total contributions at various selling prices per unit , ARC can take a decision to sell its
new 1.5 inch SSB2 valves either at a selling price of Rs.150 or Rs.165.

7. A company manufactures two products ‘Dolairs’ and ‘Tolo’ where the variable costs amount to 90%
and 10% of the selling price respectively. For convenience, let us say that the manufacturer’s selling
price is Rs 1 in both the instances and the current sales of each are 1000 units.

a. What will be the impact on unit contribution for the two products if the price is increased by 10%?
Assume that the demand remains the same.

b. Suppose the demand is price elastic and falls by 10% as a result of 10% increase in price. What will
be the change in the contribution?

c. Due to word of mouth on social media, the sales of both the products increase by 20%. Given that
the selling price is the same, how much will be the change in the contribution?

d. What will be the change in contribution if the incremental 20% sale for each product is coming
because of an extra advertising expense of Rs 100?

For Dolairs:

Selling Price = Rs 1

Variable cost = 90% of selling price = .90

Contribution = Selling price – Variable cost = 1-.90 = .10

Total Unit sales = 1000

Total contribution = 1000 *0 .10 = Rs.100

For Tolo:
Selling Price (S.P)= Rs 1

Variable cost = 10% of S.P =0 .10

Contribution = Selling price – Variable cost =Rs.( 1-0.10)=Rs.0.90

Total Unit sales = 1000

Total contribution = 1000 *0 .90 = Rs.900

a)

For Dolairs:

Price increases by 10%

Selling Price = Rs 1.1

Variable cost = 90% of selling price = .99

Contribution = Selling price – Variable cost = 1.1-.99 = .11

Total Unit sales = 1000

Total contribution = 1000 *0 .11 = 110

C hange in contribution = (110-100)/100*100= 10 %

For Tolo:

Price increases by 10%

Selling Price = Rs 1.1

Variable cost = 10% of selling price =Rs.0 .11

Contribution = Selling price – Variable cost = Rs.(1.1-0.11) = Rs.0.99

Total Unit sales = 1000

Total contribution = 1000 * 0.99 = Rs.990


C hange in contribution = (990-900)/900*100= 10 %

Total unit contribution also increases by 10 % for the both the products

b)

Price increases by 10% and Sales decreases by 10%

For Dolairs:

Selling Price = Rs 1.1

Variable cost = 90% of selling price =Rs.0 .99

Contribution = Selling price – Variable cost =Rs.( 1.1-0.99) =Rs.0 .11

Total Unit sales = 900

Total contribution = 900 * 0.11 = Rs.99

C hange in contribution = (100-99)/100*100= 1 %

For Tolo:

Selling Price = Rs 1.1

Variable cost = 10% of selling price =0 .11

Contribution = Selling price – Variable cost = 1.1-0.11 =0 .99

Total Unit sales = 900

Total contribution = 900 *0 .99 = 891

C hange in contribution = (900-891)/900*100= 1%

When Price increases by 10% and Sales decreases by 10% then for both the products total contribution
decreases by 1%.

c)

Sale increases by 20 % and selling price remains same


For Dolairs:

Sale increases by 20 % and selling price remains same

Selling Price = Rs 1

Variable cost = 90% of selling price =0 .90

Contribution = Selling price – Variable cost = 1-.90 = 0.10

Total Unit sales = 1200

Total contribution = 1200 * 0.10 = 120

C hange in contribution = (120-100)/100*100= 20%

For Tolo:

Selling Price = Rs 1

Variable cost = 10% of selling price =0 .10

Contribution = Selling price – Variable cost = 1-0.10=0.90

Total Unit sales = 1200

Total contribution = 1200 *0 .90 = 1080

C hange in contribution = (1080-900)/900*100= 20%

When sale price increases by 20% then for the both the products contribution also increases by 20%

Вам также может понравиться