Page 298 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 14: Pricing Decision

14.4.4 Break-even Pricing Notes

For this type of pricing, the price at which the products will break-even is used. This break-even
price will then be added a profit mark up.

Example: If Fixed Cost $25,000, Variable cost $2.00 per unit, Number of Units produced
4,000 and Mark-up is 15% on the break-even price, what will be selling price to the customers?
Solution:
Break-even price = Fixed Cost + Variable Cost/Marginal Cost
Total Number of units produced = $25,000 + $8,000

4,000 = $8.25 + mark up of 15% ($1.24)
= $9.50 which is the selling price to the customer.

14.4.5 Minimum Pricing

For this type of pricing, the selling price is the lowest price that a company may sell its product.
Normally the price will be the Total Relevant Costs of Manufacturing. Its salient features include:

1. Useful method in situations where there is a lot of intense competition, surplus production
capacity, clearance of old stocks, getting special orders and or improving market share of
the product.
2. Minimum Price is Incremental costs of manufacturing + Opportunity Costs (if any)

Example: Assuming the following details of product X:
Material $2.50
Labor (2 hrs. @ $3.00) $6.00
Variable production overhead $2.50
Fixed production overhead $1.20
Total $9.70
Say that the labor is in short supply and is used for other product Y which generates a contribution
of $6 per unit and requires 2 hours of the same labor.
Material $2.50
Labor $6.00
Variable production overhead $2.50
Add:
Opportunity cost from labor scarcity:
$6/2 hours= $3.00 per hr x 2 hr = $6.00
Minimum price = $17.00

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