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Pricing Of Products

:
Although prices are are regulated more by market conditions and other economic f
actors than by the decision of management, the management while fixing the price
s has to keep in view the level of profits expected.
In normal times, the price fixed must cover full costs as otherwise profits cann
ot be earned. But under certain circumstances, products may have to be priced at
a level below total cost, if such a course it necessary to meet the situation r
ising due to trade depression. This is so because fixed costs will have to be in
curred irrespective of whether production continues or not. Any contribution tow
ards the recovery of fixed costs will redeuce the losses which will be incurred
if production is stopped. A word of caution, fixation of prices below total cos
t should be made only on short term bases.
Production Pricing Methods:
To determine the selling price of a product, we use the following methods.
1. Profit Maximation Method:
According to this method the price of a product is fixed at that level which res
ults in largest amount of profits to the business enterprise.
2. Return on Capital Employed Method:
According to this method price of a product is fixed which gives a demand rate o
f return on capital employed. The following formula will help in fixing the sell
ing price of the product according to this method.
Selling Price = Total Cost + Percentage Desired Return * Capital Employed / Sal
es Volume in Units.
For example if in case a single product company, the total cost are Rs. 2,10,000
, total capital employed is Rs. 2,00,000, the desired rate of return is 20%. Sal
es volume is 50000 units.
Selling price = 2,10,000 + 20% * 2,00,000 / 50000
= 2,50,000 / 50,000
=Rs. 5 per Unit.
The selling price of a product should be fixed at Rs. 5 per Unit.
3. Conversion Cost Method:
According to this method, the selling price of product should be based on conver
sion cost (i.e. direct expenses, direct labour, and factory overheads) rather th
an on total cost, other things being equal. It would be advantageous to manfactu
re a product with comparativily lower conversion cost since less efforts would b
e necessary to earn the same or higher profits.
Full Cost Method:
According to this method selling price of a product is based on its total cost b
oth manfacturing and selling. The selling price is arrived at by adding estimate
d administartion, selling, estribution overheads and desired profit to the total
factory cost of the product.
Marginal Cost Method: According to this method selling price of a product is bas
ed on its marginal cost plus a certain percentage to cover fixed overhead and pr
ofit.
Differential Cost Method:
According to this method, the selling price of each additional unit is based on
its differential cost. In other words a lower selling price is acceptable so lo
ng as the extra revenue is sufficient to meet the additional cost and also earn
some profit, provided it does not disturb the existing market for the product. F
ixation of selling price according to this method is resorted to in times of ser
vice competition or under recessionary conditions.