Chapter 3.

“Pricing Objectives and Approaches”

Cost-based Pricing

Variable Cost = 10,000

Fixed Cost = 200,000

Expected Sales = 50,000

Markup Percentage = 20%

1) Unit Cost = Variable Cost + Fixed Cost

Unit Sales
Unit Cost = 10,000 + 200,000
50,000
Unit Cost = 10,000 + 4
Unit Cost = 10,004

2) Markup Price = Unit Cost

1 – Desired Sales
Markup Price = 10,004
1 – 20 %
Markup Price = 10,004
0.8
Markup Price = 12,505

3) Break-even Volume = Fixed Cost

Price – Variable Cost
Break-even Volume = 200,000
12,505 – 10,000
Break-even Volume = 200,000
2,505
Break-even Volume = 80 quantity per annum
4) Target-Return Volume = Fixed Cost + Target Return
Price – Variable Cost
Target-Return Volume = 200,000 + 50,000
12,505 – 10,000
Target-Return Volume = 250,000
2,505
Target-Return Volume = 100 quantity per annum

100 x 12,505 = 1,250,00 expected profit for a year

Cost–Plus Pricing

Problem 1:

Let us assume that it costs us ₱15,000 to make a smart phone and you want to realise profits of
33% from the sale of every phone.

 Cost-Plus Pricing
1) Selling Price = Cost (1 + Markup Amount)
Selling Price = 15,000 (1+33%)
Selling Price = 15,000 (1.33)
Selling Price = 19,950 each smart phone

2) Profit = Selling Price – Cost Price

Profit = 19,950 – 15,000
Profit = 4,950
 Markup Pricing
1) Markup Percentage = Profit Margin
Unit Cost
Markup Percentage = 4,950
15,000
Markup Percentage = 33%

2) Sales Price = Cost x Markup Percentage + Cost

Sales Price = 15,000 x 33% + 15,000
Sales Price = 19,950

 Target Return
Target Cost = Selling Price
1 + Profit Percentage
Target Cost = 19,950
1 + 33 %
Target Cost = 19,950
1.33
Target Cost = 15,000
Problem 2:

You’re an online seller which your product is beauty supplements and your following costs are:

Transportation: 100 Markup amount: 5%

Utilities: 500

Shipping Fee: 200

Retailer Price: 1,250

Overhead cost = 2,050

 Cost-Plus Pricing
1) Selling Price = Cost (1 + Markup Amount)
Selling Price = 2,050 (1+5%)
Selling Price = 2,050 (1.05)
Selling Price = 2,152.5 or 2,153

2) Profit = Selling Price – Cost Price

Profit = 2,153 – 2,050
Profit = 103
 Markup Pricing
1) Markup Percentage = Profit Margin
Unit Cost
Markup Percentage = 103
2,050
Markup Percentage = 5%

2) Sales Price = Cost x Markup Percentage + Cost

Sales Price = 2,050 x 5% + 2,050
Sales Price = 2,152.5 or 2,153

 Target Return
Target Cost = Selling Price
1 + Profit Percentage
Target Cost = 2,153
1+5%
Target Cost = 2,153
1.05
Target Cost = 2,050
Problem 3:

Wendy and Joseph invite you to their wedding as photographer and they ask you how much the
package of your service?

Material: 15,000 Markup Amount: 25%

Labor: 5,000

Overhead Cost: 20,000

 Cost-Plus Pricing
1) Selling Price = Cost (1 + Markup Amount)
Selling Price = 20,000 (1+25%)
Selling Price = 20,000 (1.25)
Selling Price = 25,000

2) Profit = Selling Price – Cost Price

Profit =25,000– 20,000
Profit = 5,000
 Markup Pricing
1) Markup Percentage = Profit Margin
Unit Cost
Markup Percentage = 5,000
20,000
Markup Percentage = 25%

2) Sales Price = Cost x Markup Percentage + Cost

Sales Price = 20,000 x 25% + 20,000
Sales Price = 25,000

 Target Return
Target Cost = Selling Price
1 + Profit Percentage
Target Cost = 25,000
1 + 25 %
Target Cost = 25,000
1.25
Target Cost = 20,000
Problem 4:

Fixed Cost: 15,000 Markup Amount: 15%

Variable Cost: 10,000

Overhead Cost: 25,000

 Cost-Plus Pricing
1) Selling Price = Cost (1 + Markup Amount)
Selling Price = 25,000 (1+15%)
Selling Price = 25,000 (1.15)
Selling Price = 28,750

2) Profit = Selling Price – Cost Price

Profit = 28,750 – 25,000
Profit = 3,750
 Markup Pricing
1) Markup Percentage = Profit Margin
Unit Cost
Markup Percentage = 3,750
25,000
Markup Percentage = 15%

2) Sales Price = Cost x Markup Percentage + Cost

Sales Price = 25,000 x 15% + 25,000
Sales Price = 28,750

 Target Return
Target Cost = Selling Price
1 + Profit Percentage
Target Cost = 28,750
1 + 15 %
Target Cost = 28,750
1.15
Target Cost = 25,000