Chapter 2

Pricing

By . Mohammad Salama
 1 - ITTO

Inputs Tools & Techniques Outputs

● WBS ● Pricing Strategies ● Project Acquisition

● Historical Records ● Financial Management ● Business Decision
● Cost Estimation ● Lesson Learned
● Cost management System

1 - Pricing Strategies

1 – 1 - New Business Acquisitions 1 – 2 - Acquisitions

By . Mohammad Salama
 2 - Return on Investment ROI

2.1. Traditional Formula (Simple ROI)

Simple ROI = (Gains – Investment Costs)/ Investment Costs

 Gains = $535,000 and cost = 400,000. What is ROI?

 ROI = ( 535,000 -400,000) / 400,000 = 33.75%

 Gains = $3,640 and cost = $1,880. What is ROI?

 ROI = ( 3640-1880) / 1880 = 93.62%

By . Mohammad Salama
 Example 3

 A business purchases a new form of information system technology for $500,000. Because of this
purchase, the company begins earning $50,000 a year. Find the ROI for the first year.?

Simple ROI = (Gains – Investment Costs)/ Investment Costs

 ROI = ( 50,000-500,000) / 500,000= -90%

 If ROI is negative, the costs must be greater than the gains, or we have yet to achieve an
amount of gain great enough to cover the cost of the investment

By . Mohammad Salama
 Example 4

Project

Year 1 Year 2 Year 3 Year 4 Total

Labore $30,000 $25,000 $80,000 $ 30,000 $ 165,000

Cost
Equipment $10,000 $25,000 $20,000 $ 5,000 $60,000

Benefit $0 $75,000 $125,000 $100,000 $275,000

By . Mohammad Salama
 Example 4
Project

Year 1 Year 2 Year 3 Year 4 Total

Labore $30,000 $25,000 $80,000 $ 30,000 $ 165,000

Cost
Equipment $10,000 $25,000 $20,000 $ 5,000 $60,000

Total Cost $ 40,000 $50,000 $100,000 $35,000 $225,000

Benefit $0 $75,000 $125,000 $100,000 $275,000

Net Profit (Benefit – Cost) $ - 40,000 25,000 25,000 65,000 75,000

Simple ROI = (Gains – Investment Costs)/ Investment Costs

 ROI = 75,000 / 225,000= 33.3%

By . Mohammad Salama
 3 - Return on Sales (Net Profit Margin )

ROS = (Net Profits)/ (Sales)

 Example: A Company generates $500,000 of business each year and shows operating profit of
$100,000 after taxes and interest expenses are accounted for . Calculate ROS ratio

Net Profits = $ 100,000

Net Sales = 500,000

ROS = 20%

This ratio indicates that the net profit after interest and taxation is 20 per cent of sales.

By . Mohammad Salama
 Example 1

Net Income = $ 21,000 Net profit = $ 1,010,000

ROS = $ 1,010,000 / 21,000 = 2.08 %

By . Mohammad Salama
 Example 1

ROS = (Net Profits)/ (Sales)

 A Business reports net profits of $50,000, interest expense of $10,000, and taxes of $15,000. The
net sales reported for the same period is $1,000,000. Based on this information, calculate the
return on sales factor .

ROS = (($50,000 Earnings + $10,000 Interest + $15,000 Taxes) / $1,000,000 Net sales

ROS = 7.5%

By . Mohammad Salama
 4 - Return on Assets ROA

Step 1

Assets Turn Over= Net Profit / Average Total Assets.

Step 2

ROA = Net Profit Margin (ROS) x Asset Turnover x 100%

By . Mohammad Salama
 Example 1

 Example: a company's corporate accountant is calculating its ROA for 2014. At the beginning of
the year, the balance sheet shows total assets of $1,000,800. The year-end balance sheet shows a
much-reduced total of $765,000 due to the sale of several large pieces of equipment. The annual
income statement lists the net profit for 2014 as $685,000.

The average total assets for 2014 = ($1,000,800 + $765,000) / 2 = $882,900

Earnings before interest and taxes (EBIT) = 685.000

Assets Turn Over = 685000 / 882900 = 78%

 This means that, on average, every dollar invested in the company during the 2014 fiscal year
generated 78 cents in profit

By . Mohammad Salama
 Example 2

Assets Turn Over= Net Profit / Average Total Assets.

Assets Turn Over = 1010000/ 500000= 2.02 ROS = $ 1,010,000 / 21,000 = 2.08 %

ROA = Net Profit Margin x Asset Turnover x 100% = .0208 X 2.02 X 100 = 4.2%

By . Mohammad Salama
 6 - Break –Even Analysis

 To find the level of sales necessary to operate a business on a break – even basis

 At the break even point Total Costs = Total Revenue

1 – Find (x) : The number of items sold or produced

X = FC / (SP-VC) or X = FC / CM

Where , ( FC ) Fixed Costs , (SP) Selling Price , (VC) Variable Costs and (CM) Contribution Margin

2 – Find (Break Even Revenue)

Break-even revenue ($) = (break-even units) x (selling price SP)

By . Mohammad Salama
 ‫‪Example 1‬‬

‫‪ ‬ماهي قيمة نقطة التعادل ( بالوحدات والتكلفة ) اذا علمت ان سعر بيع الوحدة = ‪ 5‬لاير والتكلفة المتغيرة = ‪ 2‬لاير واجمالي التكلفة الثابتة‬
‫لالنتاج = ‪ 750‬لاير‪.‬‬

‫‪SP = 5‬‬ ‫‪VC = 2‬‬ ‫‪ ‬المعطيات كالتالي ‪FC = 750‬‬

‫‪ ‬بالتالي ‪X = FC / (SP-VC) = 750 / ( 5-2 ) = 250‬يعني ذلك ان علينا انتاج عدد ‪ 250‬وحدة للوصول الى نقطة التعادل‬
‫التي نستعيد معها ما صرفناه ونبدأ بعدها في جني االرباح ‪.‬‬

‫‪ ‬للوصول الى االرباح الواجب تحقيقها للوصول لنقطة التعادل نستخدم المعادلة‬

‫)‪break-even revenue ($) = (break-even units) x (selling price‬‬

‫‪ ‬والتي تعبر عن عدد الوحدات الالزم انتاجها للوصول لنقطة التعادل ‪X‬سعر بيع الوحدة = ‪ 1250 = 5 * 250‬اي ان علينا‬
‫جني ارباح قدرها ‪ 1250‬لاير السترداد جميع ما انفقناه وبدأ جني االرباح بعدها ‪.‬‬

‫‪By . Mohammad Salama‬‬

 Example 2
 ABC Computer Company assembles computers in the Atlanta area. Each fully assembled computer sells
for $1,395, it costs ABC Computer Co. $960 to assemble each computer and ready for shipping. The fixed
costs for ABC Computer Co. are $1,500. What is the break-even point in units for ABC Computer?

 Selling Price = $1,395

 Variable Costs = $960

 Fixed Costs = $1,500

 X = FC / (SP – VC) = $1,500 / ($1395 - $960 ) = 3 Units

By . Mohammad Salama
 Example 3

 Using the following data, calculate the breakeven point

Selling Price = $ 50 , Variable Cost = $40 , Fixed Cost = $70,000 , Budgeted Sales = 7,500 units

 Contribution = $50 - $40 = $10 per unit

 Breakeven point = $70,000/$10 = 7,000 units

Process Outputs

Project Business Lesson

Acquisition Decision Learned

By . Mohammad Salama