1. Pricing
BMI3C1

2. Determining the Price of a Product or Service
Two factors to consider:
The cost of doing business
Intended profit

3. Price = Cost of Doing Business + Profit
Profit: The amount of money left over after all products are paid for and all expenses are covered
Price = Cost of Doing Business + Profit

4. Example Expenses Cost $0.11 $0.34 $0.20 Profit
Price = $ = $0.65

5. 2 Ways to Examine Price After it is Set

6. Markup = $ Amount Store Adds Cost
The amount of money a business adds to the cost of a product
Expressed as a %
Markup is used to cover all expenses plus make a profit
Markup = $ Amount Store Adds Cost

7. Example Expenses = $0.11 Profit = $0.20 Cost = $0.34
Markup = $ $0.34
= 91%

8. Therefore, Wal-Mart buys Skittles for $0.34 and marks them up by 91%
Example
Therefore, Wal-Mart buys Skittles for $0.34 and marks them up by 91%

9. Margin = $ Amount Store Adds Selling Price
The percentage of the price charged to customers that is not used to pay for the product
Margin = $ Amount Store Adds Selling Price

10. Example Expenses = $0.11 Profit = $0.20 Price = $0.65
Margin = $ $0.65
= 48%

11. Example
Therefore, every time Wal-Mart sells Skittles it makes a 48% profit margin

12. Markup and Margin Question
Josh needs to make some extra money to buy Christmas presents for his family so he opens a hotdog stand in Tilbury

13. Markup and Margin Question
He pays $0.30 for every hotdog that he sells.
Propane and condiments cost him an additional $0.22 per hotdog.
He wants to make $0.23 profit per hotdog

14. Markup and Margin Question
What is his selling price?
What is the markup?
What is the margin?

15. Price = Cost of doing business + profit
Answers
Price = Cost of doing business + profit
= $ = $0.75
Markup = $ Amount store adds / cost
= $ / 0.30
= $0.45 / 0.30
= 1.5 OR 150%

16. Answers Margin = $ Amount store adds / selling price
= $ / $0.75
= $0.45 / $0.75
=0.6 OR 60%

17. Break-Even Analysis
How many units must be sold at a given price to cover all operating costs?

18. Break-Even Analysis Three parts to break-even analysis:
Variable Costs: Costs that depend on the quantity of products or services sold
Example:

19. Break-Even Analysis
2. Fixed Costs: Costs that are constant. These do not depend on the quantity of sales.
Example:

20. Gross Profit = Selling Price – Variable Costs
Break-Even Analysis 3.
Sometimes called Contribution Margin
Example:
Gross Profit = Selling Price – Variable Costs

21. Break-Even Analysis Gross Profit Example
Selling Price = $1.49
Variable Cost = $0.35
GP = Selling Price - VC
Therefore, $1.14 of Gross Profit is made with every sale of an Iced Cap
This is used to pay for Fixed Costs

22. BEP = Fixed Costs Gross Profit
Break-Even Point
Again, Break-Even Point (BEP) is the # of units that must be sold at a given price to cover all operating costs
BEP = Fixed Costs Gross Profit

23. Break-Even Point Back to Cody He pays $0.30 for every hotdog
$0.22 for gas and condiments per hotdog
Sells hotdogs for $0.75 each
Pays $200/month to rent the cart (Fixed)

24. What is Cody’s BEP? Gross Profit = Selling Price – VC
= $0.75 – 0.30 – 0.22 = $0.23
BEP = FC / Gross Profit
= $200 / $0.23
= 870 hotdogs

25. What is Cody’s BEP?
Therefore, Cody has to sell 870 hotdogs in order to cover the cost of renting the cart.
If he doesn’t sell 870 he will lose money!

26. Pricing and BEP Example
Subway has the following costs for a 6”assorted sub it sells:
Bread = $0.37
Meat = $1.68
Toppings = $0.39
Expenses = $1.30 (includes all other FC and VC)
Subway wants to make $1.25 per sub

27. What should the price be?

28. What it the markup? What is the margin?
Cost = $2.44
Markup = 105%
Margin = 51%

29. What is the Gross Profit?
Assuming that:
Bread = $0.37
Meat = $1.68
Toppings = $0.39
Expenses = $1.30 (includes all other FC and VC)
Other VC = $0.90

30. What it the gross profit?
Total VC = $3.34
Gross Profit = $4.99 – 3.34
= $1.65

31. What is the BEP?
Assume that Subway pays the following monthly Fixed Costs:
Wages $12,500
Rent $2,100
Hydro $800

32. What is the BEP? FC = $15,400 BEP = $15,400 / $1.65 = 9,333 subs
Therefore, every month Subway needs to sell 9,333 subs just to break even!