Your business provides a service to local residents. Your fixed costs are $2,000 per month, and you expect 40 customers per month. The variable cost associated with each service is $35.
1. Using cost-based pricing and a markup of 20%, what should the price be? Show calculations.
2. Using breakeven analysis, what should the break-even volume of production be? Hint the formula is Break-even volume = Total fixed costs / (Price – Average variable cost). Note: This formula needs manipulated algebraically to be able to solve for price. Show calculations.
3. Using target costing, a price you think is acceptable to customers ($99) and an acceptable profit margin (20%), what should the price be? Hint the formula is Target cost = cost customers are willing to pay – acceptable profit margin to obtain the desired cost. Show calculations.
4. If your nearest competitor charges $95, what should the price be? Explain.
5. With all this information and the results you calculated for parts 1-4, what do you think your price should be?
3 answers