What to Do: Consider the following, and then do the calculations to solve (formulas and concept explanations in the book).

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? 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? Show calculations.
4. If your nearest competitor charges $95, what should the price be? Explain.

To answer these questions, we will need to understand and use three different pricing methods: cost-based pricing, breakeven analysis, and target costing. Here's how you can calculate the answers:

1. Cost-based pricing with a markup of 20%:
Cost-based pricing involves calculating the price by adding a markup percentage to the total cost per unit. To find the price, follow these steps:

Step 1: Calculate the total cost per unit:
Total cost per unit = Fixed cost per month + (Variable cost per unit * Number of units)

Fixed cost per month = $2000
Variable cost per unit = $35
Number of units = 40

Total cost per unit = $2000 + ($35 * 40) = $3600

Step 2: Calculate the price:
Price = Total cost per unit * (1 + Markup percentage)
Markup percentage = 20%

Price = $3600 * (1 + 0.20) = $3600 * 1.20 = $4320

Therefore, the price, using cost-based pricing and a markup of 20%, should be $4320.

2. Breakeven analysis:
Breakeven analysis helps determine the volume of production needed to cover all costs and achieve a zero-profit point. To find the breakeven volume, follow these steps:

Step 1: Calculate the breakeven volume:
Breakeven volume = Fixed costs / (Price - Variable cost per unit)

Fixed costs = $2000
Price (from question 1) = $4320
Variable cost per unit = $35

Breakeven volume = $2000 / ($4320 - $35) ≈ 48.54

Therefore, the breakeven volume of production should be approximately 49 units.

3. Target costing:
Target costing involves working backward from a desired selling price and target profit margin to determine the maximum cost that can be incurred. To find the price using target costing, follow these steps:

Step 1: Calculate the maximum allowable cost:
Maximum allowable cost = Selling price - (Selling price * Target profit margin)

Selling price = $99 (acceptable to customers)
Target profit margin = 20%

Maximum allowable cost = $99 - ($99 * 0.20) = $99 - $19.80 = $79.20

Step 2: Determine the cost per unit:
Cost per unit = Fixed costs / Number of units

Fixed costs = $2000
Number of units = 40

Cost per unit = $2000 / 40 = $50

Step 3: Calculate the target price:
Target price = Cost per unit + Maximum allowable cost

Target price = $50 + $79.20 = $129.20

Therefore, the price, using target costing, should be approximately $129.20.

4. Adjusting price based on competitor:
If your nearest competitor charges $95, you may want to adjust your price to remain competitive. One approach could be to match their price or offer a slightly lower price to attract customers.

However, it's important to consider the impact on profitability and if lowering the price is sustainable in the long run. You could also differentiate your service or add value to justify charging a higher price compared to the competitor.

It's crucial to regularly monitor the market and adjust pricing strategies accordingly to maintain competitiveness and profitability.