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.
5. With all this information and the results you calculated for parts 1-4, what do you think your price should be?

35x2000=7.00 = 42. markup

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.
5. With all this information and the results you calculated for parts 1-4, what do you think your price should be?

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.
5. With all this information and the results you calculated for parts 1-4, what do you think your price should be?

1. To calculate the price using cost-based pricing and a markup of 20%, you first need to determine the total cost per unit.

The fixed costs per month are $2,000, and the variable cost per service is $35. So, the total cost per unit is the sum of the fixed cost and the variable cost:
Total Cost per Unit = Fixed Cost + Variable Cost = $2,000 + $35 = $2,035

Next, you need to calculate the markup. In this case, it's 20% of the total cost per unit:
Markup = 20% of Total Cost per Unit = 0.2 * $2,035 = $407

Finally, you can calculate the price by adding the markup to the total cost per unit:
Price = Total Cost per Unit + Markup = $2,035 + $407 = $2,442

Therefore, the price should be $2,442.

2. Breakeven volume of production can be calculated by dividing the total fixed costs by the contribution margin per unit. The contribution margin is the difference between the price and the variable cost per unit.

Contribution Margin per Unit = Price - Variable Cost per Unit = $2,442 - $35 = $2,407

Breakeven Volume of Production = Total Fixed Costs / Contribution Margin per Unit
Breakeven Volume of Production = $2,000 / $2,407 ≈ 0.83

Therefore, the break-even volume of production should be approximately 0.83 units.

3. To calculate the price using target costing, an acceptable profit margin of 20%, and a target price of $99, you can rearrange the profit margin formula:

Target Price = Variable Cost per Unit + (Target Profit Margin * Variable Cost per Unit)
$99 = $35 + (0.2 * $35)

Let's solve this equation:

$99 = $35 + (0.2 * $35)
$99 = $35 + $7
$99 = $42

Therefore, the calculated price using target costing, a target price of $99, and an acceptable profit margin of 20% is $42.

4. If your nearest competitor charges $95, and you still want to maintain a profit margin of 20%, you would need to adjust your price accordingly.

Let's calculate the variable cost per unit and the target price:

Variable Cost per Unit = $35
Target Price = Variable Cost per Unit + (Target Profit Margin * Variable Cost per Unit)
$95 = $35 + (0.2 * $35)

Solving the equation:

$95 = $35 + (0.2 * $35)
$95 = $35 + $7
$95 = $42

Since the target price of $42 is lower than the competitor's price of $95, it may not be wise to undercut your competitor significantly. You might want to consider other factors such as quality, features, or customer service to differentiate yourself instead.

5. Considering the results from parts 1-4, you have different pricing options:

- Using cost-based pricing with a 20% markup: $2,442
- Using breakeven analysis: Approximately 0.83 units
- Using target costing with a target price of $99: $42
- Considering the competitor's price: $95

Based on these options, you would need to evaluate your business goals, market demand, competition, and customer perceived value to determine the most suitable price. It's essential to strike a balance between profitability and attractiveness to your target customers.