Optimal Pricing

Traditionally, organisations determined the sales price of a product or service based on a cost plus approach.Whilst this sought to cover all costs, the selling price determined was not always appealing to the customer.This approach was modernised with the advent of target pricing approaches to products and services.This approach potentially benefitted the customer.However, it does not guarantee customer demand nor profitability for the organisation.

The Toy Shop Limited is planning the launch of a new product.They hope the product will be popular with children who own the current trend product, the 'Fidget spinner'.The new toy spinner will be packaged in two different formats.One will be aimed at children aged 8 - 16 and the other at young adults aged 17 - 100!

The Toy Shop are unsure of the price levels to sell the product at to children and adults. The costs to the Toy Shop are the same for the children and adults' spinners.The components are identical, only the artwork and packaging will be different.

The Production Manager believes the cost plus approach is ideal to ensure the best sales price is determined.However, the Marketing Manager argues that market research suggests adults are prepared to pay a higher price for 'gadgets' such as trend toys.He believes that parents' are not prepared to pay a high price for the latest toy as children may break, lose, or become bored with a toy in a short period of time, before wanting the next latest toy.

The Production Manager thinks the new spinner should be sold at a price determined using cost plus pricing. The Marketing Manager thinks the new spinner should be sold for 20 maximum.

The cost data per spinner is as follows:

Material X100g at a cost of 1 per 20g

Material Y 10g at a cost of 1.50 per 5g

Labour at a cost of 7 per spinner

Other costs at 5 per spinner

The company mark-up is 25%

The production manager believes a cheaper alternative of material X at a cost of 0.52 per 20g may be purchased.The quality manager has expressed concerns about this cheaper alternative, however the production manager believes this could be possible without compromising quality.

Write a report that:

Calculates the sales price alternatives using cost-plus pricing and target pricing.