PRICING WORKSHEET- # 1

ESTIMATING DEMAND and DEMAND ELASTICITY

(refer to Slides # 9, 10)

1. You own a flower shop and you need to estimate demand for your services.

A)Assume the following:

Number of households in the market:600,000

Average number of arrangements purchased per

household per year4

Company's estimate share of the total market5%

SOLVE FOR THE FOLLOWING:

Total annual market demand

Estimated annual company demand

Estimated monthly company demand

Estimated weekly demand

B)Given the following for your flower shop: (refer to slides # 14 and 15)

Annual Expenses:

Salaries: $ 35,000Hourly labor: $10.00

Flowers: $7.00Gas: $2,000

Rent: $14,800Advertising: $1,800

Insurance: $3,000Utilities: $ 2,400

Supplies: $ 3.00

Total Fixed Costs:Total Var. Costs:

Fixed Costs per unit:Variable Cost per unit

(refer to slides # 18, 19 for explanation of Markup)

To solve the following, refer to the attached formula sheet.You must first determine what I am asking you to solve for - cost, selling price or markup.Then look for the category under the markup section on the formula sheet. (it will say "When solving for Cost" "When solving for Markup" etc. ) Then read the question carefully to see if I am asking based on cost or selling price.On the formula sheet MU(c) stands for markup on Cost and MU(r) stands for Mark up on Selling Price (the lowercase r is for retail because the consumer selling price is at the retail level).

C.Calculate the selling price per arrangement if you must have a markup of 55%

on the selling price.

D. What is the selling price per arrangement if you desire a 120% markup on cost?

E.What is the markup on selling price with a $40.00 selling price?

F.What is the markup on cost with a $40.00 selling price?

G.If you charge $50.00 per flower arrangement, what is the highest your

expenses can be and still maintain a 54% markup on selling price?

H.If you charge $50.00 per flower arrangement, what is the highest your

expenses can beand still maintain a 120% markup on costs?

(refer to slides # 11, 12, 13)

2.Using the information from ques. #1 and the selling price you calculated in C

above,

A)Calculate monthly revenue.

B)Assume you lower the average selling price to $40.00 per arrangement

and your monthly demand increases to 10,850 orders.Determine the

elasticity ofyour demand.What can you infer about your market?

C) Assume you lower the average selling price to $40.00 per arrangement and

your monthly demand increases to 11,300 orders.Determine the elasticity

of your demand.What can you infer about your market?

BREAKEVEN ANALYSIS

(refer to slides # 14 - 17)

3.Using the information in Ques. #1 A & B above:

A)Compute the breakeven point for the following:

1.Total annual revenue of$5,400,000

2.Total annual revenue of$6,000,000

3.Total annual revenue of$4,800,000

B) compute the BEfor each of the3 selling prices given in# 3 A above if the

company has a profit goal of $50,000.This is a fixed profit goal so it

impacts your fixed costs because it is not tied to # of units sold.

(Use fixed costs from # 3A above)

C) compute the BE for each of the 3 selling prices given in # 3 A above if the

company has a profit goal of 10% of sales. This is fluctuating or variable

profit goal that is tied to the # of units sold so it impacts your Variable

Costs per unit which then changes your Cont. Margin.You will add 10% of

each of the 3 selling prices to your VC/unit.

(Use original Fixed Costs in # 3A above)

(Refer to slide # 28)

D)What price are you going to charge for your product?What factors will

influence your decision?

4.Channel of Distribution Markups:

(always solved using formula based on selling price - MU r )

An item has a cost of $21.60 and selling price of $24.00 from the manufacturer, a $30.00 selling price from the wholesaler and a $50.00 from the retailer.What is the markup at each level of the channel?What does the consumer pay?

5. MARGINAL ANALYSIS

(Refer to slides # 20 - 23)

QP TRTCMRMCMR - MC

201501100

211651400

221801780

231702150

241852800

A. What is the marginal revenue from selling the 24th unit of output?

B.What is the marginal cost for producing the 20^th unit of output?

C.What is the marginal profit at 23 units of output?

D. At what level of output are profits maximized?

E. What is the optimum selling price?

CASHDISCOUNT

(Refer to Slide # 27)

6. A manufacturer sends an invoice dated Nov. 1 with terms 2/10, n/30 in the

amount of $950. If the invoice is paid on or before Nov. 11, what amount is

paid?If you don't take advantage of the discount and the invoice is paid by

Dec. 1, what amount is paid?

FORMULAS AND RATIOS

ELASTICITY

Price Elasticity of demand = %change in quantityE=(Q 2 - Q 1)/ Q 1

% change in price(P2 - P1)/P1

Greater than 1 = elasticLess than 1 = inelastic

MARKUP PRICING

When solving for markup

Mark up on Cost: MU(c):

(Selling Price - Cost)divided by the Cost

Mark up on Selling Price: MU(r):

(Selling Price - Cost) divided by the Selling Price

When solving for selling price

MU(c):Selling Price = Total cost x (1.00+ MU %)

MU(r):Selling Price =Total cost

1.00 - MU%

When solving for costs

MU(c):Costs = Selling Pricedivided by (1 + MU%)

MU(r):Costs = Selling Price X (1 - MU%)

BREAKEVEN

Break even =Fixed CostsCont. Margin = Selling price - Var. Cost

Cont. Margin

FINANCIAL RATIOS

Gross margin ratio =gross margin

net sales

Net Income ratio =net income

net sales

Operating expense ratio =total operating expenses

net sales

Returns and Allowances ratio =returns and allowances

net sales

Inventory turnover rate =costs of goods sold

Average inventory at cost

ROI =net income

total investment