Problem A & Problem B
THE ACTIVITY Determine the pricing for products as described in the problems below. Post your answers in this discussion thread. Round all answers to the nearest cent. For full credit, please show all work when submitting your answers. Solutions with no supporting calculations will receive minimal scores. PROBLEM #A-Cost-Based Pricing of Macadamia Nuts You love macadamia nuts and want to sell them on-campus in nice 6 oz packages You can buy a 114 lb sack of Macadamia nuts for $608. You can buy nice 6 oz packages in bundles of 500 for $50 1. Ignoring other costs, what price should you charge if you want to make a 40% profit on each package? 2. You want to make $1280 total profit when you sell out your 114 lbs of Macadamias. Assuming the same unit cost, what price should you charge? PROBLEM #B - Demand-Based Pricing of Pili Nuts You have discovered the unique pili nut and want to sell it on-campus in nice 5 oz packages Market research on-campus shows that Foothill Students would be willing to pay $15 for a 5 oz. bag of pili nuts. You can buy nice 5 oz packages in bundles of 40 for $20 Ignoring other costs, and assuming you want to make 100% profit, what is the maximum you will be willing to pay for pili nuts per ounce. Demand-Based Pricing Demand-Based Pricing is a pricing method based on the customer's demand and the perceived value of the product. In this method the customer's responsiveness to purchase the product at different prices is compared and then an acceptable price -- and associated unit cost -- is set. Unlike Cost-Based Pricing which first identifies cost of a product and then adds a profit element (or margin) on top of the cost to determine pricing, Demand-Based Pricing begins first with the price that a customer is willing to pay for a product, and then determines the associated cost-structure that will support the customer's acceptable price along with an acceptable profit element. Advantages of Demand-Based Pricing: Helps ensure that there are customers willing to pay a specified price for the product Avoids price competition which can damage the company Disadvantages of Demand-Based Pricing: May result in lower profit margin, or lower product quality, due to pressures to meet customer demanded pricing Demand-Based Pricing relies on a customer's perceived value of a product, which may not accurately capture all aspects of a product's value. Cost-Based Pricing Cost-Based Pricing is one of the pricing methods of determining the selling price of a product by the company, wherein the price of a product is determined by adding a profit element (percentage) in addition to the cost of making the product. The first step is to determine the unit cost of the product which is being sold, including all resources (materials, labor, etc.) required to make the product. Next, a profit element -- usually a percentage of the unit cost -- is added to the unit cost to determine the selling price. Advantages of Cost-Based Pricing: Easy to understand and calculate Ensures that unit costs are covered Fair and logical Disadvantages of Cost-Based Pricing: Ignores several economic factors such as demand, competitors pricing, capital requirements, return on investment, etc. resulting in potential under or overpricing Costs can be difficult to measure Removes motivation to become more efficient or innovative
