PRICING CASE - 1

Submitted By:Archit Garg

Geet SawhneyMohit Sharma

Siddharth Kumar

StatisticsVariable Cost (VC) = $10 Per Unit

Selling Price (SP) = $ 20 Per Unit

Annual Fixed Cost (FC) = $300,000

1. Break Even Point (BEP)

Contribution, C = SP – VC= $20 - $10= $10

 PV Ratio = C/S * 100

= $10/$20 *100 = 50%

BEP (Units) = FC/C = $300,000/$10 = 30,000 units

 BEP (Sales) = FC/PV Ratio

= $300,000/50%= $600,000

2. Return on InvestmentInvestment - $10,00,000Expected Annual Return – 20% of Investment

= $200,000 Let the units sold be X:

20X - 10X - 300,000 = 200,000X = 50,000 units

3. Capacity and Profit

50% capacity = 50,000 unitsVC = $10 P.U.FC/Unit = 300,000/50,000

= $6TC = FC+VC

= $10+$6 = $16

a) To earn 20% on cost:S.P. = $16+ 20% of 16

= $19.2

b) To earn 25% on S.P.:Let S.P. = XX = 16 + 0.25X0.75X = 16X = $21.33

4. Full Capacity UtilizationGovt. Order of 50,000 units

So Here, co. is utilizing full capacity of 100,000 units

Therefore,

FC/Unit = 300,000/100,000 = $3VC = $10

TC = $13

S.P. = $16

Profit/Unit = $16 - $13 = $3

Total Profit (A) = 50,000 * 3 = $150,000

Other 50,000 units are sold at $20 per unit

Thus,

Profit per unit = $20 - $13 = $7

Total Profit (B) = $350,000

Total Profit (A+B) = $150,000 + $350,000 = $500,000.

Implications of Accepting The OrderThe company should accept the order

because of the following benefits:

Full Capacity UtilizationReduction in Fixed costIncrease in Profits

Pricing Lessons There should be full capacity utilization

which will reduce the Fixed Cost which in turn would result into increase in profit, So the company can charge a slightly lower price in case of bulk order.