Lecture Notes: Pricing Strategies and Breakeven Analysis

Key Concepts

• Pricing Objectives & Strategy
  • Discussion on how to achieve pricing objectives.
  • Importance of competitive pricing that covers costs.

Tools for Pricing

• Breakeven Analysis
  • Tool to determine the number of units needed to cover costs.
  • Breakeven Point (BP) is a starting point for discussions.

Breakeven Point Calculation

• Formula:
  • BP = Fixed Costs / (Price - Variable Costs)

Fixed Costs (FC)

• Characteristics:
  • Do not vary over time within a certain range.
  • Examples include plant, property, equipment, advertising, insurance, and taxes.
  • Must be paid regardless of the number of items sold.

Variable Costs (VC)

• Characteristics:
  • Vary based on the number of units produced.
  • Include direct materials and direct labor.

Example Case

• Scenario: Producing cell phone cases
  • Fixed Costs: $500,000
  • Selling Price: $20 per unit
  • Variable Costs: $10 per unit
  • Breakeven Point: 50,000 units

Implications of Breakeven Point

• Attractiveness of breakeven point depends on various factors.
• Selling 50,000 units might be feasible or not depending on projections.

Strategies to Adjust Breakeven Point

1. Raise Prices
   • Increases margins and lowers breakeven point.
2. Reduce Fixed Costs
   • Downsizing plants, reducing advertising, minimizing utility expenses.
3. Lower Variable Costs
   • Cheaper materials without quality loss.
   • More efficient production methods to reduce labor costs.

Conclusion

• Breakeven analysis is a useful tool but should not be the sole basis of pricing strategy.
• It serves as a starting point for further discussion and analysis.
• Adjusting pricing components can make the breakeven point more attractive.
• Valuable for pricing and cost management.