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Chapter 10 Product, Price, and Place
expenses. After the break-even point is reached, the business starts to
make a profit. To determine how many units of a product must be sold
to meet the expenses, complete a break-even analysis. A simple break-
even analysis is:
cost × number of units
= break-even point
selling price
For example, a business sells tablet computers and recently
ordered 100 units of a new model. Each tablet computer costs $140 to
produce. The pricing strategy is to sell the tablets for $250 each. How
many tablets would need to be sold to reach the break-even point?
Complete the break-even analysis:
cost × number of units
= break-even point
selling price
$140 × 100
= break-even point
$250
56 tablets = break-even point
Cost-Based Pricing
Cost-based pricing uses the cost of the product to set the product’s
selling price. The first step is to accurately determine the actual cost to
the business of the item. Next, add the markup, which is the desired
amount of profit added, to determine the final price. It is important
to accurately estimate the profit needed based on product costs. The
following equation expresses cost-based pricing.
cost + markup = selling price
In the previous example, the cost for computer tablets is $140 each.
Suppose based on the other costs associated with buying and selling
these tablets, you must make $156 in profit on each tablet. This form
of markup is called dollar markup because it is expressed as a dollar
amount, not a percentage. What would be the selling price?
cost + dollar markup = selling price
$140 + $156 = selling price
$296 = selling price
Some businesses prefer to use a percentage markup to determine
selling prices. They establish a percent of profit necessary for each
item and add that amount to the cost to determine the selling price.
For example, your business model may state that you must make a
40 percent profit on all sales. Using a 40-percent-markup scenario, the
$140 tablet computer would have to be priced at $196.