Jul 052012
 

As the term suggests, target profit pricing is designed to determine how many units we will need to sell to both cover costs AND achieve a set profit. In some firms, marketers are allocated a profit contribution goal/target for the year, and they will use this approach to estimate the required sales volume. Work through the following two examples to gain a better understanding of this approach.
 

ACTIVITY/TASK

Using target pricing analysis:

1. How many units need to be sold to generate a $30,000 profit if the price is $30?

2. How many units need to be sold to generate a $30,000 profit if the price is $20?

 No. of Units

Allocated Fixed Costs

Variable Cost/Unit

Total Production

Cost

Average Unit Cost

Unit Price

Total Sales Revenue

Gross Profit

500

$10,000

$10

1,000

$10,000

$10

1,500

$10,000

$10

2.000

$10,000

$10

2,500

$10,000

$10


QUESTIONS

  1. Start by completing the above table.
  2. Why would this pricing approach be particularly important to a marketer? Why?
  3. Does this approach take into account likely market demand?

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