Price Calculation – Target Profit Pricing

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.

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?