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