Price Calculation: Target Profit Pricing

Topics

pricing, analysis, calculations, profitability


Review the activity below or download the PDF student worksheet


Student Discussion Activity

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

Student Discussion 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?

Related Activities

Marketing Financial Forecasts

What Price Mark-up is Needed?

Price Calculations – Marginal Analysis

Price Calculation – Breakeven Pricing

Price Calculation – Cost-plus Pricing