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
- 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?
Related Activities
Price Calculations – Marginal Analysis
Price Calculation – Breakeven Pricing
Price Calculation – Cost-plus Pricing
