Question

You are the marketing manager for a sail manufacturing company that produces two sizes of sails: small and large. You are asked to help price the products so that the company is able to make a profit AND the customer is happy.

Based on last year's sales, you expect to sell 15,000 small sails and 6,500 large sails in the upcoming year. The accounting department reports a total fixed cost for producing the small and large sails of $750,000 and $800,000 respectively. The variable cost per small sail is $800 while the variable cost per large sail is $1,200.

Your pricing objective surrounds maximizing profit. Because of this, you have a target return on investment of 30% profit for each sail. Consider the following formulas as you proceed forward on this exercise:

Markup on cost percentage = (Markup ÷ Cost) x 100
Average cost of a single unit = All costs ÷ Total number of units
Target return price per unit = [(Fixed Costs + Target Return) ÷ Units] + variable cost per unit

Complete the spreadsheet below and use it to answer the questions that follow.

This activity is important because marketing managers benefit from understanding how optimal price is calculated in order to set an exact price for an offering.

The goal of this activity is to demonstrate an understanding of the role of price and apply different pricing tactics and strategies to a pricing model.

Total Cost	Average Variable Cost	Quantity	Total Fixed Cost	Total Cost
Small Sail	$800.00	15,000.00	$750,000.00	$12,750,000.00
Large Sail	$1,200.00	6,500.00	$800,000.00	$8,600,000.00
Average Total Cost	Total Cost	Quantity	Average Cost of a Unit
Small Sail	?	15,000.00
Large Sail	?	6,500.00
Mark up Price	Average Cost of a Unit	Markup on Cost Percentage	Price
Small Sail	?	30%
Large Sail	?	30%
Total Revenue	Price	Quantity	Total Revenue
Small Sail	?	15,000.00
Large Sail	?	6,500.00

Answer 1

Total Cost	Average Variable Cost	Quantity	Total Fixed Cost		Total Variable cost- Average variable cost*Quantity	Total Cost- Total variable cost + Total fixed cost
Small Sail	800	15,000	750,000		12,000,000	12,750,000
Large Sail	1,200	6,500	800,000		7,800,000	8,600,000
Average Total Cost	Total Cost	Quantity	Average Cost of a Unit		Total Cost	Quantity	Average Cost of a Unit- Total Cost/Quantity
Small Sail	?	15,000			12,750,000	15,000	850.00
Large Sail	?	6,500			8,600,000	6,500	1,323.08
Mark up Price	Average Cost of a Unit	Markup on Cost Percentage	Price		Average Cost of a Unit	Markup on Cost Percentage	Price=Average cost * (1+Mark up)
Small Sail	?	30%			850.00	30%	1,105.00
Large Sail	?	30%			1,323.08	30%	1,720.00
Total Revenue	Price	Quantity	Total Revenue		Price	Quantity	Total Revenue= Price * Quantity
Small Sail	?	15,000			1,105.00	15,000	16,575,000
Large Sail	?	6,500			1,720.00	6,500	11,180,000