Lesson 11 Assignment Cost-Oriented Price Setting

Lesson 11 Assignment

Cost-Oriented Price Setting

This is an individual assignment.

Please answer the following questions.

Retailers and wholesalers use traditional markups that they feel will yield a reasonable rate of profit. Answer the following set of problems.

1. The usual retail price of an item is $100. The manufacturer’s cost to produce the item is $40. Retailers take a 50 percent markup and wholesalers take a 10 percent markup (markup is calculated on selling price, unless otherwise is indicated).

a. What is the retailer’s markup in dollars? $33.33

b. What is the wholesale price? $66.66

c. What is the manufacturer’s price? $60.6

d. What is the manufacturer’s markup percentage? 51.5%

2. The XYZ Manufacturing Company is trying to set its price on a product that will sell at retail for $80.

a. For retailers to earn a markup of 25 percent, what should the wholesale price be?

$64

b. For the wholesalers to earn a markup of 10 percent, what should the manufacturer’s price be? $58.18

3. Complete the following table by filling in the blanks.

	Quantity Produced
	0	1	2	3	4
Total cost	$120	$190	$260	$330	$400
Total fixed cost	$120	$120	$120	$120	$120
Total variable cost	$0	$70	$140	$210	$280
Average cost	n/a	$190	$130	$110	$100
Average fixed cost	n/a	$120	$60	$40	$30
Average variable cost	n/a	$70	$70	$70	$70

4. Suppose you were considering going into the car-wash business and investing in a new kind of car-washing unit which is more mechanized than the usual ones—but also has higher fixed costs. Calculate the break-even point in dollars and units if the usual price of $4 per car were charged. The variable cost per car is estimated at $2. The total fixed cost per year (including depreciation, interest, taxes, fixed labor costs, and other fixed costs) is estimated at $320,000.

a. Break-even Point in $. $ 640,000

b. Break-even Point in units 160,000 units

c. Calculate the break-even points (in $ and units) if the retail price of car wash drops to $3.50 per car due to competition in the future.

d. Break-even point in $ $746666.6667

e. Break-even point in units 213333.33 units

f. Should you go into the car-wash business in any of the above situations? Explain.

No you shouldn’t this is because you will encounter extra expenses than the previous hence you will end up with no profit