Author: Rafael Muñiz
27 pages
10 eur + iva
to buy
17. Some price formation models
17.1. The fixation of the price attending on the production costs
17.1.1. The price by means of margins
This procedure continued especially in the retail trade, is based in calculating the unitary production cost and adding a percentage of benefits. The unitary cost can be the entire production cost and then the margin is directed to obtain benefits, or takes, in case of the distribution activities, the variable cost of production or acquisition and the margin covers the fixed costs, expenses of administration, commercial, financiers and the benefit.
EXAMPLE 1
A product which commercial channel is integrated by the manufacturer, distributor and retailer. The distributors apply a margin of 15 for 100 on the sale price to the retailer, and this one with a margin of 40 for 100 on the recommended retail price. The manufacturer acts with a few entire unitary costs that he estimates in 3,61 euros and hopes to have a benefit of
15 for 100 of the sales:
Coefficients on the cost | ||||
Phases | Margins (m) | (1 - m/100) | Cost (C) | I boast [C / (1 - m/100)] |
Manufacturer Distributor Retailer | 15 % 15 % 40 % | 0,85 0,85 0,60 | 3,61 € 4,25 € 5,00 € | 4,25 € 5,00 € 8,33 € |
The big use of this procedure is due to the fact that it turns out to be very easy to apply, after there are known better the costs than the demand, and to the fact that his use on the part of all the companies of the sector leads to offering similar prices, avoiding competition situations in the prices.
17.1.2. The price that obtains a profitability valuation
It consists of fixing a valuation of wished profitability and calculating the awaited sales volume; later, to fix the price that for these sales provides the looked profitability.
As everyone knows, the profitability is measured for:
|
The benefit is given by the difference between entire income (PQ) and the entire cost, that is to say, the variable cost (Cv*Q) more the fixed cost (Cf), where Cv* is the average or unitary variable cost, and Q the volume of production or sales: Therefore:
B = PQ – Cv* Q – Cf |
|
Obtaining the price:
|
and since P - Cv* is the unitary margin:
| Unitary margin = P – Cv* = | Cf + K x r |
Q |
The margin calculated for a level Q of sales dear will recover the fixed costs and the wished benefit, as it is reflected in the following figure:
EXAMPLE 2
A company that has a few fixed costs for 25.000 euros, a few variable costs for 500 euros and wants to obtain profitability of 20 for 100 for a laid-down capital for 500.000 euros. If he estimates his annual sales in 2.000 product units, he can calculate the margin of the following form:
|
| Margin = | 25.000 + 500.000 x (0,20) | = 62,50 € |
2.000 |
and the sale price will be:
P = Cv* + m = 500 + 62,5 = 562,5 € |
The criticism of this procedure is based that uses an estimation of the demand to calculate the price, and the reality is that the demanded quantity will be given according to the price.
