Question 1
Price is the amount that a producer charges his or her consumers for a product or a service. There are various ways of determining price which may result in different prices for the same product. The pricing suggestion of the sales officer, the finance officer and the marketing officer will result in the following prices;
Pricing suggestion of the sales officer
According to the sales officer, the selling price of Amaizer should be 2,900 per tonne to make it make competitive as shown by the calculations below.
The sales officer recommended that the snack, Amaizer, should be sold at 100 below the price of potato crisps.
Price of potato crisps per tonne is 3,000
Therefore, the price of Amaizer will be; 3,000- 100 = 2,900
Pricing suggestion of the finance officer
According to the finance officer, the selling price of Amaizer should be 3,600 per tonne to make in order to maintain a margin of 20 percent and a profit of 180,000 at targeted sales of 300 tonnes.
Pricing suggestion of the marketing officer
According to the marketing officer, the selling price of Amaizer should be 4,000 per tonne because it will result in the highest net profit of 20,000 as shown in the calculations below.
Price(000)
2.5
3.0
3.5
4.0
4.5
Sales in tonnes
400
350
280
200
100
Sales revenue(000)
1000
1050
980
800
450
Less variable costs(000)
(600)
(525)
(420)
(300)
(150)
Contribution(000)
400
525
560
500
300
Less annual fixed cost (000)
(300)
(300)
(300)
(300)
(300)
Less interest(000)
(337.5)
(300)
(247.5)
(180)
(90)
Net profit
(237.5)
(75)
12.5
20
(90)
Sales revenue is obtained by; sales in tonnes multiplied by selling price
Variable costs are the direct costs per tonne of Amaizer, which is 1, 500, multiplied by the number of tonnes that are expected to be sold.
Contribution is the difference between sales revenue and total variable costs.
Interest is the cost of capital multiplied by the capital invested.
Question 2
The criteria that will result in the best price will be the marketing officer’s criterion. This is because this criterion ensures all costs are met including the cost of capital, and a fair return is obtained. The pricing suggestion of the marketing officer will ensure the firm is able to meet all expenses, pay the providers of capital and make a return in the investment to manufacture Amaizer. The marketing officer criterion not only ensures that profits are made, but it ensures they are the highest profits attainable. It, therefore, maximizes returns for the firm. For example, when the firm charges a price of 3,500 it will still make profits, however; they will not be highest profit attainable. The highest profit attainable is obtained by charging a price 4,000.
The criterion used by the finance officer is not the best alternative to determine the price because it ignores consumer demand and the prices charged by consumers. It assumes that the demand remains constant which is never the case. An increase in price normally results in a reduction in the demand of a product, while a decrease in price will result increased demand of the product according to the law of demand.
The criterion used by the sales officer is not the best alternative in determining prices because it ignores the costs incurred in producing Amaizer. Therefore, the firm risks making losses unknowingly and experiencing difficulty in paying back providers of capital their principal and interest when it falls due.
Works Cited
Kolter, Philip and Gary M Armstrong. Principles of marketing. 13. New Jersey: Prentice Hall, 2010.
Nagle, Thomas T and Reed K Holden. The strategy and tactics of pricing: a guide to profitable decision making. 3, illustrated. New Jersey: Prentice Hall, 2002.
Smith, Tim J. Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures. illustrated. London: Cengage, 2011.
