The management of STAR INC, amaker of footwear products wants to introduce a new product line. The marketing team was asked to recommend the pricing the company should adopt. After reviewing all possible strategies, the team recommended cost-plus pricing strategy. The production manager estimated 150 units per week at the cost of $500 fixed cost and $750 variable cost. Suppose the company wants an average return of 12% per unit, how much will the unit product price be? Show all steps.
In today’s competitive business landscape, pricing plays a pivotal role in determining the success of a new product launch. STAR INC, a renowned manufacturer of footwear products, is gearing up to introduce a new product line. The marketing team, after thorough analysis, has recommended the adoption of a cost-plus pricing strategy. This essay delves into the intricacies of this pricing strategy and provides a step-by-step calculation to determine the optimal unit price for the new footwear product.
Cost-plus pricing is a straightforward approach that ensures the company covers its costs while also achieving a desired profit margin. In this strategy, the selling price of a product is calculated by adding a markup percentage to the cost of production. This markup comprises both fixed and variable costs, along with the desired profit margin.
Given Data
Let’s break down the information provided by STAR INC:
1. Fixed Cost: $500 per week
2. Variable Cost: $750 per week
3. Desired Profit Margin: 12% per unit
4. Estimated Production: 150 units per week
Step-by-Step Calculation:
To determine the optimal unit price for STAR INC’s new footwear product line, we will follow these steps:
Step 1: Calculate Total Cost per Unit
Total Cost per Unit = Fixed Cost + Variable Cost
Total Cost per Unit = $500 + $750
Total Cost per Unit = $1250
Step 2: Calculate Desired Profit per Unit
Desired Profit per Unit = Desired Profit Margin × Total Cost per Unit
Desired Profit per Unit = 0.12 × $1250
Desired Profit per Unit = $150
Step 3: Calculate Selling Price per Unit
Selling Price per Unit = Total Cost per Unit + Desired Profit per Unit
Selling Price per Unit = $1250 + $150
Selling Price per Unit = $1400
In conclusion, STAR INC’s marketing team has recommended the adoption of a cost-plus pricing strategy for the introduction of their new footwear product line. By following this strategy, the company can ensure that its costs are covered while also achieving the desired profit margin of 12% per unit. The step-by-step calculation outlined in this essay demonstrates that the optimal unit price for the new footwear product should be set at $1400. This approach not only provides a transparent and rational pricing mechanism but also positions STAR INC for a successful market entry with a well-balanced pricing strategy.
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