solution set - financial

7/30/2019 Solution set - Financial

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Q# 1.

Price is the amount of money that shall be paid for a given product or service. This price

might or might not cover the total manufacturing cost of the product item. The value is

then the overall benefit that the consumer gets in owing the product. It could be the

perception toward the given product/ service.

If something has a price of zero, it means that people don't think it has any value. Price

and value are two different things. Price isn't determined by value -- it's determined by

the intersection of supply and demand. Value plays into that, by determining what the

demand part is.

Price is set by supply and demand. If supply is low prices go up (Limited quantities; If

supply is high price goes down (Infinite quantities). If demand is High price goes up

(Everybody wants it); If demand is Low price goes down (Nobody wants it). Value is

how much it is worth excluding supply and demand.

There are internal company factors and external environmental factors when setting the

price, other than the marketing mix (product, promotion and place). The major

distinctive features of pricing decisions as compared to other marketing mix decision is

that, the price set considers only the total cost of production, and make an additional

profit margin. It does not consider the marketing objectives that, the final product or

service price could not be competitive.

Marketing Mix4 Ps
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The price the company charges will be somewhere between one that is too low to

produce a profit and one that is too high to produce any demand.

Figure above summarizes the major considerations in setting price. Product costs set a

floor to the price; consumer perceptions of the product's value set the ceiling. The

company must consider competitors' prices and other external and internal factors to

find the best price between these two extremes. Companies set prices by selecting a

general pricing approach that includes one or more of three sets of factors.

1. The cost-based approach(cost-plus pricing, break-even analysis, and

target profit pricing); the

2. The buyer based approach(value-based pricing); and

3. The competition-based approach(going-rate and sealed-bid pricing).

The business considered in this problem is Debub Traditional Clothes.

The company focuses on manufacturing of traditional clothes in the modern design style

of dressing; and targeting only those customers fascinated in buying unique but

expensive clothes. Those customers feel that it is because of their rich wealth that they

could buy the products, and proud of looking themselves in the dressing.

The company applies the skimming pricing strategy, where the new design style will be

sold at the highest price possible. Once the new design released, the company sets

those older designs at a little discounted price, so as the second group of customers

then could afford to buy it. The pricing strategy that the company has been setting is

appropriate. Since the dresses design styles are based on seasons and at holidays,

customers become kin to see the new design style and dare to own it.

Product cost

Price floor No profit below

this price.

Competitors price and other

internal and external factorsConsumer perceptions of value

Price ceiling No demand above

this price


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BEQ

P

Break

Even

Point

Loss

Profi

Q # 2.

Given: MASSO PLC, TFC = 360,000 Birr

VC (per unit) = 200 Birr

Selling Price per unit, P = 300 Birr

A) Break even Quantity (BEQ) =?

At the BEP, there is neither profit nor loss. That is Total Revenue Total cost = 0

Total Revenue (TR) = P * Q and,

Total Cost (TC) = Total Fixed cost (TFC) + Total Variable cost (TVC)

TC = TFC + VC*Q

Thus, P*Q = TFC + VC*Q

(P VC)*Q =

B) Profit () = Total Revenue (TR) Total cost (TC) = ?, for Q = 2000 units

= P * Q (TFC +TVC)

= 300 * 2000 (360,000 + 20*2000)

= 200,000, which is a profit

TFC

Cost/ Revenue

Q

TVC

TC

TR


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C) = P * Q (TFC +TVC), Q = ?, for = 240,000 Birr

= P*Q TFC VC*Q

+ TFC = (P-VC)*Q

2142.86 ~ 2143 Units

Q# 3.

Marketing channel is a set of interdependent organizations involved in the process of

making a product or service available for use or consumption by the consumer or

business user. These transactions are made in exchange process and creation

availability of products for customers. Thus without marketing channels, the marketing

mix is not complete and products, services become scares at the consumer side.

The marketing channel moves goods and services from producers to consumers. It

overcomes the major time, place, and possession gaps that separate goods and

services from those who would use them. Members of the marketing channel perform

many key functions: information, promotion, matching negotiation, physical distribution,

financing, risk taking.

The economic utility of marketing channels is in providing the products/ services at the

price that are set by the producers. For example, Elfora Agro industry produces dairy

products like packed milk. The company set the price to this product at birr 5, having its

own price analysis strategies.


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There are wholesalers/jobbers distributing this product from factory outlet to retailers at

a price of birr 3. The retailers then distribute the packed milk to small reseller kiosks at

birr 4. Finally the end consumer purchase the item at birr 5 from those kiosks.

In this transaction, the intermediaries also make their own money to be live in the

economy. And also the whole distribution of the item from the factory outlet to the end

users (consumers) there are factors like transportation, preservation ( keep quality of

products), and labor inputs. Those all are involved in the economy by providing their

own contribution for the circulation of money. From the economic system's point of view,

the role of marketing channel is to transform the assortments of products made by

producers into the assortments wanted by consumers. Producers make narrow

assortments of products in large quantities, but consumers want broad assortments of

products in small quantities. In the distribution channels, intermediaries buy large

quantities from many producers and break them down into the smaller quantities and

broader assortments wanted by consumers. Thus, intermediaries play an important role

in matching supply and demand.

Factory outlet Retailers Reseller End Users

Set

price @

birr 5

Selling

price @

birr 4

Selling

price @

birr 3

Selling

price @

birr 5


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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

++++++++++++++++++++

Price is what you pay. Value is what you get.

The price variable in the marketing mix is a critical element. Price can, by itself,

communicate much about a product or service. Most consumers link price with quality

and there are many organizations that carefully reinforce the quality of their product,

using price as a surrogate cue (or substitute indicator) for quality. For example, the

BMW marketers of prestige items sets the price variable is used to indicate quality).

Price is the amount of money charged for a given product or service. In other words, it is

the sum of values that consumers receive in using the product or service.

I.e. a product should be considered cheap if the value of the product exceeds its current

price, not just because the product is cheap on an absolute basis. When customers

consume certain product or service, there are inherent motives associated with the

product. The figure below indicates the nature of customers in deciding using products

or service.

The region A, B and C indicates the interrelations among those consumers behaviors in

order to own a product. Region A, indicates that when one purchase a given product or

service, there are factors not only the absolute money associated to it but also the

benefit in exchange of the money paid.

Price led customer

Value led customerBrand led customer

A

C

B


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When the pricing decision is made, the organization must consider several factors,

apart from the market mix. These factors are as follows:

Market Mix, 4 Ps

a. Supply (or cost)

b. Demand (or revenue)

c. Perceptions in the marketplace

d. Competition and Competitors pricing strategies

e. Government Regulation

f. Companys desired pricing position

The major distinctive feature of pricing decisions starts with setting the pricing objective

that can be: Profit Oriented (concerned with increase in profit), Sales Oriented (basically

concerned with increase in sales) and Status Quo Oriented. Whereas costs set the

lower limit of prices, the market and demand set the upper limit. Both consumer and

industrial buyers balance the price of a product or service against the benefits of owning

it.

A. Cost-Based Pricing

1. Cost-Plus Pricing - The simplest pricing method is cost-plus pricingadding

a standard markup to the cost of the product.

2. break-even pricing(or a variation called target profit - pricing the firm tries

to determine the price at which it will break even or make the target profit it is

seeking.

B. Value-Based Pricing

Value-based pricing uses buyers' perceptions of value, not the seller's cost, as

the key to pricing. Value-based pricing means that the marketer cannot design a

product and marketing program and then set the price. Price is considered along

with the other marketing mix variables beforethe marketing program is set.


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C. Competition-Based Pricing -

One form of competition-based pricing is going-rate pricing, in which a firm

bases its price largely on competitors' prices, with less attention paid to its

own costs or to demand, Using sealed-bid pricing, a firm bases its price on how it thinks

competitors will price rather than on its own costs or on the demand.

Let us consider Ayka Addis Textile factory.

This company is new to Ethiopian textile market and produces garment of different

design. The company desire to penetrate the market by setting low price to the

industry. Also because of the technological advanced machineries and experience the

company had exercised for more than three decades, the cheap man power in Ethiopia,

the unit cost of production becomes so small and competitive. Thus, with the

penetration pricing strategy the company has started to attain major market share in the

country and export markets.

Product Value Price Cost Customer

Product Cost Price Value Customer

Cost - Based Pricing

Value - Based Pricing


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Q # 2.

Given: TFC = 360,000 Birr, VC (per unit) = 200 Birr, Selling Price per unit, P = 300 Birr

A) Break even Quantity =?

At the Break even Quantity, profit is set to zero.

Profit () = Total Revenue (TR) Total cost (TC) = 0

Therefore, Total Revenue (TR) = Total cost (TC)

Total Revenue (TR) = P * Q and,

Total Cost (TC) = Total Fixed cost (TFC) + Total Variable cost (TVC)

TC = TFC + VC*Q

P*Q = TFC + VC*Q, solving for Q, which is the Break even Quantity (BEQ)

(P VC)*Q =

is the BEQ

BEQ = 1286 Q = 2000

= 200,000

Quantity

Revenue / Cost

Loss


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B) Profit () = Total Revenue (TR) Total cost (TC) = ?, for Q = 2000 units

= P * Q (TFC +TVC)

= 300 * 2000 (360,000 + 20*2000)

= 200,000, which is a profit

C) = P * Q (TFC +TVC), Q = ?, for = 240,000 Birr

= P*Q TFC VC*Q

+ TFC = (P-VC)*Q

2142.86 ~ 2143 Units

Q# 3.

In the system of marketing mix of 4 Ps, one of the elements is,P = Place, which is the

means of reaching to the customer in order to render the products or services that theproducers are supplying to the market.

The use of intermediaries results from their greater efficiency in making goods available

to target markets. Through their contacts, experience, specialization, and scale of

operation, intermediaries usually offer the firm more than it can achieve on its own.

This availability is created by using networks of distribution channels. Every product and

service, whether an automobile, a watch, a personal computer, or office furniture, must

somehow be made available to billions of people. Products must also be made available

to millions of industrial firms, businesses,

government institutions, and other organizations worldwide. Firms try to realize this goal

through the creation of distribution channels.


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Figure below indicates the function of marketing channel in a simple marketing system

Everything from the producer side are communicated through this marketing channels,

where the consumers are giving their money in exchange. The money collected from

the end users by those channels is also circulated to the producer when the wholesalers

purchase products from the producers. Also the feedback from the consumer side to the

factory is achieved through those channels.

Fig 1. Number of contacts = 9 Fig 2. Number of contacts = 6

Figure above shows how using intermediaries can provide economies. Figure 1 shows

three manufacturers, each using direct marketing to reach three customers. This system

Industry Customers

Distributors


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requires nine different contacts. Figure 2 shows the three manufacturers working

through one distributor, who contacts the three customers. This system requires only six

contacts. In this way, intermediaries reduce the amount of work that must be done by

both producers and consumers.

From the economic system's point of view, the role of marketing channel is to transform

the assortments of products made by producers into the assortments wanted by

consumers. Producers make narrow assortments of products in large quantities, but

consumers want broad assortments of products in small quantities. In the distribution

channels, intermediaries buy large quantities from many producers and break them

down into the smaller quantities and broader assortments wanted by consumers. Thus,

intermediaries play an important role in matching supply and demand.


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solution set - financial

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