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Answer :
When developing pricing recommendations, the focus should be on maximizing profit. Revenue may seem more important in the short term, but in the long run, it is profitability that ensures the sustainability and growth of a business.
Maximizing revenue does not necessarily mean maximizing profit. It is possible to increase revenue without increasing profitability if the costs associated with the product/service are not taken into account. On the other hand, when profit is the focus, a business can make informed pricing decisions that ensure that every sale made generates as much profit as possible.
The company's accounting department estimated that the cost of a rental is $16.37/ day for an economy vehicle and $24.34/ day for a luxury vehicle, plus $8.70 per rental contract for reconditioning, for either type of vehicle. Delivering an additional vehicle from our state capital hub costs the company $35 on top of all of the above.To determine the optimal pricing for the economy vehicles during the selected weeks of the year, the following steps can be taken:1. Determine the breakeven price for the economy vehicles:
Breakeven price = Cost per unit + (Additional cost / Number of units sold)
Cost per unit = $16.37 + $8.70 = $25.07
Additional cost = $35
Number of units sold = Unknown
Breakeven price = $25.07 + ($35 / Number of units sold)
2. Determine the optimal price for the economy vehicles:
Optimal price = Breakeven price + Desired profit margin
Desired profit margin = 20%
Optimal price = Breakeven price + (20% x Breakeven price)
Optimal price = $30.08 + $6.02
Optimal price = $36.103.
If the optimal price is higher than the market price, consider adjusting the price upwards. If it is lower, consider adjusting downwards. It is important to monitor the sales volume and profitability after the adjustment to ensure that it is optimal.
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