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1

What are the three pricing models that are commonly used as a basis for determining price? 

cost-based pricing,

market-based pricing,

competitor-based pricing.

2

What is cost-based pricing? 

Cost-based pricing is a method in which companies use the cost of a good or service as the basis for determining its final selling price.

3

Cost-based pricing is a method in which companies use the _____  of a good or service as the basis for determining its final ____ _____.

cost, selling price 

4

How is cost-based pricing calculated? 

by taking the product cost and adding a markup to determine the final price.

5

Cost- based pricing is calculated by taking the product _____and adding a _____ to determine the final price.

cost, markup 

6

a markup is...

simply an added percentage or dollar amount added to the cost to determine its selling price.

7

A markup is simply an added _____ or dollar _____ added to the cost to determine its selling price.

percentage, dollar

8

Markup  the difference between...

the selling cost and the price 

9

Which model is the simplest, most straightforward method of pricing? 

cost-based pricing 

10

what is the formula for calculating makup dollar amount? 

 

,Markup Dollar Amount Calculation = Selling Price - Cost

11

What is the formula for calculating markup percentage? 

Markup Percentage = (Selling Price - Cost) / Cost

12

Direct- cost pricing (method of cost-based model) calculates...

variable costs only

13

full-cost pricing (method of cost-based model) takes into account...

both variable costs and fixed costs 

14

First, to use cost-based pricing, the company calculates the costs to... 

create a good or to perform a service.

15

the costs to create a good or service might incldue...

raw materials, shipping, labor, overhead 

16

After calculating the cost to create a good or to perform a service, the company... 

adds the markup percentage or dollar amount to the product cost to determine the selling price

17

Let’s assume a product cost of $10 and a desired markup of 20%. From this information, we would calculate the final price of the product using the formula...

 

What would the final price be? 

Cost + (Markup Percent * Cost) = Price

18

You can also calculate the markup after you already know the final selling price. In that instance, the markup is calculated as the... 

difference between the final selling price and the product’s cost. The markup percentage is shown as a ratio or percent of the cost.

19

What is the profit margin? 

 

 profit margin is the difference between the final selling price and the product’s cost

 

20

How is profit margin shown? 

 it is shown as a ratio or percent of the selling price (and not the product cost)

21

 ____ _____ can never exceed 100%, while the ____ _____ can.

profit margin, markup percentage 

 

Markup percentage = (Price - cost) / cost 

Margin percentage = (Price - cost) / price

22

what is the formula for markup percentage? 

Markup percentage = (Price - cost) / cost 

 

23

What is the formulat for margin percentage? 

Margin percentage = (Price - cost) / price

24

What is the difference between markup percentage and profit margin? 

25

Why is cost based pricing inefficient? 

Although cost-based pricing is very straightforward, it is often not the most profitable for companies, especially in the services industry. It does not fully take advantage of the available profits from the price that customers are willing to pay.

26

Give an example of an inefficency of cost based pricing? 

onsider an artist quoting the price for an intricate wall mural that would take her 20 hours to complete. Let’s assume she has a cost of $25 for paint. Not factoring in fixed costs, the total direct cost of mural creation is $25. Here is the calculation for direct-cost pricing with 100 percent markup:

 

Calculation = $25 + (100% of $25)

= $25 + (1 * $25)

 = $25 + $25

= $50

 

Even at 100 percent markup, the quote would be $50. This means the artist would essentially be getting paid $2.50 an hour. Common sense would tell the artist that the $50 price doesn’t convey the full value of what is offered and that the customer would likely pay more.

27

ost-based pricing does give a good ____ _____ for a product: the absolute minimum for which a company can sell a product and still break even.

price floor 

28

what is price floor? 

 the absolute minimum for which a company can sell a product and still break even.

29

A price floor in economics is a minimum price imposed by a government or agency, for a particular product or service. ... Common examples of price floors are the minimum wage, the price that employers pay for labor, currently set by the federal government at $7.25 an hour.

30

List three pros of cost based pricing? 

PROS

Easy to calculate and implement

Easy to understand

Considered fair by customers