Task 2 Fixed And Variable Costs
Fixed Costs are costs, which remain the same whatever the level of output of the businesses. For example a fixed cost could include mortgage, you have to pay a certain amount no matter what state your business is in.
Variable Costs are costs, which vary directly with the output of the businesses. For example your gas bills you have to pay depending on how much gas you use if you use a lot of gas you will pay a certain amount if you use a little bit you will end up paying a little amount.
Task 3a Pricing Strategies
There are many different pricing strategies that can be used by a business a few of them are.
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Creaming/Skimming: Selling a product at a high price, sacrificing high sales in order to earn high profits.
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Market orientated pricing: Setting a price based on an analysis of the market.
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Mark-up or profit margin: The percentage added to the cost of the production, which equals to the profit on the product.
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Penetration pricing: Setting an initial low price for a new product so that it is attractive to customers. The price is likely to be raised later as the product gains market share.
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Price discrimination: Setting a different price for the same product in different segments of the market.
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Profit margin: The extra, which is added to the cost of the product to cover the profit to be made.
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Competition based pricing: Setting a price based on prices charged by competitors for similar products.
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Cost plus pricing: Fixing a price by adding a percentage profit margin to the cost of production of the good or service.
Task 3b
The first pricing strategy I have decided to use is called Penetration pricing; I priced my car at £50 each. I done this because setting an initial low price for a remote control car will attract customers.
I will then slowly raise my price once it has gained market share.
The second pricing strategy I have decided to use is called Market orientated pricing; I priced my car at £100 each. I calculated by researching all the top models in the market and calculating an average price.
Businesses may change their pricing methods overtime for a number of reasons. This could be because they want to promote their product so they lower their price to attract their customers. They might want to lower their prices in order to compete against other organisations. They might simply want to raise their prices because the prices of the materials have risen so in order to gain the same amount of profit as before they have to raise the price of the product.
Task 4 + Task 5 Break-Even Equations + Graphs
Break Even Analysis For My Business (First Pricing Method)
By using the break-even equation I calculated that I have to sell 1670 remote control cars priced at £50 each.
(Total Costs = Total Revenue)
Break Even Analysis For My Business (Second Pricing Method)
By using the break-even equation I calculated that I have to sell 625 remote control cars priced at £100 each.
(Total Costs = Total Revenue)
Task 5 spreadsheet
* This spreadsheet differs from Task 4 because the results in Task 4 did not start from zero, because of this the line were in three different positions and weren’t crossing each other so it didn’t look like a break-even chart. So what I did was I divided a few numbers so that the results start from zero onwards.
Task 6a Findings
By observing the first break-even chart where it shows the remote control cars priced at £50 each, I could see that the fixed costs are always £50000. I could see that the total revenue starts at zero and that the Total costs start at £50000. I could also see that the break-even point is at 1670, 835500. Below this point my business will be at loss. And above the point the business will be making a profit.
The break-even chart tells me that I would have to sell 1671 remote control cars to make the minimum amount profit. It also shows me that my business will be a failure because I only ordered 1000 cars. So by the end of the first year I would of not made a profit. So I would have to order a further 1000 car in order to make a profit.
By observing the second break-even chart where it shows the remote control cars priced at £100 each, I could see that the fixed costs are always £50000. I could see that the total revenue starts at zero and that the Total costs start at £50000. I could also see that the break-even point is at 625, 62500. Below this point my business will be at loss. And above the point the business will be making a profit.
The break-even tells me that I would have to sell 625 remote control cars to make the minimum amount of profit. It also shows that my business will be a success if I could sell all the cars, because unlike the first chart I do not need to order a further 1000 cars.
Task 6b
If my cars was priced at £50 each I will be making £16500 profit by the end of the two years. If I priced my car at £100 each I will be making £37500 profit by the end of the year.
If I reduced my price due to competition, I would only decrease it by £10 or £20. This is because when I priced the car at £50 I was in actual terms making a loss. And it would take me a long time to make my profit. Even though lowering my price means that it would take longer to make my profit and that I would have to sell more cars, I would still be able to make a profit by the end of the first year.
If costs were to increase I would higher the price of my remote control cars. This would look very bad on my business but I have no choice. An alternative solution would be to take the money out of the profit out of my own pocket and pay; this would mean less profit for me.
If my costs were to increase it would mean that I would be getting less profit, not only because I would have to pay more money but also because the customers might be less attracted to my product and might buy products from my rivals who will be selling similar products at lower prices.
I think my margin of safety would be when I have sold about 850 of the car this is because I will have made more than £10000 profit.
Task 7a Conclusion
I found out that if I priced my car at £50 each it would mean that I would of made a loss, so I decided to price my car at £100 each.
The break-even shows me that I would have to sell 625 remote control cars to make the minimum amount of profit. It also shows that my business will be a success if I could sell all the cars, because unlike the first chart I do not need to order a further 1000 cars. I will be making £37500 profit by the end of the year. This means my product will be a success.
I got all this data by looking at break-even charts. The results show what would happen if I sell all my products, it is only an assumption of what would happen. This is the problem with break-even charts it only assumes the profit I will be making. If I knew the exact figures of how much cars I would be able to sell this would make my predictions much more accurate. The contingency plans a businesses might take to avoid inaccurate break-even charts is to go around doing research on how they will be able to sell, maybe conducting a questionnaire. This would make their predictions a little more accurate.
Task 7b
I might change the price of my remote control cars because of the competition of the rival products. If they end up selling more cars than I do I might be forced to lower my price of the remote control cars, I might reduce it by 10 or 20 pounds.
I might change the manufacturer of the car and end up buying remote control cars that differ greatly from the Subaru Impreza.
I might choose another model or choose another company such as Tyco RC. I might choose to import models from other countries because it would work out to be cheaper.
AHSAN AHMED 11.4 (9065) Businesses Studies Coursework
