Question

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The cost of production for a new toy is $10. The prices of competitors’ products are: Product A – $25, Product B – $20, Product C – $23, Product D– $22.
a) What price should the company sell the new toy at if it prices at cost plus profit at 100 per cent profit mark-up?
b) What price should the company sell the new toy at if it prices using competitive pricing?
c) What price should the company sell the new toy at if it prices using penetration pricing?
d) What price should the company sell the new toy at if it prices using price skimming?

Answer 1

a. The price that the company should sell the new toy at if it prices at cost plus profit at 100% profit markup is:

= $20.

b. The price that the company should sell the new toy at if it prices using competitive pricing is:

= $22.50 (average of competitors' prices)

c. The price that the company should sell the new toy at if it prices using penetration pricing is:

= $20 (lowest market price)

d. The price that the company should sell the new toy at if it prices using price skimming is:

= $25.

Step-by-step explanation:

a) Data and Calculations:

Cost of producing a new toy = $10

Competitors' prices are:

Product A – $25

Product B – $20

Product C – $23

Product D– $22

Total = $90

Average price = $22.50 ($90/4)

Cost = $10

Markup 10 ($10 * 100%)

Price = $20

b) An important consideration in the pricing of products is customers' and competitors' reactions to the firm's selling price. The purpose of considering customers is to ensure that enough demand is generated to cover production cost and make profits. Competitors can wage price wars to discourage new entrants into their markets. Many pricing methods are in use, depending on the prevailing market realities.