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markup or cost-plus pricing

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A former co-worker now represents a company that manufactures a new type of laboratory-made gemstone, called ZC, which is similar to, but better than, cubic zirconia. These gemstones are used in rings, pendant type necklaces, bracelets and pins which your firm designs. While they have begun to sell their ZC jewelry to selected stores, they have just received an invitation to sell their ZC products on one of the largest television home-shopping networks in the United States with the potential, if the products sell well, for an airing on the network's European show. Your friend`s company must now determine the best pricing method for their products in this environment.

The television program has given them complete control over how your products will be priced.

Your former co-worker brings this challenge to your marketing networking association. meeting.

Seven pricing methods are to be considered are the following:

? Going-rate or competition-based pricing
? Perceived-value pricing
? Value pricing or "every day low pricing" (EDLP)
? Markup or cost-plus pricing
? Target-return pricing
? Group pricing
? Auction pricing

The task will be two fold -

Evaluate and determine the advantages and disadvantages of markup or cost-plus pricing for this special marketing situation.

State the advantages and disadvantages of each of the above pricing strategies as applied to this new type of product and to this marketing situation. Be sure to share within this portion (1) any personal experience you have with any of the other pricing strategies for ZC jewelry that you did not choose to evaluate, and (2) any suggestions for new potential pricing methods that are not described as part of the standard seven pricing methods, or (3) any pricing strategies which combine several pricing methods.

This can be an interesting and creative task. I trust your insight and creativity and believe you will deliver an exemplary product in the provided timeframe. I just ask that the information that is pulled from outside sources not be excessive and be quoted according to APA guidelines both in text and end of paper. It should be a task compiled from inner creativity, knowledge and backed up with references and facts. Please avoid paraphrasing too much throughout the paper. It should be one that showcases your own knowledge, creativity and writing skills coupled with references and facts. You should showcase your knowledge and skill but support it with proper research and facts. Please also refrain from utilizing Wikipedia as it is not an accepted source by the institution and check spelling, grammar, content, flow as well as verify all information is property cited both in text and end of paper according to APA format.

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Solution Preview

In order to understand the applicability of markup or cost plus pricing to this special marketing situation, let us first understand about cost plus pricing in general. Cost plus Pricing is a method whereby a standard markup is added to the estimated cost of the product. The cost-plus price is computed by dividing the fixed costs of a product by the estimated number of units to be sold and then adding the variable cost per unit, or by adding the total variable costs and fixed costs and then dividing by the total number of units to be produced. This will determine the true unit cost. Once the true unit cost has been determined, that cost is divided by 1 minus the desired return on sales (a percentage) to determine the cost-plus price.

For example, the fixed costs to produce an item are $300,000, the variable costs add up to $100,000, and the estimated number of units to be produced is 50,000. Add 100,000 to 300,000, divide by 50,000, and the true unit cost equals $8. If the desired return on sales is 20%, divide $8 by 1 minus .20, and the cost-plus price for this item will be $10.

Primary Advantages and disadvantages of cost plus pricing:

Advantages of cost-plus pricing:

easy to calculate
minimal information requirements
easy to administer
tends to stabilize markets - insulated from demand variations and competitive factors
insures seller against unpredictable, or unexpected later costs
ethical advantages

Disadvantages of cost-plus pricing:

tends to ignore the role of consumers
tends to ignore the role of competitors
use of historical accounting costs rather than replacement value
use of "normal" or "standard" output level to allocate fixed costs
inclusion of sunk costs rather than just using incremental costs
ignores opportunity costs
contractors may not focus on performance because the cost is always covered by the client

source: www.answers.com/topic/cost-plus-pricing

Now, when we have summarized the relative advantages and disadvantages of this pricing strategy, let us see how well it fits for ZC's foray into the television home shopping network. As indicated above, the primary ...

Solution Summary

markup or cost-plus pricing