Pricing Part1

ACCA F5 - Performance Management 

3C's that determine price of products are Cost, Customer and Competition.

Understanding cost and revenue in economic term:

Price of a product must exceed per unit production and non-production costs. Per unit cost of product can be expressed in two ways. Average cost and Marginal cost. Average cost is per unit cost derived by dividing total costs by total unit of production. Organisation will break even for unit sales price equal to unit cost of production. Any drop in sales price will create loss. Marginal cost is the extra cost incurred for production and sales of one more unit of product. Where marginal cost is less than sales price, organisation will maximize profit. Marginal cost greater than sales price does not always mean a loss. Before creating any loss, increased marginal cost minimizes profit to zero. Money collection for the exchange of product/service is termed as revenue. In mathematical terms, sales price per unit multiplied by sales for the period is called (total) revenue. Sales price per unit is also called average revenue. Marginal revenue on the other hand is the sales revenue generated form one extra product. The table below shows effect on average cost, average revenue, marginal cost and marginal revenue for change in production level.

Example: For a monopoly firm: where facility can produce maximum of 7 units per period.

Output	Total fixed cost	Total variable cost	Total cost	Average cost	Marginal cost	(Demand at) Sales price per unit	Total revenue	Marginal revenue	Profit
A	B	C	D	E	F	G	H	I	J
		VC = 100	B+C	D/A	∆D	Average Revenue	A*G	∆H	H-D
0	100	A*VC	100	-	-	=Demand	-	-	(100)
1	100	1*100	200	200	100	180	180	180	(20)
2	100	2*100	300	150	100	170	340	160	40
3	100	3*100	400	133.33	100	160	480	140	80
4	100	4*100	500	125	100	150	600	120	100
5	100	5*100	600	120	100	140	700	100	100
6	100	6*100	700	116.7	100	130	780	80	80
7	100	7*100	800	114.2	100	120	840	60	40