Explain what is Minimim Pricing Method in Pricing Decisions( Part 5)

In the earlier article, we have dealt with the importance of making the correct pricing decisions and the factors to consider before making a pricing decision.

This article refers to the various methods of pricing which include the following:

  • Full Cost Plus pricing;
  • Variable/Marginal Cost Plus pricing
  • Rate of Return Pricing;
  • Break-even Pricing;
  • Standard Cost Plus

Salient Points on Minimum Pricing:

  • For this type of pricing, the selling price is the lowest price that a company may sell its product.
  • Normally the price will be the Total Relevant Costs of Manufacturing.
  • Useful method in situations where there is a lot of intense competition, surplus production capacity, clearance of old stocks, getting special orders and or improving market share of the product.
  • Minimum Price is Incremental costs of manufacturing + Opportunity Costs ( if any)

Simple Illustration:

Assuming the following details of product X:

Material $2.50

Labor( 2 hrs @ $3.00) $6.00

Variable production overhead $2.50

Fixed production overhead $1.20

Total $9.70

Say that the labor is in short supply and is used for other product Y which generates a contribution of $6 per unit and requires 2 hours of the same labor.

Material $2.50

Labor $6.00

Variable production overhead $2.50


Opportunity cost from labor scarcity:

$6 / 2 hours= $3.00 per hr x 2 hr = $6.00

Minimum price = $17.00

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