QUESTION 1
By using practical examples, critically discuss how you would be applying a pricing
systemin your business.
Small business owner must properly evaluate a pricing system, and must
understand potential costs, revenue, and product demand.
It is important to understand when enough products and services have
been sold to cover the operating expenses of your business.
This can be recognized as the break-even point.
Break-Even Analysis for Sweet Delights Bakery
I have a bakery and I make custom wedding cakes and to determine my pricing of my cakes I firstly need
to calculate a break-even price(A price that will cover costs of product and operation costs )
To understand and utilize the break-even analysis, we'll go through two main phases:
1)examining cost-revenue relationships
2) incorporating sales forecasts into the analysis.
This approach will help visualize the business's financial performance and help make decisions
on pricing.
Phase 1: Examining Cost-Revenue Relationships
Identifying Costs:
Fixed Costs (per month):
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Rent and utilities: R10,000
Marketing and administrative costs: R10,000
Total Fixed Costs: R20,000
Variable Costs (per cake):
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Basic ingredients: R600
Specialized ingredients: R400
Packaging: R100
Total Variable Costs per Cake: R1,100
Standard Wedding Cake Price: R7500
Calculating Contribution Margin:
Contribution Margin per Cake= Selling Price−Variable Costs
R6,400 =R7,500−R1,100
Calculating the Break-Even Point:
Break-Even Point (units): Fixed Costs/Contribution Margin per Unit
R20,000/R6,400=3.125
Rounded up, Sweet Delights Bakery needs to sell approximately 4 standard custom cakes per
month to break even.
Phase 2: Incorporating Sales Forecasts
Adjusting for the impact of price on demand helps identify realistic profit scenarios. Let's
analyze different pricing strategies to see their effect on sales volume and profitability.
Scenario 1: Penetration Pricing
Lower Price for Standard Custom Cake:
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Selling Price: R5,500
Contribution Margin per Cake: R5,500 - R1,100 = R4,400
Break-Even Point: R20,000/R4,400=4.54 (approximately 5 cakes)
Expected Sales Volume: 15 cakes per month
Profit Calculation:
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Total Revenue:
15 X R5,500 = R82,500
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Total Variable Costs:
15 X R1,100 = R16,500
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Total Costs:
R20,000 + R16,500= 36,500
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Profit: R82,500-R36,500=R46,000
Scenario 2: Price Skimming
Higher Price for Standard Custom Cake:
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Selling Price: R9,000
Contribution Margin per Cake: R9,000 - R1,100 = R7,900
Break-Even Point: R20,000/R7,900=2.51 (approximately 3 cakes)
Expected Sales Volume: 10 cakes per month
Profit Calculation:
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Total Revenue: 10 * R9,000 = R90,000
Total Variable Costs: 10* R1,100 = R11,000
Total Costs: R20,000 + R11,000 = R31,000
Profit: R90,000- R31,000=R59,000
Scenario 3: Optimal Standard Pricing
Balanced Price for Standard Custom Cake:
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Selling Price: R7,500
Contribution Margin per Cake: R7,500 - R1,100 = R6,400
Break-Even Point: R20,000/R6,400=3.125 (approximately 4 cakes)
Expected Sales Volume: 15 cakes per month
Profit Calculation:
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Total Revenue: 15 * R7,500 = R112,500
Total Variable Costs: 15 * R1,100 = R16,500
Total Costs: R20,000 + R 16,500= R36,500
Profit: R112,500- R36,500= R76,000
o
Total Revenue: Starts from the origin and increases linearly with price points of
R5,500, R7,500, and R9,000
Decision Making
Based on the analysis:
1. Penetration Pricing (R5,500):
o Higher sales volume needed to break even (5 cakes)
o Potential higher profit (R46,000) if the increased demand is achieved
2. Price Skimming (R9,000):
o Lower sales volume needed to break even (3 cakes)
o Moderate profit (R59,000) with fewer sales
3. Optimal Standard Pricing (R7,500):
o Balanced sales volume needed to break even (4 cakes)
o Good profit (R76,000) with moderate sales volume
Recommendation:
The Optimal Standard Pricing (R7,500) is recommended, as it balances competitive pricing
with a reasonable sales volume, ensuring profitability while maintaining a premium brand image.
This strategy minimizes the risk of underpricing and overpricing, and aligns well with expected
demand.
Conclusion
By combining a thorough break-even analysis with realistic sales forecasts and understanding the
impact of different pricing strategies, Sweet Delights Bakery can set prices that cover costs,
remain competitive, and ensure profitability. This comprehensive approach helps visualize
business performance and make informed decisions, contributing to the overall success and
sustainability of the bakery.
QUESTION 2
By using practical examples demonstrate how you would conduct the promotion of your
product in your business.
Promotion of a product consists of marketing communications that inform potential consumers.
about a firm or its product or service and try to persuade them to buy it and there are many
ways one can promote/advertise their product.
I would choose promotion through social media as it will be cheap and easy.
Most businesses figure out their budget for advertising with a few approaches:
:1. Budgeting a fixed percentage of sales
2. Deciding how much is left over after other expenses are covered
3. Spending at the same level as competitors
4. Determining how much is needed to achieve objectives
For me using Instagram and Facebook, I can promote by asking friends and family with a high
following to promote me on their social media and tag my social media business account. This
will be cheap, and all my efforts will have to go towards making and managing my social media
accounts.
When I need to promote my business further, I would look into spending money for paid
promotions and advertisement on social media.
The budget for this would be determined by approach 2 from earlier (Deciding how much is left
over after other expenses are covered) .
In Social Media Marketing there are a few do’s and donts:
The Do’s:
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Telling stories personalizing my brand and business.
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Post videos of customers using and enjoying my products
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Show an interest in what others are commenting on my posts.
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Being responsive and informative to direct messages from potential customers
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Respond to customers without using too many words ,keeping it short but informative/useful.
The Don’ts:
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Don’t use slang or abbreviations ,this will make it inappropriate and unprofessional.
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Don’t post anything inappropriate in the sense of the business
I, Luke Du Toit with student number 66375177 hereby declare that I have read the
Unisa policy on plagiarism and the student disciplinary procedures documents made
available on the myUnisa module site; and I understand what constitutes plagiarism,
collusion and academic fraud. I declare that this assignment is my own original work
and that I have not allowed anyone else to borrow or copy my work.