Minimum Pricing Methodology

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

Add:

Opportunity cost from labor scarcity:

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

Minimum price =  $17.00