Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e

18. Price Setting in the
    Business World

Text © The McGraw−Hill

Companies, 2002

Price Setting in the Business World 521

2.Average fixed cost(per unit) is obtained by dividing total fixed cost by the

related quantity.

3.Average variable cost(per unit) is obtained by dividing total variable cost by

the related quantity.

A good way to get a feel for these different types of costs is to extend our average-

cost pricing example (Exhibit 18-3A). Exhibit 18-4 shows the six types of cost and

how they vary at different levels of output. The line for 40,000 units is highlighted

because that was the expected level of sales in our average-cost pricing example. For

simplicity, we assume that average variable cost is the same for each unit. Notice,

however, that total variable cost increases when quantity increases.

Average fixed costs are lower

when a larger quantity is

produced.

An example shows

cost relations

Exhibit 18-4 Cost Structure of a Firm

Total Average Total

Fixed Average Fixed Variable Variable Average

Quantity Costs Costs Costs Costs Total Cost Cost

(Q) (TFC) (AFC) (AVC) (TVC) (TC) (AC)

⎧

⎩

⎧

⎩

⎧

⎩

⎧

⎩

⎧

⎩

⎧

⎩

0 $30,000 ———$ 30,000 —

10,000 30,000 $3.00 $0.80 $ 8,000 38,000 $3.80

20,000 30,000 1.50 0.80 16,000 46,000 2.30

30,000 30,000 1.00 0.80 24,000 54,000 1.80

40,000 30,000 0.75 0.80 32,000 62,000 1.55

50,000 30,000 0.60 0.80 40,000 70,000 1.40

60,000 30,000 0.50 0.80 48,000 78,000 1.30

70,000 30,000 0.43 0.80 56,000 86,000 1.23

80,000 30,000 0.38 0.80 64,000 94,000 1.18

90,000 30,000 0.33 0.80 72,000 102,000 1.13

100,000 30,000 0.30 0.80 80,000 110,000 1.10

0.30 (AFC) 1.10 (AC)

110,000 (TC) (Q) 100,000 30,000 (TFC) 100,000 (Q) 30,000 (TFC) (Q) 100,000 110,000 (TC)

80,000 (TVC) 0.80 (AVC) 0.80 (AVC) 80,000 (TVC)

30,000 (TFC) 80,000 (TVC) 110,000 (TC)