MARKETING DECISIONS 113
Table 8.2 XYZ Ltd – contribution atdifferent activity levels
Selling price
per unit
Volume expected
at given selling
price (units)Revenue (selling
price×volume)
(£)Variable costs
(@ £10 per unit)Contribution
(revenue−variable
costs) (£)40 10,000 400,000 100,000 300,000
35 15,000 525,000 150,000 375,000
30 20,000 600,000 200,000 400,000
25 25,000 625,000 250,000 375,000
20 30,000 600,000 300,000 300,000
that the price of £20 leading to 30,000 units is outside the relevant range). Although
businesses seek toincreasesales revenue, they wish tomaximizecontribution and
therefore profitability. This issue is often the cause of conflict between marketing
and finance staff in organizations.
Special pricing decisions..................................
Special pricing decisions are those outside the main market. These are usually
one-time orders at a price below that usually sold in the market. In the long term,
all the costs of the business must be covered by the selling price if the business is
to be profitable. However, in the short term, spare capacity may lead to decisions
to accept orders from customers at less than the full cost. As fixed costs remain the
same irrespective of volume, provided that the selling price covers the variable
costs it makes a positive contribution to recovering some of the fixed costs of the
business and therefore to a greater profit (or lower loss).
Using the figures from the previous example, the business may have adopted a
marketing strategy to sell at a price of £30, but only 17,000 units have been sold.
The business profitability will be:
£’000
Revenue 17,000 @ £30 510
Variable costs 17,000 @ £10 170Contribution 340
Fixed costs 200Net profit 140Accepting an order of 3,000 units at £12 will increase profits by £6,000 (3,000 at
a selling price of £12 less variable costs of £10) because fixed costs will remain
unchanged. The business profitability will then be: