Cost Analysis
The assigned estimating approach is margin pricing. Margins indicate profitability. A high volume of sales without the proper calculation of potential margins may result in an unprofitable business. Margin is the revenue from sales, which has exceeded the costs and is calculated by deducting the actual product cost from the selling price. Setting the right product or service price is, therefore, critical.
A margin-driven price calculation can be done by dividing the cost by one minus the percentage profit margin. For example, if the cost of a new product or service is 50$ and one wants to maintain a 30 percent profit margin, the process would be to divide 50$ by one minus 30 percent – 0.70 in decimal. The 50$ divided by 0.70 gives a price of 71.43 $. The profit margin here is 21.43$. If different costs exist, and one needs to maintain the 30 percent margin of profit, the cost of every product should be divided by 0.70, as in this context.
Using margin driven price estimation is more accurate compared to other models such as markup. The margin model is more accurate and reliable. The approach is more appropriate to use when the seller targets a specific constant margin or margin range. Different models may present varying margins. Margin information is critical for numerous core business activities and processes, such as demand forecasting and inventory accounting. Supply chain optimization based on the price margin has various business priorities that include (a) delivering to customers some more high-profit products and (b) the ability to stop serving products that have a low-profit yield (Kosansky & Schaefer, 2013).
Reference
Kosansky, A., & Schaefer, T. (2013). Margin-based Supply Chain Optimization. IndustryWeek. Retrieved 19 April 2020, from https://www.industryweek.com/supply-chain/procurement/article/21960565/marginbased-supply-chain-optimization.