Product Lifecycle Price Optimization In A Nutshell

 

Hi all!

Today, I return with the conclusive segment of product lifecycle price optimization. In your academic days, you might have encountered the TC=TR or MC=MR economic pricing strategies, knowing they involve linear equations. This session will demystify it comprehensively. Previously, we analyzed the MC=MR approach, noting its benefits but highlighting the drawback posed by taxation. I mentioned consulting a tax advisor? Fortunately, I optimized my schedule and meticulously incorporated taxation and deferred taxes, enhancing our model's precision. The outcome is phenomenal!

While traditional product costing methods like Absorption, Marginal, and Activity-Based Costing (ABC) are well-known and effective, this model goes beyond by incorporating TC=TR & MC=MR analyses over it. You'll be astounded by the lucrative insights it offers. In simple words, apply my methods for analysis purposes over your pricing techniques. This cutting-edge model is set to remain a staple online, owing to its unparalleled results from unprecedented strategies.

Let's begin with:

·         Determining BEP Price per unit using sales markup

·         Calculating BEP Units

For these, I have applied a Profit After Tax of zero, as our tax treatment accuracy has reached 100%. Keeping in mind that ‘Cash is King!’, the focus is on maximizing drawings and besides, the MC=MR approach doesn't truly maximize profits in this model; instead, it alleviates worsening cash flows. It's crucial to remember that textbooks define profit in terms of cash. 

I've noticed that MC=MR achieves maximum profits only at the breakeven quantity, whereas the TC=TR approach results in a loss. Quite a contrast, isn’t it?

Here are the devised strategies:

Drawings Amounts (When SOFP is not tallied & tallied):

1.       BEP Units only

2.       BEP Units + 50,000 Units

3.       BEP Units – 25,000 Units

 

Applying TC=TR (When SOFP is not tallied):

1.       BEP Units + TC=TR approach

2.       BEP Units + 50,000 Units + TC=TR approach

3.       BEP Units – 25,000 Units + TC=TR approach

Applying TC=TR (When SOFP is tallied):

1.       BEP Units + TC=TR approach

2.       BEP Units + 50,000 Units + TC=TR approach

3.       BEP Units – 25,000 Units + TC=TR approach

Recap of MC=MR (When SOFP is not tallied & tallied):

1.       BEP Units + MC=MR approach

2.       BEP Units + 50,000 Units + MC=MR approach

3.       BEP Units – 25,000 Units + MC=MR approach

Unfortunately, the Solver was unable to find an optimal solution at the second step, so I manually reconciled the Balance Sheet and updated the results. You'll see that integrating these strategies with conventional costing methods yields impressive benefits. View/Download Excel here

Note: Stabilizing prices through the TC=TR approach negatively affects drawings. Here is a live example. 

Explore the this same scenario with the MC=MR method on your own to compare and also include Profit Maximization in your constraints. Remember, this model is incredibly versatile; even I couldn’t uncover all the hidden strategies within. Ready to be amazed?

Note: I'll dive into working capital optimization in my next blog. For now, don’t stress over the absence of working capital in the first year—it only impacts drawings by that amount when SOFP is not tallied. Also, I utilized capital allowances over a 20-year period. Keep an eye out for my techniques used mainly cause my masterpiece is yet to be released and follow your necessary tax compliances! As for optimizing it, give solver.com’s official optimizer a shot. They offer a 2-week free trial.

Declaration: I take full responsibility for the techniques I’ve developed. However, I disclaim any accountability for the tax calculations—much like how tax authorities do with their deferred tax online calculators.

Copyrighted to ©Yasaswi Gomes

Disclaimer: The content provided in this publication is protected by copyright law. Any unauthorized use, reproduction, or distribution for personal gain apart from educational & professional gain is strictly prohibited. Please respect intellectual property rights and seek appropriate permissions if you intend to utilize this material beyond personal use.