Optimal Price Analysis


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Definitions and terms used in the Optimal Price Analysis

Variable Cost per Unit
The cost that vary with the production or the purchase of one unit.
Fixed Cost (FC)
The cost that remains constant within a range of production or sales, regardless of the number of units produced or sold within that range. Typical fixed costs are: rent, mortgage, equipment, salaries, insurance, fixed utilities (office utilities) etc.
Current selling price
The price that a unit is currently sold for.
Current selling units
The number of units currently sold or produced.
Maximum capacity (Units)
The constraint regarding the maximum number of units that the company can produce or sell.
Maximum financing capacity
The constraint regarding the financing capacity of the company (bank accounts, credit cards, lines of credit etc.).
Price elasticity of demand (PeD)
The responsiveness of the quantity demanded of a good or service to the increase or decrease in its price. As a general rule, sales increase with drop in prices and decrease with rise in prices.
Typically, PeD has a negative value. For our purpose, in order to make it easier for our users, we will consider the absolute value of PeD. By default we setup PeD as 1 (unit elastic).
The meaning of PeD value is:
  • PeD = 0: Perfectly inelastic
  • 0 < PeD < 1: Relatively inelastic or inelastic demand
  • PeD = 1: Unit (or unitary) elastic
  • 1 < PeD < ∞: Relatively elastic or elastic demand
  • PeD = ∞: Perfectly elastic
Optimal Price
The selling price where the company realize its maximum of profit.
Optimal Units
The number of selling units to be sold in order to realize the maximum of profit.
Total Variable Cost (VC)
The cost that varies directly with the number of units produced or sold. Typical variable costs are: materials, packaging and shipping, sales commission, hourly wages, variable utilities (factory utilities) etc.
Total Variable Cost = Selling Units x Variable Cost per Unit
Total Cost (TC)
Total expenses incurred in the process of producing or selling a number of units.
Total Cost (TC) = Fixed Cost (FC) + Total Variable Cost (VC)
Total Revenue
The total sales value of the units produced or sold.
Total Revenue = Selling Units x Selling Price per Unit
The benefits from producing or selling a number of units.
Profit = Total Revenue – Total Cost