The firm determines the price that would yield its target rate of return on investment (ROI). Suppose a manufacturer has invested one million in the business and wants t set price to earn a 20 percent ROI i.e 2,00,000. he hopes to sell 50,000 pieces and the unit cost Rs. 16/-. The target return price is given by the formula
Target return price = Unit Cost + Desired return X Capital Invested
= 16 0.20 X 10,00,000 =Rs. 20/-
Hence the manufactures will set a price of Rs. 20/-.
The manufacturer can also use break-even analysis, the break-even volume is given by
Break-even Volume = Fixed Costs
Suppose the fixed cost is Rs, 300000 and variable cost is Rs. 10/- and the produces wants to charge price of Rs. 20/-, then the break-even volume is given by
300000 = 30,000 Pieces