Price Recommendation for Avon

Prices are often measured by calculating the relevant costs and maximum profit. Theoretically speaking, the whole process can be explained by a simple equation of MC = MR = P, where MC stands for Marginal Cost, MR for Marginal Revenue, and P for Price. In the real world, however, there is an endless amount of things that should be considered in price decision making process. We will approach Avon Corporation’s price formulation with appropriate theories and formula first, and move on to look at other factors that could possibly affect the optimality of the chosen price.

First, to consider only the MC = MR = P equation, we need information about the company’s marginal costs or marginal revenue. Since their costs are more clearly stated in the article, we will approach in terms of costs to get to the optimal price.

Avon’s manufacturing cost analysis at a price lower than that of existing EAS is as follows:

 Over 200 units per week = $599

 100 units a week = $599 * 120%

 50 units a week = $599 * 140%

 30 units a week = $599 *150% or $900

What the units per week represent is the quantity output. So for example, if the company produce 50 products a week, the company will have to pay the cost per unit, which equals to $599 x 140% (=$838.6), multiplied by 50 as their manufacturing cost. This would come out as $41,930.

The article also explains that selling and administrative overhead costs are exclusive from the above cost; they are fixed at 10% rate of net sales. In addition, there are investments for such as building a plant, purchasing an equipment, and acquiring additional inventory that are fixed within certain range of output. This whole analysis is summarized in one table below:

Units