Managing Financial Principles and Techniques

Sherieda Brissett

1.1

AC 1.1-1.3

The importance of costs in the pricing strategy of the International University of the

Caribbean (IUC):
Costs are important in the pricing strategy of the International University of the Caribbean. The
organization provides an opportunity for individuals to attain tertiary education, and this is being done
amongst numerous competitors. As this is so, the company needs to be able to deliver its educational
services at a competitive cost, and this is done by surveying the rivals for the current costs on the market
and arriving at a reasonable cost that will not only benefit the customers but the organization as well.
Without controlling costs, IUC will not be able to have a niche in the tertiary education market. Having
the right costing system helps in controlling costs. Two of the main reasons behind the poor performance
of the International University of the Caribbean over the past two years are poor cost management and the
lack of pricing strategy.

1.2

A costing system to be used by the International University of the Caribbean:

IUCs costing system is based on absorption costing system. In this costing system both the fixed and
variable costs are included in the costing to determine prices. Variable costs are those costs which vary
with the change in production level while fixed costs are those which remain unchanged with the
production levels. An absorption costing system for IUC will look like:

Direct Material Costs

Plus: Direct labor costs
Plus: Variable manufacturing overhead
------------------------------------------------Total Variable costs
Add: Fixed production costs
Add: Fixed non-production costs
-------------------------------------------------Total cost = Total fixed cost + Total variable costs
Average cost per unit = Total cost / Total output
Add: Mark-up (say 20 %)

Managing Financial Principles and Techniques

Sherieda Brissett
-------------------------------------------------

AC 1.1-1.3

Total price per unit

1.3 Recommendations on improving the costing and pricing systems used by IUC
In 2011 IUC charged a mark-up of a whopping 64.015 percent (for calculations see below) on its total
cost per unit for setting the price per unit. However, the net profit margin was only 3.04 per cent.
In 2010 IUC charged a mark-up of 63.93 per cent on its total cost per unit for setting the price per unit.
However, the net profit margin was only 3.68 per cent.
In spite of the high mark-up, the net profit margin is very low because of the very high selling and
administrative expenses. It is imperative that the company cuts down its selling and administrative
expenses.
A better pricing strategy may be one where the company charges only variable cost. On the variable costs
it may charge the same mark-up which it is currently charging (around 60 per cent). This will have the
effect of lowering the price per unit charged from customers. A lower (more competitive) price may
translate into much high revenues for IUC if the price elasticity of demand of its products is greater than
one. In such a case variable costing strategy will transfer into higher profits for the company.

Calculation of mark-up:
Mark-up charged = (Sale cost of programme) / Cost of programmes ran) * 100
Mark-up charged in 2011 = (2990 1823 ) / 1823) * 100 = 64.01 per cent
Mark-up charged in 2010 = (3500 2135)/2135) * 100 = 63.93 per cent
Net profit margin = (Net Profit / Sales) * 100
Net profit margin in 2011 = (91/2990) * 100 = 3.04 per cent.
Net profit margin in 2010 = (129/ 3500) * 100 = 3.68 per cent.