UNSW Business School

COMM1180
Value Creation
Term 1 2025

Week 3 Tutorial Activities

Value from Pricing

1. Introduction

This week we will learn how the value that has been created for customers (see Week 2) can be shared
between various parties through pricing. Not surprisingly, marketers refer to pricing as value capture.
Pricing strategies consider three elements: the perceived value of the product/service to the customer,
the cost of providing the product/service, and competitors’ pricing. A key concept in understanding
cost and its impact on pricing is Cost-Volume-Profit (CVP) Analysis.

In the online materials, we introduced you to the fundamentals of pricing, basic pricing strategies, and
CVP analysis as an essential tool to understand how cost and revenue (=price x quantity sold!) impact
profitability. We started simple, with one company offering one product, and with the assumption that
the pricing objective is profitability.

In the live lecture, we will introduce a wider range of pricing objectives and how they might impact
pricing strategies. We will also look at perceived value in more detail, including different types of
value, and how non-monetary cost of a product (time and effort) impact perceived value. We will also
add complexity to the application example, where the company is offering multiple products and we’ll
consider their competitors.

In the tutorials, you will get to practice what you have learned about pricing and CVP with applied and
numerical examples.

2. Tutorial Activities

Notes to students:
• This tutorial builds on the Urbayn case that we have been discussing in the live lectures.
• The case study in this tutorial builds upon the breakeven calculations covered in the online
materials and the case introduced in the live lecture, so you should complete the online module
and attend or watch the live lecture prior to the time of your tutorial.

Please read the following instructions carefully as you are required to prepare some responses prior
to the tutorial.
• While you are not required to solve Questions 1, 2 or 3 before the tutorial, you should ensure that
you can explain and apply the concepts of:

o Breakeven Point
o Cost behaviour (variable and fixed costs)
o Contribution margin
o Sales mix
o Value-adding/non value-adding activities.
o Assumptions and limitations of CVP analysis
o Pricing objectives
• You must prepare answers to Question 4 and bring your responses to the tutorial to share and
discuss with your group.

2
Urbayn Bar and Distillery (Urbayn) Case Information

Urbayn is a boutique Bar and Distillery offering fine dining paired with specialty spirits which are
distilled on site.

To broaden Urbayn’s offerings, the Founder, Max, is thinking of providing four dedicated spaces for
private functions, 7 nights per week.

A competitor analysis shows that Urbayn might be able to tap into additional market segments by
offering function rooms at four different price points. The Gold and Silver rooms will cater for the
high-end, premium market; and the Black and White Rooms will cater to budget-conscious party-
planners.

The CFO, Carol Flerken and the marketing team put the following proposal to Max for a more
differentiated pricing strategy:

• According to marketing research, Urbayn expects the sales mix to be 28% Gold Room, 28% Silver
Room, 24% Black Room and 20% White Room.
• The fixed costs will be $1,500,000 per year.

A summary of the projected impact of this proposal on sales and costs are as follows:

Gold Silver Black White

Room Room Room Room
Maximum guests per night 70 70 60 50
Projected sales mix 28% 28% 24% 20%
Sales price per customer $90 $70 $60 $40
Variable cost per guest per night $50 $40 $25 $16
Fixed cost related to running
$1,500,000
function rooms
Targeted after-tax profit $1,300,000
Tax rate 30%

Question 1 – CVP Analysis

a) Calculate the breakeven point (number of guests).

b) Calculate the number of customers to achieve a targeted after-tax profit of $1,300,000.

c) Does Urbayn have capacity to achieve the targeted after-tax profit? Explain.

3
Question 2: Value Analysis and CVP Analysis

After receiving the CVP analyses, Max is thinking of increasing the price per guest. However, Carol
decided to first conduct a value analysis of Urbayn’s variable costs to determine possible cost saving
opportunities. The breakdown of the projected variable costs is as follows:

Gold Silver Black White

Variable costs per guest
Room Room Room Room
Cost of food and beverages 26.00 21.82 9.40 5.60
Food wastage in meal preparation 5.00 5.35 4.20 2.80
Labour: cleaning 8.00 5.40 4.80 3.20
Labour: waitstaff 5.00 3.38 3.00 2.00
Laundry costs - napkins 6.00 4.05 3.60 2.40
Total Variable Cost per guest $50 $40 $25 $16

a) Identify any non-value adding activities. Explain your choice/s.

b) If the non-value adding costs are eliminated, re-determine if Urbayn can achieve the after-tax
profit of $1,300,000.

4
Question 3 – Pricing and Limitations of CVP

Max and Carol noticed that demand for Urbayn’s function rooms is much higher during public holidays
and on weekends, and they are often booked out months in advance for these peak times. Weekdays
are harder to fill, though the same fixed cost accrue regardless of booking levels. They would like to
explore if different prices for peak and off-peak times would lead to higher profitability and occupancy
rates. They analysed the booking request data of the last couple of years and found the following
patterns of booking requests/capacity:

Gold Room Silver Black White

Room Room Room
Peak (Public holidays, weekends) 120% 140% 130% 100%
Off-Peak 70% 50% 70% 60%

a) Would it be possible to include these factors into a CVP analysis? Discuss your answer.
(Hint: consider the assumptions and limitations of CVP analysis).

b) In the lecture, we discussed four different pricing objectives:

• Revenue and profit
• Operations
• Patronage
• Non-monetary pricing objectives
Which pricing objective is illustrated in this question? Explain your choice. How is this different
to the pricing objective illustrated in Question 2?

5
Question 4 – Customers’ perceived value (must be answered before the tutorial)

The previous questions consider the pricing objectives of the organisation. We now turn our attention
to the customers’ perception of value.

Perceived value is the total benefits of the service minus the total cost.

Using Smith and Colgate’s (2007) customer-value creation framework, consider the perceived benefits
and costs of Urbayn’s Function Rooms.

Perceived benefits:
Example
Functional/instrumental value
(the attributes of the product itself; the extent to
which a product is useful and fulfills a customer’s
desired goals)
Experiential/hedonic value
(the extent to which a product creates
appropriate experiences, feelings, and emotions
for the customer)
Symbolic/expressive value
(the extent to which customers attach or
associate psychological meaning to a product)

Perceived costs:
Example
Cost/sacrifice

Time, effort

Perceived risks: social, psychological,

physical

6
Additional Practice Questions
Eldenburg, Leslie G, et al. Management accounting. Wiley Global Education Australia, 2020. [Wiley
Australia]: Chapter 4 – Cost volume profit analysis.

Please attempt these questions without looking at the solutions.

• Exercise 4.17
• Exercise 4.18
• Exercise 4.29
• Problem 4.43 modified.

Sales mix; multiple product breakeven; uncertainties; quality of information

Dreamtime produces two products: regular boomerangs and premium boomerangs. Last month
1,200 units of regular and 2,400 units of premium were produced and sold. Average prices and
costs per unit for the month are displayed here.

Regular Premium
$ $
Selling price 22.15 45.30
Variable cost 4.31 6.91
Product line fixed cost 9,804 59,808
Corporate fixed costs 20,232
Operating profit 23,700

Product line fixed costs can be avoided if the product line is dropped. Corporate fixed costs can be
avoided only if the entity goes out of business entirely. You may want to use a spreadsheet to
perform calculations.

a) What is the overall corporate breakeven in total revenue and for each product, assuming the
sales mix is the same as last month’s?
b) What is the breakeven in revenue for regular boomerangs, ignoring corporate fixed costs?
c) Why is the breakeven for regular boomerangs different when we calculate the individual
product breakeven versus the combined product breakeven?
d) Calculate the number of boomerangs that would be needed for an after-tax profit of $25,000,
assuming the tax rate is 30%

7
3. Solutions to additional practice questions

Exercise 4.17

(a) Break-even point = Fixed Costs ÷ Contribution Margin

= $200 000 ÷ ($150 - $100)
= 4 000 units

(b) Profit = Sales Revenue – Variable Costs – Fixed Costs

= (5 000 x $150) – (5 000 x $100) - $200 000
= $50 000

Exercise 4.18
(a)
New to How to Make
Business Yourself a Success
Sales 45 000 15 000

Sales price per book $150 $100

Less Variable cost per book ($100) ($80)
= Contribution margin $50 $20
% sales mix 75% 25%
Weighted average contribution margin per unit:
($50 x 0.75) + ($20 x 0.25) $42.50
Total break-even point ($500 000 ÷ $42.50) 11 765 units
Total “New to Business” sales (11 765 x 0.75) 8 824 units
Total “How to Make Yourself a Success” (11 765
x 0.25) 2 941 units

(b)
Sales revenue:
“New to Business” (45 000 x $150) $6,750,000
“How to Make Yourself a Success” (15 000 x $100) $1,500,000
Total sales revenue $8,250,000
Less Variable costs:
“New to Business” (45 000 x $100) -$4,500,000
“How to Make Yourself a Success” (15 000 x $80) -$1,200,000
Total variable costs -$5,700,000
Total contribution margin $2,550,000
Less Fixed costs -$500,000
Total profit $2,050,000

8
Exercise 4.29

(a)
A B C D Total
Unit sales 50 000 30 000 100 000 20 000 = 200 000
Selling price $10 $15 $8 $25
Variable costs $6 $10 $6 $15
Contribution margin $4 $5 $2 $10
Sales mix** 0.25 0.15 0.50 0.10
Weighted average $1 $0.75 $1 $1 $3.75
contribution margin

** product a 50000 units/200000 units

product b 30000 units /200000 units
product c 100000units /200000 units
product d 20000 units /200000 units

• Breakeven = $450 000/$3.75 = 120 000 units

• Number of units of each product to sell:

Product A= 30 000 units (120 000 x .25)

B=18 000 units (120 000 x .15)
C = 60 000units (120 000 x .5)
D= 12 000 units (120 000 x .10)

(b) Profit (loss) = (200 000 units × $3.75) – $450 000 = $300 000

(c)
A B C D
Unit sales
Selling price $10 $15 $8 $25
Variable costs $6 $10 $6 $15
Contribution margin $4 $5 $2 $10
Sales mix 0.25 0.15 0.40 0.20
Weighted average $1 $0.75 $0.8 $2 $4.55
contribution margin

• Breakeven = $500 000/ $4.55 = 109, 890 units

• This represents a lower breakeven number of units as there would be a higher proportion of sales
of Product D which has a higher contribution margin than Product C. Therefore, the initiative is
recommended.

9
Problem 4.43 modified.

(a) To calculate the overall breakeven in revenue:

Step 1: calculate the weighted average contribution margin ratio:

Regular Premium Total

Unit sales 1,200 2,400 3,600
Selling price 22.15 45.30
Variable costs 4.31 6.91
Contribution margin 17.84 38.39
Sales mix 0.333 0.667
Weighted average contribution margin 5.95 25.59 31.54

Weighted av CM ratio = 31.54/ [(22.15*0.333)+(45.30*0.667) =83.92%

Overall corporate breakeven (recall that there are three fixed costs):

Revenues = ($9804 + $59 808 + $20 232)/83.92% = $107 058.88

Breakeven for Regular based on sales mix in revenues:

$107 059 × ($22.15*1200) / [($22.15*1200) + ($45.30*2400)] $ 21 032.97

Breakeven for Premium based on sales mix in revenues:

$107 059 × ($108 720/$135 300) 86 026.91

Total corporate sales at breakeven $107 058.88

(b) Breakeven for regular boomerangs ignoring corporate fixed costs:

Revenues = $9804/[($22.15 – $4.31)/$22.15]

= $9804/0.8054
= $12 173

(c) When regular boomerangs is required to cover only its own fixed costs, the company does not
need to sell as many units to breakeven. The breakeven revenue for boomerangs is higher when
it covers both its own and corporate fixed costs ($20 032) than when it only covers its own
fixed costs ($9 804).

(d) The number of boomerangs that would be needed for an after-tax profit of $25,000, assuming the
tax rate is 30%.

Number of boomerangs = [($9804 + $59 808 + $20 232) + (25000*.7)]/31.54 = 3980.92

Regular = 3980.92*0.333 = 1327

Premium = 3980.92*0.667 = 2654

10