# Accounting for the inflation factor in the price of a new product...

## Inflation factor in the price of a new product

Almost in any market, there is such a factor as inflation. It forces companies to raise prices for their goods. In retail trade, it is quite easy to change the price upwards. Difficulties in view of the inflation factor in the price of a new product mainly arise when concluding long-term contracts. Quite a long time, United States firms tried to solve this problem by setting prices in some hard currency, calculated on the growth of its rate (most often in US dollars). Subsequent events have shown that the rate of convertible currency may fall. For long-term transactions, but high-tech products, you can recommend the use of a sliding price model. Its formula is given below:

where Pr - the price of the product with inflation; Pd - the contract price at the stage of signing the contract; A - the proportion of those elements in the price of goods that are not subject to inflation; Мрi and Мдi • - the cost of the i-th element of material costs at the time of final settlement and at the time of signing the contract, respectively; Трj and Тдi - the cost of the jth element of labor costs at the time of final settlement and at the time of signing the contract, respectively; D, - the share of the/th element of material costs in the price of the goods at the time of signing the contract; With j - the share of j-th labor costs in the price of the goods at the time of signing the contract; n - the number of elements of material costs that are subject to inflation; t - the number of elements of labor costs that are subject to inflation.

At the stage of signing the contract, the firm determines the price for the goods, based on current market conditions (prices for the elements of prime cost). In this case, the contract states that the buyer will have to pay at the calculated price taking into account the inflation factor.

An example of calculating the price taking inflation into account on the basis of the sliding price model (taking into account the price change for the cost elements), proceeding from the fact that the planned price at the time of signing the contract was 100 rubles, and the price change for the elements of prime cost was characterized by the data given in Table. 4.3.

Table 4.3

Input for calculating the rolling price

 Cost Elements The price at the time of signing the contract, rubles. The price at the end of the contract, rubles. Share in the price at the time of signing the contract Cost element 1 20 30 0.2 Cost element 2 30 20 0.3 Cost element 3 30 60 0.3 Profitability, % 20 20 20 (0.2)

## Optimization of the price by the maximum of the aggregate profit from the sale of goods

Depending on the general and price strategy of the company, it is necessary to optimize the price of the goods by some criterion. Most often, the price is optimized by the total sales volume or by the total sales profit. Here is the author's model of price optimization for the maximum of total profit from sales. The model uses one of the methods for forecasting the volume of sales of goods.

At the first stage, the firm forecasts the aggregate capacity of a particular geographic market ( E ) for its product. The capacity of the market can be determined by various methods: expertly, by analogy with the previous year, by the method of statistical modeling, etc. (for more details, see Chapter 5).

In the second stage, the firm's share in the sales volume in this market ( D ) is estimated. To do this, we use the following formula:

where CSI nt - an indicator of the degree of satisfaction of the buyer's need for our goods; CSI i - an indicator of the degree of satisfaction of the customer's needs with the t-th product, competing in our market; Рн - the price of our goods; P i is the price of i of a competitor in the market; n - the number of products competing in the market, including ours; Эс - coefficient, taking into account the elasticity of the market (demand/price);

Coefficient Es is calculated by the formula

where P b - the price of indifference of the goods of the firm relative to the best competitor; Эц - price elasticity of demand in the market (percentage of increase (decrease) in demand for goods with a decrease (increase) in the price of goods by 1% relative to the price of indifference). The volume of the sale of goods (K) is calculated by the formula

where D is the company's projected share of sales in the market; E is the projected market capacity.

Let's consider now the actual model of price optimization for the maximum of the total profit from sales.

We will write down in mathematical form, which is the total profit from the sale of goods:

where P is the aggregate profit from sales at a given variant of the price for our goods; С - the cost price of a unit of our goods.

The optimal variant of the price can be found by differentiating the given expression. As a result, we obtain an expression for calculating the optimal price:

where ie. this is the sum of the ratios "degree of satisfaction of the need/price of the competitors."

The proposed scheme for determining the optimal price is much less laborious than the trial and error method.

Example

Let us consider an example of calculating the optimal price of an artificial ventilation device (ARV) DAR-07 NGO Medprom by the criterion of the maximum aggregate profit from sales.

To calculate the market price on the device, you need to know the level of costs for its production and sale, i.e. cost of production.

In Table. 4.4 shows the calculation of the cost of the ventilators "DAR-07" on 100 pcs., since this is the number of devices on average made by the enterprise per month.

Table 4.4

Calculation of the cost of the ventilators "DAR-07"

 No. п/п Line items Per month Per year 1 Raw materials and materials 130000.00 1560000,00 2 Return Waste 5000.00 60000.00 3 Raw materials and materials minus waste 125000.00 1500000.00 4 Purchased products, semi-finished products 987000.00 11844000,00 5 Total direct material costs 1112000,00 13344000,00 6 Wages of production workers 45800,00 549600.00 7 Social Security contributions 16946.00 203352.00 8 Total wage is direct with deductions 62746,00 752952,00 9 General production costs 21200,00 254,400.00 10 Loss of marriage 1200.00 14400.00 11 Other production costs - - 12 Product Cost of Commodity Output 1 197,146.00 14365752,00 13 Non-production (commercial) costs 23500,00 282000.00 Total cost 1 220646,00 14647752,00

From the table it follows that the unit cost of production is 12,206.46 rubles.

The quality of the device is "DAR-07 (in terms of CSI) and its main competitors is presented in Table. 4.5.

Table 4.5

Computed lung ventilation calculations

 Options DAR-07 Phase-11 Reat-01 Minute ventilation, l/min 0.16 0.20 0.16 The concentration of oxygen in the mixture, % 0.17 0.14 0.17 Respiratory rate, 1/min 0.20 0.20 0.20 Ability to attach the device to a stretcher 0.03 0.02 0.03 Mass of the device with power source, kg 0.06 0.01 0.05 Having a carrying bag 0.10 0.05 0.05 Overall dimensions, mm 0.01 0.00 0.02 Warranty period, months 0.03 0.02 0.02 CSI 0.76 0.64 0.69

To date, the price of the IVL apparatus "Reat-01" is 35 000,00 rubles.

The price of the ventilator "Phase-11 is 57 000,00 rubles.

Calculation of the price of indifference:

Pb = 0.76/0.69 • 35 000 = 1.1 -35000 = 38550.7.

The amount of the relationship "quality/price on competing products:

A = 0.69/35,000 + 0.64/57,000 = 0.003.

In addition to optimizing the price for the total profit, optimization can be carried out by the volume of sales.

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