How to Determine Minimum Selling Price With Relevant Costing

Determining a minimum selling price based on relevant costing is a fairly simple process. Relevant costing as a standalone refers to analyzing the cost of a business decision based only the expenses that are relevant in the present time. The minimum pricing is essentially the break even point for that given sale. Any pricing above the absolute minimum results in profits.

A baseball stadium is nearly sold out and the game is already half way finished but a fan arrives late and wants to purchase a ticket. Do you sell the ticket to the fan? And at what price? In this scenario, the price may or may not change, but in many business models, the price will fluctuate based on relevant costing. The relevant costing is only the cost associated with personnel required to sell the ticket and allow the fan to enter the stadium. Every cost associated with the game is already accounted for and is not relevant when considering the decision to sell this single fan a ticket. Keeping a person at the ticket booth to sell the ticket is the only cost to factor into the equation.

Every cost outside of the ticket booth employee is already accounted for so the employee is the only relevant cost. The general admission seating price was 20 dollars. What do you charge arrivals who show after the half-way point? If it costs 10 dollars per hour to keep the ticket office staffed past the half way point and you average two people per hour, charging half price admission maintains profitability. The absolute minimum pricing is 10-dollars to break even on the ticket booth employee. Pricing higher than the minimum makes each person a profitable customer.

After you have determined the relevant costing or actual cost to make that specific sale, you can set your pricing. Considering the relevant costing, set an absolute minimum above the breaking even point to ensure some profitability is gained. The minimum pricing is somewhat subjective after you break even. Ideally, the minimum price point will make the sale while still maximizing profitability. In a relevant costing scenario, the pricing is typically less than retail. Knowing the customer and their urgency to purchase will help set pricing at a maximum profit margin in the given situation. If the customer does not have a sense of urgency, the price will dip towards the minimum.