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Pricing training and development programs using stochastic CVP analysis
Author(s) -
Yunker James A.,
Schofield Dale
Publication year - 2005
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1204
Subject(s) - economics , profit (economics) , stochastic game , econometrics , variable (mathematics) , variable cost , function (biology) , constant (computer programming) , microeconomics , mathematical economics , computer science , mathematics , mathematical analysis , evolutionary biology , programming language , biology
This paper sets forth, analyzes and applies a stochastic cost‐volume‐profit (CVP) model specifically geared toward the determination of enrollment fees for training and development (T+D) programs. It is a simpler model than many of those developed in the research literature, but it does incorporate one advanced component: an ‘economic’ demand function relating the expected sales level to price. Price is neither a constant nor a random variable in this model but rather the decision‐maker's basic control variable. The simplicity of the model permits analytical solutions for five ‘special prices’: (1) the highest price which sets breakeven probability equal to a minimum acceptable level; (2) the price which maximizes expected profits; (3) the price which maximizes a Cobb–Douglas utility function based on expected profits and breakeven probability; (4) the price which maximizes breakeven probability; and (5) the lowest price which sets breakeven probability equal to a minimum acceptable level. The model is applied to data provided by the Center for Management and Professional Development at the authors' university. The results suggest that there could be a significant payoff to fine‐tuning a T+D provider's pricing strategy using formal analysis. Copyright © 2005 John Wiley & Sons, Ltd.