Question

Naomi manages the selling organization for Navitol, a national distributor for industrial building supplies and roofing materials. Naomi instructs her sales representatives that their goal is to generate at least a 45 percent margin on all of the industrial building supplies and roofing materials they sell in order for her to achieve a 20% return on controllable investment (primarily inventory). Naomi is using a ________ pricing strategy.

Answer 1

Naomi is to generate at least 45% margin on all of the industrial building supplies and roofing materials they sell in order for her to achieve a 20% return on controllable investment (primarily inventory). Naomi is using a "target return pricing" strategy.

What is target return pricing?

A pricing technique that involves using a formula to determine the price that must be set for a product in order to provide the desired profit or rate of return on investment, presuming that a specific quantity of the product is sold.

The advantages of target return pricing are-

• It is a dynamic form of pricing that considers and reacts to supply and demand elements in the market when calculating the selling price.
• By lowering expenses due to the predetermined selling price, it increases corporate profitability.

Calculate the target cost of a new product using following methods-

• Examine the market environment.
• Establish the desired pricing for the product.
• Decide on your desired profit margin.
• Determine the desired price.

To know more about return on investment (ROI),

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