1 Flashcards
What are the three major influences on pricing decisions?
Customers, Competitors, and Costs.
What is the difference between short-run and long-run pricing decisions?
Short-run pricing focuses on covering variable costs and may ignore fixed costs, typically less than a year. Long-run pricing considers both fixed and variable costs and aims for a reasonable return on investment (ROI), usually longer than a year.
What is value engineering?
A systematic evaluation of all aspects of the value-chain business function to reduce costs while satisfying customer needs.
What is the difference between cost incurrence and locked-in costs?
Cost incurrence is when a resource is sacrificed for a specific objective. Locked-in costs are costs that will be incurred in the future due to decisions already made (designed-in costs).
What are the advantages of using full-cost pricing?
Explanation: Full-cost pricing ensures that both fixed and variable costs are covered. By including all the costs involved in producing, marketing, and delivering a product, companies can set prices that prevent potential losses.
Example: If a company only considers variable costs (e.g., raw materials, direct labor), it might ignore fixed costs like rent and equipment depreciation. Full-cost pricing incorporates these fixed costs, making sure the business isn’t underpricing its products.
What is price discrimination?
Charging different customers different prices for the same product, often based on demand elasticity (e.g., business travelers vs. leisure travelers).
What is peak-load pricing?
Charging higher prices during periods of high demand when capacity limits are approached (e.g., car rentals during peak travel season).
What is life-cycle budgeting?
Estimating the revenues and costs of a product over its entire life, from research and design (R&D) through to the end of customer support.
What are non-value-added costs?
Costs that do not add utility or perceived value to a product (e.g., rework, repair costs).
How is the target operating profit calculated using ROI?
TargetOperatingProfit=CapitalInvestment×TargetROIPercentage.
What is customer profitability analysis?
ustomer Profitability Analysis (CPA) is a method used to determine how much profit each individual customer generates for a company. It compares:
Revenue from the customer (how much they spend) with
Costs to serve that customer (e.g., product costs, customer service, delivery).
Purpose:
The goal of CPA is to find out which customers are most valuable (profitable) and which ones might be costing the company money.
Why It’s Useful:
Helps focus on high-profit customers.
Identifies unprofitable customers who might need different pricing or services.
Supports better decision-making for resource allocation and marketing strategies.
What are the levels of the cost hierarchy in customer costing?
Customer Output-Unit Level Costs:
Costs for activities done for each unit sold to a customer.
Example: The cost of packaging and shipping every single item.
Customer Batch-Level Costs:
Costs for activities done for a batch or group of units sold together.
Example: Setting up a machine to handle a large order.
Customer Sustaining Costs:
Costs to support an individual customer, no matter how much they buy.
Example: Providing customer service or managing their account.
Distribution-Channel Costs:
Costs related to the sales channel used (e.g., online store or physical shop), not tied to specific units sold.
Example: Fees for maintaining an online sales platform.
Corporate Sustaining Costs:
General overhead costs that can’t be traced to any specific customer or sales channel.
Example: Office rent and executive salaries.
What does a customer-profitability report help identify? .
Differences in profitability across customers, highlighting high-value customers for retention.
What is the purpose of value engineering in target costing?
To reduce costs during the product design phase without compromising customer satisfaction or product quality.
What is a non-production cost in life-cycle budgeting?
Costs that are incurred outside of manufacturing, such as R&D, marketing, and after-sales service costs.
