Business Paper 3 Flashcards
What is cost-plus pricing?
> adding a mark-up (usually at least 100% in retail) on top of the cost of production of the product
What is price skimming?
> charging a high price to attract initial enthusiast buyers, then lowering the price as time passes, or competitors enter the market
For which type of product is price-skimming used?
> innovative products
How are unit costs calculated?
Total costs/Number of units
What is competitive pricing?
> charging at market level, or a discount to the market
e.g. Branston charging 65p, whereas Heinz (market leader), charging 75p
What is competitive pricing?
> charging at market level, or a discount to the market
e.g. Branston charging 65p, whereas Heinz (market leader), charging 75p
What is the implication for businesses using competitive pricing?
> they have no real control over their future revenues
What is predatory pricing?
> charging below the cost of production, with the intention of forcing a rival out of the market
What are the prerequisites for successful predatory pricing?
> Predator business is strong financially
or
Prey business is weak financially
What is psychological pricing?
> pricing below round numbers (e.g. charging £0.99 instead of £1.00), in an attempt to entice customers
What time span are pricing TACTICS?
Pricing TACTICS = short-term
What is a price sensitive market?
> A market in which demand is highly elastic
Which factors determine appropriate pricing strategy?
>Product differentiation >Price elasticity >Strength of brand >Amount of competition >Stage in product life cycle
Which businesses mainly use cost-plus pricing?
> Businesses with strong brands and inelastic demand for products
What is the formula for Cost-plus?
Unit cost + (% mark up)
What should we consider in
‘Changes in price to reflect social trends?’
> Online sales (e.g. Amazon undercutting highstreet sellers)
>Price comparison sites (often just looking for commission, rather than showing the consumer the best deal)
What is investment appraisal?
> using forecast cash flows to estimate the value of an investment decision based on quantitative criteria, then backing up calculations with an assessment of non-financial factors
What does the payback period focus on?
> (Solely) how long it takes to repay the business’ initial outlay
What is the formula for Payback period?
> Payback = Initial outlay/net cash flow
What is the formula for REMAINING payback period?
> Outlay outstanding (from cumulative cash flow)/monthly net cash flow in year of payback
What are the three steps in calculating ARR?
- ) Total net cash flow - Initial outlay
- ) /Number of years of project
3) (Average annual profit/initial outlay) x 100
What does Net Present Value (NPV) do?
> Considers the future value of cash in today’s terms (accounts for both time risks and opportunity cost of cash)
How is NPV calculated?
1) Net cash flow x discount factor
2) Total = NPV
What are the general limitations of Investment Appraisal techniques?
Further ahead cash flows are projected > greater likelihood of inaccuracies
Quantitative investment appraisal methods fail to account for important qualitative factors
Data may be biased (e.g. calculated with an agenda, e.g. appeasing management)
What are factors which could affect future cash flow?
> Costs rising unexpectedly (perhaps due to decrease in currency value)
New competitor may push prices down >undermines future cash flow
Consumer tastes may change (e.g. away from business’ product)
Cyclical economic downturn may become full-blown recession
What are the negatives of a low capacity utilisation?
> Fixed costs cost per unit rises (fixed costs cannot be spread over as many units of output)»_space;business may have to increase prices >may decrease demand
What are the positives of a high capacity utilisation?
> Fixed costs per unit decreases (fixed costs can be spread over a greater output) >business can decrease prices to incentivise demand, or keep prices the same and enjoy higher profit margins
What are the advantages of internal recruitment?
> Business already aware of employee skills and experience
Often cheaper and quicker
Promotional opportunities may motivate existing employees
MAY avoid need and cost of induction training
What are the disadvantages of internal recruitment?
> May create vacancy >unhelpful if business wants to expand workforce
Relying on existing employees >stagnation of ideas within business
Existing employees may lack skills required for promotion (particularly in developing new products/expanding into new markets)
Lacks the wider, potentially more skilled and diverse range of external recruitment
Workforce tensions (employees disappointed a co-worker got the promotion over them)
What is the formula for capacity utilisation?
(Current output/maximum possible output) x 100
