Ch 12 Flashcards
3 reasons understanding of customers and competitors is becoming increasingly important?
1 competition from lower cost producers continually
Restrains prices
2 products are on market for shorter time periods,
Leaving less opportunity for pricing mistakes,
Loss of market share, loss of profitability
3 customers are becoming more knowledgeable
Demanding higher quality at lower prices
Target price
Estimated price for product or service that customers
Are willing to pay
5 steps in implementing target prices and target costs?
1 develop product that satisfies needs of potential customers
2 choose target price
3 derive target cost per unit
4 perform cost analysis
5 perform value engineering to achieve target cost
Target cost per unit equation?
Target cost per unit =
target price - target operating income per unit
Target operating income per unit
Operating income that company aims to earn per unit
Of product or service sold
Target cost per unit
Estimated long run cost per unit of product or service
That enables company to achieve target operating income
Per unit when selling at target price
Value engineering
Systematic evaluation of all aspects of value chain with
Objective of reducing costs
+ achieving quality level that satisfies customers
Value-added cost
Cost that if eliminated would reduce actual/perceived
Value or usefulness of customer’s experience of product
Or service
Non value added cost
Cost that if eliminated would not reduce actual/perceived
Value or usefulness of customer’s gain from use of product
Or service
Cost incurrence
When resource is consumed to meet specific objective
Locked-in costs AKA designed in costs
Costs that have not yet been incurred, but based on decisions that have already been made will be incurred in future
3 key steps in value engineering
1 understanding customer requirements, value added
And non value added costs
2 anticipating how costs are locked in before they are
Incurred
3 using cross functional teams to redesign products and
Processes to reduce costs while meeting customer needs
Target rate of return on investment equation
Target rate of return on investment =
Target annual operating income/invested capital
3 reasons managers include fixed cost per unit in cost base?
1 full recovery of all costs of product
2 price stability
3 simplicity
Price discrimination
Charging different customers different prices for same
Product or service
Peak-load pricing
Charging higher price for product or service when demand
For product or service approaches physical limit of capacity
To produce product or service
2 key features of price discrimination laws?
1 price discrimination is permissible if differences in
Prices can be justified by different costs
2 price discrimination is illegal only if intent is to lessen
Or prevent competition
Predatory pricing
Company deliberately prices below its costs in effort
To drive competitors out of market and restrict supply
Then raises prices rather than enlarge demand
Is illegal
Dumping
Non US company sells product in US at price below
market value in country where it is produced
This lower price materially injures or threatens to
Materially injure industry in US
Collusive pricing
Companies in industry conspire in pricing and production
Decisions to achieve price above competitive price
And constrain trade
Violates antitrust laws
What are the 3 major influences of pricing decisions?
Customers
Competitors
Cost influence prices through effects on demand and supply
In pricing decisions what generally affects demand? Affect supply?
Customers and competitors affect demand
Costs affect supply
What do companies consider when making short run pricing decisions?
Relevant costs that change in total as result of decision
Pricing is done opportunistically based on demand
And competition
How do companies make long run pricing decisions?
Companies consider all future variable and fixed costs as
Relevant
Use market based or cost based pricing approach to earn
Target return on investment
To reduce costs, techniques such as value engineering are most effective…
Before costs are locked in
How do companies price products using the cost plus approach?
Cost plus approach to pricing adds markup component
To cost base as starting point for pricing decisions
Prices are modified on basis of customer reactions and
Competitor responses
How do antitrust laws effect pricing? 3 things
Prevent pricing that:
1 lessens competitiveness,
2 puts another company at unfair competitive disadvantage
3 harms consumers
