Ch18: cost volume profit analysis Flashcards
What the five major influences on pricing decisions?
- product costs
- customer value
- market positioning
- competitor behaviour
- legal, political and ethical issues
What are four legal restrictions on pricing behaviour?
- predatory pricing - force competitors out
- price discrimination - charging customers difference prices
- resale price maintenance - supplier dictates minimum prices for resale
- price-fixing contracts - collusion on pricing with competitors
Explain the economic model in relation to pricing.
- difficult to determine demand, marginal revenue and marginal cost
- costing systems are not designed in this way
- price is not the only factor that drives purchases
- not valid for all forms of markets
What are the two main pricing strategies?
- value based pricing - based on customer perception of value
- economic value pricing - costs and benefits to customer, beyond purchase price, how much extra will customers pay for additional benefit?
What is variable costing? What does it include?
- all variable costs allocated to unit produced
- includes: DM, DL, variable manufacturing overhead, variable non manufacturing overhead.
When is variable costing useful for pricing?
useful for decision making as does not unitise fixed costs.
What is variable cost plus pricing and when is it used?
- selling price determined by adding mark up to variable costs
- markup cover portion of fixed costs and make profit
- not suitable where fixed costs are major portion
What is absorption costing? What does it include?
- all manufacturing costs are absorbed by units produced
- includes: DM, DL, variable and fixed manufacturing overhead
What requires the use of absorption costing?
External financial reporting
What is absorption cost plus pricing and when is it used?
- selling price determined by adding mark up to absorption costs
- not acceptable in competitive market - doesn’t factor competitor behaviour
- best used to see if company cost structure will allow profit to be made
How is mark up % calculated?
Mark up % = (target profit + total costs not included in cost base)/(annual volume x cost base per unit)
Two long term strategic pricing strategies?
Price skimming - high falling low
Penetration pricing - low to gain market share
What is the main issue with competitive bidding?
difficulty between winning bid and making acceptable profit
How can marketing and strategy impact pricing?
perception of quality at high price vs value at low price
market positioning
What are two types of product mix decisions?
- strategic/long term - what will be produced
- tactical - how many units of each product should be made
