Chapter 14 lecture Pricing decisions and cost management

Question 1

4 P’s of the marketing department

Answer 1

1. product
2. price
3. placement
4. promotion

Question 2

pricing ultimately comes down to economics:

Answer 2

supply and demand

Question 3

3 major factors affecting supply and demand

Answer 3

1. customers - customers influence price through their effect on the demand for a product or service, based on factors such as product features and quality
2. competitors - competitors influence price through their technologies, plant capacities, and operating strategies which affect their costs
3. costs - costs influence prices because they affect supply. the lower the cost of producing a product, the greater the quantity a firm is willing to supply

Question 4

short run pricing decisions have a time horizon of

Answer 4

less than one year

Question 5

• pricing a one time only special order with no long run implications
• adjusting product mix and output volume in a competitive market

Answer 5

short run pricing

Question 6

long run pricing decisions have a time horizon of __________ and are intended to build long run relatinships with customers based on stable and predictable prices

Answer 6

more than one year

Question 7

• reduces need for continuous tinkering of prices
• improves planning accuracy
• builds stable relationships with customer base

Answer 7

long run

Question 8

long run pricing ocmpaniues must consider all costs along the

Answer 8

value chain
(-research and development
- design and products and processes
- production
- marketing
- distribution
- customer service)

Question 9

typically, _____ costs comprise a substantial portion of the total cost associated with a cost object

Answer 9

indirect costs

Question 10

these costs are allocated using a methodology which must be sound and free from material error in order to be useful to decision making

Answer 10

indirect costs

Question 11

long run pricing approaches

Answer 11

1. market based approach
2. cost based approach

Question 12

given what our customers want and how competitors wil react ot what we do, what price should we charge
which long run pricing approaches is this?

Answer 12

market based approach

Question 13

given what it costs us to make this product, what price should we charge that will recooup our costs and achieve a target return on investment
which long run pricing approach is this?

Answer 13

cost based approach

Question 14

4 steps of long run pricing approaches (market and cost based) market based approach: target costing

Answer 14

1. develop a product that satisfies the needs of potential customers
2. management needs to place to start the analysis. this is best done by choosing on intitial target price
3. derive a target cost per unit by subtracting target operating income per unit from the target price
4. perform value engineering to achieve target cost

Question 15

the target price is estimated based on

Answer 15

1. an understanding of customers perceived value for a product or service, and
2. how competitors will price competing products or services

Question 16

target cost per unit equation

Answer 16

target cost per unit =
target price - target operating income per unit from the target price

Question 17

is a systenatuc evaluation of all aspects of the value chain with the objective of reducing costs and achieving a quality level that satisfies customers

Answer 17

value engineering

Question 18

to implemtn value engineering, managers must distinguish _____ and costs from ______

Answer 18

• value added cost
• non value added cost

Question 19

a cost that, if eliminated, would reduce the actual or perceived value or utilitu (usefulness) customers experience from using the product or service

Answer 19

value added cost

Question 20

costs that, if eliminated would not reduce the actual or perceived value or utility of (usefulness) customers gain from using the product or service. it is a cost the customer is unwilling to pay for

Answer 20

non value added cost

Question 21

when a resource is consumed (or benefit foregone) to meet a specific objective

Answer 21

cost incurrence

Question 22

costs that, have not yet been incurred but will be incurred in the future based on decisions that have already been made

Answer 22

locked in (designed-in) costs

Question 23

many or most costs are locked in pre production stages
which costs

Answer 23

primarily, direct and indirect manufacturing costs

Question 24

arent usually locked in until incurred

Answer 24

marketing, distribution, and customer service oriented costs

Question 25

the best opportunity to manage costs is before they are

Answer 25

locked in

Question 26

to summarize the key steps in value engineering are

Answer 26

1. understanding customer requirements and value added and non value added costs 2. anticipating how costs are locked in before they are incurred 3. using cross fucntional teams to redesign products and process to reduce costs while meeting customers needs

Question 27

1. employees may feel frustrated if they fail to attain targers 2. the cross fucntional team may add too many deatures just to accommodate the differnet wishes of team members 3. a product may be in development for a long time as the team repeatedly evaluates alternative designs 4. organizational conflicts may develop as the burdern of cutting costs falls unequally on different business functions in the companys value chain

Answer 27

value engineering and target costing undesirable effects if managed unproperly

Question 28

1. encourage employee participation and celebrate small improvements toward achieving the target cost 2. focus on the customer 3. pay attention to schedules 4. set cost cutting targets for all value chain functions to encourage a culture of teamwork and cooperation

Answer 28

how to avoid possible undesirable effects, of target costing

Question 29

____ approaches generally involve: 1. calculating a cost base 2. applying a markup

Answer 29

cost based approach

Question 30

estimating revenues and business function costs across the entire value chain for the entire product life cycle

Answer 30

life cycle budgeting

Question 31

tracking and accumulating business function costs across the entire value chain for the entire product life cycle

Answer 31

life cycle costing

Question 32

the practice of charging differnet customers different prices for the same product or service

Answer 32

price discrimination

Question 33

the practice of charging a higher price for the same product or service when demand approaches the physical limit of the capacity to produce that product or service

Answer 33

peak load pricing

Question 34

______ is permissible if differences in prices can be justified by differences in costs and is illegal only if the intent is to lessen or prevenn competition

Answer 34

price discrimination

Question 35

when a company deliberately prices below its costs in an effort to drive out competitors and restrict supply and then raises prices rather than enlarge demand

Answer 35

predatory pricing

Question 36

most courts in the united states have define the ______ as the short run marginal or average variable costs

Answer 36

appropriate measure of costs

Question 37

when companies in an industry conspire in their pricing and production decisions to achieve a price above the competitive price and so restrain trade

Answer 37

collusive pricing