Chapter 21: Pricing (Other factors)

Question 1

What are the 3 profit criteria?

Answer 1

NPV
IRR
DPP

Question 2

What are the adv & disadv for NPV

Answer 2

Adv
1. Subject to the law of diminishing returns
2. Always exists

Disadv
1. Competition is ignored (no indicator of marketability)

Question 3

What are the adv & disadv for IRR

Answer 3

Adv
1. Easy to understand
2. Informative

Disadv
1. Might not exists/ might not be unique

Question 4

What are the adv & disadv for NPV

Answer 4

Adv
1. Useful measure for product design
Company with limited capital want shorter DPP

Disadv
Ignores cashflows after DPP

Question 5

What considerations would be made for marketability?

Answer 5

1. Product design
2. Distribution channel to use
3. Profit requirement
4. Whether to proceed with marketing the product
5. Re-examine assumptions

Question 6

Why is volume important in pricing?

Answer 6

1. Covering fixed expenses (low volumes = more expensive product)
2. Economies of scale
3. M&A more likely with high volumes

Question 7

What is the relationship of premiums to volumes?

Answer 7

1. Premiums can be reduced to increase volumes
2. Inadequate premiums may be charged for a loss leader (reviewable premiums are recommended for a loss leader).