Chapter 9 pricing basics - external sales Flashcards
What is included in external sales
- target costing
- Full Cost-plus pricing
- Absorption cost plus pricing
- variable cost plus pricing
- time and material pricing
What is included in internal sales
- Transfer pricing
- transfer pricing approaches
- transfers b/w divisions in different countries
what are the factors that affect the decsions on prices for any goods or services?
- pricing objectives (gain market share, achieve a target ROI
- Demand (price sensitivity, demographics
- Environment (political reaction to prices, patent or copyright protection
- Cost considerations (fixed and variable costs, short run or long run)
What is the company’s goal
price its products to cover the product\s costs and earn a reasonable profit
do copany’s usually set their own prices?
no,
usually the price is set by the competitive market (supply and demand)
What are price takers
ex. gasoline companies cannot set the price of gasoline by themselves
- because the price of gas is set by market forces (supply and demand)
- this happens with any product that appears to be identical (corn or wheat) minerals (coal or sand)
When do companies set their own prices
- where a product is specially made for a customer (one of a kind product) ie designer dress or suit by Armani
- when few or no other producers can manufacture a similar item (ie company has a patent or copy right on a unique process ie chips by intel)
- or if they are successful at distinguishing their product or server form others (starbucks)
IFRS and pricing how are inventories reported on SFP
- must be reported at lower of cost and net realizable value
- which is the estimate selling price in the ordinary course of business less the estimated cost of completion and the estimated costs to make the sale
Who uses target pricing
when market determines a product’s price
What is target pricing used for
in order to earn a profit (auto industry must focus on controlling their costs)
- if they can produce cars at the targeted cost or less they will meet their target profit
what is the formula for target pricing
Market price - Desired profit = Target cost
What is it called when a company chooses its market segment it wants to compete in
market niche
What does it mean for a company to choose its market segment
- choose between selling luxury goods or economy goods in order to focus its efforts on one segment or the other
Using target pricing, how do they determine the target cost?
by setting the desired profit
- the difference between the target price and the desired profit is the target cost of the product
When is full-cost plus pricing used
- competitive common product environment where market price is already set
- in a less competitive market or non-competitive environment
Full - cost plus pricing in a competitive market
company must set its target cost
Full -cost plus pricing in a non-competitive market
- company may have to set its own price
- price usually depends on the cost of the product service (typical approach)
- company determines a cost base and adds a markup to determine a target selling price
- depends on the desired operating income or ROI
How do you determine the markup for full cost plus pricing
define the cost base (several different approaches)
what affects pricing
- customer demand
- competition
- product and service
What are the 3 pricing methods for external pricing
- cost-plus pricing, 2. Target Costing, 3. Time and Material Pricing
explain cost plus pricing
- start with the cost of the product
- add a mark up based on desired ROI
- = selling price
explain target costing
- starts with the price the customer is willing to pay
- determine how much profit they want to make from each sale
- selling price - desired profit = target cost
(customer willing to pay $12 and they want a profit of 2.40 then the cost can’t be more than 9.60
what are the two methods used for Cost-plus pricing
- absorption costing approach *DM, DL, VMO FMOH
- Variable costing approach (DM, DL, VMOH, VS&A)
- Full cost plus pricing
