Lecture 3 - Approaches to Pricing

Question 1

What 3 things is the price triangle made up of…

Answer 1

• Costs
• Customers
• Competitors

Question 2

What are the 3 different perspectives to the pricing decision…

Answer 2

• Accountant’s perspective
• Economist’s perspective
• Marketer’s perspective

Question 3

What is the accountant’s perspective?

Answer 3

Looks at the relationship between revenues and costs. Where the sales price must generate a profit.

Question 4

What is the economist’s perspective?

Answer 4

Looks at the competitive environment. Different market types have an impact on the ability of a business to control its own pricing.

Question 5

What is the marketer’s perspective?

Answer 5

How customers react to pricing and how pricing should be integrated into the marketing mix as a whole.

Question 6

2 different types of costs classification:

Answer 6

Direct costs and Indirect costs.

Question 7

Direct costs are:

Answer 7

• Costs that can be directly traced to a specific product or service. e.g. Direct materials used and Direct Labour (wages of staff who produced product).

Question 8

Indirect costs are:

(also known as overhead costs)

Answer 8

• Costs that cannot be directly traced to a specific product but are necessary for product.

e.g. rent, heat, light, telephone and insurance etc.

Question 9

3 types of cost behaviour:

Answer 9

• Fixed costs (not affected by changes in the level of activity in the firm) e.g. rent
• Variable costs (directly related to changes in level of activity) e.g. raw materials, commission.
• Semi-variable costs (combies fixed and variable)

Question 10

The accountant’s perspective:

Answer 10

• Full cost Plus Pricing
• Marginal Cost Plus Pricing
• Activity Based Costing and Pricing
• Lifecycle costing
• Target costing
• Kaizen

Question 11

AP: What is Full cost plus pricing?

Answer 11

• Businesses must cover all direct and indirect costs when setting prices.
• Therefore, a markup % is added to ensure profitability.

Question 12

Are Markup and Margin the same thing?

Answer 12

No

Markup = (profit/cost) X100
Margin = (profit/selling price) X 100

Question 13

2 other ways to allocate overheads:

Answer 13

• Based on direct labour hours.
• Based on machine hours.

Question 14

Problems will full cost pricing:

Answer 14

• Some cost figures must be estimated
• Annual production volume must be estimated
• Allocation between products may be arbitrary
• There is no incentive to cut costs

Question 15

AP: What is Marginal Costing?

Answer 15

• Only considers variable costs (direct materials, direct labour and variable overheads).
• Where Fixed costs are treated as period costs and are not assigned to individual units.

Question 16

What are some examples of Marginal Cost Pricing?

Answer 16

• Direct costs are more easily established.
• No need to estimate any costs.
• This method is frequently used in retailing and by professional service businesses.