Lecture 3 pricing etc

Question 1

what is the accountants approach to pricing

Answer 1

cost based,
aim to recover costs,
cost-plus pricing commonly used

Question 2

what is an economists approach to pricing

Answer 2

demand-based,
requires perfect information about cost and revenue functions,
attempts to find optimal profit-maximising selling price and output level

Question 3

what is the problem with the economists approach to pricing of finding the profit maximising equilibrium using demand curves

Answer 3

in real world it is difficult and costly to find accurate information about the market

Question 4

what does the demand curve measure

Answer 4

the demand curve measures the relationship between selling price and sales volume

Question 5

what factors other than price is demand driven by

Answer 5

marketing
quality of product
service levels
level of competition
competitors prices
product life cycle (can buy old ones cheaper)

Question 6

what do you ignore for relevant costing

Answer 6

sunk costs,
non cash flows,
committed costs,
common costs

Question 7

what do you include for relevant costing

Answer 7

opportunity costs / revenues

Question 8

what other things need to be taken into account when making relevant costing decisions

Answer 8

prestige/reputation,
staff morale,
long term strategy,
effect on rest of business,
relationship with customers

Question 9

what does roce stand for

Answer 9

return on capital employed

Question 10

what are the pricing objectives

Answer 10

target ROCE (cost oriented, return on capital employed),
market share,
sales revenue,
stable prices,
stable output volumes,
match competition,
profit max

Question 11

what are some of the factors affecting selling prices

Answer 11

costs,
competitors and markets,
monopoly,
oligopoly,
profit life cycle

Question 12

what are some factors that influence demand

Answer 12

advertising and promotions,
price,
price of substitutes,
consumer taste

Question 13

what are some practical pricing methods

Answer 13

cost plus pricing,
price skimming,
price penetration,
product line pricing,
perceived value

Question 14

what is cost plus pricing

Answer 14

based on estimates of TAC (total absorption costing),
may be based on MC,
opportunity costs can be used for one off decisions

Question 15

what are some advantages of cost plus pricing

Answer 15

justifies a price increase,
easy to implement,
ensures profit is reached if volume achieved,
more practical than MC=MR due to costs involved in assessing demand

Question 16

why is cost plus pricing seen as more practical than MC=MR think about it

Answer 16

more practical than MC=MR due to costs involved in assessing demand

Question 17

what are some disadvantages of cost plus pricing

Answer 17

ignores competition/demand,
requires cost apportionment if multiple products,
does not motivate cost control,
vicious circle leading to increased prices

Question 18

what is price skimming

Answer 18

product quality leadership justifies high initial price,
may be followed by lower price,
requires technical barriers to entry,
needs inelastic demand,
needs few scale economies

Question 19

what is price penetration

Answer 19

low prices aiming for market share,
high volumes reduce cost (FOAR),
requires price sensitive market (elasticity),
competitors will not match as price too low,

Question 20

what is the link with price penetration and loss leader

Answer 20

may use price penetration to promote related products (loss-leaders)

Question 21

what is product line pricing

Answer 21

range of complementary products,
captive products (following on from primary product),
related optional products,
product bundling

Question 22

what is perceived value pricing

Answer 22

identify the customer product is aimed at,

put yourself in their place

Question 23

what is going-rate pricing

Answer 23

price at industry average,

good in established perfectly competitive market

Question 24

what is price discrimination

Answer 24

essentially produce a single product and sell at 2 or more different prices,
create 2 or more separate markets (eg home and export),
requires no arbitrage different demand curves and degree of monopoly

Question 25

what is the general equation for a demand curve *

Answer 25

P = a - bQ

Question 26

when you are asked to find optimal output level and given demand curves and cost curves what do you do

Answer 26

maximum profit is where MR=MC,
revenue = P x Q so use demand curve (P) and multiply by Q and then differentiate,
MC is just cost curve differentiated

Question 27

what are some assumptions about using demand curves and mr=mc analysis (that could not be true and could ask to be discussed)

Answer 27

demand curve is accurate and linear throughout the range,
marginal cost is the same at all levels of production (no learning curve),
fixed costs are constant throughout the range of possible outputs