Management accounting lec 6

Question 1

What does economic theory state about the demand of a good

Answer 1

price of a good or service is determined in the market, demand is dependent on price,
in general if price goes down demand goes up

Question 2

Draw the demand curve

Answer 2

price on y axis, quantity on x axis. straight line with negative gradient

Question 3

what does the shape of the demand curve depend on

Answer 3

elasticity

Question 4

what is elasticity

Answer 4

if a change in price leads to a more than proportionate change in quantity demanded then demand is said to be elastic
decrease in revenue&raquo_space; increase in revenue

Question 5

what types of product have elastic demand

Answer 5

products which can be swapped or subsituted for a similar product

Question 6

increasing the price on coffee

Answer 6

some customers price sensitive, reduction in price would not draw them back, changed their habits
customers who remained not price sensitive (inelastic demand), price increased stayed loyal as coffee was a necessity for them

Question 7

what does economic theory state about the supply of a good

Answer 7

supply of a good or service is dependent on price

for most goods, the higher the price the greater the supply

Question 8

draw the supply curve

Answer 8

straight line from the origin

price on y, quantity on x

Question 9

How do you find market price or equilibrium price

Answer 9

it is where the supply curve and demand curve meet

supply = demand

Question 10

do you have to accept market price

Answer 10

competitive market with large number of buyers and seller with similar products YES
luxury items/premium product NO
few competitors or monopoly NO
brand reputation NO

Question 11

absorption costing is used to

Answer 11

generate a product cost

Question 12

absorption method of costing

Answer 12

add to the product cost a markup to cover non manufacturing costs and the return the business wants

Question 13

what is the issue with absorption costing

Answer 13

done via arbitary process, if allocation can lead to some products being overcosted and others undercosted - out of line with market. may lead to inventory surplus or business achieving lower return than required

Question 14

how does marginal costing work

Answer 14

calculate direct cost of a product and apply suitable mark to cover all overheads and allow for profits (needs to be realistic to be competitive)

Question 15

what is it financially to do

Answer 15

price a product just to cover direct costs

Question 16

what is the cost plus approach to pricing

Answer 16

company does not expect brand loyalty or operate premium pricing,
price rises are due to new feature and technical improvements leading to increased costs

Question 17

issue with cost plus approach

Answer 17

hard to do consistently at less than gross profit margin

Question 18

what is target pricing

Answer 18

market for product analysed and price is established, acceptable profit margin is determined and then cost which the product must be produced is calculated

Question 19

issue with target pricing and how to resolve

Answer 19

price established is lower than current cost to produce/supply, cost reduction programmes and reengineering, increase volume or lower quality/reduced specification

Question 20

how to arrive at price, target pricing

Answer 20

segmental analysis and branding
market mapping - future dimensions of market place, customer segments and target most attractive
look at quality and functions/specification volumes design and position of brand in market

Question 21

target pricing mainstream segment

Answer 21

price will determine specification, horsepower, engine capacity, speed and safety features

Question 22

target pricing high end segment pricing

Answer 22

premium price for a bran if awareness of bran, perceived quality of product, uniqueness of product, social image, corporate social responsibility

Question 23

life cycle analysis

Answer 23

sales price initially high, new product new market,
market price is high draw competitors unless process or product can be protected
as more product supplied the price will fall, eventually innovation will be overtaken

Question 24

why do life cycle analysis over cost plus pricing

Answer 24

cost plus not relevant, lot of early investment before launch for research and development - need to be recouped
initial production costs per unit will be high

Question 25

why will initial production costs per unit be high

Answer 25

staff training new methods of manufacture new process advertising and marketing costs

Question 26

personalised pricing (uber)

Answer 26

price depends on supply and demand at that point
demand is high and inelastic a higher price, encouraging more supply
pricing algorithm can also be used from going expensive are to expensive are

Question 27

why offer discounts at start

Answer 27

to attract initial custom or at the end to ensure all product are sold