Pricing Flashcards
Target Costing Equation
Equation: Selling Price - Target Profit
Steps for Target Costing
- Determine expected Selling Price
- Determine product cost that yields target profit
- Design processes & product designs to make products at desired cost
Specialty Cakes, Inc., produces two types of cakes, a round cake and a heart-shaped cake. Total fixed costs for the firm are $92,000. Variable costs and sales data for these cakes are presented below:
‘ Round Cake Heart-Shaped Cake
‘ ———- —————–
Selling price per unit $12 $20
Variable cost per unit $8 $15
Budgeted sales (units) 10,000 15,000
How many cakes will be required to reach the breakeven point?
Source: CMA Academy
Steps:
- Know that product mix requires weighted contribution margin involved
- BEP in units = Total Fixed Costs/CM per unit
- For product mix:
Market Comparables Pricing
Demand drives Pricing strategy (DEMAND)
OR
Numerous Competitors drive similar pricing amongst competitors
Does NOT consider total costs nor the profitability
Cost-Based Method
Minimum profit goal + total cost = lowest price offered to consumers
Value-Based Pricing Method
Consumers’ willingness to pay drives pricing strategy
6 Assumptions of Perfect Competition
- Numerous buyers and sellers all acting independently.
- homogeneous product.
- Free entry into and exit from the market by suppliers.
- Perfect information.
- No one supplier has control over prices. Prices are dictated to the seller by the market.
- No nonprice competition.
- Long-term effects: price = average total costs
Allowable Cost
Target price - Target profit
Equation: Target Cost per unit
Target Cost per unit = Target price per unit - Target Profit per unit
Equation: Target Operating Income Per unit
Profit Target rate * Total Sales in $
÷
Number of Units sold
Equation: Target Cost Per unit, involving total sales
(1 - Profit Target rate) * Total sales in dollars
÷
Number of Units sold
Equation: Cost plus target return pricing
Total Variable Costs + Total Fixed Costs + (Target Rate x Return measure)
÷
of units sold
Cost plus target return pricing
Only useful if firm constantly adjusts prices as demand changes
Equation: Elasticity
(Q2-Q1)/(Q2 + Q1)
÷
(P2 - P1)/(P2+P1)
When product is elastic, total revenue goes _____ when price goes up and _____ when demand goes up
Total Revenue goes DOWN as prices goes UP and UP as demand goes UP
(Elastic goods’ total revenues move in SAME direction as demand and opposite as price)
Characteristics of a perfectly competitive market
- homogenous goods
- numerous players (buyers and sellers)
- firms have to product at MR = MC levels (lowest point of average cost curve)
- price takers - no one firm can influence price
- no entry barriers
Market Skimming Strategy
charge high initially then low as market conditions change
only effective for unique goods
Market Penetration Strategy
Pricing < current market price for a product with ELASTIC demand
In the growth stage of the product life cycle, Profit margins are the ______ and firms have to consider ______
UP, differentiation (adding value)
Concept: Cost-based method is best for _____ goods
diverse, where costs differ between firms
Concept: In a perfect competition, where is the lowest point of the average cost curve?
MR = MC
Concept: goods with acceptable substitutes have _____ demand
ELASTIC
Concept: what are variations of cost-based pricing?
- Absorption
- Total
- Variable Cost Pricing methods
For an elastic good and if a firm is new to the market, it can set its price ______ than current market price to get market share
LOWER
Equation: Cross elasticity of demand
% change in Quantity of Product A
÷
% change in Price of Product B
Definition: Monopolistic Competition
Firms produce at level where MR = MC
Goods sold are DIFFERENTIATED
Definition: Oligopoly
- Profits maxed out where MR = MC
- hard to enter market (think of cartel)
Definition: Substitute Goods - Cross Elasticity of Demand
direct relation between change in quantity demanded of Product A and change in price of Product B
With goods that are substitutes, an ______ in price of one will most likely result in _____ in demand of the other
INCREASE, INCREASE
cost of statistical product quality is an example of ______ _____
Appraisal cost
Describe Monopolistic Competition in 5 phrases:
- Goods differ between competitors
- Produce where MR = MC
- Elastic demand
- Price makers
- no barriers
What are the 4 product quality costs?
- Preventative
- Appraisal
- External Failure
- Internal Failure
Describe Oligopoly in 5 phrases
- Several Firms & hard to enter
- Strategic pricing
- Firm’s decision causes other firms’ decisions
- output restricted
- Kinked demand curve
What happens to the supply curve when the product’s supply is INELASTIC?
Vertical supply curve
(i.e NO change in Q for any price change)
What factors impact demand curve?
- Price of product
- consumer income
- Price of substitute products
u
A natural monopoly exists because of the economic and technical conditions of the market that only allow _________.
1 efficient supplier
In maturity stage of a product, there is _____ competition and product is _____, with ______ customers
INTENSE, standardized, repeat
