Pricing Flashcards
What are the advantages of full cost pricing?
The price is quick and easy to calculate.
Pricing decisions can be delegated to more junior employees.
A price in excess of full cost should ensure that an organisation working at normal capacity will cover all its costs.
Price increases can be justified as costs rise.
What are the disadvantages of full cost plus pricing?
It fails to recognise that since demand may be determining price, there will be a profit maximising combination of price and demand.
It reduces incentives to control cost.
It required arbitrary absorption of overheads into product costs.
If full cost plus pricing is applied strictly the organisation me be caught in a viscous circle
What are the advantages of marginal cost plus pricing?
It is a simple method to use.
It avoids the arbitrary apportionment and absorption of fixed costs.
It is more useful than total cost plus pricing for short term management decision makings.
What are the disadvantages of marginal cost plus pricing?
The full costs might not be recovered in the long term.
The pricing method does not ensure that sufficient attention is paid to demand conditions, competitors pricing or profit maximisation.
How is optimum transfer price calculated?
External market price - cost savings either internal transfer.
What are the two options for setting full cost plus prices ?
Unit sales Prince = total production or service costs + percentage mark up.
Unit sales price = service or production cost per unit + other costs per unit + percentage mark up
What are the practical methods of transfer pricing?
Market price .
Costs plus price.
Two part transfer price.
Dual pricing.
If total demand for a product exceeds the capacity of the company, what will internal transfers do to external sales?
Displace them.
