Pricing Decisions Flashcards
determination of the appropriate selling price for a product or service provided by a firm.
Pricing
Selling price include all the costs incurred to produce and sell the product, or all the costs incurred in rendering the service, plus an acceptable mark-up or profit.
Profit-oriented organization
price should ensure recovery of costs, plus a satisfactory margin to help the organization survive or remain as a going concern.
Nonprofit-oriented Organization
consists of the procedures involved in setting sales price, as well as the methods and systems needed for its implementation.
it plays a vital role in the attainment of the organization’s objectives — profit maximization and survival as an entity.
Pricing Policy
responsible to formulate/approve the firm’s pricing policies.
Top Management
composed of key personnel involved in production, sales and other related departments whose task is to formulate pricing policies subject for approval to Board of Directors/CEO.
Pricing Committee
ACCOUNTANT’S ROLE IN PRICING DECISIONS:
to accumulate and summarize the cost data needed in formulating pricing policies for the firm.
may include internal factors such as the type of product or service that the company sells, the company’s overall objective, and the image that it wants to portray to the public, management style, among others.
Qualitative Factors
consists of competitors’ actions, type of industry to which the company belongs, type of market where the products and services are sold, economic trends, political situation and governmental influence.
External Factors
cost data, profit objectives
Quantitative Factors
Market Types:
Perfectly Competitive Market
Market Monopolistic Competition
Monopoly
Oligopoly
Economist characterize as a market where the goods traded are homogeneous.
Perfectly Competitive
several sellers of similar but not identical products exist in the market. No seller can directly influence the market price of similar products.
Market Monopolistic Competition
when a product is sold by a lone supplier. No competing products exist in the market, and the sole supplier can dictate the selling price that it wants to charge for its products.
Monopoly
when a several large sellers dominate the market and basically compete with one another. A supplier is large enough such that any change in its pricing policy may directly affect the market.
Oligopoly
SALES PRICE DETERMINATION/FORMULA
Selling Price = Cost + Mark-up
the amount of satisfactory profit may refer to the maximum profit level that the firm can possibly earn in a given business environment.
- which a price setter may use as a guide in computing the selling price.
- it may be expressed as a total amount in pesos, a per unit figure, or as a certain percentage based on some other data such as costs, sales or capital employed in the business.
Target Profit
Most formulas used in determining selling price use the cost data as the base for the desired mark-up. These cost data may be full cost, materials cost, variable cost, conversion cost, and differential cost.
Cost-Based Pricing
selling price is computed by adding the total production and operating costs to a mark-up based on such total cost.
Full Cost Pricing
some products are manufactured using a production process where the most significant element is the cost of materials, requiring a minimal amount of labor, overhead and operating costs. To facilitate the computation of selling price, mark-up may just be based on materials cost.
Materials Cost Pricing
Materials Cost Pricing Formula
SP = Materials + (Mark-up Percentage x Materials Cost) + Conversion Cost + Operating Expenses
In cases where multiple products are manufactured by a firm, and the conversion cost requirements vary from one product to another, some price setters contend that the mark-up must be based on conversion cost alone. This is based on the idea that products requiring more conversion costs should be assigned a higher selling price.
SP = CC + (MU% x CC) + Materials Cost + OpEx
Conversion Cost Pricing
also called contribution approach pricing. All cost that vary with the product are determined and used as the basis in computing the mark-up.
Selling Price = Variable Cost + (MU% x VC)
Variable Cost Pricing
usually applied in cases involving special orders where a customer offers to buy a relatively high volume of the company’s goods at a price much lower than the normal or regular selling price.
Differential Cost Pricing
The amount of mark-up used in this method is based, not on cost, but on the capital employed in the business or in the production and sale of the product under consideration. The selling price computed using this method assures recovery of total cost as well as a desired return on investment.
Return on Investment Pricing
ROI Pricing Formula
Selling Price = Total Cost + (Desired Rate of ROI x Total Capital Employed) / Sales in units
Mark-up Based on Sales Formula:
SP = Cost + (Mark-up Percentage x Selling Price)
Transpose (MU% x SP) to the other side:
SP - (MU% x SP) = C
OTHER FACTORS CONSIDERED IN PRICE SETTING
Price Ceiling
Pricing regulations imposed by government agencies
Competitors’ sales prices
Acceptability of the product at the sales price established
Type of market where the goods and services are sold
Trade Discounts
Sales Taxes
Companies sell products at a price lower than the cost. Earnings from the regularly-priced products are expected to more than offset the loss incurred from selling the other products at a price below cost
Loss Leader Pricing
Some customers relate the quality of a product to its price. Low-priced products are usually of inferior quality than those with a high selling price.
These special pricing techniques should not be used in the general analysis of pricing decisions and should be used only on a case to case basis, considering strong possibility of success.
Inferior Goods
