Semester 2, Lecture 3 Approaches to Pricing:

Question 1

What are the 3 factors which make up the price decision triangle:

Answer 1

• Consumer
• Competition
• Costs

Question 2

3 different perspectives to the pricing decision:

Answer 2

• The accountant’s perspective
• The economist’s perspective
• The marketers perspective

Question 3

What is the accountant’s perspective?

Answer 3

Looks at the relationship between revenue and costs.

Question 4

What is the economist perspective?

Answer 4

Within the competitive market there are many different market types which can affect a businesses ability to control their own pricing.

Question 5

What is the marketers perspective?

Answer 5

This is how customers react to the pricing and how price should be integrated into the market mix as one of the 7p’s.

Question 6

What are the 2 types of cost classification?

Answer 6

Direct costs and indirect costs.

Direct costs - Are costs which can be specifically traced to a particular product or service e.g. raw materials costs, wages.

Indirect costs - Costs that cannot be directly traced for a product but are crucial for production e.g. rent and insurance.

Question 7

3 different costs under cost behaviour:

Answer 7

Variable costs, fixed costs and semi-variable costs.

Fixed costs - do not change in relation to the output of a firm e.g. rent, depreciation of machinery calculated on a straight line basis.

Variable costs - directly change in relation to the level of output by a firm e.g. raw material costs.

Semi-variable costs - combine fixed and variable elements e.g. Phone bills (fixed line rental + variable usage)

Question 8

Different approaches to pricing and costing under the accountant’s perspective:

Answer 8

• Full cost plus pricing
• Marginal cost plus pricing
• Activity based costing and pricing
• Lifecycle costing
• Target costing
• Kaizen

Question 9

Full cost plus pricing (accountant’s perspective):

Answer 9

• Businesses must cover all costs when pricing.
• Therefore, a markup % is added to ensure profitability.

Equation =
Selling price = cost + (markup% X cost)

Question 10

Mark-up VS Margin:

Answer 10

If a company decides to implement a 50% markup on costs does this mean profitability will increase by 50%. NO IT WILL NOT

Mark-up = (Profit/cost) X100

Margin = (Profit/selling price) X 100

Question 11

Overhead absorption:

(full cost plus pricing)

Answer 11

other ways to allocate overheads:

Based on direct labour hours or based on machine hours

(cannot be both)

Question 12

Problems with full cost plus pricing:

Answer 12

• Some cost figures may be estimated.
• Annual production volume must be estimated.
• There is no incentive to cut costs

Question 13

Marginal costing (accountant’s perspective):

Answer 13

• Only considers variable costs.
• Fixed costs, are treated as period costs and are not assigned to individual units.

Question 14

Advantages of marginal cost pricing:

Answer 14

• No need to estimate any costs.
• This method is frequently used in retailing and professional service businesses.

Question 15

Activity based costing (accountants perspective):

Answer 15

Method attempts to more accurately estimate costs by identifying costs by activity and allocating costs by the amount the activity is involved.