Slide Deck 4 Flashcards
Managers Integrate Relevant Information about consumer demands at different price levels to:
+
- Manage Cost
- Influence Supply
3.Earn a predicted Profit
There is no universal principle of relevant cost select for product pricing
4 Major Influences on Pricing
- Customers (Through demand based on quality, availability, and substitutability)
- Competitors (Competitive environment)
- Costs (Influence supply, prices must cover all costs in the long run + profit)
- Time Horizon (Relevant info short term vs long term)
CCCT
3 Pricing Strategies
- Target Pricing (What customers are willing to pay)
- Cost-Plus Pricing (Price influences forecasted profit percentage added to full product cost)
- Life-Cycle Pricing (included environmental, reclamation, recycling costs)
Time Horizon:
Short Term (2 ex, 2 key factors affecting it)
VS
Long Term
(1 ex, 2 alternative approaches)
Short Term: Typically less than a year, like one-time special order and adjusting product mix
KF: Lots of costs are irrelevant in short-run pricing decisions & Short-run pricing is opportunistic
Long Term: Year or more, when pricing products in a market where they is some leeway in setting prices.
- Market Based (Price changes based on customer want and competitor reaction) [Use in competitive/Less competitive market]
- Cost-Based (Price changes is based on what it costs to produce + ability to recoup cost + and get a required rate of return) [Use in Non-competitive market]
Target Costing Approach
Target Price:
Target Cost Per Unit:
3 Facts about competitors and customers
5 Steps in Establishing Target Price and Target Costs
External Focus
TP: Estimated price customers are willing to pay
TCPU: Estimated long-run cost per unit, that when sold at target price, lets the company have its target margin%
A. Competition from lower-cost producers is continually restraining prices
B. Products are on the market shorter periods of time
C. Customers are becoming more knowledgeable and demanding better quality at lower prices.
- Develop a product that satisfies need of potential customers
- Choose a target price
- Derive a target cost per unit by minusing target operating income per unit from target price
- Perform Cost Analysis
- Perform value engineering to achieve target cost
What is Value Engineering:
Value Added Cost vs Non Value Added Cost
2 Key Concepts of Value Engineering + Bonus
-The systematic evaluations of all aspects of the value chain with the objective of reducing cost while improving quality and satisfying customers
Value Added: A cost that is eliminated, would reduce the actual/perceived value of the p/s
Non-Value Added: if eliminated, would not reduce value. Customers are unwilling to pay for it.
KC:
1. Cost Incurrence: Costs are incurred when a resource is consumed or sacrificed.
2. Locked-in-Costs: Costs that have not yet been incurred but are based on a decision that has already been made, will occur in the future
-If costs aren’t locked in early, cost reductions can happen right up to the time when they are incurred.
5 ways to reduce unit input cost(create value engineering)
5 Undesirable Effects of Value Engineering
- Good negotiation/change suppliers
- Modify the Quantity of input consumed
- Appropriate Staff Training
- Production Scheduling
- Good Maintenance Practices
A. Decrease Moral( if perfomance target not attained)
B. Compromises in product attributes
C. Protracted Development Cycle
D. Conflict Among Business Functions
Do the Target Costing Approach
On Pearson or Slides Please.
Markup:
Target ROI
Markup is first obtained by estimating the target rate of return on investment
TROI: The target operating income that an organization must earn/ invested capital
EXAMPLE (Suppose an expected 20% ROI on 20,000 units sold)
Invested Capital: $15,000,000
Target rate of return on investment: 20%
Total target operating income: $3,000,000 (20% x $15,000,000)
Target operating income per unit: $150 ($3,000,000 / 20,000 units )
NOTE: Do not confuse the target ROI with operating income markup percentage. The target rate of return on investment expresses expected operating income as a percentage of investment. The markup express operating income per unit as an percentage of the full product cost per unit
Cost Plus Pricing
3. Alternative Methods
- Adv of Cost Plus Pricing
Some companys dont use the full cost as the cost base[Absorption Costing] and instead pick:
1. Variable Manufacturing Cost
2. Variable Product Cost
3. Manufacturing Cost (COGS)
{These will all have higher markup to cover the % not included in base cost}
A. Full Product Cost Recovery
B. Price Stability
C. Simplicity
Do a Cost-Plus Pricing Exercise
Pearson or Slides Please
Life Cycle Budgeting
Define:
3 Benefits:
Product Life Cycle:
3 Life Cycle Budgeting Considerations:
Define: A form of budgeting that requires estimating full product cost across the entire value chain {Its long term approach that accounts for past/present/future costs}
Benefits:
1. All Rev & Costs of the product become visibe
2.Difference in when the bulk of product costs are incurred are highlighted on a product-by product- basis
3. Interrelationship between business function cost categories are highlighters
Product Life Cycle: Spans from research and development to when no customer service is offered anymore.
Considerations:
A. Non-production costs are large
B. Development period for R&D + design is long and costly
C. Many costs are locked in at the R&D + design stages
Do a Life Cycle Pricing Excercise
On Pearson or Slides Please.
