Week 11 - Introductory Decision Making (Pricing issues and relevant costing)

Question 1

What are the two approaches to long-run pricing decisions?

Answer 1

Market-based: price charged depends on what customers
want and how competitors react

Cost-Based: price charged is based on what it costs to
produce, coupled with the ability to recoup the costs and still
achieve a required rate of return

Question 2

What is value-engineering?

Answer 2

A systematic evaluation of all aspects of the value chain, with the objective of reducing costs while improving quality and satisfying customer needs

Question 3

What happens to the perceived value/usefulness of a product/service when value-added activities are eliminated?

Answer 3

if eliminated, would reduce the perceived value (or usefulness) of the product/service to customers.

Question 4

What happens to the perceived value/usefulness of a product/service when non-value-added activities are eliminated?

Answer 4

if eliminated, would not reduce the perceived value (or usefulness) of the product/service to customers

Question 5

True or False: Market-based pricing starts with what customers are willing to pay, and then specifies a desired profit per unit.

Answer 5

True

Question 6

True or False: Rework cost is an example of a value-added cost.

Answer 6

False

Question 7

True or False: Designed-in costs have already been incurred.

Answer 7

False

Question 8

What are the 2 characteristics of relevant information?

Answer 8

• It occurs in the future
• It differs among the alternative courses of action

Question 9

What does insourcing mean?

Answer 9

Making a part within an organisation

Question 10

What does outsourcing mean?

Answer 10

Making a part from outside vendors

Question 11

What are the 4 qualitative factors to consider when insourcing and outsourcing?

Answer 11

• Quality requirements
• Reputation of outsourcer
• Employee morale
• Logistical considerations

Question 12

What are the 2 types of short-run pricing decisions?

Answer 12

1. Special order: a one-time-only special order with no long-run implications.
2. Adjusting product mix and output volume in a competitive market.

Question 13

What are the 4 decision situations where we have to use the relevant-cost analysis?

Answer 13

1. One-time-only special orders
2. Insourcing vs. outsourcing (make or buy)
3. Product-mix
4. Branch/segment: adding or discontinuing