Week 3

Question 1

cost based pricing - variable

Answer 1

• use mark-up from variable costs
• recovers relevant costs and ensures a positive contribution margin
• need to be aware of fixed costs as they need to be recoverable

Question 2

cost based pricing - full absorbtion

Answer 2

• include fixed and variable costs
• is required for GAAP
• can result in companies turning down jobs which may still provide a positive CM

Question 3

cost-based pricing - life cycles

Answer 3

• 5 stages (development, introduction, growth, maturity, decline)
• set price based on each stage, aiming to recover extra costs from development
• maximize profits over life cycle

Question 4

cost based pricing - target based

Answer 4

• aim for a price consumers are willing to pay based on perceived value

Question 5

Demand based pricing - predatory

Answer 5

• setting prices below costs to drive out competition
• giving free gifts or products
• forces out smaller competitors
• works in short term but long long term
• anti competitive and illegal if proven

Question 6

demand based pricing - penetration

Answer 6

• does not focus on elimination of competition
• goal is to gain market share
• price set to penetrate market
• low price to set high volume

Question 7

demand based pricing - skimming

Answer 7

• set a high initial price, and slowly drop

- used to recover investment and research costs

Question 8

demand based pricing - peak load

Answer 8

• when physical capacity is high, increase prices

- prices adjust to demand and volume

Question 9

product life cycle

Answer 9

• development: before the product has been released
• introduction: still low sales, early adopters
• growth: sales increase to point of maturity
• maturity: sales flatten. sales stay high
• decline: sales fall, product becomes obsolete