week 6 Flashcards
full cost plus pricing
all variable / direct costs + overheads
total price
full cost + mark up
advantages of full cost plus pricing
- simple- quick, cheap and easy method
- assured profit - ensures cost recovery and profit at normal operating capacity, no risk of loss on sales
- justifiable- to clients particularly where persuasion is required in event of price increase
limitations full cost plus pricing
-disregards competition &market conditions
-need to establish budgeted output volume & OAR
-fails to recognise the profit maximisation combination of price and demand
price makers
the cost plus approaches assumed we established the selling price. in many high competition, firms are price takers
psychological pricing
reducing price by 1p to give impression of cheaper product
price discrimination
sell identical products in different markets at different prices. common in travel & media
conditions from price discrimination
-groups paying different prices must be isolated from each other by distance, time…
-must be possibility of creating different versions of what is in fact same product
price skimming
high price strategy particularly at new product launch and backed with heavy advertisement and promotion. later stage of product life cycle
price skimming motives
-desire for profit maximisation
-need to recoup research and development costs as early as possible
- communicate quality
- room for price adjustment
problems of price skimming
-lead to low sales volume and lost market share
- may contribute to high unit costs and reduced profit
-may attract competition
conditions favouring price skimming
- higher price does not draw in more competition (barriers to entry)
- high price is supported by customers perceptions of superior product
market penetration
low prices are set when product is first launched, to attract as many people
market penetration motives
-desire to win bigger market share through high initial sales volume
- need to discourage new entrants into the market by way of low margin on sales
market penetration problems
-reduced profit or loss of profit at first
-demand may exceed supply
- products may be viewed as inferior in quality due to lower price
conditions favouring price penetration
-higher price sensitivity
where low price is likely to stimulate growth
- low price may keep competition out
price elasticity
product considered elastic if small change in price creates large change in demand
profit maximisation
total production cost (Z)= fixed cost + Batches + X units produced
x- variable cost
y- cost associated with setting up batch of production
considerations of pricing strategies
-quality of product
-competitors likely reaction to strategy
- level of disposable income available
- price sensitivity of product
budget
quantified financial plan aimed at helping a company achieve its objectives. usually covers 1 year
what a budget is
strategic planning
long term plan
prepare annual budget
monitor actual results
respond to deviations from plan
principle budgeting factor
thing that drives a budget. usually sales
order of the budget
sales budget- how much sell
material requirements
Labour requirements
production overhead requirements
admin, marketing, selling expenses
types of budget (master budget)
statement of profit and loss
statement of financial position
