C Theory Flashcards
(119 cards)
1
Q
What do demand curves show?
A
Relationship between the price per unit of a product, P, and the quantity of units sold, Q
2
Q
What is meant by elastic demand?
A
As a relatively small proportional decrease in price causes a relatively large proportional increase in volume and so revenue increases
3
Q
What is meant by inelastic demand?
A
A decrease in price causes a relatively small increase in volume and so revenue decreases
4
Q
What if price elasticity of demand is greater than 1?
A
Elastic
5
Q
Consequence if price elasticity of demand is greater than one (revenue and volume)
A
A drop in price is more than compensated by the increase in volume and revenue increases.
6
Q
Consequence if price elasticity of demand is less than one (revenue and volume)
A
A drop in price is not compensated by the increase in volume and revenue decreases.
7
Q
Consequence if price elasticity of demand is one (revenue and volume)
A
Is precisely compensated for by an increase in volume and the revenue stays constant. At the very top of the revenue curve
8
Q
What is marginal revenue?
A
Change in revenue when one extra unit is sold
9
Q
What does a high positive marginal revenue imply?
A
High price elasticty of demand >1
10
Q
What does a high negative marginal revenue imply?
A
Low price elasticty of demand <1
11
Q
Why is a cost-plus approach used?
A
So that a mark-up is added to the cost to produce a price
12
Q
What should the selling price cover in pricing decisions?
A
Cover the cost of production
13
Q
Influences on product pricing?
A
Cost
Customers
Competitors
14
Q
What is meant by customers? (product pricing)
A
If costs are too high, no-one will buy products – or not in a high enough volumes
15
Q
What is meant by competitors? (product pricing)
A
If many competitors are selling very similar products then companies have little flexibility in their pricing
16
Q
What does lifecycle costing emphasise?
A
Importance of taking all costs into account to try to ensure that these are covered by the decision to embark on the production of a new product.
17
Q
What is relevant costing?
A
Uses relevant cash flows to assess the cost of the product or contract
18
Q
Major flaw in cost-plus pricing? (mechanism)
A
Because there is a mechanism for arriving at a selling price does not mean that any units at all will sell at that price
19
Q
ANother flaw of cost-based methods? (inward)
A
Are entirely inward-looking and pay no attention to customers or competitors
20
Q
Issue with using costs to determine prices? (under)
A
Might under-estimate a viable selling price
21
Q
What is price (market) skimming?
A
When a new product is launched at a very high price.
22
Q
What does seller assume in price skimming?
A
The seller assumes that there will be enough customers who are willing to pay a lot to be one of the first to have the product
23
Q
What is penetration pricing?
A
Going into the market with an aggressively low price
24
Q
Aim of penetration pricing?
A
The aim is to win a large market share and to sell large volumes
25
Why use penetration pricing?
Large volumes can lead to low unit costs (for example, fixed costs are spread more thinly) and this can allow the company to make profits even at low prices
26
What is complementary product pricing?
The initial product is sold at a low price to attract customers. Having enticed the customer to buy the initial product, subsequent training, maintenance and consumables are sold at relatively high prices.
27
Example of complementary product pricing?
Ink-jet printers: cost of the printer $70; cost of a set of replacement ink cartridges $30!
28
Where are most profits made in complementary product pricing?
Follow-up sales rather than the initial product.
29
What is product-line pricing?
A group of products from a manufacturer that are similar in design, functionality and target customer. They present a range of features and different prices
30
Advantages of product-line pricing (purchases)
Buyers can adjust their purchases to suit their pocket and their requirements without having to go to a different supplier.
31
Example of product-line pricing?
Mobile phones: Different screen sizes, resolutions, speed and camera resolutions
32
Advantages of product-line pricing (increase price)
The increase in price between a basic model and a better model is usually much greater than the increase in costs needed to make the better model
33
Advantages of product-line pricing (choice)
If only one level of trim and engine were offered you would certainly look elsewhere before choosing.
34
What is meant by price discrimination?
Offering the same goods in different markets at different prices.
35
Example of price discrimination?
Pharmaceuticals priced radically differently in different countries depending on the wealth of each country’s patients or health services.
36
What is needed for price discrimination to work?
Needs to be difficult for goods sold in the cheaper market to be bought there then transferred to the more expensive market
37
Relevant cost (additional amounts)
Additional amounts that must be paid
38
Relevant cost (decrease amounts)
A decrease in amounts that must be paid
39
Relevant cost (additional revenue)
Additional revenue that will be earned
40
Relevant cost (decrease revenue)
A decrease in revenue that will be earned.
41
What are sunk costs?
Monies already spent or money that is already contracted to be spent.
42
An example of sunk costs?
Money that has been spent on market research for a new product or planning a new factory is already spent and isn’t coming back to the company
43
What are committed costs?
Costs that would be incurred in the future but they cannot be avoided because the company has already committed to them through another decision which has been made
44
An example of committed costs?
A company has two year lease for piece of machinery, that cost will not be relevant to a decision on whether to use that machinery on a new project which will last for the next month
45
What are re-apportionment of existing fixed costs (total same no cash)?
Irrespective of what treatment is used in the company’s management accounts to split up costs, if the total costs remain the same, there is no cash flow effect caused by the decision.
46
When are fixed costs relevant in relevant costing?
So, if you were evaluating the viability of a new production facility, then the rent of a building specially leased for the new facility is relevant
47
Are depreciation and book values relevant in relevant costing?
No, as they are not a cash flow
48
Increases or decreases in cash flows caused by a project (relevant or not relevant)
Relevant
49
An example of increases or decreases in cash flows caused by a project?
If an old product is discontinued three years early to make room for a new product, the revenue and cost decreases relating to the old product are relevant, as are the revenue and cost increases on the new
50
Revenue forgone because of a decision (relevant or not relevant)
Relevant
51
An example of revenue forgone?
A company decides to keep an asset for use in the manufacture of a new product rather than selling it, then its cash flow is affected by the decision to keep the asset, as it will now not benefit from the sale of the asset
52
What is an opportunity cost?
Which is the value of a benefit foregone when one course of action is chosen in preference to another
53
What does CVP analysis primarily look at?
Effects of differing levels of activity on the financial results of a business
54
Issue with sales volume which CVP analysis tries to address?
Not usually so predictable
55
What is meant by the break-even point?
When total revenues and total costs are equal
56
Profit calculation?
Total revenue – total variable costs – total fixed costs = Profit
57
WHy is it inappropriate to use a unit fixed cost?
Unit fixed costs will vary depending on the level of output
58
What is the margin of safety?
How much sales can decrease before a loss occurs – e.g. it is the excess of budgeted revenues over break-even revenues
59
What is the contribution to sales ratio used for?
To ascertain how much each £ sold actually contributes towards the fixed costs
60
Limitation of CVP analysis (constant mix)
Either a single product is being sold or, if there are multiple products, these are sold in a constant mix
61
Limitation of CVP analysis (volume assumption)
Volume is the only factor that causes revenues and costs to change. If there is a change in sales mix, revenue will change
62
Limitation of CVP analysis (linear)
The total cost and total revenue functions are linear. This is only likely to hold a short-run, restricted level of activity.
63
Limitation of CVP analysis (cost division)
Costs can be divided into a component that is fixed and a component that is variable. In reality, some costs may be semi-fixed
64
Limitation of CVP analysis (absorption)
If absorption costing is used, it is assumed that production volumes are equal to sales volumes.
65
Limitation of CVP analysis (profit)
Profits are calculated on a variable cost basis
66
1st step of linear programming?
Define the variables and the objective function
67
Is the non-negativity constraint used in linear programming?
Yes
68
Point of linear programming?
To provide management with a target production plan in order to maximise contribution and therefore profit
69
What is probability
The likelihood or chance that a certain event will occur, with potential values ranging from 0 (the event will not occur) to 1 (the event will definitely occur)
70
What is an independent event?
When the outcome does not depend on the outcome of a previous event
71
What does the availability of information regarding the probabilities of potential outcomes allow?
Calculation of both an expected value for the outcome, and a measure of the variability (or dispersion) of the potential outcomes around the expected value (most typically standard deviation)
72
What is the maximim criteria based upon?
A risk-averse (cautious) approach
73
What is the maximax criteria based upon?
This criteria is based upon a risk-seeking (optimistic) approach
74
What is the minimax regret criteria based upon?
Attempts to minimise the regret from making the wrong decision
75
Decision trees effective (options)
Clearly lay out the problem so that all options can be challenged
76
Decision trees effective (analyse)
Allow us to fully analyse the possible consequences of a decision
77
Decision trees effective (framework)
Provide a framework in which to quantify the values of outcomes and the probabilities of achieving them
78
Decision trees effective (decisions)
Help us to make the best decisions on the basis of existing information and best guesses.
79
What is a decision tree?
A diagrammatic representation of a problem and on it we show all possible courses of action that we can take in a particular situation and all possible outcomes for each possible course of action
80
First stage of decision tree?
Construction stage, where the decision tree is drawn and all of the probabilities and financial outcome values are put on the tree
81
Second stage of decision tree?
he evaluation and recommendation stage. Here, the decision is ‘rolled back’ by calculating all the expected values at each of the outcome points and using these to make decisions while working back across the decision tree.
82
What are decision points?
Represent the alternative courses of action that are available to you
83
What are outcomes?
They are dependent on the external environment
84
When is expected value criterion for decision making is useful?
Where the attitude of the investor is risk neutral
85
What is perfect information?
Said to be available when a 100% accurate prediction can be made about the future
86
What is imperfect information?
Not 100% accurate but provides more knowledge than no information
87
What is the value of perfect information?
Difference between the expected value of profit with perfect information and the expected value of profit without perfect information
88
Which product is produced first?
The product with the highest contribution per unit
89
Why are joint costs not relevant to further processing decision?
As they have already been incurred
90
Fixed costs in a make or buy decision?
They will be incurred anyway
91
Relevant cost when there is no spare capacity?
The opportunity cost calculated as normal cost PLUS the contribution foregone
92
What is the contribution foregone?
Lost revenue less variable costs saved
93
Issue if an activity is performed internally by an organisation?
May incur additional fixed costs that it would not otherwise incur (e.g. salaries of staff performing the activity)
94
What is meant by the shadow price?
The maximum premium amount that a company should be prepared to pay (i.e. in addition to its existing cost)
95
What is a shadow price of 0?
A resource with a constraint line that does not pass through the optimum point
96
What is the cost of selling price if there is a margin of 40%?
COst is 60% of the selling price
97
What happens to initial high price in market skimming?
It is later reduced
98
Why is cost plus pricing not likely to maximise profits?
As it ignores the market
99
When is penetration pricing appropriate?
When launching a new product into a competitive market
100
Initially charging low prices so as to gain rapid market share while demand is relatively elastic
Penetration pricing or price skimming?
Penetration pricing
101
Initially charging high prices so as to earn maximum profits while demand is relatively inelastic
Penetration pricing or price skimming?
Price skimming
102
Why is expected value is most useful for decisions that are repeated often?
Since the expected value is an average that would be expected if a decision were to be repeated many times
103
Issue with using expected value in decision-making?
Can lead to the worst possible outcome being ignored
104
What heavily influences the reliability of expected value calculations?
By the accuracy of the probabilities assigned to outcomes
105
When the total revenue is a straight line?
The selling price per unit
106
Why pick the product with the highest contribution per unit when it's not possible to break-even selling only one product?
To cover the fixed costs as quickly as possible
107
When more profitable products are sold first (contribution)
The fixed costs will be covered more quickly
108
What is a loss leader?
A product that is sold at a loss to attract customers who will then buy other products
109
What is going-rate pricing?
This means charging the prevailing market price. Common for homogeneous products that have minimum variation
110
What is volume discounting?
Offer discounts to customers who buy a certain number of products
111
Benefit of using volume discounting
To offer a more competitive price overall (as the average price paid for two items will be lower than the price for one)
112
How is demand influenced (income)
Demand for most goods rises when consumers' incomes rise
113
How is demand influenced (substitute)
If substitutes are available for a much lower price, consumers may buy the substitutes instead
114
How is demand influenced (complementary goods)
Complementary goods are goods which are bought together, for example, petrol and cars
115
How is demand influenced (consumer tastes and fashion)
Trend towards buying organically grown vegetables, so demand for these products is high
116
How is demand influenced (advertising)
Spending on advertising can increase a product's demand
117
What is meant by perfect competition (sellers)
There are many sellers
118
What is meant by perfect competition (buyers)
There are many buyers
119
What is meant by perfect competition (information)
There is perfect information (no hidden information, buyers know everything about the goods they are buying)
