Ch7: Pricing Flashcards
(35 cards)
(1) Full Cost-Plus Pricing
(2) Marginal Cost-Plus Pricing
(3) Return on Investment (ROI) Pricing
(4) Opportunity Cost Pricing / Relevant Cost Pricing
(5) Limitations of Cost-Based Approaches
(6) Demand
(7) Marginal Revenue (MR)
(8) Marginal Cost (MC)
(9) Maximising Profits (MR vs MC)
(11) Pricing Strategies - Market Skimming, Market Penetration, Complementary Product Pricing, Price Discrimination, Loss Leaders, Going-Rate Pricing, Product-Line Pricing, Volume Discounting, Relevant Cost-Pricing
(12) Product Lifecycle (PLC)
What is Full Cost-Plus Pricing?
A long-term pricing strategy that aims to ensure prices cover all variable costs (VC) and fixed costs (FC).
What is the proforma for Target ROI and Full Cost-Plus Pricing?
Direct Production Costs, Absorption of Overheads (Variable Production Overheads, Fixed Production Overheads, Variable Non-Production Overheads, Fixed Non-Production Overheads), Full Cost, Mark-Up Percentage, Selling Price.
What is the formula for Selling Price Per Unit in Full Cost-Plus Pricing?
Selling Price Per Unit = (Total Budgeted Production Cost + Total Budgeted Non-Production Costs + Mark-Up) / Units of Scarce Resources Used.
What are the advantages of Full Cost-Plus Pricing?
Ensures profit if budget sales level is achieved, full cost readily available with standard costing, appropriate where FC are significant, useful for justifying prices, simple and cheap to operate.
What are the disadvantages of Full Cost-Plus Pricing?
Method of accounting for overheads impacts costs, potential losses if actual sales are below budget, ignores external factors, may not maximize profits.
What is Marginal Cost-Plus Pricing?
A pricing strategy where the selling price per unit is calculated based on budgeted variable production and non-production costs plus a mark-up.
What is the formula for Selling Price Per Unit in Marginal Cost-Plus Pricing?
Selling Price Per Unit = (Budgeted Variable Production Cost + Budgeted Variable Non-Production Costs + Mark-Up) / Budgeted Sales Units.
What are the advantages of Marginal Cost-Plus Pricing?
Mark-up represents contribution, useful in short-term pricing decisions, treats FC by their nature without arbitrary allocation.
What are the disadvantages of Marginal Cost-Plus Pricing?
May lead to failure to recover FC, not appropriate for long-term pricing where FC are significant.
What is Return on Investment (ROI) Pricing?
A long-term pricing method where prices are set to achieve a target percentage ROI in production.
What is the formula for ROI?
ROI = (Divisional Profit Before Interest and Tax (PBIT) / Divisional Investment) * 100 OR ROI = (Divisional Controllable Profit Before Interest and Tax (PBIT) / Divisional Net Controllable Assets) * 100.
What is the formula for Selling Price Per Unit in ROI Pricing?
Selling Price Per Unit = (Budgeted Full Cost + (Target ROI % * Capital Employed)) / Budgeted Sales Units.
What are the advantages of ROI Pricing?
Links price to short-term costs and long-term capital employed, consistent with ROI as a performance measure, target ROI can account for risk, better measure of profitability, achieving goal convergence, comparative analysis.
What are the disadvantages of ROI Pricing?
Ignores external factors, problems in calculating capital employed, subjective split of shared investment, dysfunctional behavior, ratio distortion by asset age, focus on short-term results.
What is Opportunity Cost Pricing / Relevant Cost Pricing?
A short-term strategy used to price one-off projects, special orders, and tenders for contracts using a relevant costing approach.
What are the limitations of Cost-Based Approaches?
Ignores external factors like demand and competition, unlikely to maximize profits, revenue, or market share, may result in prices different from competitors, may underestimate product features attractive to customers.
What is Price Elasticity of Demand (PED)?
Measures the extent of the change in market demand for a product or service in response to a change in its price. PED = (% Δ in Demand) / (% Δ in Price).
What does it mean if demand is inelastic?
Demand is inelastic when PED < 1, meaning prices can be raised without significantly affecting demand.
What does it mean if demand is elastic?
Demand is elastic when PED > 1, meaning a decrease in price increases demand.
What is Marginal Revenue (MR)?
The increase in total revenue resulting from selling one additional unit of a product or service.
What is the formula for Marginal Revenue (MR)?
MR = a - 2bQ, where MR = Marginal Revenue, Q = Quantity Demanded, a = Price at which D = 0, b = (Δ in Price) / (Δ in Quantity).
What is Marginal Cost (MC)?
The increase in total cost from producing and selling one additional unit of a product or service.
What happens to Marginal Cost (MC) as output increases?
Initially, MC falls due to economies of scale, but once the lowest MC is achieved, MC rises as output increases.
