Pricing Flashcards
How to work out price
Variable costs + fixed costs = total cost
Price = total costs x ( 1+ % of profit wanted)
How to find the best price option ?
Selling price - variable cost per unit = contribution per unit
Contribution per unit x sale volume = total contribution
The highest total contribution is the best
What is marginal costing ?
It is the assumption that fixed costs are not affected by the decision to produce/sell products in the short term therefore only variable costs need to be considered in calculating cost. This means that marginal costing is the practice of setting the price slightly above variable costs to produce it. The logic is that the surplus will be used to pay off the fixed costs and then after that surplus will become profit, only intended as a short term strategy.
Advantages of cost plus pricing ?
Offers a way in which plausible prices can be found with ease and speed no matter how many products the firm handles
It can encourage price stability as firms in the same market if using the same cost pricing strategy will be able to predict the range in which competitors will price there products
Can help decide whether or not to enter a market
Disadvantages of cost plus pricing ?
Arbitrary overhead allocation may lead to an inaccurate amount of the full cost
Doesn’t take into account demand and may find their competitors offering similar products for much lower or the market will not buy at the cost plus price
Reliability of forecasts
Demand based pricing ?
Used the demand and supply model to deduce the optimal selling point and maximum profit
Differential pricing?
A pricing strategy involving and offering different prices to different segments of the market to maximise the profits generated from each segment
