More From This User
Global Business: Chapter 05 by Dr. Mike W. Peng
Global Business: Chapter 05 by Dr. Mike W. Peng Updated 2009 Edition
Global Business: Chapter 04 by Dr. Mike W. Peng
Global Business 2009 Update By Dr. Mike W. Peng
Chapter 11, Pricing Decisions, Including Target Costing and Transfer Pricing
Chapter 11
Review of Learning Objectives
LO1 Identify the objectives and rules used to establish prices of goods and services,and relate pricing issues to the management process.
A company’s long-run objectives should include statements on pricing policy. Possible pricing policy objectives include (1) identifying and adhering to both short-run and long-run pricing strategies, (2) maximizing profits, (3) maintaining or gaining market share,(4) setting socially responsible prices, (5) maintaining a minimum rate of return oninvestment, and (6) being customer focused.For a company to stay in business, a product’s or service’s selling price must (1) be competitive with the competition’s price, (2) be acceptable to the customer, (3) recover all costs incurred in bringing the product or service to market, and (4) return a profit. If amanager deviates from any of these four pricing rules, there must be a specific short-runobjective that accounts for the change. Breaking those pricing rules for a long period willforce a company into bankruptcy.Pricing issues are addressed at each step in the management process. Whenmanagers plan, they must determine how much to charge for each product or service andidentify the maximum price that the market will accept and the minimum price that theycan sustain. During the period, the products or services are sold at either an auction priceor the specified prices. When managers evaluate performance, they analyze sales todetermine which pricing strategies were successful and which failed. When managerscommunicate about performance inside the organization, analyses of actual versustargeted prices and profits are prepared for use.
LO2 Describe economic pricing concepts, including the auction-based pricingmethod used on the Internet.
The economic approach to pricing is based on microeconomic theory. Microeconomictheory states that profits will be maximized when the difference between total revenue
Chapter 11, Pricing Decisions, Including Target Costing and Transfer Pricingand total cost is greatest. Total revenue then increases more slowly, because as a productis marketed, price reductions are necessary to sell more units. Total cost increases whenlarger quantities are produced because fixed costs change. To locate the point of maximum profit, marginal revenue and marginal cost must be computed and plotted.Profit is maximized at the point where the marginal revenue and marginal cost curvesintersect. Auction-based pricing is growing in importance as a pricing mechanism asmore businesses and individuals are conducting business over the Internet. Basically, theInternet allows sellers and buyers to solicit bids and transact exchanges in an open marketenvironment. An auction-based price is set by a willing buyer and seller in a salestransaction.
LO3 Use cost-based pricing methods to develop prices.
Cost-based pricing methods include gross margin pricing and return on assets pricing.Under these two methods, a markup representing a percentage of production costs or adesired rate of return is added to the total costs. A pricing method often used by service businesses is time and materials pricing. Although managers may depend on one or twotraditional approaches to pricing, they often also factor in their own experience.
LO4 Describe target costing, and use that concept to analyze pricing decisions andevaluate a new product opportunity.
Target costing enhances a company’s ability to compete in the global marketplace.Instead of first determining the cost of a product or service and then adding a profit factor to arrive at its price, target costing reverses the procedure. Target costing (1) identifies the price at which a product will be competitive in the marketplace, (2) defines the desired profit to be made on the product, and (3) computes the target cost for the product bysubtracting the desired profit from the competitive market price. Target costing givesmanagers the ability to control or dictate the costs of a new product at the planning stage;under a traditional pricing system, managers cannot control costs until after the producthas been manufactured. To identify a new product’s target cost, the following formula isapplied:Target Price
−
Desired Profit = Target Cost
of 00
Managerial Accounting 9e Ch Review Ch11
696 Reads
Info and Rating
| Category: | |
| Rating: | |
| Upload Date: | 03/26/2009 |
| Copyright: | Attribution Non-commercial |
| Tags: |
Leave a Comment