management Accounting, Pricing Decision, Factors influencing pricing decision​, Short-run and long-run pricing decisions, Different Methods of pricing​, Target-costing approach, Cost-plus approach​, Life-cycle budgeting and costing ​

1. Pricing Decisions
By: Sakshi
Group: D
Date: 22 Feb 2021

2. TABLEOF
CONTENTS
•
•
•
•
•
•
•

3. Introduction •
•

4. Factors Influencing Pricing Decisions
Customers
• They influence price through their effect on the demand for a product or service, based
on factors such as the features of a product and its quality
Competitors
• At one extreme, substitute products of competitors hurt demand and force a company to
lower prices. At the other extreme, a company without a competitor is free to set higher prices
Cost
• Cost affect supply. Low cost of production implies increased supply

5. Short-run vs.Long-runpricing
decisions

6. SHORT-RUN VS. LONG-RUN PRICING DECISIONS
• Short-run decisions have a
time horizon of less than a year
• Pricing a one-time-only special
order, adjusting product mix and output
volume
• Long-run decisions involve a time horizon of a
year or longer
• Pricing a product in a major market where price
setting has some leeway.
• Profit margins in long-run pricing decisions are
often set to earn a reasonable return on
investment.
Costs that are often irrelevant for short-run pricing decisions (fixed costs) are often relevant in the long run​

7. Case: Costing and Pricing for the
Short Run Cost Per case
Variable manufacturing​ 38​
Variable marketing and distribution​ 13​
Fixed manufacturing​ 14​
Fixed marketing and distribution​ 15
Total​ 80​

8. Solution
Relevant Costs Variable manufacturing​
38.00​
Additional Fixed overhead 1.10​
Total​ 39.10​

9. Case: Costing and
Pricing for the
Long Run

10. Ordering ₹78 per order
Testing $2 per inspection hour
Rework $38 per unit reworked
COST PER UNIT
Direct Material $450.00
Direct labor: 3.50 hours @ $19 per hour 66.50
Total $516.50
Number of orders placed 17000
Number of testing hours 300000
Number of units reworked 8000

11. Solution Direct material and labor​ ₹51,650,000​
Direct fixed costs​ 7,000,000​
Ordering (17,000 × $78)​ 1,326,000​
Testing (3,000,000 × $2)​ 6,000,000​
Rework (8,000 × $38)​ 304,000
Total​ $66,280,000​

12. ALTERNATIVELONG-RUNPRICINGAPPROACHES

13. PRICEPRODUCTSUSINGTHETARGET-COSTING APPROACH

14. TargetPriceandTarget
Cost
•
•
•
•
• Target price is the estimated price for a product (or service) that potential customers will be willing to pay.
• Target Price – Target operating income per unit = Target cost per unit

15. TARGETPRICEAND
TARGETCOST
•
•
I.
II.
III.
Develop a product
that satisfies the
needs of potential customers.
Choose a target
price.
Derive a target cost per
unit.
Perform value engineering
to achieve target costs

16. TARGETPRICEAND
TARGETCOST
•
•
Develop a product
that satisfies the
needs of potential customers.
Choose a target
price.
Derive a target cost per
unit.
Perform value engineering
to achieve target costs

17. ImplementingTargetPriceandTargetCost
Latisha’s management wants a15%target operating income on sales revenues
of CC.
Target sales revenue is $750 per unit.
What is the target cost per unit?
$750 × 15% = $112.50
$750 - ₹112.50 = $637.50
Current full cost per unit of CC is $662.80
Estimated actual > Target Cost
Invetigation needs to be done to bring down actual cost

18. VALUE-ADDED
COSTS
A value-added cost is a cost that
customers perceive as adding value,
or utility, to a product or service:
Adequate memory
Pre-loaded software
Reliability
Easy-to-use keyboards

19. COST-PLUSAPPROACH

20. COST-PLUSPRICING •
•

21. Case
Solution-
• Assume that Latisha’s engineers have redesigned C
C into CCI at a new cost of $637.50
• The company desires a 20% markup on the full
unit cost.
• What is the prospective selling price?
Cost base:​ $637.50​
Markup component: (637.50 × .20)​ 127.50​
Prospective selling price:​ $765.00​

22. Advantagesofusingfullcostmethod
• Simple: It is quite easy to derive a product price using this method, since
it is based on a simple formula. Given the use of a standard formula, it can
be derived at almost any level of an organization.
• Likely profit. As long as the budget assumptions used to derive the price
turn out to be correct, a company is very likely going to earn
a profit on sales if it uses this method to calculate prices.
• Justifiable. In cases where the supplier must
persuade its customers of the need for a price increase,
the supplier can show that its prices
are based on costs, and that those costs have increased.
Simple
Justifiable
Likely profit

23. LIFE-CYCLEBUDGETING
ANDCOSTING

24. Lifecycleproduct
costingandpricing
•
•
•

25. OTHERCONSIDERATIONSIN
PRICINGDECISIONS
• Price discrimination is a pricing strategy that
charges customers different prices for the same
product or service. In pure price discrimination, the
seller charges each customer the maximum price he
or she will pay. In more common forms of
price discrimination, the seller places customers in
groups based on certain attributes and charges each
group a different price. Example: Airlines
• Peak load pricing is another pricing variation where t
he operator and government interests coincide.
Peak-load pricing is useful when marginal
costs vary depending on when the service
is used. For
example, the telecommunications operator builds hi
s network with the capacity to serve the
peak demand, which
generally occurs during business hours. Example:
Uber

26. Thank you