The document discusses various pricing strategies and concepts. It lists the group members working on pricing products and services. It then defines pricing and explores how prices affect business. Various pricing approaches are discussed, including mark-up pricing, cost-plus pricing using absorption costing, elasticity of demand approaches, and target costing. Drawbacks of different approaches are also highlighted.

3. GROUP MEMBERS
• RUQIA TABASSUM MC 15051
• ZUNAIRA MAQSOOD MC 15221
• MARYAM FAYYAZ MC 15236
• MEMOONA MAQSOOD MC15218
• TEHMINA KOUSAR MC15205

4. PRICING PRODUCTS AND SERVICES

7. WHAT IS PRICING?
“THE ACT OF SETTING A PRICE FOR A PRODUCT OR SERVICE”
(COLLINS ENGLISH DICTIONARY)
IT CAN ALSO BE DEFINED AS :
“PRICING IS THE PROCESS WHEREBY A BUSINESS SETS THE PRICE
AT WHICH IT WILL SELL ITS PRODUCTS AND SERVICES

8. HOW PRICES EFFECT THE
BUSINESS ?
• THE PRICING OF YOUR PRODUCT OR SERVICE IS A
KEY ELEMENT IN DETERMINING THE PROFITABILITY
OF THE BUSINESS.
• IF PRICES HIGH = DEMAND REDUCE
• IF PRICES LOW = SALES VOLUME MAY NOT GENERATE
REVENUE TO COVER THE COSTS .

9. • IN THE FIRMS , TO SET PRICES OF THE PRODUCTS & SERVICES IS A
CRUCIAL JOB. SOME PRODUCTS HAVE THE ESTABLISHED MARKET PRICE
AND THESE PRODUCTS CHARGE PRICES ACCORDING TO THEIR MARKET
PRICE.
• BUT ,
• IN COMMON SITUATIONS, MARKET PRICES ARE NOT EVALUATED WHILE
SETTING THE PRICES. IN THIS CASE USUAL APPROACH IS FOLLOWED TO
SET PRICES OF PRODUCTS & SERVICES .

10. USUAL APPROACH OF PRICING

11. WHAT IS MARK-UP ?
MARK-UP IS THE DIFFERENCE BETWEEN ITS SELLING PRICE AND ITS COST
• EXPRESSED IN %AGE

12. FORMULA
SELLING PRICE = (1+MARKUP %)*COST

13. EXAMPLE
A COMPANY HAS A PREDETERMINED MARK-UP OF 50%. IF THE PRODUCT
COSTS $10. THEN THE COMPANY’S SELLING PRICE WILL BE ;
SELLING PRICE = (1+MARKUP %)*COST
=(1+0.50)*10
= 15

14. DRAWBACKS OF MARK-UP COST
TWO BASIC DRAWBACKS WERE FOUND IN THE MARK-UP COST METHOD;
FIRST, WHAT COST SHOULD BE USED ?
SECOND, HOW SHOULD THE MARK-UP BE DETERMINED ?

15. SEVERAL ALTERNATIVE APPROACHES
TRADITIONAL APPROACHES;
• ECONOMISTS APPROACH
• ELASTICITY OF DEMAND
• THE PROFIT MAXIMIZING PRICE
• ABSORPTION COSTING APPROACH TO COST PLUS PRICING
MODERN APPROACH
• TARGET COSTING

16. ECONOMISTS’ APPROACH
•PRICE ELASTICITY OF DEMAND
•PROFIT MAXIMIZING RULE

17. ELASTICITY OF DEMAND
PRICE ELASTICITY OF DEMAND MEASURES THE DEGREE TO WHICH A
CHANGE IN PRICE AFFECTS THE UNIT SOLD OF PRODUCTS & SERVICES.
ED= % CHANGE IN QUANTITY÷% CHANGE IN PRICE
ED= %ΔQD÷%ΔP

18. HOW PRICE ELASTICITY EFFECTS THE
DEMAND & SALE ?
• MEASURES THE DEGREE OF RESPONSIVENESS IN UNIT SOLD DUE TO CHANGE IN
PRICE
• WHILE SETTING THE PRICE THE KEEP IN MIND THE PRICE ELASTICITY OF
DEMAND OF GOOD (GOOD MAY BE ELASTIC AND IN ELASTIC)
• ELASTICITY OF DEMAND SHOWS THE PRICE SENSITIVITY OF THE PRODUCT
• LARGER THE PRICE SENSITIVITY =GREATER THE ELASTICITY OF THE PRODUCT
• GREATER THE ELASTICITY = LOWER THE MARK-UP%
• LOWER MARK UP % = DIFFERENCE BETWEEN THE SELLING PRICE AND COST OF
GOOD IS LESS.

19. TYPES OF ELASTICITY OF
DEMAND
•ELASTIC DEMAND WHEN ED>1
•INELASTIC DEMAND WHEN ED<1
•ABSOLUTE WHEN ED=1

20. ELASTIC DEMAND
• WHEN CHANGE IN PRICE HAS A MAJOR EFFECT ON THE VOLUME OF UNIT SOLD.
• IN THIS TYPE OF GOODS THAT HAVE ELASTIC DEMAND, MANAGERS SHOULD
CHARGE LOWER MARK-UP BECAUSE CUSTOMERS ARE RELATIVELY SENSITIVE TO
THE PRICE.
• CUSTOMERS ARE SENSITIVE TO PRICE BECAUSE MINOR CHANGE IN PRICE LEADS
TOWARDS MAJOR CHANGE IN SALE.
• THIS IS APPLIED IN LUXURIOUS GOODS.

21. EFFECT OF ELASTIC DEMAND

22. INELASTIC DEMAND
• WHEN CHANGE IN PRICE HAS A MINOR AND LITTLE EFFECT ON THE
NUMBER OF UNITS SOLD.
• IN THIS TYPE OF GOODS THAT HAVE INELASTIC DEMAND, MANAGERS
SHOULD CHARGE HIGHER MARK-UP OVER COST BECAUSE CUSTOMERS
ARE RELATIVELY INSENSITIVE TO PRICE.
• CUSTOMERS ARE INSENSITIVE TO PRICE BECAUSE MAJOR CHANGE IN
PRICE LEADS TOWARDS A MINOR CHANGE IN SALES.
• THIS IS APPLIED ON NECESSITY GOODS.

23. EFFECT OF INELASTIC DEMAND

24. HOW TO CALCULATE ELASTICITY OF
DEMAND ?

26. QUIZ QUESTION

27. SOLUTION

28. • IMPORTANCE
• FORMULA
• EXAMPLE
• INTERPRETATION
• DRAWBACK

30. IMPORTANCE
• CLUES FOR INCREASE OR DECREASE PRICE OF PRODUCTS
• PROFIT MAXIMIZING INVERSELY RELATE TO ELASTICITY OF DEMAND
MARKUP (DECREASE)=ELASTICITY (INCREASE)
VICE VERSA

31. FORMULA

32. RELATIONSHIP OF MARK-UP &
VARIABLE COST
THE OPTIMAL SELLING PRICE DEPEND ON TWO COSTS;
• VARIABLE COST
• ELASTICITY OF DEMAND

33. EFFECT OF FIXED COST
• FIXED COST PLAY NO ROLE IN SETTING THE OPTIMAL PRICE.
• FIXED COST IS RELEVANT WHEN DECIDING WHETHER TO OFFER A PRODUCT,
BUT NOT RELEVANT WHEN DECIDING HOW MUCH CHARGE FOR THE PRODUCT.

34. ASSUMPTIONS
• IF ELASTICITY OF DEMAND IS CONSTANT
• TOTAL COST EQUAL= TOTAL FIXED COST+ TOTAL VARIABLE COST
• THE PRICE OF THE PRODUCT HAS NO EFFECT ON SALE OR COST OF ANY OTHER
PRODUCT

35. EXAMPLE

37. DRAWBACK
Cautions For establishing selling price of product according
to its elasticity, the percentages may be inexact

38. MARYAM FAYYAZ
MC15236

39. ABSORPTION COSTING
APPROACH TO COST-PLUS
PRICING

40. DEFINITION OF
ABSORPTION PRICING
Absorption pricing is a method for setting
prices, under which the price of a product
includes all of the variable costs attributable
to it, as well as a proportion of all fixed costs.

41. Definition Of Absorption Costing
Approach
Under the absorption approach to cost-plus
pricing, the cost base is the absorption
costing unit product cost. The cost base
includes direct material, direct labour, and
variable and fixed manufacturing overhead.

42. USE OF ABSORPTION
COSTING
One study found that 83% of the 504 large
manufacturing companies surveyed used some
form of full cost as the base for pricing. The
remaining 17% used only variable cost as a
base for pricing decision.

43. DIFFERS THAN
ECONOMISTS APPROACH
It differ from economists approach both in
What costs are marked up
How mark up is determined

44. Price of product =Unit product cost + Mark
UP % on cost
Setting A Target Selling Price Using
the Absorption Costing Approach
First step is to compute the unit product cost
2nd step is to determine the mark up percentage of cost

45. COMPUTING PER UNIT COST
DATA
Direct material 6 P.U
Direct labor 4 P.U
Variable Manufacturing over
head
3 P.U
Fixed manufacturing over head 70000 (Total)
Variable admin and selling
expenses
2 P.U
Fixed admin and selling
expenses
60000 (Total)

46. COST OF A PRODUCT
PER
NUIT
DIRECT MATERIAL $ 6
DIRECT LABOUR 4
VARIABLE MANUFACTURING OVERHEAD 3
FIXED F.O.H ($70,000/10,000 UNITS) 7
---------------
-
PER UNIT PRODUCT COST $ 20
NOTE : { MANUFACTURER PRODUCES
10,000 UNITS }

47. DETERMINING THE MARK UP
PERCENTAGE
Most of the companies use 50% of their unit cost as mark
up it’s a generally used rule ( i.e. 20+10 = 30 per unit price)
Many company base their mark up on cost and desired
profit
Mark up should be large enough to cover selling and
admin expenses and provide adequate ROI
We can compute markup using forecasted sales.

48. COMPUTING MARK UP %
(Required ROI*Investments)+Selling and Admin
Expenses
Markup % = ------------------------------------------------------
-----
Unit product cost * UNIT SALES
Data
Required Rate of return 20%
Investments 100000

49. DETERMINING THE MARK UP
PERCENTAGE
(20%*$100,000)+($ 2*10,000+60,000)
MARKUP % = -----------------------------------------
---
$20 PER UNIT *10,000 UNITS
(Required ROI*Investments)+Selling and Admin
Expenses
Markup % = -------------------------------------------------
----------
Unit product cost * UNIT SALES
= 50 %

50. TARGET PRICE OF PRODUCT
TARGET PRICE OF PRODUCT = COST + MARK UP
% ON COST
= 20 + (50% OF 20 = 10)
=20+10
=30 $
 It means if the company sold 10000 units at 30$ PU
then the company will will get 20% return on
investment

51. Absorption costing Income
statement
SALE (30*10,000) = $ 300,000
COST OF GOODS SOLD (20*10,000) = 200,000
GROSS MARGIN = 100,000
SELLING & ADMIN EXP (2*10,000+60,000) = (80,000)
NET OPERATING INCOME = 20,000
R.O.I= NET OPERATING INCOME INVESTMENT
R.O.I= 20,000 100,000
= 20 %

53. PROBLEMS OF
ABSORPTION COSTING
TARGET COSTING

54. Actual income statement
SALE (30*7,000).............................................$ 210,000
COST OF GOODS SOLD (23*7,000) ............................161,000
GROSS MARGIN.............................................49,000
SELLING & ADMIN EXP (2*7,000+60,000)................74000
NET OPERATING INCOME ................................(25,000)
R.O.I= NET OPERATING INCOME INVESTMENT
R.O.I= 25,000 100,000
= -25 %

55. COST HIDE IN INVENTORY
• THE COMPANY ALLOCATES THE FIXED OVERHEAD TO THE UNIT LEVEL,
SO THE COST INCLUDE IN INVENTORY. THE COST DOES NOT SHOW AS
EXPENSE UNTILL THE ALL UNITS ARE SOLD IN THE GIVEN PERIOD OF
TIME AND FIXED OVERHEAD ARE SHOWN AS AN ASSET IN BALANCE
SHEET

56. EXAMPLE
UNIT PRODUCED. 1OOOO UNITS
UNIT SOLD. 1OOO
INVENTORY. 9OOO
FIXED OVERHEAD PER UNIT. RS.1
SO RS.9OOO ARE SHOWN AS AN ASSET IN BALANCE SHEET.

57. UNSUITABLE FOR IRREGULAR
VOLUME
IF COMPANY PRODUCE AND SELL AN EQUAL AND STEADY VOLUME FOR A
PERIOD THEN ABSORPTION COSTING IS APPROPRIATE METHOD. BUT FOR
IRREGULAR VOLUME THE FIXED OVERHEAD APPEARS TO FLUCTUATES
WITH PRODUCTION WHILE INFACT, FIXED OVERHEAD ARE NOT
FLUCTUATED.

58. SHOWS UNTRUE PROFIT
• ABSORPTION COSTING SHOWS THE BETTER PROFIT THAN ITS ACTUALLY
IN A ACCOUNTING PERIOD. THIS IS DUE TO FACT THAT ALL THE FIXED
OVERHEAD ARE NOT DEDUCTED FROM REVENUE UNLESS ALL THE
PRODUCTS ARE SOLD.

59. COST AND VOLUME ANALYSIS
• IF FIXED COST ARE THE LARGE PART OF PRODUCTION, THEN IT IS
DIFFICULT TO DETERMINE THE VARIATION IN COST. THAT OCCUR AT
DIFFERENT PRODUCTION LEVEL. IN RETURN IT ALSO MAKES DIFFICULT
FOR MANAGEMENT TO MAKES THE DECISION FOR OPERATIONAL
EFFICIENCY

60. INADEQUATE FOR MANAGERIAL
DECISION MAKING
ABSORPTION COSTING ALLOCATES THE FIXED OVERHEAD COST TO UNIT
LEVEL, THIS MAY APPEARS THAT THE ADDITIONAL UNITS ADD THE
OVERHEAD COST WHEN INFACT, THEY ARE REVENUE OPPORTUNITY.

61. EXAMPLE
UNITS SOLD. 1OO BASE BALL
SALE PRICE. 5 PER UNIT
VARIABLE COST. 4 PER UNIT
FIXED COST. 1
ADDITIONAL UNIT SOLD. 1O
TOTAL COST. 4.50
VARIABLE COST. 4.00
FIXED COST. 0.50
SO THE 0.50 IS THE REVENUE OPPORTUNITY.

62. ASSUMPTION OF ABSORPTION
COSTING
• THE ABSORPTION COSTING IS SAFE IF THE CUSTOMERS CHOOSE TO BUY
ATLEAST, AS MANY UNITS AS MANAGER FORECASTED THEY WOULD BUY

63. TARGET COSTING
DEFINITION
TARGET COSTING IS THE PROCESS OF DETERMINING THE COST
OF A NEW PRODUCT BASED ON MARKET DRIVEN CONSIDERATIONS
$

64. USED BY
MANY COMPANIES PRACTICALLY USED THE TARGET COSTING
• ISUZU MOTORS
• BANK AL -MAGHRIB (THE CENTRAL BANK OF MOROCCO)
• PCBM (PRINTED CIRCUIT BOARD MANUFACTURER)
• ETC

65. REASONS FOR USING TARGET
COSTING

66. LESS CONTROL OVER
PRICE
• COMPANIES HAVE LESS CONTROL OVER PRICE. NORMALLY SUPPLY AND
DEMAND DETERMINES THE PRICE WHEN A COMPANY WANTS TO
IGNORE THIS METHOD, IT ADOPT THE TARGET COSTING. THEREFORE
THE ANTICIPATED MARKET PRICE IS TAKEN AS A GIVEN IN TARGET
COSTING.

67. CONTROL THE COST
• COMPANIES CAN CONTROL THE COST ON DESIGNING STAGE BY USING
INEXPENSIVE PARTS OR OTHER TECHNIQUES DUE TO WHICH COST CAN BE
CONTROLLED.

68. TEHMINA KOUSAR
MC15205

70. HOW DOES COMPETITION AMONG
BUYERS AND SELLERS AFFECT MARKET
PRICE?
• COMPETITION AMONG BUYERS DETERMINES HIGHER MARKET PRICE BECAUSE
THE PRODUCT IS IN DEMAND.
• COMPETITION AMONG SELLERS DETERMINES THE LOWER MARKET PRICE
CONSUMER WILL HAVE TO PAY FOR THAT PRODUCT FROM EARLIER.

71. COMPETITION AMONG BUYERS:
• BUYERS COMPETE WITH ONE ANOTHER. THE PRODUCERS OF A
PRODUCT AWARE THAT THEIR PRODUCT WAS IN HIGH DEMAND, AND
THEY USED THIS KNOWLEDGE TO SET THE PRICE OF THAT PRODUCT
FOR CONSUMERS. COMPETITION DETERMINES MARKET PRICE
BECAUSE THE MORE THAT PRODUCT IS IN DEMAND (WHICH IS THE
COMPETITION AMONG THE BUYERS), THE HIGHER PRICE THE
CONSUMER WILL PAY AND THE MORE MONEY A PRODUCER STANDS TO
MAKE.

72. COMPETITION AMONG SELLERS:
• COMPETITION AMONG SELLERS USUALLY DEALS WITH WHO HAS THE
BEST PRICE. THIS WILL ALSO HELP DETERMINE THE PRICE CONSUMER
WILL HAVE TO PAY FOR THAT PRODUCT FROM EARLIER. GREATER
COMPETITION AMONG SELLERS RESULTS IN A LOWER PRODUCT
MARKET PRICE. IF THE SAME PRODUCT HAD NUMEROUS PRODUCERS
INSTEAD OF ONLY ONE, THE PRICE WOULD BE LOWER BECAUSE THE
PRODUCER KNOWS THE CONSUMER COULD GET THE PRODUCT
SOMEWHERE ELSE.

75. TARGET COSTING
DEFINITION:
TARGET COSTING IS PROCESS OF DETERMINING THE MAXIMUM
ALLOWABLE COST FOR A NEW PRODUCT AND THEN DEVELOPING THE
PROTOTYPE THAT CAN BE PROFITABLY MADE FOR THAT MAXIMUM
TARGET COST FIGURE.

76. EXAMPLE
TATA NANO CAR IS THE BEST EXAMPLE OF TARGET COSTING.
FIRST OF ALL CUSTOMER NEED IS ACCESSED AND THEN SET A TARGET PRICE.AT
THE END THE CAR IS MANUFACTURED.

77. TARGET COSTING
COMPANIES THAT USE TARGET COSTING ARE:
oTOYOTA
oHP (HEWLETT- PACKARD)
oCOMPAQ
oFORD

78. GENERAL CONCEPT
TARGET COST IS THE COST THAT CAN BE INCURRED WHILE STILL EARNING THE
DESIRED PROFIT
SELLING PRICE – DESIRED PROFIT = TARGET COST
oTHE CUSTOMER SETS THE PRICE
oPROFIT MUST BE ACHIEVED THROUGH COST CONTROL

79. TARGET COSTING
CHARACTERISTICS
• IN TARGET COSTING , INSTEAD OF STARTING WITH COST AND THEN
DETERMINING PRICES , IT STARTS WITH PRICES AND THEN
DETERMINE ALLOWABLE COST.
• COMPANIES THAT USE TARGET COSTING ESTIMATES WHAT A NEW
PRODUCT’S MARKET PRICE LIKELY TO BE BASED ON ITS ANTICIPATED
FEATURES PRICES OF PRODUCTS ALREADY ON THE MARKET.

80. TARGET COSTING
CHARACTERISTICS
INTENSE CUSTOMER FOCUS
o WHAT DO THEY WANT ?
o HOW MUCH WILL THEY PAY FOR IT?
o CAN WE MAKE A PROFIT ON IT?
• WANT ANSWERS QUESTIONS BEFORE COMMITTING TO THE PROJECT

81. TARGET COSTING
CHARACTERISTICS
• COST CONTROL FROM THE BEGINNING
o70-90% OF COSTS COMMITTED TO AT THE DESIGN STAGE
oFOCUS ON PRODUCT AND PROCESS DESIGN TO ENGINEER OUT COSTS FROM
THE BEGINNING

82. FORMULA

83. ILLUSTRATION
HANDY COMPANY WANTS TO INVEST $2,000,000 TO LAUNCH A NEW
HAND MIXER IN THE MARKET. COMPANY DESIRES A 15% ROI.
MARKETING DEPARTMENT WAS ESTIMATED THAT 40,000 HAND MIXERS
WERE SOLD AT $30 PER HAND MIXER.
REQUIRED
WHAT IS THE TARGET COST PER HAND MIXER?

84. SOLUTION
ESTIMATED SALES (40,000 MIXERS *$30)=$1200000
LESS:DESIRED PROFIT (15%*$2,000,000) =$300,000
TARGET COST FOR 40,000 MIXERS $900,000
TARGET COST PER MIXER
=$900,000 /40,000 MIXERS
= $22.50

85. TARGET COSTING PROCESS
Target Price
Profit margin
Target Cost
Establishing the
Target Price
 Concept
development
 Planning
and market
analysis
Achieving the target
cost
 Production
design and
value
engineering
 Production
and
continuous
improvement
•
Process

86. TARGET COSTING:
REASONS FOR USING THE TARGET COSTING:
oMARKET DEMAND AND SUPPLY
oPRODUCT DESIGN STAGE
oTARGET COST IS SET FIRST AND THEN DESIGN THE PRODUCT SO THAT
THE TARGET COST IS ACHIEVED

87. DRAWBACKS OF TARGET
COSTING
oINCREASE WORK PRESSURE
oBALANCE WORK PERFORMANCE AND COST
oHARD TO CONTROL EXTERNAL COST

88. ESTABLISHING THE TARGET COST
DETERMINE THE PRODUCT AND ITS MARKET
oWHO IS THE TARGET MARKET?
oWHAT DO THEY WANT?
oWHAT DO COMPETITORS OFFER?
INTRODUCE CONCEPT OR PROTOTYPE
oEVOLUTIONARY OR REVOLUTIONARY
oREFINE UNTIL IT MEETS CUSTOMER NEEDS

89. ESTABLISHING THE TARGET COST
DETERMINE THE SELLING PRICE
o MUST BE ACCEPTABLE TO THE CUSTOMER
o MUST BE ABLE TO WITHSTAND COMPETITION
oEXISTING PRICE +/- VALUE OF FEATURES ADDED
OR DELETED

90. THANK YOU