1. A project report on
pricing decision
prepared by…
1) Nayansisodiya
Submitted to…
Prof. Avani shah
Introduction about pricing decision

2. Pricing decisions are management decisions about what to charge
for the products and services that companies deliver. To maximize
operating income, companies produce and sell units as long as the
revenue from an additional unit exceeds the cost of producing it.
The three major influences on pricing decisions
1) Customers
2) Competitors
3) Costs
The price of a product or service is the outcome of the interaction
between the demand for the product or service and its supply.
1) Customers influence prices through their effect on demand.
Companies must always examine pricing decisions through the
eyes of their customers. Too high a price may cause customers to
reject a company’s product.
2) Competitors influence prices through theiractions.Alternative or
substitute products of a competitor may affect demand and force a
business to lower its prices.Fluctuations in the exchange rates of
different countries’ currencies also affectpricing decisions.
3) Costs influence prices because they affectsupply.The lower the
cost relative to the price, thegreater the quantity of product the
companyis willing to supply.
Short-run and long-run pricing decisions

3. Most pricing decisions are either short run or long run. Short-run
decisions typically 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
considerable leeway
Two key differences when pricing for thelong run relative to the short
run:
1 Costs that are often irrelevant for short-run pricing decisions (fixed
costs) are often relevant in the long run.
2 Profit margins in long-run pricing decisions are often set to earn a
reasonable return on investment.
THEORY PORTION

4. PRICING DECISIONS
This a very important decision faced by top management and marketing
managers. How much to charge for a product or service depend on a multitude of
factors such as competition, cost, advertising and sales promotion
Managers have a general tendency to believe that price is an important issue
for customers. Research, however, has shown that customers are frequently
unaware of prices paid and that price is one of the least important purchase criteria
for them
Need for pricing decision:
 Long range survival of company depends on its pricing decision.
Objective of pricing decision;
 To attain target result
 To achieve and sustain the market share
 To have consistency of price as far as practicable and also its stability
 To keep up profit motivation
 To sustain the competitors’ forces effectively and efficiently
INFLUENCES ON DEMAND AND SUPPLY

5.  Customers – influence price through their effect on the demand for a product
or service, based on factors such as quality and product features
 Competitors – influence price through their pricing schemes, product
features, and production volume
 Costs – influence prices because they affect supply (the lower the cost, the
greater the quantity a firm is willing to supply)
Time Horizons and Pricing
 Short-run pricing decisions have a time horizon of less than one year and
include decisions such as:
 Pricing a one-time-only special order with no long-run implications
 Adjusting product mix and output volume in a competitive market
 Long-run pricing decisions have a time horizon of one year or longer and
include decisions such as:
 Pricing a product in a major market where there is some leeway in
setting price
Pricing

6.  External sales- outside
 Target pricing-Competition-based pricing
 Cost plus pricing
 Variable cost pricing
 Customer based pricing-value-based pricing
 Time and material pricing
 Internal-within the company among divisions
 Negotiated transfer prices
 Cost based transfer prices
 Market based transfer prices
 Effect of outsourcing on transfer prices
 Transfers between divisions in different countries
COST PLUS PRICING
In this pricing is set by adding some predetermined margin on the costs of the work
to be executed.

7. TOTAL PLUS PROFIT PERCENTAGE;
In cost plus pricing method, profit is added to the total absorption cost
MARGINAL COST PLUS CONTRIBUTION PERCENTAGE;
In marginal cost plus contribution method, price of the product is worked out by
adding the contribution as a percentage of the marginal cost.
STANDARD COST PLUS PRICING:
In standard cost plus pricing method, profit is added to the standard or
predetermined cost of product
BREAK EVEN PRICING:
It is the method of pricing used when work with identifiable cost may involve
different levels of activity.
PRACTICAL PORTION
Q. 18.6 (paresh shah-691)

8. Answer:
1) Absorption cost
Particular Amount Amount
Selling price/ unit as par dept. B 55
Transfer price 22.50
Additional cost of dept. B 25 47.50
Gross profit per unit 7.50
2) Variable cost
Particular Amount Amount
Selling price/ unit as par dept. B 55
Transfer price (variable cost only) 15
Additional cost of dept. B 25 40
Gross profit per unit 40
3) Cost plus transfer price
Particular Amount Amount
Selling price/ unit as par dept. B 55
Transfer price 28.13
Additional cost of dept. B 25 53.13
Gross profit per unit 1.87
4) Market transfer price
Particular Amount Amount
Selling price/ unit as par dept. B 55

9. Transfer price 27.50
Additional cost of dept. B 25 52.50
Gross profit per unit 2.50
5) Negotiated transfer price
Particular Amount Amount
Selling price/ unit as par dept. B 55
Transfer price as par negotiation 23.50
Additional cost of dept. B 25 48.50
Gross profit per unit 6.50
6) Dual price
Particular Amount Amount
Selling price/ unit as par dept. B 55
Transfer price 15
Additional cost of dept. B 25 40
Gross profit per unit 15
Q. 21.2 (M. N. Arora) 21.11
Answer:

10. Statement showing residual income
Particular Division
X-rs. Y-rs. Z-rs.
Additional investment 500000 500000 500000
Net profit 70000 65000 85000
Less: cost of capital
@ 12% on investment 60000 60000 60000
Residual income 10000 5000 25000
Conclusion:
Additional investment should be made in division Z as it gives the
highest residual imcome.
Q. 21.3 (M.N.Arrora) 21.12

11. Answer:
1) Cost of capital = divisional investment * cost of capital
= 16000000*13.75%
= 2200000
2) Divisional profit =4000000
Residual income =divisional profit – cost of capital
=40 lakh – 22 lakh
= 18 lakh
Q. 2. Paresh shah (693)

12. Answer:
Minimum transfer price = Sales value ÷ No. of unit
= 1800000 ÷ 6000
= 300/ unit transfer price
Rs. 3oo / unit is minimum transfer price charged by the machining
division to other division of the company.
Q. 4. Paresh shah (694)
Answer:
Required contribution = fixed cost + net profit + cost of capital
= 800000 + 1000000 + 900000
= 2700000
Outside sales = selling price – variable cost
= 180 – 160
= 20/ unit × 120000
= 2400000
Internal transfer = 300000 ÷ 30000
= 10 / unit
Minimum transfer price = 160 + 10 = 175

13. "The role of management accounting in
pricing decisions:
One of the main purposes of management accounting is to contribu
te information towards an optimal price decision. While theoretically opt
imal pricing is vastly discussed in mainstream economics (e.g. Pindyck a
nd Rubinfeld, 2005; Hirschleifer and Hirschleifer, 1998; Landsburg, 201
1),
there is apparently a "reality gap", i.e. a gap between neoclassical theory
of the firm and the behavior observed by firms, which goes at least back
to the 1930's (Hall and Hitch, 1939), perhaps much further (Lee, 1994).
Many reasons for this apparent gap have been proposed.
One is that the cost of obtaining the correct cost base which is mar
ginal cost, is impossible or prohibitively expensive. Thus it could be that
firms are behaving, at least implicitly, in accord with theory. For instanc
e, Lere (1986) suggests ways of using traditional management accountin
g costs as proxies of marginal cost.
Lucas (2003) argues that management accountants have largely left
the debate over this controversial "reality gap" to economists. However,
he shows that evidence to date is too poor to settle the dispute of whethe
r firms are indeed behaving in line with neoclassical theory. There shoul
d be possibilities for advancing the field of management accounting relat
ed to the reality gap, both theoretically and empirically.
One research project could be to follow Lucas'(2003) suggestion fo
r a series of case studies to reveal whether neoclassical principles are foll
owed. Another could be to advance the understanding of firm behavior i
n different directions.