MSA University

Cost Accounting 2 Project

"Pricing Decisions & Cost Management"

Presented to Dr

Done by:
Ahmed Shoaib Abu Ramadan 084555
Hisham Mohamed L Husseini 084537
Salem Nael L Shorafa 08

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 "OutLine"

I) Introduction------------------------------------------------------------------------3

II) Cost Management----------------------------------------------------------------4

III) Pricing Decisions----------------------------------------------------------------6

1- Price Strategies-----------------------------------------------------------------6

2- Price Exercise-------------------------------------------------------------------9

3- Factors Affecting Pricing Decisions-----------------------------------------

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A) Internal Factors------------------------------------------------------------10

B) External Factors-------------------------------------------------------------
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Introduction:

When talking about price and cost, first thing comes to your mind is what
happens if they were equal, what will occur at that time is called The break-
even point, which is the point where total revenue you got equals the total
costs you paid to sell a product it also means that your profit will be Zero. A
break-even point is typically intended in order for businesses to decide if it
would be profitable to sell a projected product, as opposed to attempting to
modify an existing product instead so it can be made rewarding. Break even
analysis can also be used to analyze the potential profitability of an
expenditure in a sales-based business.
After you've determined your break-even points which establish floors for
your price, there are strategies for establishing pricing based upon
additional financial objectives, such as:
1- Establishing a high price to make high profits initially. This strategy is used to recover
high research and development costs or to maximize profits before competitors enter the
market. (Pharmaceutical companies often use this strategy when introducing new drugs.
2- Setting a low price on one or more products to make quick sales to support another
product in development. (Some companies also employ this strategy when they need to
increase cash flow.
3- Setting prices to meet a desired profit goal. For example, if the desired profit per unit
is 20 percent and unit costs are $10 (taking into account your fixed and variable costs),
set your price at $12.

You may also determine how many units you will need to sell to meet a
profit goal by using the following formula.
Break-Even Unit Volume = (Fixed Costs / Unit Contribution Margin)*

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* Unit Contribution Margin = Selling Price per Unit - Variable cost per unit

Cost management
Cost management is the transaction that the company know who make,
control and create the plan for business process according to the cost , also
the small projects should have customized cost management plans. and
companies as a whole also integrate cost management into their overall
business model. there is no detention of term and familiar with all possible
strategies, when the cost management is efficient that effect into the
production and services that will decrease them.
the company’s management should be effective overall, cost management
must be an integral feature of it. That will be easier if the concept explained
as single project. For example, before the project began that must be know
and measured the costs and the expenses should be approved and also
identify before purchasing occurs. Through the transaction of completing a
project, all cost should be saved and kept in record on safe place. That helps
to insure that controlled and kept in line with initial expectations.
This approach to cost management will help a company to determine
whether the closely estimated cost of the first, and help them to predict costs
more in the future. Any expenditure can also be controlled in this manner
and must be removed in future projects, or if specifically approved
expenditure was necessary.

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administrative costs can not be used in isolation projects must be organized
and adapted to this strategy in mind when were determine the cost
management before starting projects that help to Avoid allot of problems for
the costs, if the projects is not clearly targets, and will change the Course of
the project, cost over-runs will be high probability.
If costs are not fully researched before the project, they may be
underestimated, then the expectation of this project will be flair. build of
projects are subject to their own private challenges; these can Contain build
in the form of laws and Calends that must be planned around.
if the project are run Exactly as we planned, this is easier to effect on
management of the costs it will incur. and when put a good strategies for
cost management that help the team deliver a finished within allocated
budgeted, while also making its value as possible for the company. in
another way that can be appeared and bear unexpected cost.

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Pricing Decisions:-

-Price strategies

Pricing is one of the major strategic challenges faced by any business,

whether the business are big or small . Ultimately, That consider of the
appropriate price for the product one of the important factors that
determine if there is make a profit or loss. The different pricing strategies
available to a business can be divided in to two major categories. Those
categories are:

-Types of pricing strategies

1- High Pricing strategies:

Creaming or skimming: This type of strategy provides for selling the

product at a high price to get a higher profit, before any of the competitors.
This is often used strategy for the products of new thinking and have a
patent to protect it from theft for a limited period of time.

Premium pricing: This strategy provided the lowest price of the product,
but with lower quality. it is a competition for the same product but at a
lower price than competitors. on the other hand can be priced higher than
our competitors, but higher-quality of product. This strategy is used to
enhance the reputation of the market through the products offered to the
customers. It is usually used in the fashion industry, fragrances, because
people are willing to pay higher prices to the highest quality.

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2- Low Pricing Strategies:

Promotional Pricing: This strategy tends to short-term pricing that adopted

by the business trade to reducing the prices of the product for a limited
period of time to check the location of the product. It is considered a one of
strategic objective to gain a wider market place.

Penetration Pricing: A strategy of pricing which provides that the price of

the product or service is very low in order to undermine competitors and
gain a foothold in the market.

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Loss Leader: It is considered one of the best pricing strategies used by
companies, but have a bad reputation. It involves the sale of popular
product with very low price, Is usually at less than cost price. . Once
customers have acquired this 'loss leader product' they are then offered
other products from the same business that will make a good profit, thereby
negating the original loss. Offering a loss leader product is really a
platform to acquire more customers quickly and then attempt to up-sell to
them.
There are many factors that must be considered before deciding how to
price the product or service:

1. Performing a market analysis and establishing what sort of demand

there will be for your product or service.
2. Performing a thorough costing of the product or service you are
offering and looking at the breakeven point.
3. Considering other external factors like legal constraints.
4. Deciding on your main pricing objective e.g. more market share or
exclusivity etc...

A majority of companies to adopt the correct pricing strategy enables them

to achieve good profits. And that will fit their products and services and the
aspirations of the customers. That must study carefully before deciding the
kind of pricing strategy because it is very difficult to change or switch to
another system.

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Price exercise

The exercise price, or strike price, is the price at which the owner can
exercise an option. A call entitles the holder to buy the underlying asset at
the exercise price, and a put entitles the owner to sell the underlying at the
exercise price. And The price of the practice is far less than the market price
so it can exercise the option at a profit. But we must consider the impact of
transaction costs in determining whether it is feasible to exercise this option
if the exercise price much more than the market price. Avert the decided to
increase the price of the option for a smooth Certain the rate of origin, as
well as the actual options available for the exercise price for the acquisition
of such assets. For example, on a stock trading at $52.50, the exchange may
initiate a new option series at one exercise price above and one below, say
$50 and $55. If the stock price passes $55, options at the $60 exercise price
will be offered.

Ten ways to ‘increase’ prices without increasing price

• Revise the discount structure
• Change the minimum order size
• Charge for delivery and special services
• Invoice for repairs on serviced equipment
• Charge for engineering, installation
• Charge for overtime on rushed orders
• Collect interest on overdue accounts
• Produce less of the lower margin models in the line
• Write penalty clauses into contracts
• Change the physical characteristics of the product

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-Factors Affecting Pricing Decision
There are several factors must be considered for the marketers when are set
the price because that effect on the price. and the final price may be effect
for product with many factors, and this factors can be division on two
groups:

Internal Factors:
1)Cost
For many of the companies whose goal is profit, before get the product to
the customer that must setting price to determine how much it will cost.
obviously, whatever how much the customer pay for the product or service
that must be greater than the cost of produce, otherwise the company will be
Verify failure.
when analyzing cost, when the marketer needed to get the product on market
that consider all cost like marketing, company administration and
distribution(e.g., office expense) associated with production. that can put
these cost into two main groups:

Fixed costs also referred to as overhead cost the level of production or sales
was not effected by the cost of marketing organization. for example” for a
manufacturer of writing instruments that has just built a new production
facility, whether they produce one pen or one million they will still need to
pay the monthly mortgage for the building”. from the marketing side and
fixed assets there may be in the form of sending a sales force,

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and also the implementation of the advertising campaign, and find services
for hosting companies. These costs are fixed because there is a high level of
commitment in spending, so they are not affected to a great extent in the
levels of sales and production.

Variable Costs –the cost have direct relationship with the sales of products
and production and consequently, may change as the level of production or
sales changes. typically variable cost are evaluated in a per-unit basis since
the cost is direct relation with individual items. most variable cost that
consider cost of items that are either directly with creating the product like
"electricity to run an assembly line" or with components of the product like
"parts, packaging"., however, that may be cost more than they expected
(i.e., customers using the coupon). variable assets, especially for tangibles
products, tend to decrease when produce more than plan. when the company
purchase a large number of products that will have a large discount for this
order.
Determining individual unit cost can be a complicated process. While
variable costs are often determined on a per-unit basis, applying fixed costs
to individual products is less straightforward. For example, if a company
manufactures five different products in one manufacturing plant how would
it distribute the plant’s fixed costs (e.g., mortgage, production workers’
cost) over the five products? In general, a company will assign fixed cost to
individual products if the company can clearly associate the cost with the
product, such as assigning the cost of operating production machines based
on how much time it takes to produce each item.

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Alternatively, if it is too difficult to associate to specific products the
company may simply divide the total fixed cost by production of each item
and assign it on percentage basis.
External Factors:
1)Elasticity of Demand
Marketers should never rest on their marketing decisions. They must
continually use market research and their own judgment to determine
whether marketing decisions need to be adjusted. When it comes to
adjusting price, the marketer must understand what effect a change in price
is likely to have on target market demand for a product.
Understanding how price changes impact the market requires the marketer
have a firm understanding of the concept economists call elasticity of
demand, which relates to how purchase quantity changes as prices change.
Elasticity is evaluated under the assumption that no other changes are being
made (i.e., “all things being equal”) and only price is adjusted. The logic is
to see how price by itself will affect overall demand. Obviously, the chance
of nothing else changing in the market but the price of one product is often
unrealistic. For example, competitors may react to the marketer’s price
change by changing the price on their product. Despite this, elasticity
analysis does serve as a useful tool for estimating market reaction

Elasticity deals with three types of demand scenarios:

Elastic Demand – Products are considered to exist in a market that exhibits
elastic demand when a certain percentage change in price results in a
larger and opposite percentage change in demand.

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For example, if the price of a product increases (decreases) by 10%, the
demand for the product is likely to decline (rise) by greater than 10%.
Inelastic Demand – Products are considered to exist in an inelastic market
when a certain percentage change in price results in a smaller and opposite
percentage change in demand. For example, if the price of a product
increases (decreases) by 10%, the demand for the product is likely to
decline (rise) by less than 10%.
Unitary Demand – This demand occurs when a percentage change in price
results in an equal and opposite percentage change in demand. For
example, if the price of a product increases (decreases) by 10%, the demand
for the product is likely to decline (rise) by 10%. for marketers the
important issue with elasticity of demand is to understand how it impacts
company revenue. In general the following scenarios apply to making price
changes for a given type of market demand:
For elastic markets – increasing price lowers total revenue while
decreasing price increases total revenue.
For inelastic markets – increasing price raises total revenue while
decreasing price lowers total revenue.
For unitary markets – there is no change in revenue when price is changed..

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2)Customer Expectations

Possibly the most obvious external factors that influence price setting are
the expectations of customers and channel partners. As we discussed, when
it comes to making a purchase decision customers assess the overall
“value” of a product much more than they assess the price. When deciding
on a price marketers need to conduct customer research to determine what
“price points” are acceptable. Pricing beyond these price points could
discourage customers from purchasing.
Firms within the marketer’s channels of distribution also must be
considered when determining price. Distribution partners expect to receive
financial compensation for their efforts, which usually means they will
receive a percentage of the final selling price. This percentage or margin
between what they pay the marketer to acquire the product and the price
they charge their customers must be sufficient for the distributor to cover
their costs and also earn a desired profit.

3)Government Regulation
Marketers must be aware of regulations that impact how price is set in the
markets in which their products are sold. These regulations are primarily
government enacted meaning that there may be legal ramifications if the
rules are not followed. Price regulations can come from any level of
government and vary widely in their requirements.

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 For instance, in some industries, government regulation may set price
ceilings (how high price may be set) while in other industries there may be
price floors (how low price may be set). Additional areas of potential
regulation include: deceptive pricing, price discrimination, predatory
pricing and price fixing.
Finally, when selling beyond their home market, marketers must recognize
that local regulations may make pricing decisions different for each market.
This is particularly a concern when selling to international markets where
failure to consider regulations can lead to severe penalties. Consequently
marketers must have a clear understanding of regulations in each market
they serve.

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