Académique Documents
Professionnel Documents
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For Managers
Chapter 5
Pricing and Product
Pricing And Product Related
Related
Decision
Decisionsg and Product
Related Decision
Group Member
1) Mohd Shamsul Fahmi Bin Shamsudin 819915
2) Mohd Fahmi Bin Idris 820289
3) Nur Aeidah Binti Sabri 819439
4) Norita Binti Rasli 822130
5) Norazimah Binti Mohamad Tahir 819385
Cost Concept
for Decision
Making
An example of identifying
relevant costs and benefits
No
Item
Annual cost of
fixed items
Cost per
Mile (based
on 10,000
miles per
year)
$ 2,800
$0.280
$0.100
$1,380
$0.138
$0.065
$360
$0.036
$0.619
An example of identifying
relevant costs and benefits
N
o
Item
Annual
cost of
fixed
items
$40
$0.026/mil
e
$104
-
$25/day
$46.00
$29.90
$11.96
$50.00
Total
$137.86
Relevant financial cost of taking the train to New York
$104.00
Differenti
al costs
and
benefits
5,000
5,000
$40
$40
$0
$14
$14
$0
$8
$5
$15,000
$2
$2
$0
$62,000
$62,000
$0
$3,000
-$3,000
$18,000
$30,000
$12,000
$ 15,000
-$3,000
$12,000
5.2
Pricing
Decision
Pricing Methods
These 5 methods below are used to
determine the optimal price that a customer is
willing to pay for a product or service.
1. Cost-based
2. Value-based pricing
3. Competition-based
4. Penetration pricing
5. Price skimming
1. Cost-based pricing
Price is set by adding a certain mark-up above the
cost of producing and selling the product.
The goal of doing business is to maximize profits.
Cost-based pricing ensures that costs are fully
recovered and desired profits are met.
Cost-Plus Pricing Formula
-The price derived from applying mark-up over the
cost of the product is known ascost-plus price.
-Cost-Plus Price = Cost + Mark-up
The mark-up can be computed as a percentage of
total costs, product costs, variable manufacturing
costs, or total variable costs.
2.Value-based pricing
2.Value-based pricing
more applicable in situations where individual
quotes are given to individual orders or jobs.
Examples include: architectural design,
general repairs, car customization, and other
custom products and services.
Target Costing-When charging value-based
price, the seller still considers relevant costs.
Though mark-up is not directly computed on
the basis of cost, the selling price must be
enough to cover for the costs to be incurred.
3.Competition-based
pricing
pricing method that makes use of competitors'
3.Competition-based pricing
4. Penetration pricing
Penetration pricing is a pricing method that
involves setting low prices with the
intention of quickly introducing a new
product to the market.
Penetration pricing aims to attract
customers away from competitors by
offering lower prices initially.
Once the product has been accepted and
has established its brand in the market,
prices may be increased to yield greater
profits.
4. Penetration pricing
gets the new product diffused into the market
quickly. However, when prices are set very low, it
results in low profit per unit and need the higher
volume of sales in order to sustain.
can help the business establish market
dominance. By setting low prices, possible
entrants will be discouraged in entering the
market. Current competitors may also be forced to
leave if they cannot keep up with low prices.
On the downside, by setting low prices might
cause customers to question the quality of the
product. Also, once prices are increased, buyers
may not be willing to make repeat purchases
anymore.
5. Price skimming
5. Price skimming
Chapter 5 :
Product Mix Decision
Management Accounting for Managers
-- Total
Total group
group of
of products
products
offered
offered by
by company
company
-Total
-Total assortment
assortment of
of
product
product and
and services
services
marketed
marketed by
by a
a company
company
Product
Product
Line
Line
Group
Group of
of closely
closely related
related
product
product items
items
-- Individual
Individual
products
products that
that are
are closely
closely
related
related in
in same
same way
way
Individual
Individual
Product
Product
Any
Any brand
brand or
or variant
variant of
of
a
brand
in
a
product
a brand in a product line
line
Length
Length
The
The Number
Number of
of
product
product lines
lines in
in
the
the product
product mix
mix
Depth
Depth
The
The number
number of
of
product
product in
in a
a
product
product line
line
How
How many
many
variants
variants offered
offered
of
of each
each product
product
line
line
Consistency
Consistency
The
The relatedness
relatedness
of
of the
the different
different
product
product line
line in
in a
a
product
product mix
mix
Delete
Delete Existing
Existing
Product
Product Lines
Lines
Branding
Branding
Strategies
Strategies
Individual
Individual Product
Product
Strategies
Strategies
Introduction
Introduction
Strategies
Strategies
Rapid Increase in
profitability
Length depends on nature
of product and competitive
reaction
Create unique positioning
Find ideal balance between
price and demand
Growth
Growth Strategies
Strategies
Maturity
Maturity
Strategies
Strategies
Declining
Declining
Strategies
Strategies
Strategic Alternatives
either to increase or
decrease length of
product line
Product
Product Line
Line
Strategies
Strategies
Downward Stretch
Attempt to add products to
lower end product line
Upward Stretch Products
are added at the higher
end of product line
Two-way Stretch adding
product at both high and
low end of product
Line Filing Adding product
in different places within
product line to fill up gap
Cannibalisations Occurs
when new product takes
sales away from existing
products.
Line
Line Stretching
Stretching
Contraction
Contraction
Strategies
Strategies
Branding Strategies
Product
Product Mix
Mix
Branding
Branding
Strategies
Strategies
Individual
Individual
brand
brand name
name
strategy
strategy
Company
Company
name
name
Family
Family brand
brand
name
strategy
name strategy
Family
Family brands
brands
for
product
for product
name
name
Family
Family and
and
individual
individual
name
name
Branding Decisions
Product Category
Existing
New
Existing
Brand name
New
Line Extension
Brand
Extension
Multibrands
New brands
Chapter 5 :
Other Type Of Decisions
Management Accounting for Managers
9
5
1
3
2
10
$ 30
The
The avoidable
avoidable costs
costs associated
associated with
with making
making part
part 4A
4A include
include direct
direct
materials,
materials, direct
direct labor,
labor, variable
variable overhead,
overhead, and
and the
the supervisors
supervisors salary.
salary.
The
The depreciation
depreciation of
of the
the special
special equipment
equipment represents
represents aa sunk
sunk
cost.
cost. The
The equipment
equipment has
has no
no resale
resale value,
value, thus
thus its
its cost
cost and
and
associated
associated depreciation
depreciation are
are irrelevant
irrelevant to
to the
the decision.
decision.
Not
Not avoidable;
avoidable; irrelevant.
irrelevant. IfIf the
the product
product is
is
dropped,
dropped, itit will
will be
be reallocated
reallocated to
to other
other products.
products.
Special Order
A special order is a one-time
order that is not considered
part of the companys normal
ongoing business.
When analyzing a special
order, only the incremental
costs and benefits are
relevant.
Since the existing fixed
manufacturing overhead costs
would not be affected by the
order, they are not relevant.
Special Orders
Jet, Inc. makes a single product whose normal selling
price is $20 per unit.
Special Orders
Jet, Inc.
Contribution Income Statement
Revenue (5,000 $20)
$ 100,000
Variable costs:
Direct materials
$ 20,000
Direct labor
5,000
$8 variable cost
Manufacturing overhead
10,000
Marketing costs
5,000
Total variable costs
40,000
Contribution margin
60,000
Fixed costs:
Manufacturing overhead $ 28,000
Marketing costs
20,000
Total fixed costs
48,000
Net operating income
$ 12,000
Special Orders
If Jet accepts the special order, the incremental revenue
will exceed the incremental costs. In other words, net
operating income will increase by $6,000. This
suggests that Jet should accept the order.
Increase in revenue (3,000 $10)
Increase in costs (3,000 $8 variable cost)
Increase in net income
$ 30,000
24,000
$ 6,000
Joint Product
In
Joint Products
Oil
Joint
Input
Common
Production
Process
Gasoline
Chemicals
Split-Off
Point
For example,
in the petroleum
refining industry,
a large number
of products are
extracted from
crude oil,
including
gasoline, jet fuel,
home heating oil,
lubricants,
asphalt, and
various organic
chemicals.
Joint Products
Joint costs
are incurred
up to the
split-off point
Joint
Input
Common
Production
Process
Oil
Gasoline
Chemicals
Split-Off
Point
Separate
Processing
Final
Sale
Final
Sale
Separate
Processing
Separate
Product
Costs
Final
Sale
51
Relevant Amounts
Incremental
Revenue
The decline in revenue
from dropping
Incremental Cost
Savings
The variable cost
savings due to dropping
The direct fixed cost
savings due to
dropping
52
Our allocations
can make a
segment look less
profitable than it
really is.
Take Outs has three product lines in its retail stores: snacks,
salads, and sandwiches. The allocated fixed costs are unavoidable.
Results of July follow:
Units sold
Revenue
Variable costs
Direct fixed costs
Allocated fixed
costs
Operating income
Snacks
Salads
Sandwiche
s
Total
800
1,200
2,400
4,400
$49,600 $52,800 $67,200 $169,600
19,200
26,400
33,600 79,200
10,000
14,000
13,000 37,000
16,000
$4,400
18,000
($5,600)
16,000
$4,600
50,000
$3,400
54
Data reproduced:
Units sold
Revenue
Variable costs
Direct fixed costs
Allocated fixed costs
Operating income
Snacks
800
$49,600
19,200
10,000
16,000
$4,400
Salads
1,200
$52,800
26,400
14,000
18,000
($5,600)
Sandwiches
cont.
Total
2,400
4,400
$67,200 $169,600
33,600
79,200
13,000
37,000
16,000
50,000
$4,600
$3,400
Sawmill,
Per Log
Lumber
Sawdust
$
140
$
40
270
176
50
50
24
20
270
140
130
50
80
Sawdust
50
40
10
20
(10)
270
140
130
50
80
Sawdust
50
40
10
20
(10)