Transcript No Slide Title

Chapter 12
Pricing Decisions, Product
Profitability Decisions, and Cost
Management
Copyright © 2003 Pearson Education Canada Inc.
Slide 12-131
Major Influences on Pricing
•
The three major influences on pricing decisions:
1. Customers
• examine pricing problems through the eyes of
the customer
2. Competitors
• think about prices as part of the total marketing
package and strategic positioning of the
company and its products
3. Costs
• prices must cover all costs in the long-run
• important to know what your costs are
Copyright © 2003 Pearson Education Canada Inc.
Pages 452 - 453
Slide 12-132
Costing and Pricing for the Long Run
•
•
Accurate product cost information is essential
In many industries, competitive market forces set
prices (oil & gas, mining)
Two Alternative Long-Run Pricing Approaches
1. Market-based
• What do our customers want and what are our
competitors doing?
2. Cost-based (or cost-plus)
• What price should we charge to cover our costs
and earn a profit?
Copyright © 2003 Pearson Education Canada Inc.
Pages 455 - 458
Slide 12-133
Target Costing for Target Pricing
•
•
•
Target price is the estimated price for a product or
service that potential customers will be willing to pay
Based on an understanding of customers’ perceived
value for a product and competitors’ responses
Target cost per unit is the estimated long-run cost per
unit of product or service that, when sold at the target
price, enables the company to achieve its target income
4 Steps in Target Pricing and Target Costing
1.
2.
3.
4.
Develop a product that satisfies a customer need
Choose target price based on customers’ values
Derive a target cost
Perform value engineering to achieve target costs
Copyright © 2003 Pearson Education Canada Inc.
Pages 458 - 460
Slide 12-134
Cost Incurrence and Locked-In Costs
• Cost incurrence occurs when a resource is
sacrificed or used up
• Locked-in (or designed-in) costs are costs that have
not yet been incurred but are committed to be spent
Locked-in
cost curve
Cumulative
Costs
per unit
$
Cost incurrence
curve
R&D
and
Design
Copyright © 2003 Pearson Education Canada Inc.
Manufacturing
Marketing,
Distribution &
Customer Service
ValueChain
Functions
Pages 460 - 462
Slide 12-135
Cost Plus Pricing
• Most companies establish prices using either a
market-based or cost-based approach
• Cost plus pricing begins with some form of product
or service cost and adds on an appropriate mark-up
Variable
manufacturing
costs $483.00
+
65% markup =
$797
Total manufacturing
costs $540.00
+
50% markup =
$810
Full costs $720.00
+
12% markup =
$806
Copyright © 2003 Pearson Education Canada Inc.
Pages 464 - 467
Slide 12-136
Cost-Plus Target Rate of Return on Investment
• One approach to determining the markup % is to
consider the desired rate of return on the organization’s
invested capital
Invested capital
Target rate of return on investment
Target operating income
Total expected unit sales of product
Target operating income per unit
Cost base
$720.00
+
$96,000,000
18%
$17,280,000
200,000
$86.40
Target operating income
per unit $86.40
Copyright © 2003 Pearson Education Canada Inc.
=
(a)
(b)
(a x b)
(c)
(a x b / c)
Target selling
price $806.40
Pages 464 - 465
Slide 12-137
Life Cycle Product Budgeting and Costing
• Product life cycle spans the time from initial R&D to
the time at which support from the customers is
withdrawn
Life Cycle Budgeting
• Budget revenues and costs over the life cycle of the
product or service
Life Cycle Costing
• Track and accumulate costs over the life cycle of the
product or service
• “cradle-to-grave” costing
• “womb-to-tomb” costing
Copyright © 2003 Pearson Education Canada Inc.
Pages 469 - 472
Slide 12-138