Cost Analysis and Pricing Decisions

1
15
Chapter Fifteen

• Cost Analysis andPricing Decisions

2
Major Influences onPricing Decisions
Political, legal, and image issues
Customerdemand
PricingDecisions
Competitors
Costs
3
TOTAL REVENUE, DEMAND AND MARGINAL REVENUE CURVES
Total revenue curve
Demand (or average revenue) curve and marginal
revenue curve
4
TOTAL AND MARGINAL COST CURVES
Total cost curve
Marginal cost curve
5
PROFIT MAXIMIZATION GRAPH
Total revenue and total cost curves
Marginal revenue and marginal cost curves
6
Limitations of theProfit-Maximizing Model

• Demand marginal revenuedifficult to determine
• Market may be an oligopoly--marginal revenue
  marginal cost models may not be valid
• Marginal cost is difficult to measure.

7
Role of AccountingProduct Costs in Pricing
Exh. 15-4

• Information is available from our acctg system
• Its one place to start
• Its the general model used in retail pricing
  (cost ( x cost) Price
• It always a general guideline
• System is used in Govt Cost Plus contracts
• Represents our ultimate objective SP Costs
  Net Income

8
Cost-Plus Pricing
1.Full-absorptionmanufacturingcost?
3.Variablemanufacturingcost?
2.Total cost,including sellingand
administrative?
4.Total variable cost,including sellingand
administrative?
9
Cost-Plus Pricing

• NEED TARGET PROFITS TO PRICE
• TARGET PROFIT Average Invested Capital X Target
  ROI
• 300,000 X 20
• 60,000

10
Cost-Plus Pricing - Example
Per Unit Total Variable mfg.
cost 400 192000 Fixed mfg. cost
250 120000 Full-absorption mfg. cost
650 312000 Variable S A cost 50
24000 Fixed S A cost 100 48000 Total
cost 800 384000 Net profit 125
60000
Total units in model are 480
11
(No Transcript)
12
(No Transcript)