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CHAPTER 12
PRICING DECISIONS AND COST MANAGEMENT
12-1 The three major influences on pricing decisions are:
1. Customers, who influence price through their effect on demand for a product or service.
2. Competitors, who offer alternative or substitute products or services a customer could choose.
3. Costs that affect the supply of a product or service.
12-2 Not necessarily. For a one-time-onlyspecial order, the relevant costs are only those costs that will change as a result of accepting the order. In this case, full product costs will rarely be relevant. It is more likely that full product costs will be relevant costs for long-run pricing decisions.
12-3 Two examples of pricing decisions with a short-run focus:
1. Pricing for a one-time-only special order with no long-termimplications.
2. Adjusting product mix and volume in a competitive market.
12-4 Activity-based costing helps managers in pricing decisions in two ways.
1. It gives managers more accurate product-cost information for making pricing decisions.
2. It helps managers to manage costs during value engineering by identifying the cost impact of eliminating, reducing, or changing various activities.
12-5 Twoalternative starting points for long-run pricing decisions are:
1. Market-based pricing, an important form of which is target pricing. The market-based approach asks, “Given what our customers want and how our competitors will react to what we do, what price should we charge?”
2. Cost-based pricing which asks, “Given what it costs us to make this product, what price should we charge that will recoupour costs and achieve a required return on investment?”
12-6 A target cost per unit is the estimated long-run cost per unit of a product or service that enables the company to achieve its target operating income per unit when selling at the target price.
12-7 Value engineering is a systematic evaluation of all aspects of the value-chain business functions, with the objective of reducing costswhile satisfying customer needs. Value engineering via improvement in product designs, changes in material specifications, or modification in process methods, is a principal technique that companies use to achieve target cost per unit.
12-8 A value-added cost is a cost that customers perceive as adding value, or utility, to a product or service. Examples are costs of materials, direct labor,tools, and machinery. A nonvalue-added cost is a cost that customers do not perceive as adding value, or utility, to a product or service. Examples of nonvalue-added costs are costs of rework, scrap, expediting, and breakdown maintenance.
12-9 No. It is important to distinguish between when costs are locked in and when costs are incurred, because it is difficult to alter or reduce costs that havealready been locked in.
12-10 Cost-plus pricing is a pricing approach in which managers add a markup to cost in order to determine price.
12-11 Cost-plus pricing methods vary depending on the bases used to calculate prices. Examples are (a) variable manufacturing costs; (b) manufacturing function costs; (c) variable cost of the product; and (d) full cost of the product.
12-12 Two exampleswhere the difference in the costs of two products or services are much smaller than the differences in their prices follow:
1. The difference in prices charged for a telephone call, hotel room, or car rental during busy versus slack periods is often much greater than the difference in costs to provide these services.
2. The difference in costs for an airplane seat in coach class sold to a passengertraveling on business or a passenger traveling for pleasure is roughly the same. However, airline companies routinely charge business travelers––those who are likely to start and complete their travel during the same week excluding the weekend––a much higher price than pleasure travelers who generally stay at their destinations over at least one weekend.
12-13 Life-cycle budgeting is an estimate...
PRICING DECISIONS AND COST MANAGEMENT
12-1 The three major influences on pricing decisions are:
1. Customers, who influence price through their effect on demand for a product or service.
2. Competitors, who offer alternative or substitute products or services a customer could choose.
3. Costs that affect the supply of a product or service.
12-2 Not necessarily. For a one-time-onlyspecial order, the relevant costs are only those costs that will change as a result of accepting the order. In this case, full product costs will rarely be relevant. It is more likely that full product costs will be relevant costs for long-run pricing decisions.
12-3 Two examples of pricing decisions with a short-run focus:
1. Pricing for a one-time-only special order with no long-termimplications.
2. Adjusting product mix and volume in a competitive market.
12-4 Activity-based costing helps managers in pricing decisions in two ways.
1. It gives managers more accurate product-cost information for making pricing decisions.
2. It helps managers to manage costs during value engineering by identifying the cost impact of eliminating, reducing, or changing various activities.
12-5 Twoalternative starting points for long-run pricing decisions are:
1. Market-based pricing, an important form of which is target pricing. The market-based approach asks, “Given what our customers want and how our competitors will react to what we do, what price should we charge?”
2. Cost-based pricing which asks, “Given what it costs us to make this product, what price should we charge that will recoupour costs and achieve a required return on investment?”
12-6 A target cost per unit is the estimated long-run cost per unit of a product or service that enables the company to achieve its target operating income per unit when selling at the target price.
12-7 Value engineering is a systematic evaluation of all aspects of the value-chain business functions, with the objective of reducing costswhile satisfying customer needs. Value engineering via improvement in product designs, changes in material specifications, or modification in process methods, is a principal technique that companies use to achieve target cost per unit.
12-8 A value-added cost is a cost that customers perceive as adding value, or utility, to a product or service. Examples are costs of materials, direct labor,tools, and machinery. A nonvalue-added cost is a cost that customers do not perceive as adding value, or utility, to a product or service. Examples of nonvalue-added costs are costs of rework, scrap, expediting, and breakdown maintenance.
12-9 No. It is important to distinguish between when costs are locked in and when costs are incurred, because it is difficult to alter or reduce costs that havealready been locked in.
12-10 Cost-plus pricing is a pricing approach in which managers add a markup to cost in order to determine price.
12-11 Cost-plus pricing methods vary depending on the bases used to calculate prices. Examples are (a) variable manufacturing costs; (b) manufacturing function costs; (c) variable cost of the product; and (d) full cost of the product.
12-12 Two exampleswhere the difference in the costs of two products or services are much smaller than the differences in their prices follow:
1. The difference in prices charged for a telephone call, hotel room, or car rental during busy versus slack periods is often much greater than the difference in costs to provide these services.
2. The difference in costs for an airplane seat in coach class sold to a passengertraveling on business or a passenger traveling for pleasure is roughly the same. However, airline companies routinely charge business travelers––those who are likely to start and complete their travel during the same week excluding the weekend––a much higher price than pleasure travelers who generally stay at their destinations over at least one weekend.
12-13 Life-cycle budgeting is an estimate...
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