copyright © 2003 pearson education canada inc. slide 12-131 chapter 12 pricing decisions, product...
TRANSCRIPT
Copyright © 2003 Pearson Education Canada Inc. Slide 12-1
Chapter 12
Pricing Decisions, Product Profitability Decisions, and Cost Management
Copyright © 2003 Pearson Education Canada Inc. Slide 12-2
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
Pages 452 - 453
Copyright © 2003 Pearson Education Canada Inc. Slide 12-3
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?
Pages 455 - 458
Copyright © 2003 Pearson Education Canada Inc. Slide 12-4
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. Develop a product that satisfies a customer need
2. Choose target price based on customers’ values
3. Derive a target cost
4. Perform value engineering to achieve target costs
Pages 458 - 460
Copyright © 2003 Pearson Education Canada Inc. Slide 12-5
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
CumulativeCosts
per unit$
R&D Marketing,and Manufacturing Distribution &
Design Customer Service
Value-ChainFunctions
Locked-incost curve
Cost incurrencecurve
Pages 460 - 462
Copyright © 2003 Pearson Education Canada Inc. Slide 12-6
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 + 65% markup = $797costs $483.00
Total manufacturing + 50% markup = $810costs $540.00
Full costs $720.00 + 12% markup = $806
Pages 464 - 467
Copyright © 2003 Pearson Education Canada Inc. Slide 12-7
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 $96,000,000 (a)
Target rate of return on investment 18% (b)
Target operating income $17,280,000 (a x b)
Total expected unit sales of product 200,000 (c)
Target operating income per unit $86.40 (a x b / c)
Cost base Target operating income Target selling
$720.00 per unit $86.40 price $806.40+ =
Pages 464 - 465
Copyright © 2003 Pearson Education Canada Inc. Slide 12-8
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
Pages 469 - 472