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1、CHAPTER 12,Pricing DecisionsandCost Management,Pricing and Business,How companies price a product or service ultimately depends on the demand and supply for itThree influences on demand&supply:CustomersCompetitorsCosts,Influences on Demand&Supply,Customers influence price through their effect on the
2、 demand for a product or service,based on factors such as quality and product featuresCompetitors influence price through their pricing schemes,product features,and production volumeCosts influence prices because they affect supply(the lower the cost,the greater the quantity a firm is willing to sup
3、ply),Time Horizons and Pricing,Short-run pricing decisions have a time horizon of less than one year and include decisions such as:Pricing a one-time-only special order with no long-run implications：EX P328 EX12-18Adjusting product mix and output volume in a competitive market Long-run pricing decis
4、ions have a time horizon of one year or longer and include decisions such as:Pricing a product in a major market where there is some leeway in setting priceEX329,Differences Affecting Pricing:Long Run vs.Short Run,Costs that are often irrelevant for short-run policy decisions,such as fixed costs tha
5、t cannot be changed,are generally relevant in the long run because costs can be altered in the long runProfit margins in long-run pricing decisions are often set to earn a reasonable return on investment prices are decreased when demand is weak and increased when demand is strong,Alternative Long-Ru
6、n Pricing Approaches,Market-Based:price charged is based on what customers want and how competitors reactCost-Based:price charged is based on what it cost to produce,coupled with the ability to recoup the costs and still achieve a required rate of return,ABC Manufacturing Cost Illustration,Product P
7、rofitability Using ABC Costing:Illustration,Cost-Based(Cost-Plus)Pricing,The general formula adds a markup component to the cost base to determine a prospective selling priceUsually only a starting point in the price-setting processMarkup is somewhat flexible,based partially on customers and competi
8、tors,Forms of Cost-Plus Pricing,Setting a Target Rate of Return on Investment:the Target Annual Operating Return that an organization aims to achieve,divided by Invested CapitalSelecting different cost bases for the“cost-plus”calculation:Variable Manufacturing CostVariable CostManufacturing CostFull
9、 Cost,Market-Based Approach,Starts with a target priceTarget Price estimated price for a product or service that potential customers will payEstimated on customers perceived value for a product or service and how competitors will price competing products or services,Common Business Practice,Most fir
10、ms use full cost for their cost-based pricing decisions,because:Allows for full recovery of all costs of the productAllows for price stabilityIt is a simple approachEX 12-33EX12-35,Markets and Pricing,Competitive Markets-use the market-based approachLess-Competitive Markets can use either the market
11、-based or cost-based approachNon-Competitive Markets use cost-based approaches,Understanding the Market Environment,Understanding customers and competitors is important because:Competition from lower cost producers has meant that prices cannot be increasedProducts are on the market for shorter periods of time,leaving less time and opportunity to recover from pricing mistakesCustomers have become more knowledgeable and demand quality products at reasonable prices,Target Costing Illustration,Target Costing Illustration,Continued,
