Price decisionsand profitability analysis Management Accounting Mukhtar Mankeyev 21 Feb 2013
INTRODUCTION TO THE ARTICLE Accounting information is an important input to pricing decision; Setting...
PRICE TAKERS AND SETTERS There are two types of companies: 1. Price takers ...
SHORT-RUN PRICING DECISIONCompanies bidding for a one-time special order incompetition with other suppliersONLY incrementa...
LONG-RUN PRICING DECISIONThree approaches of long-run pricing decision:1. Pricing customized products;2. Pricing non-custo...
PRICING CUSTOMIZED PRODUCTS In the long-run firms Product/Service should can adjust the supply of ...
PRICING NON-CUSTOMIZED PRODUCTSApplicable to make a pricing decision for large andunknown volumes of a single productThe u...
PRICING NON-CUSTOMIZED PRODUCTSUSING TARGET COSTINGStages of target costing:1. Determine the target price which customer...
COST-PLUS PRICINGMethod using for price setting when impossible to estimate demand andwhere cost is used as the starting p...
PRICING POLICIES 1. Price-skimming policy: attempt to exploit those sections of the market that...
CUSTOMER PROFITABILITY ANALYSIS Provides important information that can be used to determine which classes of custom...
Thank you for attention!12 Mukhtar Mankeyev
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Price decisions and profitability analisys

Introduction to pricing methods and policies
Published on: Mar 4, 2016
Published in: Business      
Source: www.slideshare.net


Transcripts - Price decisions and profitability analisys

  • 1. Price decisionsand profitability analysis Management Accounting Mukhtar Mankeyev 21 Feb 2013
  • 2. INTRODUCTION TO THE ARTICLE Accounting information is an important input to pricing decision; Setting of prices depend on organization’s business and production strategy: customized, differentiated, etc.; It is important to operate right cost information to make a price decision; Accounting information play a big role in determining the selling prices; Main theoretical solution to pricing decision is derived from economic theory, BUT it’s only for theoretical understanding. 2 Mukhtar Mankeyev
  • 3. PRICE TAKERS AND SETTERS There are two types of companies: 1. Price takers 2. Price settersFour different situations to determine product pricing:1. A price setting firm facing short-run pricing decisions;2. A price setting firm facing long-run pricing decisions;3. A price taker firm facing short-run product-mix decisions;4. A price taker firm facing long-run product-mix decisions. 3 Mukhtar Mankeyev
  • 4. SHORT-RUN PRICING DECISIONCompanies bidding for a one-time special order incompetition with other suppliersONLY incremental costs should be taken into account:- extra materials required to fulfil the order;- any extra part-time labour, overtime or other labour costs;- extra energy and maintenance costs for machinery equipment and equipment required to complete the order.NOTE: Batch, product and service-sustaining activitiesresources usually already been acquired and in most casesno extra costs on the supply of activities are likely to beincurred 4 Mukhtar Mankeyev
  • 5. LONG-RUN PRICING DECISIONThree approaches of long-run pricing decision:1. Pricing customized products;2. Pricing non-customized products;3. Target costing for pricing non-customized products. 5 Mukhtar Mankeyev
  • 6. PRICING CUSTOMIZED PRODUCTS In the long-run firms Product/Service should can adjust the supply of be priced to cover all of virtually all of their the resources that are activity resources committed to itFull cost and long-run cost – the sum of the cost of all thoseresources committed to a product in the long-term Facility-sustaining Shouldn’t be allocated to products costs are incurred to for most decision (arbitrary). support the Such costs must be covered by organization as a sales revenues, and for pricing whole and not for purposes their allocation can beindividual (customized) justified as long as they are products separately reported 6 Mukhtar Mankeyev
  • 7. PRICING NON-CUSTOMIZED PRODUCTSApplicable to make a pricing decision for large andunknown volumes of a single productThe unit cost calculation indicates the break-evenselling price at each sales volume required to coverthe cost of the resources committed at that particularvolumeManagement MUST assess the likelihood of selling thespecified volumes at the designated prices and choosethe price which they consider has the highestprobability of generating at Mukhtar Mankeyev specified sales 7 least the
  • 8. PRICING NON-CUSTOMIZED PRODUCTSUSING TARGET COSTINGStages of target costing:1. Determine the target price which customers will be prepared to pay;2. Deduct a target profit margin from the target price to determine the target cost;3. Estimate the actual cost of the product;4. If estimated actual cost exceeds the target cost investigate ways of driving down the actual cost to the target.Most suited for setting prices for non-customized and highsales volume productsImportant mechanism for managing the cost of the futureproducts 8 Mukhtar Mankeyev
  • 9. COST-PLUS PRICINGMethod using for price setting when impossible to estimate demand andwhere cost is used as the starting point to determine the selling price Mark-up Cost-plus Cost base $ percentage, selling price, % $1 Direct variable costs 200 150 5002 Direct non-variable costs 1003 Total direct costs 300 70 5104 Indirect costs 805 Total cost (excluding higher level 380 40 532 sustaining costs)6 Higher level sustaining costs 607 Total costs 440 20 528 9 Mukhtar Mankeyev
  • 10. PRICING POLICIES 1. Price-skimming policy: attempt to exploit those sections of the market that are relatively insensitive to price changes. 2. Penetration pricing policy: based on concept of charging low prices initially with the intention of gaining rapid acceptance of the product. 3. Product life cycle: consisting of four stages as introductory, growth, maturity and decline.10 Mukhtar Mankeyev
  • 11. CUSTOMER PROFITABILITY ANALYSIS Provides important information that can be used to determine which classes of customers should be emphasized or de-emphasized and the price to charge for customer services; Identifies the characteristics of high cost and low cost to serve customers and shows how customer profitability can be increased; Can be used to rank customers by order of profitability based on Pareto analysis. 11 Mukhtar Mankeyev
  • 12. Thank you for attention!12 Mukhtar Mankeyev

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