A project report on
pricing decision
prepared by…
1) Nayansisodiya
Submitted to…
Prof. Avani shah
Introduction about prici...
Pricing decisions are management decisions about what to charge
for the products and services that companies deliver. To m...
Most pricing decisions are either short run or long run. Short-run
decisions typically have a time horizon of less than a ...
PRICING DECISIONS
This a very important decision faced by top management and marketing
managers. How much to charge for a ...
 Customers – influence price through their effect on the demand for a product
or service, based on factors such as qualit...
 External sales- outside
 Target pricing-Competition-based pricing
 Cost plus pricing
 Variable cost pricing
 Custome...
TOTAL PLUS PROFIT PERCENTAGE;
In cost plus pricing method, profit is added to the total absorption cost
MARGINAL COST PLUS...
Answer:
1) Absorption cost
Particular Amount Amount
Selling price/ unit as par dept. B 55
Transfer price 22.50
Additional ...
Transfer price 27.50
Additional cost of dept. B 25 52.50
Gross profit per unit 2.50
5) Negotiated transfer price
Particula...
Statement showing residual income
Particular Division
X-rs. Y-rs. Z-rs.
Additional investment 500000 500000 500000
Net pro...
Answer:
1) Cost of capital = divisional investment * cost of capital
= 16000000*13.75%
= 2200000
2) Divisional profit =400...
Answer:
Minimum transfer price = Sales value ÷ No. of unit
= 1800000 ÷ 6000
= 300/ unit transfer price
Rs. 3oo / unit is m...
"The role of management accounting in
pricing decisions:
One of the main purposes of management accounting is to contribu
...
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Pricing decision report with introduction to conclusion

Published on: Mar 4, 2016
Published in: Business      Economy & Finance      
Source: www.slideshare.net


Transcripts - Pricing decision report with introduction to conclusion

  • 1. A project report on pricing decision prepared by… 1) Nayansisodiya Submitted to… Prof. Avani shah Introduction about pricing decision
  • 2. Pricing decisions are management decisions about what to charge for the products and services that companies deliver. To maximize operating income, companies produce and sell units as long as the revenue from an additional unit exceeds the cost of producing it. The three major influences on pricing decisions 1) Customers 2) Competitors 3) Costs The price of a product or service is the outcome of the interaction between the demand for the product or service and its supply. 1) Customers influence prices through their effect on demand. Companies must always examine pricing decisions through the eyes of their customers. Too high a price may cause customers to reject a company’s product. 2) Competitors influence prices through theiractions.Alternative or substitute products of a competitor may affect demand and force a business to lower its prices.Fluctuations in the exchange rates of different countries’ currencies also affectpricing decisions. 3) Costs influence prices because they affectsupply.The lower the cost relative to the price, thegreater the quantity of product the companyis willing to supply. Short-run and long-run pricing decisions
  • 3. Most pricing decisions are either short run or long run. Short-run decisions typically have a time horizon of less than a year. Pricing a one-time-only special order Adjusting product mix and output volume Long-run decisions involve a time horizon of a year or longer. – Pricing a product in a major market where price setting has considerable leeway Two key differences when pricing for thelong run relative to the short run: 1 Costs that are often irrelevant for short-run pricing decisions (fixed costs) are often relevant in the long run. 2 Profit margins in long-run pricing decisions are often set to earn a reasonable return on investment. THEORY PORTION
  • 4. PRICING DECISIONS This a very important decision faced by top management and marketing managers. How much to charge for a product or service depend on a multitude of factors such as competition, cost, advertising and sales promotion Managers have a general tendency to believe that price is an important issue for customers. Research, however, has shown that customers are frequently unaware of prices paid and that price is one of the least important purchase criteria for them Need for pricing decision:  Long range survival of company depends on its pricing decision. Objective of pricing decision;  To attain target result  To achieve and sustain the market share  To have consistency of price as far as practicable and also its stability  To keep up profit motivation  To sustain the competitors’ forces effectively and efficiently INFLUENCES ON DEMAND AND SUPPLY
  • 5.  Customers – influence price through their effect on the demand for a product or service, based on factors such as quality and product features  Competitors – influence price through their pricing schemes, product features, and production volume  Costs – influence prices because they affect supply (the lower the cost, the greater the quantity a firm is willing to supply) 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  Adjusting product mix and output volume in a competitive market  Long-run pricing decisions 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 price Pricing
  • 6.  External sales- outside  Target pricing-Competition-based pricing  Cost plus pricing  Variable cost pricing  Customer based pricing-value-based pricing  Time and material pricing  Internal-within the company among divisions  Negotiated transfer prices  Cost based transfer prices  Market based transfer prices  Effect of outsourcing on transfer prices  Transfers between divisions in different countries COST PLUS PRICING In this pricing is set by adding some predetermined margin on the costs of the work to be executed.
  • 7. TOTAL PLUS PROFIT PERCENTAGE; In cost plus pricing method, profit is added to the total absorption cost MARGINAL COST PLUS CONTRIBUTION PERCENTAGE; In marginal cost plus contribution method, price of the product is worked out by adding the contribution as a percentage of the marginal cost. STANDARD COST PLUS PRICING: In standard cost plus pricing method, profit is added to the standard or predetermined cost of product BREAK EVEN PRICING: It is the method of pricing used when work with identifiable cost may involve different levels of activity. PRACTICAL PORTION Q. 18.6 (paresh shah-691)
  • 8. Answer: 1) Absorption cost Particular Amount Amount Selling price/ unit as par dept. B 55 Transfer price 22.50 Additional cost of dept. B 25 47.50 Gross profit per unit 7.50 2) Variable cost Particular Amount Amount Selling price/ unit as par dept. B 55 Transfer price (variable cost only) 15 Additional cost of dept. B 25 40 Gross profit per unit 40 3) Cost plus transfer price Particular Amount Amount Selling price/ unit as par dept. B 55 Transfer price 28.13 Additional cost of dept. B 25 53.13 Gross profit per unit 1.87 4) Market transfer price Particular Amount Amount Selling price/ unit as par dept. B 55
  • 9. Transfer price 27.50 Additional cost of dept. B 25 52.50 Gross profit per unit 2.50 5) Negotiated transfer price Particular Amount Amount Selling price/ unit as par dept. B 55 Transfer price as par negotiation 23.50 Additional cost of dept. B 25 48.50 Gross profit per unit 6.50 6) Dual price Particular Amount Amount Selling price/ unit as par dept. B 55 Transfer price 15 Additional cost of dept. B 25 40 Gross profit per unit 15 Q. 21.2 (M. N. Arora) 21.11 Answer:
  • 10. Statement showing residual income Particular Division X-rs. Y-rs. Z-rs. Additional investment 500000 500000 500000 Net profit 70000 65000 85000 Less: cost of capital @ 12% on investment 60000 60000 60000 Residual income 10000 5000 25000 Conclusion: Additional investment should be made in division Z as it gives the highest residual imcome. Q. 21.3 (M.N.Arrora) 21.12
  • 11. Answer: 1) Cost of capital = divisional investment * cost of capital = 16000000*13.75% = 2200000 2) Divisional profit =4000000 Residual income =divisional profit – cost of capital =40 lakh – 22 lakh = 18 lakh Q. 2. Paresh shah (693)
  • 12. Answer: Minimum transfer price = Sales value ÷ No. of unit = 1800000 ÷ 6000 = 300/ unit transfer price Rs. 3oo / unit is minimum transfer price charged by the machining division to other division of the company. Q. 4. Paresh shah (694) Answer: Required contribution = fixed cost + net profit + cost of capital = 800000 + 1000000 + 900000 = 2700000 Outside sales = selling price – variable cost = 180 – 160 = 20/ unit × 120000 = 2400000 Internal transfer = 300000 ÷ 30000 = 10 / unit Minimum transfer price = 160 + 10 = 175
  • 13. "The role of management accounting in pricing decisions: One of the main purposes of management accounting is to contribu te information towards an optimal price decision. While theoretically opt imal pricing is vastly discussed in mainstream economics (e.g. Pindyck a nd Rubinfeld, 2005; Hirschleifer and Hirschleifer, 1998; Landsburg, 201 1), there is apparently a "reality gap", i.e. a gap between neoclassical theory of the firm and the behavior observed by firms, which goes at least back to the 1930's (Hall and Hitch, 1939), perhaps much further (Lee, 1994). Many reasons for this apparent gap have been proposed. One is that the cost of obtaining the correct cost base which is mar ginal cost, is impossible or prohibitively expensive. Thus it could be that firms are behaving, at least implicitly, in accord with theory. For instanc e, Lere (1986) suggests ways of using traditional management accountin g costs as proxies of marginal cost. Lucas (2003) argues that management accountants have largely left the debate over this controversial "reality gap" to economists. However, he shows that evidence to date is too poor to settle the dispute of whethe r firms are indeed behaving in line with neoclassical theory. There shoul d be possibilities for advancing the field of management accounting relat ed to the reality gap, both theoretically and empirically. One research project could be to follow Lucas'(2003) suggestion fo r a series of case studies to reveal whether neoclassical principles are foll owed. Another could be to advance the understanding of firm behavior i n different directions.

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