Accounting Ch. 5 Test

What steps must be considered when a company uses target pricing?

1. Determine the selling price of the product based on market surveys (customer perspective). 2. It determines the markup needed to provide a sufficient return to shareholders (learning and growth perspective). 3. It takes the selling price less the required markup to determine the target cost (internal processes perspective). 4. The target cost, then, is the maximum that the product can cost to generate a sufficient return to owners. 5. Now the company must determine how to manufacture the product so that costs do not exceed the target cost.

Monopolistic competition

An environment in which there are many companies whose products/services are similar but not identical.

Oligopoly

An environment where a few firms control the types of products and services and their distribution.

Pure competition

An environment where a large number of sellers produce and distribute virtually identical products and services.

Customers

Customer perspective

FUTA

Federal Unemployment Tax Act

Competitors

Learning and growth perspective

Legal and social forces

Learning and growth perspective

Price gouging

Pricing products unreasonably high when the need is great or when consumers do not have other choices. (Illegal)

Calculate target costs

Target cost = Target selling price - Required markup

Life cycle pricing

a pricing strategy where the company attempts to set a selling price for the life of the product based on its total life-cycle costs

gross pay vs net pay

income before taxes and deductions are taken vs income after taxes and deductions have been taken

Target pricing

pricing goods according to what the customer is willing to pay

Predatory pricing

selling a product below cost to drive competitors out of the market (illegal)

Dumping (also known as predatory pricing)

selling products in a foreign country at lower prices than those charged in the producing country

Penetration pricing

setting a low initial price on a new product to appeal immediately to the mass market

Monopoly

A company that has exclusive control over a product, service, or geographic market.

Which taxes are paid by both employer and employee?

FICA

Employer paid taxes

FICA, FUTA, SUTA

Employee paid taxes

FICA, federal income tax, state income tax

Cost

Internal Processes Perspective

Monopolistic market competition influences on selling prices

Monopolistic competition has a large impact on, but no control over prices. Individual companies operating within this type of market can influence selling prices by advertising quality and service as well as price.

Pure market competition influences on selling prices

Pure competition has little to no influence on the selling price. The market (demand) determines the price.

Calculate estimated product cost (selling margin)

Selling margin = Selling price - Cost

Calculate the selling price with a markup on cost

Selling price = Cost + (Cost X Markup percentage)

FICA

Social Security and Medicare

SUTA

State Unemployment Tax Act

Skimming pricing

setting the highest initial price that customers really desiring the product are willing to pay

Primary Influences on Selling Prices

the quantity demanded by customers; the quantity supplied by competitors; legal, social and political factors; and the company's costs in the long run.