BADM 324 Final Exam

D. The seller to secure prompt payment, and the buyer to pay a lower price per unit

A cash discount allows: A. the buyer to always calculate the discount based on the delivery date. B. the seller to secure prompt payment, but has no benefits for the buyer. C. the seller to demand payment in cash on demand (C.O.D.) upon receipt of goods. D. the seller to secure prompt payment, and the buyer to pay a lower price per unit. E. the buyer to pay a lower price per unit, but has no benefits for the seller.

Cost approach

Approach in which price is set greater than direct costs, allowing for sufficient contribution to cover indirect costs and overhead, and leaving a margin for profit

Market approach

Approach in which prices are set in the marketplace and may not be directly related to cost

1. Cost approach 2. Market approach

Approaches to setting prices

Cost-Plus-Incentive-Fee (CPIF) Contract

Contract in which buyer and seller agree on a target cost figure, a fixed fee, and a formula under which any cost over- or underruns are shared

Cost-No-Fee (CNF) Contract

Contract in which only costs are reimbursed. Buyer must persuade supplier that there will be enough subsidiary benefits from doing a particular job.

Firm-Fixed-Price (FFP) Contract

Contract in which price is not subject to change, under any circumstances. Market conditions are stable. Financial risks are otherwise insignificant. Might be risky for long lead times.

Encourages suppliers to cut costs

Contract incentive of Cost-Plus-Incentive-Fee (CPIF) contracts

Generally realizes an additional dollar of profit for every dollar that costs are reduced

Contract incentive of Firm-Fixed-Price (FFP) Contract

Encourages supplier to control cost (as cost increases, profit percentage declines)

Contract incentive of cost-plus-fixed-fee (CPFF) contract

Indirect costs

Costs incurred in the operation of a production plant or service process, but normally cannot be related directly to any given unit of production of a product or service; "overhead"

Direct costs

Costs that can be specifically and accurately assigned to a given unit of production of a product or service

Trade discount

Discount granted by a manufacturer to a particular type of distributor or user; aim to protest the distributor by making it more profitable for a purchaser to buy from the distributor than directly from the manufacturer

Quantity discount

Discount granted for buying in certain quantities and vary in proportion to the amount purchased

Cash discounts

Discounts intended to encourage prompt payment on an account

Direct materials

Example of direct costs

Rent, property tax, power, heat, light

Example of indirect costs

Producer Price Index (PPI)

Family of indexes that measures the average change over time in selling prices received by domestic producers for their output

A. Cost-Plus-Incentive-Fee (CPIF)

If the buyer wants to motivate the seller to manage total costs, the best type of contract is: A. cost-plus-incentive-fee (CPIF) B. cost-plus-fixed-fee (CPFF) C. cost-no-fee (CNF) D. firm-fixed-price (FFP) E. both A and B

B. Firm-fixed-price (FFP)

If the delivery date is some months or years away and if there is substantial chance of price escalation, a supplier may feel that there is far too much risk of loss to agree to sell under a: A. cost-no-fee (CNF) B. firm-fixed-price (FFP) C. firm-fixed-price plus incentive fee (FFPIF) D. cost-plus-fixed-fee (CPFF) E. cost-plus-incentive-fee (CPIF)

Fixed or variable

Indirect costs can be...

Generally not appropriate for R&D

Limitations of Firm-Fixed-Price (FFP) Contract

Variable

Most direct costs are...

B. Variable costs

Most direct costs are: A. semivariable costs. B. variable costs. C. general and administrative costs. D. overhead costs. E. fixed costs

A. Means prices are set to cover direct costs, contribute to indirect, and attain profit.

The cost approach to pricing: A. means prices are set to cover direct costs, contribute to indirect, and attain profit. B. is the only defensible pricing mechanism for the ethical companies to use. C. implies that cost analysis is the only technique to be used to negotiate prices. D. implies that prices are set based on the cost the market will bear. E. means prices are adjusted to ensure the selling organization recoups all costs.

Fair price

The lowest price that ensures a continuous supply of the proper quality where and when needed

B. Implies that prices are set based on what the market will bear

The market approach to pricing: A. is the only defensible pricing mechanism for ethical companies to use. B. implies that prices are set based on what the market will bear. C. means that prices are adjusted regularly to ensure that the seller recoups all its marketing costs. D. means prices are set to cover direct costs, contribute to indirect, and attain a profit. E. implies that market analysis is the only technique that should be employed to negotiate prices.

Cash discount, quantity discount, trade discount

Types of discounts

Cost-Plus-Fixed-Fee (CPFF) Contract

Used if the item is experimental and the specifications are not firm, or if future costs cannot be predicted. Buyer to reimburse supplier for all reasonable costs incurred.

Semi-variable costs

Vary with the number of units of products or services produced but are partly variable and partly fixed