Chapter 13

The three major influences on pricing decisions are

1. Customers 2. Competitors 3. Costs

Activity-based costing helps managers in pricing decisions in two ways.

1. It gives managers more accurate product-cost information for making pricing decisions. 2. It helps managers to manage costs during value engineering by identifying the cost impact of eliminating, reducing, or changing various activities.

Two alternative approaches to long-run pricing decisions are the following

1. Market-based pricing, an important form of which is target pricing. The market-based approach asks, "Given what our customers want and how our competitors will react to what we do, what price should we charge?" 2. Cost-based pricing which asks, "What does it cost us to make this product and, hence, what price should we charge that will recoup our costs and achieve a target return on investment?"

Give two examples in which the difference in the costs of two products or services is much smaller than the difference in their prices.

1. The difference in prices charged for a telephone call, hotel room, or car rental during busy versus slack periods is often much greater than the difference in costs to provide these services. 2. The difference in costs for an airplane seat sold to a passenger traveling on business or a passenger traveling for pleasure is roughly the same. However, airline companies price discriminate. They routinely charge business travelers--those who are likely to start and complete their travel during the same week excluding the weekend--a much higher price for the same class of service than pleasure travelers who generally stay at their destinations over at least one weekend.

What are three benefits of using a product life-cycle reporting format?

1. The full set of revenues and costs associated with each product becomes more visible. 2. Differences among products in the percentage of total costs committed at early stages in the life cycle are highlighted. 3. Interrelationships among business function cost categories are highlighted.

Four purposes of cost allocation are as follows:

1. To provide information for economic decisions 2. To motivate managers and other employees 3. To justify costs or compute reimbursement amounts 4. To measure income and assets

What is a target cost per unit?

A target cost per unit is the estimated long-run cost per unit of a product (or service) that, when sold at the target price, enables the company to achieve the targeted operating income per unit.

Give two examples of a value-added cost and two examples of a non-value-added cost.

A value-added cost is a cost that customers perceive as adding value, or utility, to a product or service. Examples are costs of materials, direct labor, tools, and machinery. A nonvalue-added cost is a cost that customers do not perceive as adding value, or utility, to a product or service. Examples of nonvalue-added costs are costs of rework, scrap, expediting, and breakdown maintenance.

What is cost-plus pricing?

Cost-plus pricing is a pricing approach in which managers add a markup to cost in order to determine price.

Describe four alternative cost-plus pricing methods.

Cost-plus pricing methods vary with the bases used to calculate prices. Examples are (a) variable manufacturing costs; (b) manufacturing function costs; (c) variable product costs; and (d) full product costs.

What is life-cycle budgeting?

Life-cycle budgeting is an estimate of the revenues and costs attributable to each product from its initial R&D to its final customer servicing and support.

"It is not important for a company to distinguish between cost incurrence and locked-in costs." Do you agree? Explain.

No. It is important to distinguish between when costs are locked in and when costs are incurred because it is difficult to alter or reduce costs that have already been locked in.

"Relevant costs for pricing decisions are full costs of the product." Do you agree?

Not necessarily. For a one-time-only special order, the relevant costs are only those costs that will change as a result of accepting the order. In this case, full product costs will rarely be relevant. It is more likely that full product costs will be relevant costs for long-run pricing decisions.

Define predatory pricing, dumping, and collusive pricing.

Predatory pricing occurs when a business deliberately prices below its costs in an effort to drive competitors out of the market and restrict supply and then raises prices rather than enlarge demand. Under U.S. laws, dumping occurs when a non-U.S. company sells a product in the United States at a price below the market value in the country where it is produced, and this lower price materially injures or threatens to materially injure an industry in the United States. Collusive pricing occurs when companies in an industry conspire in their pricing and production decisions to achieve a price above the competitive price and so restrain trade.

Describe value engineering and its role in target costing.

Value engineering is a systematic evaluation of all aspects of the value-chain business functions, with the objective of reducing costs while satisfying customer needs. Value engineering via improvement in product and process designs is a principal technique that companies use to achieve target cost per unit.