Chapter 13 Pricing Decisions and Cost Management

What is​ life-cycle budgeting?

An estimate of the revenues and costs attributable to each product from its initial​ R&D to its final customer servicing and support.

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.

What are the three major influences on pricing​ decisions?

Customers, Competitors, and Costs

Determine which description below defines predatory​ pricing, dumping, and collusive pricing.

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 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. 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 supply.

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

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

How is​ activity-based costing useful for pricing​ decisions?

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

Which of the following​ cost(s) can be used in​ cost-plus pricing?

Manufacturing function costs Variable manufacturing costs Full product costs

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

No, because it is difficult to alter or reduce costs that have already been locked in so you need to distinguish between them.

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

Possibly, the relevant costs of each pricing decision depend on that particular scenario.

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

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. 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 than pleasure travelers who generally stay at their destinations over at least one weekend.

What is a target cost per​ unit?

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.

Complete the sentences to best 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 costs per unit.

Determine the choice that gives the best examples of​ value-added costs and​ nonvalue-added costs.

Value-added costs are costs of materials and direct labor. ​Nonvalue-added costs are costs of rework and scrap.