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.