Variable Cost and Contribution Margin
CHAPTER 12
PRICING DECISIONS AND COST MANAGEMENT
12-1 The three major influences on pricing decisions are
1. Customers
2. Competitors
3. Costs
12-2 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.
12-3 Two examples of pricing decisions with a short-run focus:
1. Pricing for a one-time-only special order with no long-term implications.
2. Adjusting product mix and volume in a competitive market.
12-4 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.
12-5 Two alternative starting points for long-run pricing decisions are
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?”
12-6 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.
12-7 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.
12-8 A
PRICING DECISIONS AND COST MANAGEMENT
12-1 The three major influences on pricing decisions are
1. Customers
2. Competitors
3. Costs
12-2 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.
12-3 Two examples of pricing decisions with a short-run focus:
1. Pricing for a one-time-only special order with no long-term implications.
2. Adjusting product mix and volume in a competitive market.
12-4 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.
12-5 Two alternative starting points for long-run pricing decisions are
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?”
12-6 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.
12-7 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.
12-8 A