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    Session 12

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    Hamza Bennis
    Sweet Tastings produces candy bars for vending machines. It uses cost-plus pricing to generate a 12% target return on investment. 1) The target operating income is $1,600,000 2) The selling price needs to be $11 per case to earn the target income, with a 37.5% mark-up on full costs. 3) Increasing the price to $13 per case with 10% lower production and sales would yield an 8.4% return, below the target. Increasing price is not a good idea.

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    Session 12

    Uploaded by

    Hamza Bennis
    42 views28 pages
    Sweet Tastings produces candy bars for vending machines. It uses cost-plus pricing to generate a 12% target return on investment. 1) The target operating income is $1,600,000 2) The selling price needs to be $11 per case to earn the target income, with a 37.5% mark-up on full costs. 3) Increasing the price to $13 per case with 10% lower production and sales would yield an 8.4% return, below the target. Increasing price is not a good idea.

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    Sweet Tastings produces candy bars for vending machines. It uses cost-plus pricing to generate a 12% target return on investment. 1) The target operating income is $1,600,000 2) The selling price needs to be $11 per case to earn the target income, with a 37.5% mark-up on full costs. 3) Increasing the price to $13 per case with 10% lower production and sales would yield an 8.4% return, below the target. Increasing price is not a good idea.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    42 views28 pages

    Session 12

    Uploaded by

    Hamza Bennis
    Sweet Tastings produces candy bars for vending machines. It uses cost-plus pricing to generate a 12% target return on investment. 1) The target operating income is $1,600,000 2) The selling price needs to be $11 per case to earn the target income, with a 37.5% mark-up on full costs. 3) Increasing the price to $13 per case with 10% lower production and sales would yield an 8.4% return, below the target. Increasing price is not a good idea.

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    Download as pdf or txt
    of 28

    Cost Accounting

    Chapter 14
    Pricing Decisions
    and
    Cost Management
    Session 12
    Prof. Jorge Merladet

    Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
    Programme for this section

    S12 Exercises: mark-up/ROI and life cycle of a product


    Pricing decisions and cost management (Ch14)

    S13 Exercises: equipment replacement, opportunity costs, special order


    Measuring relevant costs and revenues for decision making (Ch12)

    S14 Exercises 12-1/2/3/4 & 12.29


    Product mix, make or buy with replacement, closing and opening stores
    bottlenecks, avoidable costs

    S15 Exercises: price segmentation, pricing and demand


    Decision making problems: concept recap (Ch14 and Ch12)

    S16 Concepts in action: pricing issues.


    Tata Nano, eDreams, Digital Native Brands

    S17 Quiz chapter 14 & 12


    Cost-plus, target return on investment pricing. Sweet
    Tastings makes candy bars for vending machines and sells
    them to vendors in cases of 30 bars. Although Sweet Sweet Tastings prices the cases of candy at full cost plus
    Tastings makes a variety of candy, the cost differences are mark-up to generate profits equal to the target return on
    insignificant, and the cases all sell for the same price. capital.

    Sweet Tastings has a total capital investment of


    $10,000,000. It expects to produce and sell 400,000 cases
    of candy next year. Sweet Tastings requires a 12% target Required:
    return on investment.
    1. What is the target operating income?
    Expected costs for next year are:
    2. What is the selling price Sweet Tastings needs to
    • Variable production costs $3.00 per case charge to earn the target operating income? Calculate the
    mark-up percentage on full cost.
    • Variable marketing and distribution costs $2.00 per case
    3. Sweet Tastings is considering increasing its selling price
    • Fixed production costs $400,000
    to $13 per case. Assuming production and sales decrease
    by 10%, calculate Sweet Tastings’ return on investment.
    • Fixed marketing and distribution costs $700,000
    Is increasing the selling price a good idea?
    • Other fixed costs $500,000
    Porter’s Toys
    Part I
    Porter’s five forces (1979)
    Key Success Factors

    Source: Pr. Rui Vieira


    Porter’s generic strategies (1980)

    Source: Wikipedia. https://en.wikipedia.org/wiki/Porter%27s_generic_strategies


    Porter’s Value Chain (1985)

    https://en.wikipedia.org/wiki/Value_chain#/media/File:Porter_Value_Chain.png
    Toy recap
    1. Financial vs Management 3. Value chain
    Accounting – Value chain
    – Management Acc. is different – Supply chain
    – Cost terms – CRM and ERPs, designing
    systems, your understanding of the
    business
    – Key success factors
    2. Strategic management
    – Two main competitive strategies
    4. Five step decision making
    – Porter’s five forces
    – Five step decision making process
    – Planning and controlling

    5. Key guidelines
    – Cost-benefit
    – Behavioural and technical
    – Different costs for different
    purposes
    Short Term Pricing
    Long Run Pricing
    Part II

    Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved.
    Pricing framework

    Term & Strategy Long-run pricing approaches

    • Short term price/mix/quantity •Strategic fit & purpose


    adjustments
    • Special Order
    (differentiation or cost
    efficiency)
    Market-based approach
    •Total cost recovery plus
    profit (return on investment)
    Prices of my competitors  my costs
    •Indirect cost allocations
    •Life time product & other
    considerations

    Short Long Cost-based approach


    term Run My costs  prices of my competitors

    Low-cost
    Products have Customers have
    Secular competitors
    pressure prices down
    shorter lives more info
    Trends (increasingly along
    no time to recover or
    room for errors
    and more alternatives
    online
    the life of the product)
    Market based pricing
    Part III
    Market-based Approach:
    Target Pricing, Target Costing

    1. Develop a product that satisfies the needs of potential


    customers. Perceived value.
    2. Choose a target price.
    3. Derive a target cost per unit by subtracting target
    operating income per unit from the target price.
    4. Perform value engineering to achieve target cost.
    Value engineering

    •Before they are locked-


    in (much before they are
    incurred)
    •Continuous improvement
    (Kaizen)

    Act on
    costs

    Value
    engineering
    improve product from
    the profitability
    perspective (49) What Engineers
    Found When They Tore
    • Design Apart Tesla's Model 3 -
    • Specifications,
    materials… YouTube
    • Production, distribution
    process
    Kaizen
    Cost-plus pricing
    Part IV
    Cost-plus Pricing
    (or mark-up)
    1. Calculate the total cost per unit.
    2. Mark-up a percentage to cover for your desired margin
    (“the plus”)
    3. Compare to competing and alternative products in terms
    of perceived value.
    4. Perform value engineering to achieve target cost and
    target price.
    Fix the base, fix the plus

    Total cost per unit (TCU) Return on Investment (ROI)


    • Computing the total cost per unit requires to • Mark-up is set to earn a target operating
    allocate fixed costs along the life of the income
    product (highly uncertain)
    • Target operating income can be set to obtain a
    • It allows for full recovery of all costs of the target ROI, where
    product.

    • It is a simple approach and stable. 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒


    ROI =
    𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
    • Because computing the specific amount of
    capital invested in a product is challenging, • Computing the specific amount of capital
    sometimes managers use alternate cost bases invested in a product is challenging because it
    to set prospective selling prices: variable requires difficult allocations of investments in
    manufacturing cost, variable cost, equipment and buildings to individual products.
    manufacturing cost…
    Other important
    considerations on
    pricing
    Part V
    The life cycle of a product
    Budget life cycle costs & revenues

    https://www.marketing91.com/product-life-cycle/
    Managing product life cycle

    Source: Anand Subramaniam –


    https://www.slideshare.net/anandsubramaniam/product-life-cycle-management
    Other important considerations
    in pricing
    Customer life-
    cycle costs of • Illegal discrimination
    the product,
    customer • Predatory pricing
    profitability • Collusive pricing
    • Dumping
    • Legally set prices

    Legal limits

    Environmental
    and
    sustainability
    costs
    Life cycle
    of a product

    Pricing power,
    customer
    purchasing
    power in
    different
    markets

    Discrimination
    &
    segmentation
    (peak-load)
    Summary and
    Homework
    The last part
    Some reading won’t do any harm!
    Pages in your book
    TERMS TO LEARN TERMS TO LEARN
    Product life cycle Collusive pricing
    Target cost per unit Cost incurrence
    Target operating income Customer life-cycle costs
    per unit
    Target price Designed-in costs

    Target rate of return on Dumping


    investment Life-cycle budgeting
    Value-added cost Life-cycle costing
    Value engineering Locked-in costs
    Non-value-added costs

    Peak-load pricing
    Predatory pricing
    Price discrimination
    What we learned today
    Resources that may be used for pricing discussion

    Short term vs Long term pricing

    Market-based pricing and Value Engineering

    Cost driven pricing, full cost and target return

    Other relevant factors in pricing, product life-cycle and legal limits

    Remember to do Big Assignment – Part 3A Pricing

    Read Ch 14 in your Book, look for the concepts

    Groups presenting in Session 16 prepare your work, find the story behind the companies’
    decisions and strategies (Tata Nano, eDreams, Digital Brands)

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