Chapter 9 pricing basics - external sales

Question 1

What is included in external sales

Answer 1

1. target costing
2. Full Cost-plus pricing
3. Absorption cost plus pricing
4. variable cost plus pricing
5. time and material pricing

Question 2

What is included in internal sales

Answer 2

1. Transfer pricing
2. transfer pricing approaches
3. transfers b/w divisions in different countries

Question 3

what are the factors that affect the decsions on prices for any goods or services?

Answer 3

1. pricing objectives (gain market share, achieve a target ROI
2. Demand (price sensitivity, demographics
3. Environment (political reaction to prices, patent or copyright protection
4. Cost considerations (fixed and variable costs, short run or long run)

Question 4

What is the company’s goal

Answer 4

price its products to cover the product\s costs and earn a reasonable profit

Question 5

do copany’s usually set their own prices?

Answer 5

no,

usually the price is set by the competitive market (supply and demand)

Question 6

What are price takers

Answer 6

ex. gasoline companies cannot set the price of gasoline by themselves
- because the price of gas is set by market forces (supply and demand)
- this happens with any product that appears to be identical (corn or wheat) minerals (coal or sand)

Question 7

When do companies set their own prices

Answer 7

• where a product is specially made for a customer (one of a kind product) ie designer dress or suit by Armani
• when few or no other producers can manufacture a similar item (ie company has a patent or copy right on a unique process ie chips by intel)
• or if they are successful at distinguishing their product or server form others (starbucks)

Question 8

IFRS and pricing how are inventories reported on SFP

Answer 8

1. must be reported at lower of cost and net realizable value
2. which is the estimate selling price in the ordinary course of business less the estimated cost of completion and the estimated costs to make the sale

Question 9

Who uses target pricing

Answer 9

when market determines a product’s price

Question 10

What is target pricing used for

Answer 10

in order to earn a profit (auto industry must focus on controlling their costs)
- if they can produce cars at the targeted cost or less they will meet their target profit

Question 11

what is the formula for target pricing

Answer 11

Market price - Desired profit = Target cost

Question 12

What is it called when a company chooses its market segment it wants to compete in

Answer 12

market niche

Question 13

What does it mean for a company to choose its market segment

Answer 13

• choose between selling luxury goods or economy goods in order to focus its efforts on one segment or the other

Question 14

Using target pricing, how do they determine the target cost?

Answer 14

by setting the desired profit

- the difference between the target price and the desired profit is the target cost of the product

Question 15

When is full-cost plus pricing used

Answer 15

1. competitive common product environment where market price is already set
2. in a less competitive market or non-competitive environment

Question 16

Full - cost plus pricing in a competitive market

Answer 16

company must set its target cost

Question 17

Full -cost plus pricing in a non-competitive market

Answer 17

1. company may have to set its own price
2. price usually depends on the cost of the product service (typical approach)
3. company determines a cost base and adds a markup to determine a target selling price
4. depends on the desired operating income or ROI

Question 18

How do you determine the markup for full cost plus pricing

Answer 18

define the cost base (several different approaches)

Question 19

what affects pricing

Answer 19

1. customer demand
2. competition
3. product and service

Question 20

What are the 3 pricing methods for external pricing

Answer 20

1. cost-plus pricing, 2. Target Costing, 3. Time and Material Pricing

Question 21

explain cost plus pricing

Answer 21

1. start with the cost of the product
2. add a mark up based on desired ROI
3. = selling price

Question 22

explain target costing

Answer 22

1. starts with the price the customer is willing to pay
2. determine how much profit they want to make from each sale
3. selling price - desired profit = target cost
   (customer willing to pay $12 and they want a profit of 2.40 then the cost can’t be more than 9.60

Question 23

what are the two methods used for Cost-plus pricing

Answer 23

1. absorption costing approach *DM, DL, VMO FMOH
2. Variable costing approach (DM, DL, VMOH, VS&A)
3. Full cost plus pricing