Pricing

Question 1

Total sales revenue vs addition to total revenue

Answer 1

Example-1:
A firm’s pricing of a product is as under:
20 units @ ~4.00 per unit.
21 units @ 0.90 per unit.
22 units @ ~3.80 per unit.

The sales figures can be summarised as below;

Qt Price Total sales revenue Addition to total revenue

20 4.00 80 –

21 3.90 81.90 1.90

22 3.80 83.60 1.70

Question 2

What is rate of return pricing

Answer 2

IRR=NPV zero=a zero NPV means that the investment earns a rate of return equal to the discount rate

If you discount the cash flows using a 15% real rate and produce a $0 NPV, then the analysis indicates your investment would earn a 15% real rate of return.

1. Calculate annual cash flow stream
2. discount with AF factor (for relevant investment years). this will give PV of recurring annual CFs
3. Add investment at T0
4. (2+3) will give total outlay of investment
5. divide 4/AF to get annual In CFs (revenue) each year
6. divide 5 by no of units to get price per unit

Question 3

What is Pricing Model - based upon economic theory of prices

Answer 3

Question 4

Answer 4

Question 5

New Product

Three Categories

Revolutionary

Evolutionary

Me-too

Answer 5

Revolutionary- Premium price

Evolutionary - 1. Cost-benifit, 2. demand, 3. competitor

Me-too - Price takers——price determined by competitive forces

CALCULATE CONTRIBUTION AT DIFFERENT DEMAND LEVELS AND SELECT THE PRICE WITH HIGHEST CONTRIBUTION

Question 6

Answer 6

Question 7

Finished Goods Pricing Methods

Answer 7

Full Cost (@current output & wage level) Plus [To maintain fixed capital intact; by including depreciation]

Rate of Return - Allowing the industry to earn adequate return on CE would attract additional capital & investment

Variable cost pricing - Due to limitations of total cost method like Allocation of inter-departmental overheads is arbitrary;estimation of normal output can npt be done precisely

Competitive pricing

Incremental Pricing

Question 8

Finished Goods Pricing Methods - Cost Plus

Answer 8

Question 9

Cost Plus Example

Answer 9

Question 10

Rate of return pricing

Answer 10

Question 11

Variable Cost Pricing

Answer 11

Question 12

Variable Cost Pricing-Example

Answer 12

Question 13

Competitive Pricing

Answer 13

Question 14

Incremental Pricing

Points that show how this technique gives consideration to all repurcussions of a decision

Answer 14

Question 15

Incremental Pricing-Example

Answer 15

Question 16

Importance of Pricing

Answer 16

Most Crucial & Difficult decision

Long Term suvival of profit oreinted firm

Accounting info imp. as sometimes cost+profit

Pricing decisions=>>>Org Goals>may be max. profit/sales/optimal utilization of resources.

Question 17

Pricing Theory

1. Basic & other Assumption?
2. Theory

Answer 17

1. Assumptions
   
   1. Profit maximization-main objective of firm
   2. Demand factor
   3. cost factor
   4. one product
2. Demand effect will cause reduction in price—-in other words to increase sales price has to be decreased, therefore rate of increase in revenue drops while cost keeps on increasing due to difficulty in expanding with current resources, resultantly revenue curve drops while cost increase; optimal level is where MR=MC; if MR>MC firms will contnue producing, if MR<mc></mc>

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Question 18

How to determine price with using price theory

Answer 18

1. Use price equation to derive total revenue equation

P=a-bq

1. Revenue Eq; Pxq

PxQ=aq-bq²

^Derivative

^{Revenue=a-2bq}

1. ^{determine q (demnand) from MC=MR equation where MC=variable cost}
2. ^{Put q in price eq again to determine price}

Question 19

Role of capacity utilization in Pricing

Answer 19